š Hey everyone! Let’s dive into a topic that’s been buzzing around in personal finance circles lately: **”Pay faster or invest?”**
So, here’s the scoop! I own a house with a *mortgage rate of 2.875%*. Currently, Iām throwing an extra $600 a month towards the principal, helping me pay off my mortgage in 20 years instead of 30. However, my accountant suggests that I might be better off making smaller payments and investing the extra cash instead. š¤
Now, this raises the million-dollar question:
- **š° Should I keep paying down my mortgage faster?**
- **š Or should I direct that money into a savings account, an IRA, or the S&P 500?**
Here are some thoughts on the pain points that many of us can relate to:
- Peace of Mind: For many, paying off a mortgage gives a sense of security and freedom. The idea of owning your home outright is appealing! š”
- Opportunity Cost: On the flip side, that *2.875% interest rate* is low! The stock market can yield returns that often surpass that rateāpotentially more than you’ll save by paying down the mortgage faster. š
- Lack of Liquidity: Money tied up in a home may not be easily accessible for emergencies or opportunities that arise. Keeping cash in investments can offer greater flexibility! šµ
But what did I find might help settle this debate? š¤·āāļø
- **Assess Your Financial Goals:** Are you aiming for early retirement, or do you feel more secure owning your home? Determine what matters most to you.
- **Consider Your Risk Tolerance:** Investing in the stock market carries risk, but it can also mean higher returns. Think about how you’d handle market fluctuations.
- **Diversify:** A mixed approach could also be a solid choice. Perhaps split the $600āsome towards the mortgage, some towards investing? š
- **Consult with a Financial Planner:** Alongside your accountant, a financial advisor can offer insights tailored to your unique situation.
What do you all think? How do you balance paying off your mortgage versus investing? Do you have any personal experiences or tips that could help? Maybe you’ve tried both methods and can share what worked for you! š¬
Letās get a discussion going in the comments! š£ļø
#MortgageVsInvestments #FinancialPlanning #InvestmentStrategies #Homeowners
Makes no sense to pay it, CPA is correct. From less risk/less reward to more risky
1) HYSA
2) S&P
3) Sector ETFs
4) Individual stocks
Your money will grow faster than you’re saving on the mortgage plus you’ll have access to it if you need it, PLUS you’re more diversified with your money in more places.
In your case, unless you want to retire ASAP and get the mortgage paid off, there’s a pretty major opportunity cost in paying more on your mortgage.Ā Ā
It’s fairly easy to get a high yield savings account rate of 5% right now, nearly double the return and that’s guaranteed so long as the rate stays high.
But more importantly, investments get you potential returns of 8% or more and if you haven’t maxed retirement investment accounts, that’s money that’s tax-advantaged and help you more when you retire.
Your accountant is right.
$7200 in your jobās 401k OR open an IRA and put 7000 in there. Open a taxable brokerage account and put $200 in there. Invest in VOO or VTI
Consider inflation, interest rates, and investment returns before deciding. It’s not just about the numbers.
I have the exact same rate and I will not pay anything early unless I either sell the house or die.
Maybe this simple example will help – if you pay extra principal, you are getting a 2.875% return. If you save money in a savings account earning ~4%, you are getting a 4% return. Which one gives you the better return? How often do you think savings or investment rates will drop below that 2.875%?
You should follow the prime directive flowchart on this subās sidebar, but without knowing your finances you are probably better off putting it in your IRA first (always prioritize tax advantaged retirement savings over taxed investments).
Listen to your accountant. She seems smart.
I agree with your accountant. You have a 2.875% rate. Hell, you could dump that extra money in a basic HYSA account right now and generate larger returns on that, compared to what you’re paying in interest on the mortgage. And that’s starting at the bottom with a HYSA, in terms of investments.
This is low rate debt and is one of the last places to put money if you are following the personal finance flowchart. Put the money in tax-advantaged investment accounts accounts if you have enough space remaining (401k, Roth IRA, HSA) and invest it. If you are already maxing out all of those, a taxable brokerage invested in a tax-efficient broad market fund would be the next best choice.
You can earn more than your 2.875% mortgage rate by investing … or even with a high-yield bank savings account.
Don’t pay down a low-rate loan.
Instead, pay down a high-rate loan if you have one.
If not, put your “extra” money to work. Make it earn. Make it earn!
Don’t pay an extra cent towards that mortgage. You’ll be far better off investing any extra money, particularly if you have any room in tax advantaged accounts like a 401k.
Paying faster makes no sense if your mortgage won’t get recasted. You just end up sitting on your own hands. Doing so at the detriment of your investment portfolio would be more ridiculous.
Save, Invest. But don’t pay faster if you are not planning on recasting the mortgage.