Pay your mortgage or invest for retirement?

picture of a toy house sitting on a table with a set of keys next to it

Should you pay your mortgage or invest for retirement? Well, it depends.

If you’re in a position where you have extra funds to allocate to a goal other than debt repayment, first off, CONGRATULATIONS! However, if you’re in this position, you may be wondering what to do, particularly if you have a mortgage you’re tempted to pay off.

If this is you, here are two questions you should ask yourself when deciding whether to pay your mortgage or investment for retirement

1. Which option mathematically makes most sense?

2. Which option will help you sleep better at night?

Let’s look at the math of option 1:

While is impossible to know how the markets will behave in the future, history has shown that the US stock market has consistently returned 10% per year on average.

If your mortgage is at a low rate, i.e. 2% or less, it may make sense to use extra money to invest and benefit from the record high market returns rather than pay down the low interest mortgage.

This is call leveraging debt and while debt is generally a bad thing, sometimes it can work in your favor. Leveraging the low interest rate and investing your extra funds to achieve higher investment returns may be the right option for you if this mathematically makes sense to you. While we can’t predict how the market will behave, historically speaking it has proven to be a safe bet.

Having said that…

There’s no denying the massive psychological factor with the second option of paying off your mortgage. It’s easy to imagine the sense of relief that comes with knowing your mortgage debt was gone.

And then there’s cash flow factor. Generally speaking, a person’s monthly mortgage payment tends to be their biggest monthly expense, this is probably the case for you. I know it certainly is for me. Eliminating that payment would result in a big increase in cash flow which is something to consider as well. You could use those extra funds to double down on your savings or save towards other savings goals like house renos, travel, or education.

So should you pay off your mortgage or invest for retirement?

As always, personal finance is personal and this decision is no different. Do the math and weigh the psychological and cash flow factors before coming to a decision as to whether paying off your mortgage or investing for retirement is right for you.

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