Many people struggle with the decision between paying off their mortgage or saving for retirement. Getting out of debt is attractive to many people – they don’t like the large mortgage hanging over their heads, but others prefer to have that nice nest egg for retirement, so which is right for you?
What’s the Difference?
Many people think paying off the mortgage and saving for retirement have the same effects. Whether you have a large nest egg or you don’t have a mortgage to worry about, aren’t you in the same boat? You’re not and here’s why.
When you pay off your mortgage, your money is tied up in your home. It’s not a liquid investment. It’s true that you could sell your home and take out the equity, but you have to live somewhere. You won’t be able to live off the funds completely. If you save for retirement, but still have a mortgage, you at least have money to live off of and pay your mortgage.
Acting Early Matters
Both paying off your mortgage and saving for retirement are done best when done early. When you pay extra toward your mortgage early in the term, you pay down the principal faster, which means you lower the amount of interest you pay in the long-term. This may help you have more money to save for retirement down the road.
Saving for retirement early is important because of compound interest. The money you save now will be worth a lot more than the money you save down the road because of the time the interest has to compound. In other words, the interest you earn on the money you invest now will earn interest, which will earn interest. This keeps going until you withdraw the funds.
Giving your retirement fund time to weather the storm so to speak is important too. We all know that investments don’t always go up. You may lose money from time to time, but if you start early and have time for the investments to come back, you won’t find yourself struggling come retirement.
Striking a Balance
So how do you strike a balance between saving for retirement vs paying off your mortgage? Because of the way interest compounds, saving for retirement is more important, especially if you are young. If you’re thinking about paying more than the monthly minimum towards your mortgage, consider redirecting those additional funds towards your retirement savings. In the long term, the value of your retirement account will likely outpace the value of your home.