Now that you’ve bought your forever home and are confident in your career, you might be wondering if it would be worth investing your extra income towards retirement or using it to pay off your mortgage.
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We asked financial experts from across the country how to do it Make the most of your money. Most agree that the answer depends on where you are in your life, how much you save, and your long-term financial goals.
The majority of our experts agree that if you have enough disposable income to make the choice between paying off your mortgage or investing in retirement, you’re in a pretty good position. A healthy financial situation is crucial before you can even think about spending extra money on anything other than your necessities.
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You want to make sure you have enough cash to survive unexpected expenses. In general, you should have around three to six months of savings. That means money that is readily available to you in an emergency. Once you’ve built up your savings, now is the time to start thinking about how to get the most out of the rest of your income.
Most financially savvy people know that carrying large amounts of debt is not a good idea, but it may depend on the type of debt you have. While credit cards and other types of consumer debt are typically considered “bad debt” and should be paid off as soon as possible, a mortgage is considered “good debt” — the kind that can help build wealth or increase income over time increase.
Kevin Roche, CEO at Pouldrew LLC and Managing Director at lion wealth, said: “For most homeowners, there are also tax benefits of holding a mortgage; Interest is tax deductible.” He is, in most cases, a strong advocate of saving for retirement.
According to Roche, the number one reason people should choose to save for retirement is because of the “compounding effect.” Compounding is the accumulation of interest on interest. While there are some benefits to paying off your mortgage, he said, if you “compare long-term returns (on investments) to the interest rate you pay on a mortgage, the difference favors investments.”
He also said that there are “tax benefits to saving for retirement through a company-sponsored plan on top of IRAs, in addition to generating returns on a tax-advantaged basis.” He warned that concerned investors shouldn’t worry about the falling stock market this year as “markets are recovering.”
“Currently, an investor can earn 4% on a 10-year Treasury bond,” he said. “If they’ve taken out a mortgage in recent years, their mortgage rate is likely to be lower. So borrow “cheap” and achieve additional returns [mortgage rate] will create a positive range between the two interest rates and put them on the path to prosperity.”
Adam Pippington, CFO at freedom dividend, said: “When it comes to saving money for retirement or paying off your mortgage, there is no one-size-fits-all answer. This depends on your individual financial situation.
“If you’re nearing retirement and you have a large mortgage balance, it may make more sense to focus on paying off your mortgage,” he said. “This frees up more money to live on each month and you don’t have to worry about monthly mortgage payments.”
Pippington also said, “There are a few things to keep in mind when making it [the] Decision. First, make sure you’re paying the maximum amount into your retirement account each year. How to save faster for retirement.
“Second, if you have a high-yield mortgage, consider refinancing at a lower rate. This saves you money on your monthly payments and gives you more money to invest in retirement or other goals.
“Ultimately, the decision to focus on pension or mortgage payments comes down to your individual situation. Speak to a financial advisor for more specific advice tailored to your needs.”
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This article originally appeared on GOBankingRates.com: Should you be saving for retirement or paying off your mortgage early?
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