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A question about saving

Chris Farrell May 18, 2011

Question: Hi! Love you guys. My husband and I are in our mid 40s. We have about $150k in various accounts, with about 75K of that in retirement accounts. At this point in our lives we are finally putting ~13% of our income into 403b’s, and are funding our Roth IRAs fully each year. Plus we put about $300 into taxed savings accounts, to use towards future big purchases such as cars (and maybe that dream sailboat someday). So we’re doing okay with saving right now, and I love seeing my balances grow steadily.

I also have been making extra payments on our house. The house cost ~$200K when we bought it 3 years ago, and we owe ~$167K. I have been paying an extra $250 a month in the mortgage payment. I recently read that if you plan to retire in the home you are in, this is a good idea; paying the mortgage off early will benefit you. Problem is, I don’t see us in this home for more than about 10 years. So if we don’t plan to retire in this home, and don’t plan to pay off the mortgage before selling, are my extra payments a good idea? I love the idea of that mortgage growing smaller even if I don’t burn the note on this house — aren’t I building equity faster? Or am I foolish not to be putting more in that 403b? Thanks for any advice you have. Janet, Topsham, ME

Answer: You’re doing a terrific job with saving. And my answer is shaped by that fact. You can’t go wrong if you decide to pay down the mortgage faster or if you choose to put the extra $250 a month into savings. The answer really lies with which option will best support your lifestyle.

Here’s what I mean: Let’s say you like owning a home. You may be in the home 10 years from now or you may not be there, but the house provides a lot of pleasure, from gardening to decorating to talking to neighbors. I would then lean toward continuing to pay down the mortgage fast. An additional benefit is that you’ll earn more on your money with every extra payment on the mortgage compared to what you can get in a certificate of deposit or Treasury bill. You’re building up equity.

Now, let’s say you like your home, but what you really want to do in coming years is to change careers or job. You know that at some point over the next few years you’ll want to trade income for meaning. In that case, I would automatically put the extra $250 into savings. The money will be there to help fund a career or job transition. And, if it turns out that you change your mind–you’ll stick with your current career and you want to stay in your house–you can always put a big chunk of savings into paying down principal.

If it were me, I would embrace the latter option because it offers the most financial flexibility.

However, the specifics of my examples may be off considering your circumstances. The point is that by thinking through what you want to do over the next decade may help you decide the best place for the extra $250 a month.

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