I have worked for the past 5 years to get out of debt, pay my bills, and own a home. I'm glad to say that all my debts are paid off, my bills are paid every month, and my mortgage is cut by 10 years time, since I pay a little extra toward it.

I have an emergency fund of approximately 4 months saved up, and have investments if that turns out to not be enough. I'm saving for retirement through the company pension, as well as with an outside organization, so I believe I will be comfortable in my retirement years.

I'm under 30, and have 15 years of a 25 year mortgage left, at 2.89%. My credit card is paid off every month, and I use cash for everything I can.

My goal is to get my house paid off, but I'm feeling that the interest rate is low enough that it should be one of the last things on my mind. Should I try to build more of an emergency fund, pay more down on my mortgage, or try to get some more investments in my name?

  • As percentages of your income, what is the current mortgage payment, and how much are you putting into retirement savings? Jan 10, 2017 at 0:45
  • @Nathan Mortgage - 2 payments that are 16.5% of my take-home income each per month; pension is 16% of my income take-home income each month; other retirement savings are approx. 10% of my take-home income. I also have CPP maxed each year. Jan 10, 2017 at 0:52
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    Boost your savings so you can one day "fire yourself" Jan 10, 2017 at 15:15
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    Can you find better use of your money? Getting a certificate or a degree, investing, or starting a business might be better options for you given your low interest rate. You could also invest in improving your home, buying solar panels for example might be a good long term investment.
    – ventsyv
    Jan 10, 2017 at 21:57
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    "I'm glad to say that all my debts are paid off, ... and my mortgage is cut by 10 years time" - if your mortgage isn't paid off then how can you say all of your debts are paid off? Jan 29, 2017 at 22:46

8 Answers 8


Understand your own risk tolerance and discipline. From Moneychimp we can see different market results -

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This is a 15 year span, containing what was arguably one of the most awful decades going. A full 10 year period with a negative return. Yet, the 15 year return was a 6.65% CAGR. You'd net 5.65% after long term cap gains.

Your mortgage is likely costing ~4% or 3% after tax (This is not applicable to my Canadian friends, I understand you don't deduct interest). In my not so humble opinion, I'd pay off the highest rate debts first (unlike The David followers who are happy to pay off tens of thousands of dollars in 0% interest debt before the large 18% debt) and invest at the highest rate I'd get long term. The problem is knowing when to flip from one to the other.

Here's food for thought - The David insists on his use of the 12% long term market return. The last 100 years have had an average 11.96% return, but you can't spend average, the CAGR, the real compound rate was 10.06%. Why would he recommend paying off a sub 3% loan while using 12% for his long term planning (All my David remarks are not applicable to Canadian members, you all probably know better than to listen to US entertainers)?

I am retired, and put my money where my mouth is. The $200K I still owe on my mortgage is offset by over $400K in my 401(k). The money went in at 25%/28% pretax, has grown over these past 20 years, and comes out at 15% to pay my mortgage each month. No regrets. Anyone starting out now, and taking a 30 year mortgage, but putting the delta to a 15 year mortgage payment into their 401(k) is nearly certain to have far more in the retirement account 15 years hence than their remaining balance on the loan, even after taxes are considered. Even more if this money helps them to get the full matching, which too many miss.

All that said, keep in mind, the market is likely to see a correction or two in the next 15 years, one of which may be painful. If that would keep you up at night, don't listen to me. If a fixed return of 4% seems more appealing than a 10% return with a 15% standard deviation, pay the mortgage first.

Last - if you have a paid off house but no job, the town still wants its property tax, and the utilities still need to be paid. If you lose your job with $400K in your 401(k)/IRA but have a $200K mortgage, you have a lot of time to find a new job or sell the house with little pressure from the debt collectors.

(To answer the question in advance - "Joe, at what mortgage rate do you pay it off first?" Good question. I'd deposit to my 401(k) to grab matching deposits first, and then if the mortgage was anywhere north of 6%, prioritize that. This would keep my chances at near 100% of coming out ahead.)

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    Yes, my property tax is about $150/month & utilities at another $250, but I also have more house than I need. By retirement time, I'd be willing to downsize significantly if I didn't have enough money to support my lifestyle otherwise. I agree that the Dave is extreme in his prescriptions, but I think paying off the home gives peace of mind that is worth a lot. Jan 10, 2017 at 4:40
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    This is why finance is personal. And for us, the mortgage payment is not a factor in our piece of mind. It's literally a pre-funded expense that's part of our annual retirement withdrawal. In effect, that's what retirement is, enough money so that 4% or so will cover one's expenses. Still, I'm curious to see your feelings regarding the recent interaction I had regarding the snowball. Jan 10, 2017 at 12:38
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    Dave Ramsey, whom many treat with much reverence, attributing a level of infallibility typically reserved for the Catholic Pope. Jan 10, 2017 at 19:01
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    Dave Ramsey's plan has worked for millions of families. He is not personally infallible, as he often mentions himself. The OP said his goal was to get the house paid off. The Baby Steps appear to be perfect. Your answer captures the math but not personal behavior. Maintaining financial discipline with large amounts of cash for decades is very difficult for most people. Getting out of debt make great sense for the vast majority of people. Jan 10, 2017 at 20:43
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    OP also said "the interest rate is low enough that it should be one of the last things on my mind." and I agree. You are 100% correct. There are those who benefit from his advice. Those who should never use credit cards. Those who lack the discipline. All those people should listen to his advice 100%. I address a different audience. Jan 10, 2017 at 20:48
  • You're putting plenty away for retirement, awesome! Others who read this should plan on 10-15% for that. The big bonus here is the tax advantage that comes from lowering your taxable income. Consider what portion of your salary is being taxed at a higher marginal rate. All of that money has an (often quite large) immediate return through lower taxes.
  • Keep putting money aside for your short-term savings until you have 6 months.
  • Save up for other major purchases you see on the horizon so you don't need to go into debt for them.
  • Pay down the house. It will feel so good when you know you have a place to stay whatever else comes in your life.
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    One thing to add here is that normally it's best to take advantage of any tax advantaged accounts you have - while a 3% interest rate might seem like a safe bet, not putting money into a 401k or RRSP might mean you are paying a 30% marginal tax on that money (or whatever your marginal rate is). It takes quite a few years for that to become worthwhile even if your investments are in something incredibly safe. If you save 30% on marginal taxes it takes 9 years before the interest on the loan would be equal to the tax savings, even if your investments earn 0% every year.
    – enderland
    Jan 10, 2017 at 13:57
  • second what @enderland said. saving pre-tax money is awesome. max out those pre-tax accounts before everyting else. Jan 10, 2017 at 15:13
  • @enderland Aren't 401ks tax-deferred, making that 9-year figure irrelevant? You're going to pay taxes on it someday. Jan 11, 2017 at 16:20
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    @Darthfett The nine year figure should be revised probably to reflect 15% at withdrawal vs. 25-30% and deferral time. Of course that makes a lot of assumptions about tax brackets before and after retirement, but many people experience it this way in reality. Jan 11, 2017 at 16:22
  • @Darthfett, also note the Canada tag, so we would be discussing TDA/RRSP, not 401k/IRA. Jan 11, 2017 at 16:28

This seems to be a very emotional thing for people and there are a lot of conflicting answers. I agree with JoeTaxpayer in general but I think it's worth coming at it from a slightly different angle.

You are in Canada and you don't get to deduct anything for your mortgage interest like in the US, so that simplifies things a bit. The next thing to consider is that in an amortized mortgage, the later payments include increasingly more principal. This matters because the extra payments you make earlier in the loan have much more impact on reducing your interest than those made at the end of the loan.

Why does that matter? Let's say for example, your loan was for $100K and you will end up getting $150K for the sale after all the transaction costs. Consider two scenarios:

  1. You have paid off the house.
  2. You owe $50K and have $50K in a bank account.

If you do the math, you'll see that the total is the same in both scenarios. Nominally, $50K of equity is worth the same as $50K in the bank.

"But wait!" you protest, "what about the interest on the loan?" For sure, you likely won't get 2.89% on money in a bank account in this environment. But there's a big difference between money in the bank and equity in your house: you can't withdraw part of your equity. You either have to sell the house (which takes time) or you have to take out a loan against your equity which is likely going to be more expensive than your current loan.

This is the basic reasoning behind the advice to have a certain period of time covered. 4 months isn't terrible but you could have more of a cushion. Consider things like upcoming maintenance or improvements on the house. Are you going to need a new roof before you move? New driveway or landscape improvements? Having enough cash to make a down-payment on your next home can be a huge advantage because you can make a non-contingent offer which will often be accepted at a lower value than a contingent offer.

By putting this money into your home equity, you essentially make it inaccessible and there's an opportunity cost to that. You will also earn exact 0% on that equity. The only benefit you get is to reduce a loan which is charging you a tiny rate that you are unlikely to get again any time soon.

I would take that extra cash and build more cushion. I would also put as much money into any tax sheltered investments as you can. You should expect to earn more than 2.89% on your long-term investments. You really aren't in debt as far as the house goes as long as you are not underwater on the loan: the net value of that asset is positive on your balance sheet. Yes you need to keep making payments but a big account balance covers that. In fact if you hit on hard times and you've put all your extra cash into equity, you might ironically not being able to make your payments and lose the home.

One thing I just realized is that since you are in Canada, you probably don't have a fixed-rate on your mortgage. A variable-rate loan does make the calculation different. If you are concerned that rates may spike significantly, I think you still want to increase your cushion but whether you want to increase long-term investments depends on your risk tolerance.

  • +1 for as level headed answer as this question can get. And for the mention of liquidity being important. Jan 12, 2017 at 0:49

You are doing great! Congratulations.

Check out the Dave Ramsey Baby Steps. He has advice for exactly your situation. The book Financial Peace covers the topic in detail.

You have an Emergency Fund which is Step 3. Step 4 is investing 15% for retirement in 401k and similar. Step 5 is funding college if you have children.

In Step 6, he advises putting any extra money towards the principal on your home. Owning your own home outright is a better goal than investing the money at a higher interest versus your mortgage interest rate.

After your are completely debt free, then you can invest and give generously which is Step 7.

Answering your question, push your emergency fund to 6 months, bump your retirement saving to 15% and put any extra money to your mortgage.

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    "Owning your own home outright is a better goal than investing the money at a higher interest versus your mortgage interest rate." ??? In what way is that a better goal? Jan 12, 2017 at 0:35
  • In case Matt doesn't answer, it's better because it's guaranteed. There's only a 99% chance the market will exceed the rate on the loan over that period of time. Financial Peace is all about feelings, not numbers, or so it would seem. Pay the mortgage in 15 years vs 30, and only then start to save. 1 million fans can't be wrong. (Or can they?) Jan 12, 2017 at 0:39
  • Owning your home has much less risk than borrowing money to invest. As Dave says 'If your home were paid off, would you take a mortgage against it and invest the money?" For most people, this idea represents way too much risk thus the resounding answer is 'No!' I personally know at least 5 people who lost their family homes to foreclosure in the recent housing crash. All of them had leveraged the equity in their home with disregard for the risk. Having less risk in your life will give your more 'Financial Peace' thus owning your home is a better goal than leveraging for investment. Jan 12, 2017 at 1:24

I'm in my 40's, and fully paid off the mortgage early. My ex would have preferred that I'd given it to her as spending money instead. It can be said that since interest rates after year 2000 went down not up, I am a mug to have paid off early when perhaps I could have just bought more stuff like everyone else does. I looked at the 1970 to 1990 average interest rate; about 10%, and thought that it would be imprudent to have a big debt which would be crippling at 10 or 15% interest rates, so I paid it off while I could.

A factor to consider is how you expect your own income to change over the next decade. If you work in shops, call centres, taxi driving, import warehousing, language translation, news writing, or anything which can be offshored or automated, then either the expectation of your salary diminishes towards the worldwide typical, or if it goes below £7.50 per hour typical then your employer goes bust. Or blags a subsidy. That is, I am a pessimist and would pay off early while possible. I don't know chinese for "he's not here" to say to the debt collector.

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    I think your 2nd paragraph could better emphasize the idea that you should pay debts down if you expect your salary to go down in the future. I'll wager very few expect that to occur. Jan 10, 2017 at 16:43
  • "when perhaps I could have just bought more stuff like everyone else does." - I'm sure you'll agree that wasn't the only alternative to paying off the mortgage early. "I looked at the 1970 to 1990 average interest rate" - what made you choose that timeframe? Jan 12, 2017 at 0:39

Hold onto that money, put it in savings. With such a change in the US government, who knows what will happen - and if things start to go sideways, having savings - so that you can continue paying your mortgage, and thus keep your house - is going to help you more than being able to throw more money at your mortgage principle. (Unless you can pay it off totally. Then do that.)

I would build more of an emergency fund (2 years, just to be on the safe side), THEN see what other things are going on in your life, and what's going to be more advantageous for you. (That's a nice low interest rate. Not many other loans these days are going to have an interest rate that low.)

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    2 years seems excessive - and there's an opportunity cost to holding that money in a low-interest account. Would sooner see the OP put the money into a low-risk investment, such as bonds, after a sufficiently sized emergency fund has been established.
    – Chris
    Jan 10, 2017 at 0:40

According to Dave Ramsey you should pay off the house. What I've found is that I'm willing to work a lot harder at saving money to put toward the house when I have that specific goal in mind.

If I were to put the money in the market instead then I would be less likely to make as many sacrifices and would inevitability end up putting less money away.

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    According to the 'baby steps' referenced elsewhere, this is not what he recommends. You should provide a reference if there is some contradicting advice.
    – JimmyJames
    Jan 11, 2017 at 22:07
  • He is out of debt (Baby step 2), has 4 months in savings (Baby step 3), and baby steps 4,5,6 are done at the same time. The point I was making is that paying off your home is behaviorally different and that's critical information that is often unknown, underrated, or misunderstood. daveramsey.com/askdave/college/how-much-for-baby-step-5 Jan 12, 2017 at 22:18
  • It's not clear how much is being put away for investments so I guess that part is debatable. As to your point, it seems to me that the goal is to build wealth, not 'put money away'. Lets say you put away half what I do and end up with twice as much at the end. I would be envious of you. Would you envy me? I've never been successful at tricking myself. Honestly I think yo might be rationalizing risk-aversion. I don't mean to judge, it's just that you are giving advice that is contrary to basic financial logic. Joe has a pretty good essay on how much this kind of thinking can cost you.
    – JimmyJames
    Jan 13, 2017 at 0:35
  • You might be right that I'm rationalizing risk-aversion but it's also important to understand where your strengths are. I'm a Dave Ramsey fan because I don't have the best self discipline. If I increased my savings as you suggest I would be much more likely to spend it on random stuff. Maybe after I earn a few more grey hairs I'll have better discipline. But right now the best thing I can do is to lock that money in equity that I can't easily spend. Jan 13, 2017 at 4:23
  • Do what works for you for sure. I would note that it's pretty hard to spend money in a 401K or IRA (assuming you are in the US.) And not having a sizable bank account (or keeping it) you are really running a lot of risk. I have an internet bank account that I use only for savings. In order to withdraw money, I have to transfer it to another bank account and wait a few days. It's enough of a pain that I rarely think about doing it. As far as this thread goes, the OP doesn't really seem to have a spending problem.
    – JimmyJames
    Jan 13, 2017 at 14:29

To piggyback on a comment that @enderland posted, if you have some extra cash saved, something worth considering is to evaluate your current retirement accounts to determine future tax liability.

In Canada, there exist Roth IRA-like Tax Free Savings Accounts (TFSA) which are pre-taxed (meaning that you pay all taxes up front when you deposit monies to this account rather than when you withdraw them during retirement after they have grown in interest). Depending on the type of account your retirement funds are currently held in, it might be financially advantageous of you to save your extra money in a short term savings account, transfer your current retirement savings from a post-tax account to a TFSA and use that extra money to pay off any immediate tax liability incurred as a result of the transfer.

You will have to run the numbers yourself to determine if your retirement account setup, balance and interest justifies this route but given your age there is a fairly high chance that you can end up saving many tens of thousands of dollars in taxes that might be otherwise be due when you retire.

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