Let’s say you have a sum of money. You could have saved it, received it from an inheritance or won the lottery. How you got the money does not matter, in this post we will look into what you should do with it. Obviously you should save/invest the money for your future, but how? Many people ask whether they should pay off their mortgage early or opt to build an emergency fund. This question is asked time and time again. If you ask 50 different people you will get 50 different answers, here is my take:
Pros of paying off your mortgage early
Paying off your mortgage early relieves you of your biggest debt, and that alone should count for something. Also, you will be opening up over a thousand dollars each month in your budget that used to go to your mortgage that can now go to saving money each month or investing money each month.
Most people who qualify for a mortgage and “buy” a home consider themselves home owners, but that is not entirely accurate. The bank will always own your home while you are paying a mortgage. If you miss a few loan payments, you will get a few nasty letters or phone calls from the bank that owns the mortgage. If you miss a few more payments your home will be foreclosed on and you will be left out to dry. Does this sound like “owning” a home to you? Truly owning a home means you have 100% equity in it and have no mortgage to pay. This achievement no doubt comes with a very rewarding feeling.
Pros of building an emergency fund
Everyone should have an emergency fund of at least 6 months of living expenses, especially if they have a family. Unemployment is high and underemployment (having a job with fewer hours or less responsibilities) is common these days. Our economy seems to have stabilized over the past year or so, but that does not mean it is strong by any means. If you are laid off you will need an emergency fund to lean on because unemployment only lasts for a short period of time.
It is so tough to build an emergency fund. Conservatively, a family of four would need $25,000 to survive for six months. When you are on a tight budget and you would like to build up college savings for your kids or sock money away for your retirement, an emergency fund is often the “odd man out”. Even if you are able to sock away 500 dollars each month to build your emergency fund it would still take 50 months, or over 4 years to build the fund.
Why building your emergency fund is the right choice
It is a tough call between these two options, and depending on your personal situation choosing to pay off your mortgage may be the right choice. But for most, building your emergency fund is the way to go. I look at it like this: Once you pay your mortgage it is very difficult/impossible to get the money back if disaster strikes. Sure you can look into reverse mortgages but those are a hassle and nothing is guaranteed.
If you choose to build up an emergency fund you can always change your mind, and if your situation changes then use the money you had in your emergency fund to pay off your mortgage. Building an emergency fund just gives you so much more financial flexibility.
This guest post was written by Evan. Read up on Forex Strategies at forexpipster.com.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.