Which Comes First: Up the 401(k) or Pay Down the Mortgage?

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Picture this. You’ve been working the Baby Steps with gazelle intensity. You knocked out all of your consumer debt, saved up 3–6 months of expenses in a full emergency fund, and dove right into Baby Steps 4, 5, and 6. You’re putting 15% of your household income into retirement savings. And you’re saving for your children’s college with a 529 or an ESA. You’re killing it.

Now all that’s left between you and the pinnacle of the Baby Steps is paying off the mortgage.

Maybe that’s where you are in your financial journey. Or maybe you’re on track to be there soon. Either way, this is where people start to stumble. They slow down, start to settle for “good enough,” and question whether they should pay off the house—or up their 401(k) contributions (above and beyond the 15% they began investing in Baby Step 4).

Saving for retirement is great—and important. But hear this loud and clear: You need to pay off your house before you start throwing extra money at your 401(k). There are a few reasons why.

1. Mortgage debt is still debt.

Life has a funny way of throwing curve balls when we least expect them. If you get sick or lose your job, would you rather have a mortgage payment or be completely debt-free? Mortgage debt is still debt—and debt is risk. Romans 13:8 (KJV) doesn’t say owe no man any thing except for the mortgage. Your house represents your last big hurdle in your financial journey. Don’t fall apart just before the finish line. Pay off the house and you’ll be completely, totally, 100% debt-free!

2. The “tax advantage” is a joke.

If someone warns you not to pay off your house because of the tax advantage, run the other way—and fast. Say you pay $10,000 in interest on a $200,000 mortgage. That “saves you” roughly $2,500 in taxes per year. That might sound good and well when tax time comes around, but stop and think about the math for a minute. All you’re really doing is sending $10,000 to the bank instead of $2,500 to the IRS. That’s not a good reason to keep a house payment.

3. Your most important wealth-building tool is your income.

A lot of American families are paying somewhere between $500–1,000 on their monthly mortgage. That’s a pretty decent chunk of change. But think about this: When your debt is gone, you’re free to keep more of your money. How much money could you put into your 401(k) and retirement investments if you didn’t have to make a house payment each month? You could supercharge it in no time! Nothing kicks your retirement savings into high gear like paying off the house.

The last thing you want to carry with you into retirement is a house payment. Lugging that mortgage around will turn the American dream into a nightmare faster than you can say “debt free.” Pay off the house and you’ve made it to Baby Step 7. Once you’re there, you can throw extra money at your retirement savings—and enjoy being able to live and give like no one else!

money | @ChrisBrownOnAir