Investing v paying down debt

I get asked the 'should I invest my spare cash or pay off my mortgage with it?' question a lot.  It's one I wish I could have a standard answer to.  Here is how I like to think about. Your family has a balance sheet - the top half is your assets (cash in the bank, investment accounts, property) and the bottom half is your liabilities (mortgage debt, loans, credit cards etc).  It's a simple spreadsheet.  Except what I have come to realise is that there is nothing simple about it all, because every line on that balance sheet has a story behind it.

There is a story behind the house purchase, behind the holiday cabin you inherited from your grandmother.  There is a story behind the coca-cola stock you own, and the investment accounts (something like: I bought the utility stocks because my Dad told me to, and I have an account over there because my family have always had their money managed there).  There is a story behind the cash even.


Ben Carlson points out in a recent blog that the decision of whether to pay off mortgage debt or invest in the markets is about a re-balancing of your personal balance sheet.  And because that balance sheet is full of stories, the decision is about far more than just what looks best on the spreadsheet.  It's about personal values and emotions.

Some people are very happy holding debt.  Some wake up in cold sweats in the night.  If you fall in the latter group, then it absolutely makes sense to focus on paying off your debt.  After all, the whole purpose of financial planning is to move away from stress and anxiety around money towards peace of mind and a sense of ease.  And true freedom around money really only comes when we are free from debt and regular mortgage payments.

For most people, it's about balance.  I generally encourage people to do a bit of both; take a bonus and split it appropriately between the mortgage and your investment account.  Or if you have spent the past few years aggressively putting money into your mortgage, spend the next few adding more aggressively to your investment account.  Certainly that is the view that my family has taken.  We have done a good job of bringing our mortgage down over the past couple of years to a level that is really comfortable and now we are focusing on our investments.  I do dream of being mortgage-free, but have realised that it's a lot of money to have tied up in a very illiquid asset, and it has gone down the priority list for me right now.  But that might change.

There are a few questions that Ben Carlson recommends addressing before making a decision to pay off a big chunk of your mortgage:

  • How much money you have saved for retirement and other long-term goals.
  • How long you plan on staying in your house.
  • How comfortable you are in having your savings tied up in an illiquid asset that you also live in.
  • Which move you’ll regret less — paying down your mortgage faster or potentially missing out on future stock market gains.
  • How close you are to retirement.

These are good things to think about.

He also points out that paying off your mortgage is more or less a decision that you can’t take back.

"With stocks, you can buy and sell, go to cash, go to bonds, buy other funds, etc. But paying down your mortgage debt is a one-time deal (I suppose you could take out a home equity line of credit but that gets you right back to where you started — in more debt)."  Ben Carlson.

Having said that though, I am yet to meet someone who has paid off their mortgage and regretted it.  However, I have met people who tell me they paid it off simply because they weren't really sure what else to do with their cash.  Those people probably would have benefited from having a 'financial plan' a bit earlier on in their lives.  If you find yourself in that position, drop me a line, I'd love to talk things through with you.