3 Buckets to Consider Before Paying Off Your Mortgage

“Should I pay off my mortgage or invest my money?” It’s a common dilemma, but it’s one that needs careful thought. Spoiler: It’s not a one-size-fits-all answer.

The Mortgage Side: Paying Off Early Isn’t Always the Best Move

People tend to lean towards paying off their homes as quickly as possible to feel that sense of freedom. But what a lot of folks don’t realize is that by putting all your extra money into paying off your mortgage, you're locking up your cash in a home.

Here’s a real-life example: Let’s say you put every extra penny toward your mortgage, thinking it’s a smart move. Unexpectedly, life throws you a curveball—a financial hardship—and now you can’t access that extra cash. Now, your best option is to borrow against your home again, but what happens if your income drops or your credit changes? You might go from feeling secure to feeling stuck.

This isn’t to say paying off your mortgage is a bad idea, but it does highlight an important point. Having your money tied up in your home can create problems if you need access to cash down the road.

Before You Pay Extra: Take Care of Your Financial Buckets

Before you start throwing all your extra money at your mortgage, make sure your other financial “buckets” are in good shape. Here’s what you should prioritize:

Emergency Savings: Do you have at least 3-6 months of living expenses in an easily accessible account for unexpected situations?
Retirement Contributions: Are you maxing out your 401(k) or IRA? Take full advantage of that tax-deferred growth before you start paying off low-interest debt.
Lifestyle Needs: Make sure you’ve got enough for your day-to-day life and fun stuff. Don’t sacrifice your current quality of life just to knock out a mortgage.

If these buckets are full and you’ve still got extra funds, then it might make sense to start putting more toward your mortgage. But it’s not always the best move, and balance is key. Think of it like this, you wouldn’t want to pour all your water into one bucket (your house) and leave the others (savings, retirement, lifestyle) empty. Make sure all areas are taken care of first.

The Financial Advisory Side: What About Investing?

Financial advisors usually lean toward the benefits of investing rather than aggressively paying off debt, such as mortgages. Here’s why: if you’ve locked in a low mortgage rate (like 3-4%) and the market is averaging a return of 6-8%, your money might work harder for you in the market than paying off low-cost debt.

Of course, investing has its risks. The market can be volatile, and while it’s easy to look at long-term averages, we all know past performance doesn’t guarantee future results. That’s why it’s so important to decide based on your personal risk tolerance, financial goals, and time horizon. Everyone’s situation is different.

Finding the Balance: Can You Do Both?

Here’s the thing: it doesn’t have to be one or the other. Some people find a sweet spot by doing both—making extra mortgage payments while also investing. It’s all about what makes sense for you.

A Collaborative Approach: Consider All Factors

The decision to pay off your mortgage or invest isn’t something you should base on what your neighbor or cousin did. It’s personal and depends on a bunch of factors, like:

Liquidity Needs: How much cash do you need to have on hand in case of emergencies or major life changes?
Interest Rates vs. Market Returns: What’s your current mortgage rate? How does that stack up against the potential returns you could earn by investing?
Financial Goals and Timeline: Are you close to retirement, or just starting to build your wealth?
Risk Tolerance: How comfortable are you with the ups and downs of the stock market? How do you balance that with the comfort of being debt-free?

The Bottom Line: Make an Informed Decision

At the end of the day, the choice to pay off your mortgage or invest isn’t a simple one. There’s no “right” answer, just what’s right for you and your unique situation. The most important thing is not to make this decision based on opinions, family chatter, or emotions. Look at all the factors, ask the tough questions, and work with professionals who can help guide you through the process.

If you are interested in connecting with one of our team members or learning more about how Green Ridge Wealth Planning can help you, please reach out via our website to schedule some time to speak.

Green Ridge Wealth Planning, LLC is a registered investment adviser. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment / tax advice. The investment / tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment / tax strategy for his or her own particular situation before making any investment decision. You are responsible for consulting your own investment and/or tax advisor as to the consequences associated with any investment.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of AUTHOR, may differ from the views or opinions expressed by other areas of Green Ridge Wealth Planning, LLC, and are only for general informational purposes as of the date indicated.

Dollar-Cost Averaging: A Disciplined Approach to Investing

If you have extra cash sitting in your investment and bank account, then you probably have asked yourself when is the right time to put the money to work. Is now the right time? Am I going to miss the next big move? What if the market tanks the minute I invest? AAAAHHHHHH!!!!

Clearly the above does not reflect a levelheaded mentality for getting cash to work. That is when dollar-cost averaging comes into play. This strategy helps take away timing the market and creates a disciplined approach to putting funds to work. Nobody can time the market perfectly, and while sometimes you may get lucky, putting together a thoughtful strategy with discipline takes the stress and emotions out of the game. The below information covers what dollar-cost averaging is, the rationale behind it, as well as our philosophy at Green Ridge Wealth Planning.

What is Dollar-Cost Averaging

Dollar-Cost Averaging (DCA) is an investment strategy that involves creating a consistent strategy to invest funds into the market. This approach spreads out the purchase price over time essentially creating a disciplined approach to risk management as well as taking out the emotional piece of thinking that is now the right time to be investing. If you had $12,000 to put into the market instead of investing it all at once, you would put $1,000 in per month for a year or $2,000 in per month for 6 months. This creates you buying investments at different price points, some high, some low, and some in the middle which creates an average price that you would have bought at. This helps mitigate the impact of short-term market fluctuations in your portfolio.

The Rationale: The biggest fear investors have is that as soon as they invest their money, they see a market decline. The point of dollar-cost averaging is to take this fear away or take away emotions and think logically by not putting the lump-sum to work all at once.

Behavioral Finance: Dollar-cost averaging helps investors avoid common pitfalls driven by emotions, such as panic selling during market downturns or greed-driven buying during market peaks.
Risk Management: By spreading investments over time, dollar-cost averaging reduces the risk associated with investing a lump-sum at an inopportune time.
Long-term Focus: It encourages a long-term investment perspective, focusing on consistent growth and accumulation over time rather than short-term market movement.

Green Ridge Philosophy: While we agree wholeheartedly with the above information, there are two important nuances that we take into account.

Lump-Sum Contributions: Whether it be a new account or someone who wants to contribute a larger sum to their portfolio we will put a strategy into place. The above information talks as if you are investing your own money but what about giving it to your advisor? We create a disciplined strategy whether you are making monthly contributions or giving us a lump-sum contribution. We often use a money market mutual fund as a short-term parking spot for funds so that we can earn interest while we find the right opportunities to invest in the market.
Market Declines: When we see a market decline, we see this as an opportunity to deploy funds. In some cases, this may speed up the process of dollar-cost averaging into the market if opportunities present themselves at lower prices.

Dollar-Cost Averaging is a practical and effective investment strategy for managing risk, encouraging disciplined investing, and avoiding emotional decision-making. It is particularly beneficial for long-term investors who wish to steadily accumulate assets over time without being overly concerned about short-term market volatility.