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It’s a question I hear often from clients regardless of the current mortgage interest rate environment. There’s no easy & quick guidance on what to do. Making the right choice necessitates a careful consideration of your own individual circumstances.
It may help to apply this framework to lead us to the right path for you. For starters, let’s reassess your current financial position. Do you already have an emergency savings bank account funded with 3-6 months of your average household expenses? Do you also not have any high-interest credit card or student debt? If you answered “yes” to both then we can consider applying surplus cash flow towards a mortgage or investing towards your retirement or other future goals.
Making extra mortgage payments could make sense if you are risk-averse since paying off your mortgage might align more with your comfort level. Moreover, if you’re nearing retirement, reducing debt might be a priority. Conversely, investing surplus cash for future goals could be appropriate if the expected return on investments is higher than the interest rate on your mortgage. Furthermore, if retirement is far off, investing for the long-term could be more beneficial.
It's also important to carefully consider the tax implications of either option. Sometimes, mortgage interest can be tax-deductible, while investments might have capital gains tax implications.
The right choice is one that not only makes mathematical sense but also aligns with your peace of mind and financial security.
You’re not wrong to feel overwhelmed by the sheer volume of information sources available nowadays on ways to invest. Investing does involve taking a certain amount of risk but there are ways to invest that may reduce that risk over time by following a few basic and prudent measures.
The first step is to establish an emergency savings account funded with a balance equal to 3-6 months of your average monthly expenses. Having this account available will spare you from having to pursue more expensive ways of raising cash to pay for unplanned expenses.
Next step is to determine your goals for investing. Goals should be reasonable and measurable. One such goal could be retiring by age 65.
You can then determine an investment plan for each goal that’s consistent with the level of risk you’re comfortable taking along with your investment timeline. Specifically, it’s important to create a portfolio of investments that have different return and risk profiles. Generally, that should over time reduce the overall risk of the portfolio.
Lastly, it’s important to monitor your plan but to also stick with it during periods of short-term market volatility. That may help alleviate concerns you feel about meeting your long-term goals.
Last received September 2023 based on 12/31/2022 data.
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