If I came into a million dollars what would I do with it? Would I pay off my mortgage or would I invest it? This is a very interesting question. And could be applied to many different scenarios. In the sense that if I inherited or won enough money to pay off my mortgage would I?
Short answer…NO! I hear gasps of shock as I write this. The truth is my DH would not do it solely because of the statistically reasons of earning more interest than our mortgage. So it’s completely logically to him to not pay it off. For me it’s not about the math or logic. It’s about behavior, emotion, and knowing myself.
This is not easy to write, but I know if I paid off our mortgage tomorrow, I would not necessarily save our entire mortgage payment. And that I feel would be detrimental to our future. Why? Well because I know that I would have a million reasons to justify buying something, not saving as much, and loosening the purse strings.
I think if I were older my answer might be different. But with 30 years till retirement, I would want to pretend that I didn’t have the money. I would want to force myself to live on a budget and say “I can’t afford that right now.” It would be much to easy to justify a “once in a lifetime trip” or increase the eating out budget or even buy a nicer car than I would have if I didn’t have all that extra cash. Think about it $2k/month, instead of saving it I could say well we need to go on vacation and it’s just 2 months of mortgage payments, but we no longer have a mortgage! Instead of stashing away every penny.
I know myself and this is likely to happen. I’ve also heard from people who have a paid off mortgage in 15 years instead of 30 years, that when they pay it off they start to spend the mortgage payment instead of saving it. So if that is the typical behavior, then wouldn’t it hurt me if I kept spending my mortgage payment? My parents have paid off the mortgage on two homes, and now they have ANOTHER mortgage. I think if they had kept mortgages on their homes, they might never have bought another home with a mortgage. It would have deterred them from taking on more debt. It’s a behavior issue not math issue.
But perhaps most people have strict self-control and discipline. But I don’t. My DH does, but I would probably be able to wheedle him into buying a new Car instead of a used car because we have no mortgage. Or a trip to Greece instead of camping. And I think he would definitely consider it if we didn’t have a mortgage. But a mortgage, well it weighs on you. It makes you consider your finances in a different light.
So until I retire I don’t plan on paying off my mortgage. I want to be under the gun. Sure knowing I could pay it off would make me secure and happy. BUT my having that debt, I would always weigh out my spending. I would carefully consider what a new versus a used car would cost. A $4k trip versus a $2k vacation. While it doesn’t seem like a big deal in some ways it is.
If you came into (won, inherited, found) enough money to pay off your mortgage would you?
8 responses so far ↓
1 Grace // Apr 18, 2008 at 2:47 pm
Knowing yourself is a big part of the financial battle. That’s why Dave Ramsey suggests paying debts smallest to largest rather than go the more rational route of paying those with the highest interest rates first. That’s why I get a large tax refund even though it means I’m lending the government money interest-free. The correct response is to do whatever works for you. Personally, I probably would pay off the mortgage just to have that out of the way. But that’s Grace, not YOU.
2 tom // Apr 18, 2008 at 8:44 pm
that is a very tough question. I think I would probably pay it off. You make a very convincing arguement not to. We currently have a mortgage rate of 5.75%, which is very good. If we are in the 25% tax bracket, thats bascially a rate of 4.3%. If you invest the million, you will likely see a better return than 4.3% over the long run. However, the peace of mind that comes with having no mortgage, outweighs the “loss”.
I agree that if I did pay it off that I probably wouldn’t invest all of that monthly “savings”. I would invest most of it though…
3 Meg // Apr 18, 2008 at 9:15 pm
Assuming I had a low fixed rate, I wouldn’t pay off my mortgages.
The main financial and psychological reason to eliminate debt (even good debt, even debt at low interest rates) is to minimize your debt-to-income ratio so that less of your income is needed for fixed costs each month. This increases your level and sense of security: if you lose your job or the market tanks your retirement fund, you will still probably be fine because your fixed costs are so low.
But if you had millions sitting in the bank and you knew you could pay off all your debt at any time, then the psychological release of paying off your mortgage would be less - and the financial benefits (leverage) of keeping it would still remain.
4 obsolete29 // Apr 19, 2008 at 12:55 am
What’s the purpose of fiscal security and the freedom that goes with that? If you’re debt free with a big ole nest egg saved up for retirement, why not take the vacation to Greece?
Hehe, to put it another way, if I’m eating pinto beans all the time for dinner and driving a 97 honda accord, what’s the purpose of having a net worth of $2million?
I would pay off all debt and invest the rest. I also wouldn’t feel guilty about paying cash for nearly new cars every few years or a yearly vacation to Europe.
I dunno, maybe my line of thinking is the reason I don’t have a networth of $200k.
5 LivingAlmostLarge // Apr 19, 2008 at 4:12 am
Good point Meg about having the financial release of knowing you could pay off the mortgage. That would help a lot.
But I couldn’t pay off the mortgage and be under the gun in saving. And yes it would be losing me money even 6%.
But it’s a mindset. And obsolete, I think the problem is that I might get too foolish with spending and jeopardize my financial future. By having a set savings and spending limit with a very fixed budget it’s easy. When you have more disposable income then it’s easier to spend.
And just because I have a paid off home, doesn’t mean I’m set for life. If anything I still have to make sure I can afford property taxes, insurance, etc when I retire. And that will be generated by my savings. If I save nothing and only have a home I’m screwed.
7 Barb1954 // Apr 19, 2008 at 3:08 pm
Obsolete, you said what I wanted to post.
People who put off enjoying what life has to offer until retirement may find themselves sorely disappointed. There are no guarantees how long we or our partners may live. Some people never get to enjoy retirement. In the last couple years, people I know have died at ages 62, 69, 59, and 46. If you have a million dollars in the bank and a paid for home, you can certainly afford to take annual vacations to someplace nice. One must always balance planning for tomorrow and living for today. Otherwise you end up like Ebeneezer Scrooge, sitting alone counting up your stacks of money and never enjoying the pleasures of a life well lived.
8 Future Millionaire // Apr 20, 2008 at 11:33 pm
Since I’m currently a renter because I like to keep my monthly cash flow at its current levels - if I came into a $1M I’d probably buy a home and then do some type of automatic withdraw each month so that I would still be paying “rent” it would just be going into savings. This automatic withdraws seems to work well for me - its how I do my Roth IRA savings and my car savings and I completely forget that I have this in my take home pay. But everyone has different methods.
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