Save. Spend. Splurge.

This is absolutely the time to clear your mortgage and your debts

I was talking to someone the other day who said to me: But why would I bother paying down my mortgage now? My interest rate is at like.. 3% and I could make more investing it in the stock market.

Half true.

1. You’re assuming you’ll make more on the stock market which is not entirely true

Unless you have a crystal ball, you aren’t ever going to know if you make more on the stock market.

Yes, in the LONG-TERM you will make more money in the stock market than saving it away in a 1.3% piddly high-interest savings account, but for the short-term, 5-10 years, the stock market could dip again.

2. You are paying 3% interest…… NOW

..but when interest rates increase to 4%.. then 5%.. then 6%… then 7%… perhaps all the way up to the average 11.45% – 12.71% it has historically been in the past, maybe you’re going to wish you cleared that debt today.

  • Read: How much space do you really need?

3. But rates are SO CHEAP! I have to get in NOW to lock them down.

Not really. If you spend less money overall on the debt, it is worth it to pay more in interest on less.

Take for instance if you borrow $10,000 and pay 3%, you’re paying about $300 a year.

If you wait, save up, and borrow $8000 instead because prices have gone down and people are more desperate to sell, you will pay 5% which means you’re paying $400 a year or $100 more, but you’ll have saved $2000 in the process.

Think about this for a home. Waiting for prices to go down, and paying $50,000 less, is $50,000 less of debt you will have, which will outweigh any percentage increase in interest rates you may have.

When the times are good, clear your debt as quickly as possible to prepare for the bad times.

Now is the BEST time to clear your debts.

Clear your mortgage while it’s still at its deliciously low interest rate, and get rid of it while you still can, and while MORE of your money goes towards the principal rather than the interest rate.

Don’t wait until the rates go up before realizing you should have done it sooner.

Don’t take on more debt to buy a new car, a new toy, a pool, or any other kind of depreciating asset EVEN THOUGH the interest rates are low and very enticing.

If you want something (usually unnecessary, I’m guessing) and can’t afford it save until you have enough to buy it in full, and then CHOOSE to buy it on credit and pay 0% interest or whatever it is that they’re offering you.

Don’t get screwed on the upswing and regret it.

Debt is never a way of life and never a good thing to have unless you are in control and know what you’re doing.

Who are those in-control people you say?

They are people who have plenty of cash in their bank accounts, and are borrowing money at super low interest rates because they KNOW they can leverage that money to make more by investing it, but if push comes to shove, they have the ability to liquidate what they have to clear that loan if things get nasty.

That’s who is in control of debt and can use it wisely.

UPDATE: Looks like Garth had the same brainwave I did when I was walking around outside looking at For Sale signs on homes coming up with this post on a whim, because he wrote a perfect piece to why you should rent instead of buy.

He just did a lot better than I did.


  • Pauline

    I don’t clear my mortgage for all the reasons you mention, can’t justify having a 3% savings account and a 2.29% mortgage and still paying said mortgage.
    There have been times for double digit mortgages and that has been a time for double digit savings accounts. Just five years ago I had a 6% savings account.
    This is assuming you save/invest the cash and don’t blow it on shoes.
    If my mortgage goes up to 8% tomorrow it would take me less than a year to clear it so not a big deal, and since it is a rental it would still have positive cash flow up to a 11% mortgage. An 11% mortgage would probably mean high inflation and rent prices going up so my rents could be adjusted up.

    • saverspender @ save. spend. splurge.

      @Pauline: All good points, but you are a natural saver and already financially independent.

      Most people (non-PF freaks) are accumulating debt like crazy without seeing what it would take to clear that debt (e.g. in a year at 8%) or if they could handle an 11% increase or not.

      These people are basically gorging themselves on cheap debt with no way out. They are the ones who REALLY need to clear their debts and mortgages before going on vacations or taking on more debt.

  • Gen Y

    Your post strengthened my resolve again to pay off my student debt asap, but I would still like to set aside some savings, so perhaps 80/20 until my debt clears.
    Especially since I think there is a good possibility of our interest rate going up next year.

  • Kathleen

    I think this is only true if you’re already maxing out your 401K and IRA, and have money left. Because compound interest trumps 3.5% interest paid today.

    • saverspender @ save. spend. splurge.

      Not necessarily.

      I suppose you could see it as compounding interest trumping 3.5% today, but I am hesitant to suggest this route because if you lose your job and still have your mortgage on your back, it would have been better to clear your mortgage (debt) than to save for retirement totally as an unbalanced approach.

      It’s like putting all your eggs into one basket and hoping/imagining that you will keep your job and still make an income to keep paying your debt.

      It’s the same idea in fact, as someone who pays the minimum on their mortgage now, to invest the money in the stock market for the future, which is again something I said was NOT guaranteed.

      For a balanced approach, I’d suggest a more 50/50 deal where you save a good chunk in your 401K and IRA, and the rest goes to your mortgage principal to pay it down faster, rather than putting it all towards your retirement or all towards your mortgage.

      My point is backed up also by learning that Americans are dipping into their retirement savings accounts to pay for living expenses. They’re paying a 10% penalty for taking it out for one thing, but to add insult to injury, they don’t get that compounding interest in the end.

      Read: Americans are dipping into their savings to live.

      It would have been better for them to have saved less, and paid down their debts more.

  • Tina

    I try not to put all my eggs all in one basket, so I’m putting extra cash towards investments AND the mortgage principal. For me, it’s another way of diversification. I agree with our comment above though.It’s easier to pay down debt in the good times versus bad.

  • Liquid

    Good points. I should pay down some of my debts soon. I think most stocks are a bit overvalued currently anyway. I like to think I’m one of those people who’s in control of my debts and can liquidate readily if interest rates go back to normal, but things can quickly get out of control if I’m not careful so it’s better to be safe than sorry lol. I think interest will probably start to rise next year. I plan to pay down at least $10K of my debt principle before that happens 😀

  • Laurie @thefrugalfarmer

    Another great post, Mochimac. I too am a huge proponent of paying off the debt in the good times – plain and simple: just get rid of it!!!

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