Should I save or pay on my loan?

Question

This fall, I am going to be bringing home an extra $180-200 per month. I don't forsee any changes in my spending habits. What should I do with it? Should I put some extra on my mortgage (6.5% rate)? Should I put it in savings (4.35% yield)? I know all about the tax issues, etc. I just want to know what makes the most sense to you.

I have no other debt and about 7 months' take-home pay in savings.

Answer 1

Well you have a house, you have no debt and you have savings. All of these things are good and important. You might think about putting some of your current savings into CDs. You'll get more interest that way. Put your money into multiple CDs with staggered maturity dates so that you'll always have some money available to you. Just roll them over if you don't need the money as each CD matures.

At this point, you're on pretty firm financial footing for the present and the short-term future. Now it's time to think about the future. What are your goals? Do you want to retire early? What kind of lifestyle do you want? Think about how you're going to reach those goals. So maybe after figuring your goals, simple savings or paying off the mortgage don't look to be your best options.

Does your company offer a 401(k) with matching funds? Are you participating in it? If not, get in and put in enough to maximize the match. Free money is good.

Next, consider your IRA. Roth if you qualify for it (tax-free growth is good), traditional if you don't qualify for the Roth (tax-deferred growth is good, but not as good as tax-free growth). Max it.

Then if you still have extra money left over, think about going back to the 401(k) and maxing that if it doesn't interfere with your lifestyle.

If you've done all these things already and the extra money you're getting is on top of that, you might consider investing in some things outside your tax deferred holdings. Let me know if that's an option. If it is, I'll recommend some books you can read to determine what investments best fit your risk tolerance and goals.

Answer 2

There's limited info in your question but here goes. (e.g. No indication of how much reserve savings you have, your mortgage payment, amount you owe, tax bracket etc.)

- Suggest you pay off any higher interest debts first.
- Then save as much as possible.
- A few times a year, make some extra principle payments.

While paying more on your mortgage will save you some interest, that equity doesn't necessarily help you if you have an emergency need for funds. Your effective interest rate is slightly less than what you acutally pay assuming you itemize on your taxes. If you sock away as much as possible, you could build up a bit of a cushion for those "rainy day" expenses. And, no matter how well we plan, those always come up.

The other savings approach you could take is to bump up your savings for retirement (if you have any at all)-- e.g. 401k, Roth or Traditional IRA

Answer 3

First you would probably be better off saving because if you know the tax issues. You won't get any more deductions actually it will be less because the interest will be less. For the short term put it in savings. If you want to pay your house off maybe a year or two early or save a couple of thousand over the long haul put it towards your mortgage. Or finally you can (not the best idea by far but still and idea) do neither and take it to the strip club baby!!!! Just kidding either decision will be great except the strip club one.

Answer 4

First I would save to have 1-2 months of saving to cover your bills kind of a cash insurance policy.

If your only debt is your mortgage then you should look into putting the money into short term CDs or other investment vehicles.

If you have credit card debt, pay that off first. Allocate how much of the extra income that you want to use and send that extra amount with your normal payment to the credit card with the lowest balance. Once that is payed off send the extra money, plus the payment amount from the recently paid off account to the next lowest amount on your list. Soon you will be out of debt and living well.

Answer 5

put it away in an interest bearing account. you can make one extra payment on your mtg in the year, and cut your payoff time by seven years. any extra money towards your mtg payment is always good, esp if your mtg is at least 5 years old, since you are now paying down the principal. i would concentrate on saving it in an interest bearing account either way. but of course, you need to find out what your own personal financial goals are. whether it is to pay off your mtg as fast as possible or if you want to yield more money with what you can give (to attain investments? etc?) or both.

Answer 6

It all depends. If you don't have a pre payment penalty then it is good to pay off your mortgage asap. or you can put it into a CD account and get up to 5% interest rate on your money. i would do half and half.

Answer 7

save half, pay the other half on your mortgage.