For young investors with a low-interest rate, investing more may make sense.
Paying down your debt as quickly as possible seems like a great idea, but the opportunity cost, especially for young investors, can be enormous. Let’s unpack this.
If you have a low-interest rate mortgage and are under the age of 45, you should generally consider investing more for retirement rather than paying off your mortgage early. It simply doesn’t make mathematical sense for younger investors to put scarce and precious resources towards low-interest mortgage debt when the expected return of investing for retirement is significantly higher.
What if I’m older?
Prepaying low-interest debt is Step 9 of the Financial Order of Operations. Once you reach Step 9 and are 45 or older, you can consider prepaying your mortgage. The opportunity cost of not investing the difference is no longer as great, and at this point in your financial journey your focus begins to shift from accumulation to protection. You should aim to be completely debt-free by the time you reach retirement or financial independence.
We give a mathematical breakdown of why younger investors should think twice about prepaying their mortgage, and discuss other pitfalls of prepaying your mortgage, in this episode of The Money Guy Show:
Video: The BIG Danger of Paying Down Your House!