Mortgage vs. Savings

Having extra money seems like a good thing, but it can be tricky to manage. If you keep the cash where it is in a checking account, you're missing out on potential benefits and you just might spend it on frivolous items. If you do something risky with the extra money, you might lose it. One dilemma occurs when you have a large debt, like a mortgage, and you're unsure if it's best to pay it off or put that money in some type of a savings account. The choice is yours, but make sure you talk over the decision with your partner first.

Paying Mortgage Off

If you have extra money left over at the end of each month and you have a mortgage, you have the option to put that cash toward extra principal payments. If you continue that habit each month, you'll eventually pay off the loan more quickly than you expected. For example, if you have a 20-year fixed loan for $120,000 at a 5.5 percent interest rate and you pay an extra $200 per month toward principal, you'll pay off the mortgage within 14 years instead of 20. You'll also save about $25,750 in interest costs over the life of the loan.

Paying Savings

An alternative to paying off your mortgage with that extra money is to put it in a savings or investment account and allow it to draw interest. This option works if you have a specific goal in the future, such as the desire to retire more comfortably or to pay for a child's college education. For example, if you work for a company that offers a 401(k) plan with matching contributions where the employer adds half of each dollar you contribute, you're basically receiving a 50 percent return on your money. If you contributed that extra $200 per month ($2,400 per year) to a 401(k) with a rate of return of 7 percent, to which your employer contributes 50 cents on the dollar, you'd have over $157,000 in your retirement account after 20 years.

Examine Your Needs and Goals

Your decision on whether to pay off your mortgage or save should be based on your and your partner's personal goals and needs for the future. Some people like to pay off the mortgage to be debt free. But if you're not going to be in the house for long, you might want to put your extra money toward other goals. Also, keep in mind that when you pay off your mortgage early, you lose the benefit of a mortgage interest tax deduction each year. If you save the money, it's a way to build wealth, but keep in mind that the amount is likely going to be taxed at some point.

Suggestions for Freeing Up Extra Money

You may have to get creative to free up money to embark on either of these strategies. Both options can help you achieve some much-needed goals for your future. Consider getting a part-time job to supplement your income. Cut your entertainment, grocery or cable television budget. Ask your boss for a raise if it's about that time. Consider downgrading your vehicle to a more affordable, reliable and compact used model so that you can cut down on payments, insurance and gas.


About the Author

Louise Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.