If you have excess income, good for you!
You might find yourself facing the decision of whether to contribute the extra money to your retirement fund or to pay off your mortgage more quickly. While that's a great problem to have, it's a difficult choice.
Let's go over the pros of doing both:
Paying off a mortgage is a daunting task. Your home is likely the most expensive thing you own, and you could be looking at decades of monthly payments. Channeling some extra income to extra mortgage payments might be the right idea for you for several reasons.
Like most debts, a mortgage accumulates interest. The longer it takes to pay off your mortgage, the more you will end up paying in total. So, making additional payments to your mortgage, especially on a monthly basis, could save you a significant amount of money overall.
For example, if your original mortgage was $400,000, with the loan length set at 30 years with a 5.7% interest rate, by the time you pay it off entirely, you will pay $835,777. But, if you make extra payments of $100 per month, you could pay off your mortgage three years early, saving you $51,216.68. Just check our mortgage calculator to see for yourself.
It's no secret: Debt is stressful. In fact, 60% of American adults say money is a "significant form of stress," according to a survey conducted by the American Psychological Association. Making additional payments to your mortgage will result in you paying it off earlier and having one less monthly payment on your plate.
On the other hand, contributing your excess income to your retirement fund is a great way to prepare for your future.
The earlier you start saving for retirement, the better. Thanks to compounding interest, the money in your retirement account grows exponentially. The money accumulated through interest payments is also subject to interest. So, money creates more money, and the longer it sits in your account, the more it accumulates.
For example, depositing $100 into a retirement account with a 2.3% rate of return every month for 30 years will result in $51,777.33. You can use our interest calculator to see how your investment could grow, and you can even look at the amortization table to see how interest builds upon itself.
Making financial sacrifices today that help you plan for a better future could have positive impacts on your mental health. Planning for retirement may feel like tomorrow's problem, but it may be affecting you today more than you realize. Young people who have a retirement plan feel less stress than those who do not, according to a BlackRock study.
It makes sense. The more prepared you are for your future, the less you have to worry about it.
What the decision comes down to is your personal goals and preferences. Do you want one more monthly payment off your plate as soon as possible, or would you rather redirect that money towards making your retirement more comfortable? Either way, you are making an investment in your future.
The Federal Savings Bank can help you with financial decisions like these. Contact us today for more information.