Paying Off Mortgages vs. Investing

The investment industry is, of course, concerned with getting you to invest more, and therefore can be pretty biased toward that. While there are some good financial advisors out there who will take a more balanced and practical approach to managing your personal finances, which won’t involve an excessive focus and bias on investing, for the most part the industry does tend to seek to drive more business for themselves, which is actually pretty understandable.

Those who have at least some idea of how investments work will be familiar with the dynamic between risk and return, and investments are often compared to what we consider a risk free rate, where we use U.S. treasuries as the benchmark.

The risk of the U.S. government defaulting on treasury notes is about as low as you can get, as these are short term notes and the government will simply do whatever it takes to pay them out. In the very long term, these securities may eventually end up being more risky than they are, when for instance debt becomes unmanageable, but that’s many decades away at a minimum.

What’s even more risk free is paying off debt, because there’s absolutely no risk involved. If you make extra payments on your mortgage for instance, you know what your return will be and that return will never be subject to risk, you owe the money and you are guaranteed the return of the interest savings by paying less.

This is what we need to keep in mind when we compare the strategies of paying down our mortgage versus investing this extra money we may have, and while this does not always mean that we’re better off paying down the mortgage, it often does, given the types of investments that people usually make, long term stock market plays.

People selling investments will of course want you to invest more with them and will cite things like the average return of their investments versus the significantly lower interest savings involved, and when positioned that way, may even seem like a no brainer to the investor. We need to always use our brains when deciding what to do with our money though, and this is not quite as simple of a matter as it may appear.