Ah, you’re ready to eliminate your very last debt – the mortgage! What once seems like an impossible task is now very doable. After all, you shouldn’t have any non-mortgage payments by this point. Plus, you have a gigantic emergency fund to help you weather any storms that might come your way. Welcome, to Baby Step 6.
Dave Ramsey’s 7 Baby Steps
- Step 1: Save up $1,000 to start your emergency fund.
- Step 2: Pay off all non-mortgage debt using the debt snowball.
- Step 3: Save up 3 to 6 months of expenses to complete your emergency fund.
- Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement accounts.
- Step 5: Work on college funding for children.
- Step 6: Pay off your mortgage early.
- Step 7: Build wealth and give!
Don’t Quit! The Rewards Are Great
In Dave’s book, The Total Money Makeover, he warns that many people will be tempted to quit once they hit Baby Step 6. Paying off your mortgage – especially at such a fast pace – seems like a daunting task. Whatever you do, don’t give up at this point. You are almost there!
The rewards of paying off your mortgage are huge. Imagine for a moment that you don’t have any payments in the world – simply pure income. Dream for a moment. Think about how much money you could save, invest, and give! You’ll literally save thousands of dollars in interest as you pay off your mortgage.
Arguments Against Paying Off Your Mortgage
There are many people out there who claim that paying off your mortgage is a bad move. Some claim that getting a tax deduction on your mortgage is worth keeping the mortgage around. Dave dispels this myth in The Total Money Makeover:
If you have a home with a pyament of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would, in fact, lose the tax deduction, so the myth says to keep your home mortgaged because of tax advantages.
This situation is one more opportunity to discover if your CPA can add. If you do not have a $10,000 tax deduction and you are in a 30 percent bracket, you will have to pay $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000.
Dave Ramsey’s mentality is that any debt is bad debt and should be avoided and eliminated. It will melt away your stress when you don’t have any payments, and you’ll be on a firmer foundation once you’ve eliminated your debts.
There are many other myths on why you shouldn’t pay off your mortgage (inflation won’t work for you, lack of diversification, etc.), but none of them hold up when you add in the element of “gazelle intensity.” Gazelle intensity (or focused intensity) will help you eliminate any downsides to paying off your mortgage. When you eliminate your mortgage payment quickly, diversification of your investments comes in Baby Step 7 where you can build wealth. Thus the focused, gazelle-like intensity lowers the risk from pouring money into one asset (your home).
Tactical Guide To Paying Off Your Home
Alright, so you may be wondering how to pay off your mortgage. Many people look at this baby step and can’t fathom paying off their mortgage in 10 years or less (many Total Money Makeover participants accomplish this). But remember, you have NO NON-MORTGAGE DEBT by this point. That helps – a lot!
Here are a few things to keep in mind when you are attempting to pay off your home.
- Keep the gap in mind. Always remember to spend less than you earn. Take the extra money, and throw it at the mortgage. The faster you throw money at it, the more interest you’ll save yourself from paying.
- Don’t raise your expenses once you pay off your non-mortgage debt. Many people unnecessarily raise their expenses once they have eliminated a certain amount of debt. Pretend you have to live on the same amount of money as before!
- Discover new income sources. If you really want to fly through your debt, discover new ways of bringing in the dough!
Aim High!
I encourage you to aim high on this baby step. Try to get your mortgage paid off faster than you initially think up. The more zeal you have, the better off you are. Sacrifice to win, and remember the goal: COMPLETE DEBT FREEDOM!
Next time, we’ll be exploring the last baby step in this series: how to build wealth and give like never before. You’ll be surprised at how quickly you can gain wealth once you have no payments. Are you ready?
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It depends on the inflation rate. Today it makes sense to pay down the mortgage. If inflation goes up to 6-7% it absolutely makes more sense to pay the minimum payment and invest the extra money. If you plan to sell the house, pay the minimum payment. If you are in your twenties, pay the minimum payment and invest the extra money you would have used to pay off the mortgage. If you are nearing retirement, pay off the mortgage. With interest rates so low most people pay an effective 2.7-3% in interest. John gives good advise but its not for everyone. Everyone talks about paying off a house and than using the extra money for investments. Its better to invest young so the money has longer to grow. Once you hit mid thirties your investments will only double 3 more times or 8 times (2 x 2 x 2). If you invest in your twenties you will get a 16 times bang for our buck. I would rather save for retirement than pay down a 3% interest mortgage. The difference could mean $1 million dollars when you retire.
Hey Ohiodale, thanks for your comment. You’re mathematically correct! However, according to your logic, people should borrow against their house in order to turn around and invest the money – it would make the most mathematical sense. Why do people hesitate to do that? I think it’s because they feel the risk when it is framed that way. Again, your mathematically correct, but my conviction is that money isn’t all about the numbers – it’s about behavior too.
I really appreciate your thoughtful comment, and would love to see you participating in the comments more in the future! God bless!