digest
Short Summary
Main recommendation: Use spare cash to pay down the mortgage early after you have an emergency fund and are saving 15% of income for retirement and kids' college, rather than keeping the low-rate mortgage to invest. The caller has about $90,000 in cash, a $180,000 mortgage on a $520,000 home, and a 3.25% rate, and the host argues that a paid-off house is a foundation for wealth and reduced risk, not just a rate-of-return decision.
Key Points
- The host bases the advice on a study of over 10,000 millionaires, saying about 79% inherited nothing and about 90% inherited too little to become millionaires.
- The primary early wealth-building habits he cites are a 401(k) and a paid-for house, not borrowing cheap money to invest.
- Millionaires in the study generally used the increased cash flow from having no house payment to invest more aggressively.
- He argues a paid-off home reduces risk: foreclosures occur only on homes with mortgages, and owning outright gives stability that lets people change jobs or take calculated career risks.
- He projects that if the caller follows this plan, the mortgage would be gone in about three years and his net worth would be around $1.5 to $1.7 million in five to seven years, with about $700,000 in home equity.
Details Worth Noting
- Concrete instructions:
- Keep the emergency fund at three to six months of expenses. If none exists separately, set aside part of the $90,000 for it first, then apply the rest to the mortgage.
- Save 15% of household income for retirement: 10% in the 401(k) and 5% more in Roth IRAs and good mutual funds. The caller already saves 10% in his 401(k), so he should add 5% more.
- Keep contributing to kids' college savings, which the host considered on track given about $75,000 in 529 plans for children aged 5 and 8.
- Apply everything else to the mortgage: any budget money above the 15% retirement savings goes toward the mortgage.
- Do not borrow against a paid-for home to invest; keep the mortgage only until it is gone.
- The host's ordering is: pay off consumer debt and build an emergency fund (Baby Steps 1 to 3), invest 15% for retirement (Baby Step 4), save for kids' college (Baby Step 5), then pay off the house early (Baby Step 6).
- The caller's numbers: mortgage balance about $180,000, home worth $520,000, non-retirement savings about $90,000, 401(k) about $150,000, IRA and Roth about $100,000, household income about $140,000, age 35.
- The host's reasoning is that the caller would become a "typical" millionaire in the study if he pays off the house, and would be "very unusual" if he did not.
Bottom Line
The host's answer is to prioritize a debt-free house after the emergency fund and retirement and college savings are in place, since he sees the mortgage payoff as a source of stability and freed cash flow. The advice is framed as the host's view based on his millionaire study, not as a guaranteed outcome.
