The Downside of Not Planning a Budget as a Digital Nomad
Budgeting skills can be helpful for digital nomads. Developing money management skills is wise if you're working while traveling the world. Find out why.
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Some people take out a 30-year mortgage and carry it well into their 60s. Others make extra payments toward their mortgages in an effort to pay them off sooner.
If you ask financial experts whether it makes sense to pay off a mortgage early or not, you’ll get different answers. Shark Tank personality Kevin O’Leary, for example, says homeowners should aim to have their mortgages paid off by age 45.
But sticking to your mortgage’s original repayment schedule could work to your benefit. That’s because paying off your home loan early comes with the following pitfalls.
1. You lose out on a tax break
If you itemize your deductions on your taxes, you can claim a deduction for the interest you pay on your mortgage. And that deduction could be instrumental in keeping your IRS bills to a minimum. Lose out on that deduction, and you might find yourself writing a check to the IRS every April instead of walking away with a tax refund.
2. You lose out on the chance to invest your money elsewhere
You might save yourself money on interest by paying your mortgage off early. But if you were to invest the money you’re using to knock out the remainder of your mortgage balance, you might come out ahead financially.
Let’s say you’ve signed a 30-year, $300,000 mortgage at 5% interest, and you have 10 years left on your loan. Let’s assume at that point, you get a $150,000 inheritance to pay off the remainder of your loan, which is roughly what you’d have left at that point. Doing so could save you about $41,000 in interest, which isn’t a small amount of money.
Meanwhile, the stock market’s average yearly return over the past 50 years has been 10% (before inflation), as measured by the S&P 500 index. If you were to invest $150,000 and leave that money alone for 10 years, you’d more than double it to about $389,000, assuming you snag a 10% average annual return in your portfolio. So in that case, rather than save $41,000 on interest, you’d gain almost $240,000.
3. You lose out on an easy opportunity to score a risk-free return
You might save yourself a lot of money on interest by paying off your mortgage early. But if you were to take the money you have to pay off your loan and put it into the bank, you could set yourself up for years of risk-free returns in a savings account.
Now some years, your savings account may not pay as generously as in others. But either way, that money could serve as your financial safety net. If you put it into your mortgage, it will simply be gone. Granted, so will your mortgage debt, but that’s not the same thing as having cash in the bank.
Paying off a mortgage early isn’t necessarily a bad move. Just make sure to consider the downside of going this route before throwing a pile of cash into your mortgage.
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