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The average median age of a first time home buyer has climbed to 38 years old, this rose drastically from 35 in only 2023. To put some perspective to this, in the 1980’s the average first time home buyer was in their late 20’s. For most people, they will be getting a 30 year fixed rate mortgage, this puts the average first time home buyer not paying off their homes until they are almost 70 years old!

We are also told non-stop to invest every cent that we can if we want to even have a chance at retirement. What really should be said is to reduce your risk in order to secure your retirement. Which is more secure from a risk management perspective? — Well, that depends on your goals, risk tolerance, lifestyle, and income. We’ll examine the factors I use to allocate extra payments and investment.

Free money first:
If you work for a company that has a 401K or IRA match, it’s important that you are taking money out to hit the maximum match amount. This is free money that the employer will be giving to you to put towards your retirement. Although, some people think the 401Ks are scams, they have proven to be an effective way for me to have over 6 figures in my account. It continues to grow every 2 weeks, I don’t think about it, and it reduces my taxes, it’s also a guaranteed 100% return if the employer is giving you a dollar to dollar match.

ESPP (if available):

I have the opportunity to put money into a ESPP (Employee Stock Purchase Program), where I will get at least 15% off of the companies shares from their lowest point every [insert time frame/ month/ quarter/ 6 months/ect.) For me, due to the discount in shares and the understanding that shares will fluctuate, I put the maximum that I can into the ESPP. This provides me with roughly a 15% ROI immediately (after vesting period). Although returns aren’t always 15% as stock may fall as vesting period occurs, but in any given year, I will reap about 15% return in addition to dividends for the shares I have purchased (which I reinvest to purchase more shares.)

Mortgage pay down main factor:

There are a few ways to determine if you should put extra money into your home. The first being interest rate, if you were fortunate enough to lock up a piece of property pre-pandemic, you likely have a stranglehold on the nice 3% mortgage rates. Inflation is currently at 6% with mortgage rates reaching recent highs of 7% in some cases. To illustrate the difference in cost, for a single month if the home price was $400,000, the interest for a 3% will be about $1,000 a month or $12,000 a year. Compare this to a 7% mortgage, the interest skyrockets to $2,333 per month and $28,000 a year!

If you’re in a 6% or higher mortgage rate it is likely the best case scenario to put at least some extra to your mortgage. People in the 7% mortgage range will want to aggressively attack adding extra principle payments as early as possible. Mortgages are amortized over 30 years, so the sooner the balance begins to drop, the less you will pay overall in a mortgage. There are very little investments in this world that can guarantee you a 6%+ return every year and provide equity, paying down your mortgage can.

Paying down a high interest mortgage can be beneficial as well for future planning. If you have more equity in your property, it makes it much easier to refinance if rates ever return to a 4 or 3% interest rate (wouldn’t you like to save $1,300 a month on interest if you could?!).

Ultimately, making 1 single extra payment a year, or adding 1/12th a payment every month will reduce your mortgage by 7 years, over 30 year span, an extra 2 payments over 30 years will reduce your mortgage by 13 years. This means that as an average first time home buyer, you can have your home paid off by 51 instead of 70!

Investing: 
You’ve heard the old adage, don’t invest money you cannot afford to lose. This is a silly premise because I’ve never felt anyone can ‘afford’ to lose money, except Elon of course.

This is a likely sage advice for most people. The nice part, is just like the 401K, I don’t have to think about this or do anything, and on average, the S&P 500 makes about 10% a year. This is much higher than the 6%+ on the mortgage, I hear you say! The caution I would have to this argument is, your mortgage payments are guaranteed, there is an exact amount one must pay every month, and it’s usually not a surprise. The stock market on the other hand can be like this. If you hold and your goal is to continue to invest without needing this money to pay something off, then this is a great strategy. Over the long term, the stock market hasn’t lost money in any given 20 year period. The exception being if you sold at the bottom of any dips in a panic.

Parting Thoughts

If you have a high interest rate on your mortgage, it will likely be more beneficial to start with making a small additional payment of your mortgage (if your mortgage payment is $2,400 a month, then adding $200 extra a month can reduce the mortgage term by 7 years!) If you are satisfied with the amount of extra you’re paying on your mortgage, then maybe it is time to look at the stock market to diversify.

Ultimately, in this high inflationary era, I try to do both. My home and stocks are an effective hedge against inflation and a predictable and proven way to make your money and net worth grow faster than your income.