Tuesday, August 02, 2005

Dave Ramsey says: "How aggressive should you be on your house?"

"How aggressive should you be on your house?" 

Dear Dave,

My wife and I have been living by the principles you teach, and, as of October of last year, have become debt-free except for our mortgage. Now, we’re trying to figure out how aggressive we should be about paying off the house.

Each month we pay a little extra on the mortgage, into investments and into home improvements. We both fully fund our 401(k) program at work and have Roth IRA accounts. I’d like to scale back my 401(k) to the amount at which my employer matched my investment and use the rest of the money to pay off the mortgage.

We are in our mid-40s and have no children. I’ve currently got about $50,000 saved up in my 401(k). We’ve also got about $15,000 in our other investments. I’m thinking about cashing in those investments and putting that on the house note as well. We only owe about $49,000 more on the house.

Mike in LA

Congratulations! You’ve done a good job. Now, you’re at Baby Step 4 in our program, which is to put 15% of your income into your retirement investments. Anything extra you have above 15% retirement investing I recommend you put on the mortgage. You really need to keep that retirement planning going. Your mortgage balance is low. You should have enough extra income, now that you’re debt-free, to pay off this mortgage quickly without messing with your retirement funds. Then, in just 12-18 months, you’ll be in your mid-40s, no payments at all and still have your retirement money. That’s a great place to be! Of course, with no mortgage you can max out all your retirement options and retire really wealthy and change your family tree. 

My thoughts 

Someone in their mid 40s shouldn't be scaling back their retirement savings at all. While I love Dave and his advice on paying off debt when he get beyond Baby step 3 I tend to disagree with him a bit.  Personally, we are maxing out our 401k and funding a Roth for me.  It is coming out to about 15%-16%. If we had more money it would go towards a Roth for my husband or college. 

Read Dave's answer

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