Paying off debt is the only investment that reduces rather than increases your risk, and has no chance of loss. It also pays a tax-free return greater than treasuries or cash, and almost as good as the after-tax return on stocks (with none of the massive volatility and risk of the latter).
Your savings priorities should be:
1. Build up a cash emergency fund sufficient to pay 1 year of normal living expenses plus another year of reduced living expenses.
2. Put all your additional savings and spare cash into paying off any debt, starting with the highest interest rate first, and your mortgage last.
3. Once you have paid off your entire mortgage, start putting 50% of your savings into bonds and 50% into stocks. Rebalance each year, and reduce your weighting if there is a serious market valuation bubble (e.g. 2000).
As long as you have a 1-2 year cash cushion, then you should always pay off your mortgage in full before you invest any money into stocks or bonds.
One great thing about paying off the mortgage is that the more you do it, the more free cashflow you have each year to pay it off even more, due to your mortgage decreasing thus cutting the monthly payment. It's a virtuous circle.
The only scenario where it's good to have a mortgage is if there's high inflation. But if you see that happening, just buy an investment property to take advantage. Leverage is good in inflation, and rental property offers far more leverage ability than stocks do. A $100k apartment that goes up to 200k is a 5-fold return for someone who bought with $20k down. $20k in stocks is only going to be a double in the same scenario.
Just to illustrate the point between paying down your mortgage vs investing in stocks, consider this: investing in stocks whilst you have a mortgage is identical to taking out a long-term fixed-rate margin loan to invest in stocks. Borrowing at 5-6% per annum to buy an asset with a historical 3 year return of somewhere between -89% and +120% is crazy.
Your savings priorities should be:
1. Build up a cash emergency fund sufficient to pay 1 year of normal living expenses plus another year of reduced living expenses.
2. Put all your additional savings and spare cash into paying off any debt, starting with the highest interest rate first, and your mortgage last.
3. Once you have paid off your entire mortgage, start putting 50% of your savings into bonds and 50% into stocks. Rebalance each year, and reduce your weighting if there is a serious market valuation bubble (e.g. 2000).
As long as you have a 1-2 year cash cushion, then you should always pay off your mortgage in full before you invest any money into stocks or bonds.
One great thing about paying off the mortgage is that the more you do it, the more free cashflow you have each year to pay it off even more, due to your mortgage decreasing thus cutting the monthly payment. It's a virtuous circle.
The only scenario where it's good to have a mortgage is if there's high inflation. But if you see that happening, just buy an investment property to take advantage. Leverage is good in inflation, and rental property offers far more leverage ability than stocks do. A $100k apartment that goes up to 200k is a 5-fold return for someone who bought with $20k down. $20k in stocks is only going to be a double in the same scenario.
Just to illustrate the point between paying down your mortgage vs investing in stocks, consider this: investing in stocks whilst you have a mortgage is identical to taking out a long-term fixed-rate margin loan to invest in stocks. Borrowing at 5-6% per annum to buy an asset with a historical 3 year return of somewhere between -89% and +120% is crazy.
