I remember sitting in a history class back in high school, I didn't often pay attention but apparently I was this day and our teacher was discussing one of the many, many wars in our world's history and he said, "Nearly all wars are simply a battle for power, and power is one of the most finite resources on earth."
I remember that because I had never thought of the world that way - that every time someone gained power, they weren't just creating that power for themselves, they were taking it from somewhere or someone else. They were seizing control or capturing territory leadership from another leader or a free people or another government.
The amount of money that you have is what you have, and if you want to allocate some of it somewhere, you are likely taking it away from somewhere else.
I think about that realization often as a financial advisor, as I see money in a very similar way as that description of power. Sure, it's a bit less limited as you can make more money for yourself and grow what you can, but in a large sense, the amount of money that you have is what you have, and if you want to allocate some of it somewhere, you are likely taking it away from somewhere else. You are losing an opportunity in one area, to capture an opportunity somewhere else because, specifically in the short term, your financial resources are finite.
This concept, or idea, is especially relevant when people ask me about the best way to use their money; the best use for those limited financial resources. One of the more common questions I get from folks is whether it makes sense to pay off a mortgage early or to use that "extra" money for something else.
Frankly, there really is no right or wrong answer to that question and any such decision needs to be based on an individual's unique financial situation.
There's a sense of freedom or accomplishment that comes with paying off a mortgage.
So, let's talk through some of the factors possibly affecting such a decision, starting with a very common impetus for wanting to allocate limited resources to paying off a mortgage: emotions. I get it; there's a sense of freedom or accomplishment that comes with paying off a mortgage. But this feeling or emotion should not be the reason to pay off a mortgage early. Never let your emotions get the best of you, and make sure that, if you do decide to pay off your mortgage early, you are doing it because it makes the most financial sense, not just because it makes you feel good.
Determining what makes the most financial sense often depends on the terms of a mortgage. What's the interest rate? Is that rate fixed or adjustable? How many years are remaining? What is the income tax deduction for the mortgage interest paid? Mortgages are often considered financially beneficial because they free up money to be used in other areas or invested so that it will grow at a rate higher than the interest rate on the mortgage.
The other thing to consider is the comfort or security of the current financial situation. Like I said, money, in the short term, is a limited resource. So if you use that resource to pay off your mortgage, you need to be very confident that you will have enough of that limited resource remaining if you lose your job, need to buy a new car or pay for college, et cetera. Paying more money toward your mortgage is not necessary, but paying to get your car fixed so you can drive to work is.
You should also think about how prepared you are for retirement and make sure you are comfortable with the amount you have saved.
As many financial professionals will remind you, it is possible to get loans for a house or for an education but no one will loan you money for retirement.
So remember that lesson about war and the seizing of power: oftentimes, the amount of money you have is limited, finite, and, in a large sense, out of your control, but determining the best way to use those limited resources is wholly in your control.