Conventional wisdom to building wealth is to get a mortgage, buy a house, save some money, and retire in your 60’s with your colleagues.  However, not all of us are willing to follow the norm. Some of us, like many readers of this blog, want to buck the trend and achieve financial independence a little earlier.

Paying off a Mortgage

While many people want financial independence, the real question is if they are willing to do what it takes to make it happen. Are you willing to set goals and work towards what you want despite the chance of failure? Are you willing to ensure that your monthly expenses are significantly less than your monthly income?  Are you willing to be different than your peers? Will you do what it takes to pay off all your debt as fast as possible, including your mortgage?

A number of Million Dollar Journey readers have done just that, they have achieved the big goal of paying off all their debt including their mortgage.  Some at a very young age.   I think that paying off debt first is a smart thing to do, even in a low interest rate environment.  Sure your mortgage rate may only be 3% or less, but it’s still an after-tax return.  Not only that, paying off a large debt, like a mortgage, will add a lot of cash flow to your finances on a monthly basis and give you a big psychological boost.

Now What?

After paying off the mortgage, the most common question I get is “now what?”  It’s a satisfying question for me to answer because now that you’ve hit this huge financial milestone, it’s time to move up and onward.

Lets start with what not to do.  I think the biggest mistake after achieving debt freedom is to assume the battle is over and increase your lifestyle to replace your debt payments.  I’ve seen this happen first hand, and it’s almost painful to watch.  This is particularly detrimental for those who have forgone investing for many years in favour of paying off debt. Don’t get me wrong, I think celebrating a big achievement is a requirement, but upgrading vehicles may not be the best financial move.

If you are serious about financial independence, then you need to put that extra cash flow into appreciating assets.  To some, this may be income producing real estate, others it may be small business, to me, it’s mostly investing in the public stock market by building a diversified portfolio.  In fact, because of the low barriers of entry and relative simplicity, I think that everyone should have at least a portion of their nest egg in the broad market.

Keep Investing Simple

When I say “the market”, I’m not talking about picking the hot stock that your co-worker has been raving about.  Although “hot” stocks may be fun to follow, building a long-term, diversified, and relatively low risk portfolio is what you are after.  I’ve written this many times before, but over the long term (think 20-30 years), the broad stock market only goes up.  Even the great Warren Buffet considers indexing a no-risk way to invest over the long term.  The key is to stick with a proven strategy through the ups and (especially) downs – and trust me, there will be ups and downs.

For me, I have a portion of our portfolios indexed, but a large portion is invested in a variety of dividend stocks.  Why dividend stocks?  Since I’m planning on living off my portfolio a little earlier than tradition (in my 40’s), I’m interested in buying income producing assets.  Owning companies with a long track record of paying dividends is one way to do that.  Even better still, I’m overweight on companies that have a long history of dividend increases.

If I were just starting my investing journey today with no mortgage payment, I would start off with a simple index based portfolio with regular monthly contributions to replace the old payments.

  1. If you want to stick with bank mutual funds, here are their index based funds sorted by bank.
  2. If you want to go the self-directed route, first open a low cost discount brokerage account, then pick low cost index ETFs that cover the world markets.  Here are some sample ETF portfolios.

You may want to go deeper still and optimize taxation of your accounts.  To keep it simple, it’s best to maximize your tax sheltered accounts first, then move onto non-registered accounts once your tax sheltered accounts are maxed out.  More on this on portfolio tax allocation.

Final Thoughts

I think the biggest message out of this article is to keep building your net worth even after your debt payments are eliminated.  It will put you on the fast track to financial freedom.

Have you paid off your mortgage, or soon to?  What is your plan with the extra cash flow?

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I am 31 years old and I have 250K of my money invested in rental property and I have 200K in RRSP’s. I live in a 1.2M dollar house in Toronto with a mortgage of 650K and I have 155K in cash. My personal net worth is 1.1M.

Sometimes I feel that paying off my house instead of investing was the way to go. For now I will stay on course.

We bought our first house in 2008 (age 28). Put about 35% down, paid off mortgage (aggressively) by 2011. Then redirected about 80% of the previous mortgage payments to investing.

We also bought more house to account for possible future family needs (could have put 40% down if we had bought just what we needed at the time), and to avoid taking on a bigger mortage 5 years down the road. We’ve been in the house 8 years, have done extensive renovations and don’t see ourselves moving in the next 5 years minimum, or even 10 years.

At 35, and having been mortgage free since 31, the idea of taking on a morgtage again is very unappealing.

When the mortgage is paid off, especially one you were aggressively paying, and your bank account starts appreciating by literally thousands of dollars a month it is a glorious feeling. It really helps reinforce the stay-the-course mantra. Having money to fully fund your RRSP and TFSA and RESP and anything else you wish to invest your money in is a great reward for working so hard to ditch that mortgage.

We’ll be moving before we pay off our current mortgage, but I’m looking forward to paying cash for our new place and having enough left over to buy a rental property. The one nice thing about living in Silicon Valley – if you can afford a house and still save money on top of that, once you leave the area, your relative net worth skyrockets.

Nothing to do with being mortgage free, but I strongly object to your terminology: “If you are serious about financial independence, then you need to put that extra cash flow into appreciating assets.”

“Financial independence” is one of the great marketing fallacies of the (personal) finance world. It does not exist and here’s why:

“To some, this may be income producing real estate, others it may be small business, to me, it’s mostly investing in the public stock market by building a diversified portfolio.”

Your finances will ALWAYS be dependent on at least one asset and all the market forces of that asset, even cash.

What people mean when they use that false term is that they want to realise income without having a job (kinda like welfare, only better).

Realistic wording might be something such as “Employment Independence”. Or, with vacancy of employment come abundance of disposable time, perhaps what people really mean is that they want to be in control of their time, “Timelord” if you will (hey, if you can be a landlord…).

The important thing to realise is that you are exchanging reliance on one income producing asset, human capital, for reliance on a variety of other assets.

Precise and realistic terminology can only lead to a better educated base of retail investors.

I recently turned 26 and am in the process of renewing my mortgage. I have the option to pay it off by selling investments and putting that money towards paying off the remaining balance. I have chosen to renew my mortgage since the interest rates are so low and I feel I will get a better return by being in the stock markets. So the only change now that I am “Mortgage Free” is that I have cut my principle payments to as low as I can get them.

I have reallocated that cash flow into my unregistered investment accounts in preparation for future life changes – my TFSA is maxed out and I have made the decision to not max out my RRSP since I would like to buy a business eventually and will need accessible cash for that. Things that I consider as alternative options include a sabbatical from work to travel, buying a larger home if needed, getting married if I find a partner I desire that with, and continuing to work towards my goal of buying a business. I anticipate pursing all those options to various degrees.

Thanks FrugalTrader,

My investment strategy I feel is strongly influenced by the profile of a defensive investor as described by Benjamin Graham in “The Intelligent Investor”. The exception to that is that the most strict adherence to that profile would have me be invested in 50% Bonds/ Fixed Income securities and 50% Equities. In actuality I have made the decision to cut my ownership of fixed income assets to near 0%. So in that regard I have taken a more entrepreneurial approach – which is the other investment profile described by Graham.

As a defensive investor I try to maintain a high level of diversification and have a mix of etf’s and mutual funds in both domestic and international markets. With those investments I have tried to minimize my management expenses. As my net worth has increased I have been feeling more comfortable investing in individual stocks since I can achieve an acceptable level of diversification with the amounts allocated to the particular market. This is more true of the Canadian market and the American market whereas my foreign investment is 100% in ETF/ Mutual Funds.

I have considered building a Canadian investment portfolio with the equity in my home to take advantage of the dividend tax credit in Canada – which you described as the Smith Maneuver. At this time the account is set up and my line of credit is established, but I am yet to pull the trigger on it. However with the energy sector (and the broader market to a lesser extent) going on sale the incentive for me to go forward is improving.

Many people highlight dividend yield – and its respective stability and growth – as a major factor in their decision making for their investments. I agree that yield is a factor that should be taken into account however I don’t believe that it should take priority over earnings growth. As such, I am happy to make an investment that does not have as high of a yield so long as the earnings and earnings growth justify it relative to the share price. Why should I assume that I can outperform the company by investing a potential dividend in the broad market compared to the management using that money to expand their business and increase their market share? Having said that, I don’t own any stock that has a 0% yield – but some have larger yields than others.

For those that are interested in the arguments about what to do with corporate earnings, Warren Buffet discusses this in his letters to shareholders every year for the market at the time of his writing. Graham also discusses this issue in the Intelligent Investor.

FrugalTrader: I have read many of the articles on your blog and have been grateful to be able to observe what has worked well for you and what has not. This blog has influenced my decision making with regard to my own personal financial journey. One area that I have felt would be beneficial for your readership is insurance (Life, Short Term Disability, Long Term Disability, Long Term Care, actively making the decision to self insure, etc.).

One book that I recommend beyond the Intelligent Investor is the Ascent of Money by Niall Ferguson. Perhaps you have already read it and reviewed it on your blog.

re: “I feel I will get a better return by being in the stock markets.”

All major stock classes (and asset classes) are facing losses this year:

A simple primer to making financial decisions based on “feel” rather than fact or figure.

That said, I’m in the same boat — mortgage could be paid off by selling other assets, but by not doing so my wealth is growing far more than the sub-2% post-tax “return” being mortgage free would currently provide. My payments are also as low as can go, which still leaves plenty of room for additional saving/investing.

It might make sense to pay off the mortgage if rates jumped to 5-6% (post-tax return) and pre-tax/fee equity returns decline to similar levels.

@Steve: what kind of business are you looking at? Have you done a cost analysis on buying vs. starting your own?

Hey FT

Thanks a lot for this post. A lot of information here that i will be coming back to look into. For me it will be investing to get the down payment for mortgage and during paying of mortgage, rather than the investment after mortgage(sometime in the future).

Mortgages at 1.99% (tax-free!) doesn’t come anywhere near average market returns.

I can see the feel-good vibe you folks get for paying off these 1.99% debts but you know you would have been doing better (financially) investing the money.

Most people putting money against their mortgage are probably paying somewhere around 3%, not 1.99% that might be advertised in select markets. As you mention, that is a tax free return, so the market return would have to be better than 4% to match it. Considering the risk vs reward of a guaranteed repayment vs a market return, that can be compelling.

I paid off my mortgage in just over four years. I agree with Andrew that I likely could have done better financially if I put that money into the market. That said, I looked beyond the potential extra gains, and thought what would help me sleep better at night.

I also was paying 3.79, which seemed crazy low at the time, and now seems high.

I think the decision on what to do with your money is personal. But, I agree with the idea that after you pay it off, especially if you are agreesively paying it off, there becomes a ‘what now’ issue. The folks at Get Rich Slowly refer to this as Stage 4 of personal finance. You can determine what makes the most sense to you. Personally, I have allocated about 20% my take home pay towards charity, 20% towards reckless spending (whatever I want with no feelings of guilt) and the rest I save.

I ran the numbers and saving the entire aggressive mortgage payment I was making would be nice to my bottom line, but I felt like I needed to have a better balance. I don’t want to be 80 with $10,000,000 and no health, but at the same time I don’t want to be 80 with no money and great health. Its all about balance, and that’s a constant struggle.

Instead of everyone thinking of things of 100% stock market or paying off the mortgage I will take a different position. I will first state that I do not have a mortgage, but rent because I get it dirt cheap. If I did buy a house instead of taking on the sub-par bond market returns that most ETFs and Mutual Funds were offering I would be taking that money to accelerate the downpayment of the mortgage. I would be paying myself that interest yield versus a bond, bond etf, or bond mutual fund. For my investment portfolio I would be 100% in stocks. Once my house is paid off I can then shift those extra payments towards building that slightly more balanced investment portfolio over time.

Yes we paid our mortgage off in 5 years and I’m not even 40 yet with a 1 yr old child. We were investing along the way but now we have even more to invest. I agree that sticking to a plan is best. I’ve heard of people who become debt free and then just live life like they are free. We are never free unless money is no object, even then the rich fail at finances too.

My husband and I are early 30s and paid off our mortgage just over a year ago. It was so exciting! Since then we have focused on refilling our TFSAs, maxing out our RSPs and building our wealth in the stock market. Now that we’re debt free, it’s fun to watch the money grow!!

I’m a bit lost and wondering what next as well. I’ve recently paid off all of my debt (just this past week), I don’t own a home and I have no savings. With my regular full-time income I have about $1200/month to save/invest but I’m completely overwhelmed with what to do next. I’ve been reading the posts but I feel like it’s all over my head as I don;t have a very good understanding of stocks and investing. I know I need savings (long & short term) but I also would like to buy a home eventually. Can you offer any suggestions on my best next step?

RGisFree, if you don’t have any savings perhaps a type of forced savings (like a mortgage) would be best. If you are a patient shopper you can buy a place under market value. This requires many hours of hunting and many hours of educating yourself on how to spot deficiencies, then a few more hours reading about the art of persuasion so you negotiate skillfully. Try to visualize the benefits of that home. We all look at a home differently and what an individual appreciates is what drives them to get and take care of that home. Now its important not to get emotionally attached to that home so you can sell it if someone offers you a profitable offer. Many people are continually flipping their houses as there is no tax on the capital gains. They move in, do any necessary brushups and repairs, then offer it for sale. This can take a while but who cares if you’re living there anyways? If you can live in a small space, you can really pay off that mortgage fast by renting out the larger rooms to roommates, Homestay students or even Bed and Breakfast clients. If you can convert a room that is not a bedroom to a bedroom the money really rolls in. Many people live in houses with rooms that are simply rarely used. Think of some dining rooms, sun rooms, basements, etc. Get 2 or 3 of these going and wow….. Sure its a hassle living with other people but you’re the boss and can tell them to leave anytime if they disturb you. You want to aim for peace and quiet at home so many people can live close together without others hearing them often. Go for older renters and ban (overnight at least) visitors as they are often the ones that do the most damage. Its all about what you are willing to sacrifice now to have more later. Most people say they wished they wouldn’t have spent/wasted so much of their money when young because compounding interesting is rather powerful. And you don’t need that new car anyways. The opinions of people are utterly valueless to the wise person. You want that nest egg so you can control where/when/how you work later. That is financial freedom. Once that mortgage is paid off and you’ve had it living with people you take your big wad of money you got when you sold it for a profit and spend part of it on a small house just for you. Just keep reading good forums like this on finances and you’ll find a type of investing that fits your personality. Once you’re comfortable with that after a few months other avenues of opportunity present themselves.

Funny how those who advocate to keep the mortgage since the rate is “only 3%” are always the broke ones.