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Ask Dave

Mortgage or College?

Ed and his wife owe $297,000 on their mortgage. They'll receive an extra $35,000 next year. Should they put that toward the mortgage?

QUESTION: Ed in Denver and his wife owe $297,000 on their mortgage with 28 years left. They’ll receive an extra $35,000 next year. Should they put that toward the mortgage? And should they be putting extra toward their mortgage each month or contributing to their kids’ 529 accounts?

ANSWER: It depends on the goal with the 529 account. Our Baby Steps say put 15% of your income into retirement in Baby Step 4. Do your kids’ college funding, and anything else you can get your hands on, throw it at the mortgage and try to pay the mortgage off as fast as you can. Kids’ college funding is so all over the map because it’s how many kids, how old are they, how long have we got, what are your education goals and stuff there? You need to kind of back into that and say, “They’re this age. Based on that, I’m going to send them to this school or this level of schooling. I need this much money, and then that means I can back it out with my mutual fund broker.” The mutual fund broker can stick that in the calculator and tell you what you need to save per month to be able to hit that goal.

What we did was take a lump sum when we could and just finished it. We said, all right, if they’re six years old and we put in $8,000, by the time we get there, it’ll be $40,000 and that’ll be enough. We just finished that Baby Step 5 with that lump sum. You could do that with a 529. If you want to knock that out, then it would be real clean. You could just put 15% of your income into retirement and everything else goes toward the house until the house is paid off. Of course, that includes that you’re saving and buying other things as you go along like a car that you want to replace or you need a new couch or you’re going on vacation and that kind of stuff.

My plan is once you get past Baby Step 3 and you have your emergency fund of three to six months of expenses and you’re doing retirement, kids’ college, and paying off the house, that’s when you let your foot off the gas a little bit. You start to buy some stuff. You’re not going to not go on vacation for nine years. That’s not my plan. You’re not going to not buy a car or a couch or replace the dishwasher or whatever. You let your foot off the gas a little, but any kind of found money like this $35,000—if college is under control, we just chunk it at the house. If you’ll just throw found money at the house and make sure that there’s always some found money by being in control and managing your spending, the average person is paying off their home in about seven years doing our stuff.