Anxious Security Gland

Matt and his wife have about $63,000 in the bank, and they owe $47,000 on their house. Matt is considering paying off the house early, but he's concerned about Murphy moving in once he does.

QUESTION: Matt in Oklahoma City and his wife have about $63,000 in the bank, and they owe $47,000 on their house. Matt is considering paying off the house early, but he’s concerned about Murphy moving in once he does. They make $100,000 a year, and the home is worth about $250,000. Dave advises Matt to pay off the house today.

ANSWER: We’re only talking about nine months—maybe 12 months—but somewhere in there is the only discussion you and I are having. You can either continue like you are, and somewhere around a year from now, you’ll be debt-free. Or you can write a check today and be debt-free today, and you would have $20,000 or so in the bank. The next month, you would have that plus $3,000–5,000, and the next month plus $6,000–10,000, and the next month plus $12,000–15,000. So three months from now, your savings would no longer be $20,000 but would be $30,000-something.

I think if you sit down and actually look at it that way, it doesn’t do your security gland as much damage to pay the house off today, because we’re not really saying we’re going to limit your emergency fund to that low point. It’s a very, very temporary low point.

Dave and Sharon Ramsey would write a check and pay the house off today. Then we would continue paying what we were planning to pay on the house back into the emergency fund to build it up to three to six months of expenses back up to that comfort level. In your case, you like six months, probably, just because you do. Then you have no payments at all, and you’ve got that six months of cash and now you’re in a position to really do just about anything you want to do from this point.

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