Let’s create a debt-free scenario where you are faced with the decision of investing or paying off your home mortgage. Without looking at the numbers, do you know which one mathematically is the right answer?

Everyone talks about compound interest and how powerful it is, but think about how much extra money you would have if you had no mortgage. If you compared the two scenarios, could you actually have more money in the long run if you paid off your mortgage first? Today we will crunch the numbers and find out!

**Being Debt Free Will Pay Off – But Exactly How Much?**

Congratulations! You have been budgeting and using a cash envelope system for years and you have finally paid off that last loan. No more car loans, no more student loans, no more debt! With such a freeing feeling, what exactly do you do next?

Most of us know we should probably save for retirement but how much should we be saving and how should we invest our money? Other people will tell you that your mortgage is a liability and should be paid off as soon as possible for safety and security. With so many opinions out there, which one actually makes the most mathematical sense?

To answer this questions, we will make a few assumptions about how much money you can make by investing or paying off a mortgage and then investing heavily.

**Option 1: Investing $1,000 A Month With A Mortgage**

For the first assumption, let’s say that it will take us 30 years to pay off our mortgage if we invest first. This is because we will invest our money while paying on our mortgage which will keep us from being able to pay our mortgage off early. With that being said, let’s say we have $1,000 extra a month to invest into retirement and receive an average return of 8% on our money (S&P Index Fund Historical Return).

**Invest $1,000 a month = $12,000 a year**

**Invest $12,000 a year invested at .08% return**

**Compounded over 30 years = 1,468,150.42 (WOW!)**

In this scenario, after 30 years you would have your mortgage paid off and $1,468,150.42 on top of it. Now before you choose this option, let’s think about a separate scenario where you paid an extra $1,000 a month on your mortgage and then invested everything after the home was paid off.

**Option 2: Pay Off Mortgage First, Then Invest Heavily**

For this second option, let’s imagine you have a $300,000 mortgage with a 4% interest rate. In this exercise, we will ignore the variable PMI, taxes, insurance etc to keep it simple. At $300,000 with a 4% interest rate, your monthly payment will be approximately $1,500 a month.

**$300,000 mortgage at 4% interest = (approx.) $1,500 a month**

**Payoff time = 30 years**

However, what if we put that extra $1,000 a month to the mortgage and ignored the retirement saving for now? If we did that, this would be our outlook:

**$300,000 mortgage at 4% interest = (approx.) $1,500 a month**

**+$1,000 = $2,500 a month**

**Payoff time = 12.75 years**

Using this scenario, we would be able to invest $2,500 a month for 17.25 years (17.25 years + 12.75 years = 30 year total scenario)

Here is how our investment would work out in the end:

**Invest $2,500 a month = $30,000 a year**

**Invest $30,000 a year invested at .08% return**

**Compounded over 17.25 years = 1,122,618.13 **

**Putting It All Together**

What you are witnessing here is the power of compound interest. In the first scenario, we invested only $12,000 a year for 30 years and ended up with $1,436,150.42.

In the second scenario, we invested a mighty $30,000 a year (2.5x more) for 17.25 years and ended up with $1,122,618.13.

To make it extremely clear, in the first scenario we invested a total of $360,000 by investing $1,000 a month. This allowed us to retire with an account value of: $1,436,150.42.

In the second scenario, we invested a total of $517,590 by investing $2,500 a month. This allowed us to retire with an account value of: $1,122,618.13.

Scenario 1: Invested $157,590 **less** but made $313,532.29 **more**.

At the end of 30 years we ended up in exactly the same place. We had a paid off home and a solid retirement account. However, by switching up the order in which we spent our money, there actually is a huge benefit to investing smaller amounts early rather than trying to get it all in at the end.

**Calming The Critics**

I know this was an over simplified scenario, however the principles remain the same. Several things I did not include in the mortgage payoff was the private mortgage insurance, taxes, home insurance, home owners association payments or a possible refinance.

However, I also did not include any management fees or expense ratios related to the investments.

Obviously there could be an unlimited number of scenarios and variable involved, but the fundamental principles remain the same. Invest early and reap the benefits. Playing the catchup game and investing heavily on the back end will not mathematically benefit you as much as early compound interest does.

As a full-time police officer and personal finance blogger, Ryan Luke has made it his personal mission to provide honest and easy to understand personal finance information. He is a husband and the father of three children. Through proper budgeting and money management, they have been able to live off one income and build wealth at the same time. Come join him in an active conversation about all the best personal finance information available at ArrestYourDebt.com!