Savings Vs. Paying Off Mortgage Early

I’m facing a financial decision that will affect my long-term wealth.

The problem here is that I hate thinking long-term. For whatever reason, I still believe that I’m going to be making big money — like, “My, what a lovely number of zeroes in that paycheck” — any year now. Why waste money saving when I can be spending it on my fantastic business ideas? Or Panda Express?

Here’s the issue: we’re building our budget for 2007. We’ve written down what all our bills come out to, and we believe in the importance of paying yourself first — putting away 10% of your earnings for rainy days (or, preferrably, sunny days in retirement).

But does it make much sense to save money in some piddly 1% interest savings account when I’m paying more than 8% on my second mortgage?

The answer is no. And yes.

I know I need savings. I want to have 6 months’ of current lifestyle saved up so that when I lose my job — perhaps for posting to my LiveJournal when I should be working, for example — I can have some time to find a GOOD job, rather than being panic-stricken and taken the next thing I find, which in my case would be shoveling HTML into a big furnace, and coming home smelling like script.

But how likely is that scenario? And is 6 months really necessary? It’s banking a bit pessimistically, if you ask me.

I’m more of a bull-market guy. I’m not so bullish that I’m going to try to put the savings towards stocks and such, in hopes of generating more than the 8% I’m paying for the mortgage (see Missed Fortune), but I’m not such a bear that I’m gonna take my cash and shove it under my bank’s mattress.

Perhaps, though, in the interest of saving for emergencies, I could put some into savings and some into paying off my mortgage early.

If I didn’t already have a lot stashed away — and I’m no saver, I just had some windfalls last year — I think I’d lean towards that plan. As it is, I think I’ll try to put the cash towards the mortgage, rather than savings. I have several months’ salary in the bank; paying off my mortgage really will mean saving a ton of money in the long run.

If I never change my loan or my additional payment amount, I can pay off my 2nd mortgage in 7 years rather than 30. After that I refuse to say — we’ll probably have moved, but we’ll have at least refinanced. (I’m in a 7-yr ARM right now.)

“Saving for retirement” is an ugly, ugly phrase to me. But it helps to see that I wasn’t a millionaire by age 25, and I’m still not a millionaire at age 32, so I better stop planning on having it by 40. Hoping for it, sure. Working on it, of course. Planning on it? Bad idea.