After making payments every month for the past 22 years, a good friend will achieve a major financial goal next month: he will be making his last mortgage payment. His house will be paid off, giving him complete ownership of his most important asset. He plans to celebrate this achievement by taking his family out to dinner and will explore the possibility of a European vacation.
I am happy for my friend and a celebration is certainly in order. But after the initial celebration, he must answer a tough question: How should he save and invest the money that has been going toward house payments for all these years?
Most people who have paid off their mortgage haven’t given much thought or done much research about this question. And it’s hard to blame them. Most of us are focused on grinding it out and making our mortgage payments month after month, year after year. If anything, we’re concerned about some unplanned expense hitting our budgets and causing us to fall behind. The idea of never having to make another mortgage payment almost seems like a fantasy.
But once you are fortunate enough to reach this goal, it’s critical to have a plan to save and invest this extra cash. As always, start by determining your goals. Do you want to save more money for retirement? If you plan to keep working for several more years, do you want to save for something special, such as a greenhouse in the backyard or a condo on the beach?
Or should you set aside some cash to help your adult children purchase a home or start a college savings account for your grandchildren?
Once you determine your goals, here are some potential savings and investment strategies to consider:
- Invest the maximum amount of money in your 401(k) retirement savings plan. Right now the maximum contribution for each person is $17,500 annually. If you are 50 years old or older, however, you are also allowed to contribute an additional $5,500. So simply putting away the maximum amount over the next five years can add up quickly.
- Consider purchasing long-term care insurance. Incorporating long-term care into a financial plan can help protect your assets. If you don’t think you’ll need some sort of care in old age, think again. The U.S. government reports that 70 percent of people who reach age 65 will require long-term care services at some point. Speak with a financial adviser or insurance professional about the right amount of coverage for you and your spouse.
- Save some money for home maintenance. You may not have to make monthly mortgage payments, but if you’re going to live in the home, you still have to take care of it. Homeowners know that even routine maintenance can cost several hundred dollars annually and one major improvement, such as a new furnace or air conditioning unit, will run several thousand dollars. So make sure to continue to save and budget for these expenses.
- Finally, consider a cutback in lifestyle. The immediate reaction when we come into some extra money is to splurge and not keep a close eye on our budget. Instead, now is a good time to consider reducing expenses on key items. For example, if you have a large or older car, think about buying a smaller car that doesn’t require as much gasoline. And, if you see the need for a new car in the next two years, start budgeting for it now. It will make that purchase much less costly when the time comes to replace your current car.