This Is Not the Way to Save Money: Pay the Mortgage Now, Save Later
In previous articles we surveyed our hatred of debt. Prospect theory teaches us that aversion to loss and to debt is an animal instinct, shared even by other creatures. We all have a primal urge to break free from the chains of the mortgage as fast as possible. We're convinced that once we make the last payment, a medal will be waiting for us and we'll be bathed in glorious light. The truth is that the day after the last payment, we'll still have to get up and earn a living. We may be done paying our debts for now, but our duty to care for our loved ones and for our own well-being in retirement carries on.
In the article on setting the monthly payment, we described the need to allocate our financial resources between obligations, investments, and day-to-day expenses. The need to save while paying down our debts is clear. But it's easy to say and hard to do. Paying off debt while saving at the same time is a mentally demanding task. On the one hand, carrying debt can impair cognitive functioning, our mental health, and our decision-making. On the other hand, we don't necessarily know — or want to know — how to invest our money.
A survey by the American Psychological Association (APA) found that 72% of adults report feeling stressed about money. Financial stress isn't just an unpleasant feeling — it has real health consequences. Money is like oxygen: when it flows freely, you don't think about it. But the moment you feel short of breath, it becomes all you can focus on. So sound financial management isn't just a matter of numbers — it's an inseparable part of our health.
Dr. Elizabeth Scott, author, workshop facilitator and award-winning blogger in the fields of stress management and positive psychology.
So one common way to handle this conflict is to tackle these tasks one after the other rather than at the same time. Since our mortgage obligation is immediate and can't be deferred, while saving for retirement can always start later, the naïve course of action seems clear: pour all our effort and resources into finishing the mortgage early, and once that's done, redirect everything toward saving. Put simply:
The way to handle a mortgage and saving together: pay off the mortgage first, then start saving money.
The advantages of the "mortgage now, save later" method
This method has plenty of advantages. It's simple to carry out, it comes with a clear multi-stage plan, the task at each stage is obvious, and pouring resources into the mortgage lets you finish it sooner — which is good for your peace of mind.
Financial inertia reinforces this method too. Say that in recent years you saved everything you could to put together the capital needed to buy the apartment. Now the goal is met, and the apartment is yours (and the bank's). What will you do with the money you save each month? The natural, easy thing is to keep doing what you've been doing — pour all your resources into the apartment by paying down the debt. Choosing a different course is harder: channeling savings into other investment vehicles means you have to learn about them and get comfortable with them.
On top of that, increasing the mortgage payments carries a guaranteed gain — cutting the interest we'll pay. With other investments the gain is uncertain, since it depends on how our investment vehicle performs. So why break the inertia and choose a different course at all?
For all its merits, the problem with this method is that it isn't economically sound. This path will give us a brief, short-lived mental boost when the mortgage ends, but it does nothing to guarantee we'll reach retirement with enough savings. What's more, according to various economic theories, the odds that we'll actually channel the money into retirement saving are low — and in the end, as we'll see shortly, it costs us far more money.
Among the many financial challenges we face throughout our lives, accumulating assets that will allow retirement at an adequate standard of living is the number-one financial worry. So it's worth pausing to understand how to build a financial plan that addresses this need head-on.
The power of compound interest — financial prosperity for early savers
To dig into this question, let's look at an example we'll come back to throughout the article. Say we need to borrow 1,400,000 NIS to buy our dream home in Gush Dan. Take a couple aged 35 with three children. Both work steady jobs in the private sector.
After carrying out a detailed analysis of the couple's current and future cash flow, we found that after deducting current and future monthly expenses, the total budget for savings and obligations (that is, the mortgage) comes to 7,000 NIS. How should we split the money? We have two options:
1. Plan A — Mortgage now, save later: We can put all the money toward the mortgage and pay it off within 22 years. Once the mortgage ends, we redirect the freed-up 7,000 NIS a month into a savings vehicle yielding a net return of 4% per year.
2. Plan B — Mortgage and savings together: We put 5,700 NIS toward the mortgage and another 1,300 NIS into monthly savings. In this scenario the mortgage ends after thirty years.
We'll calibrate the risk in the savings according to the borrower's age (in accordance with the Chilean model): for the first twenty years the money goes into a high-risk savings vehicle yielding a net annual return of 5%, and for the last ten years it's managed in a savings vehicle identical to Plan A, yielding a net return of 4% per year.
The table below shows the annual deposits into the savings plan. Under Plan A — "Mortgage now, save later" — the total deposits over thirty years come to 672,000 NIS. Under Plan B — "Mortgage and savings together" — the total deposits come to 446,000 NIS, almost 33% less.
Savings Strategies Combined with a Mortgage
Total savings deposits over the years
So how much will each plan accumulate (deposits plus interest)? Under "Mortgage now, save later," we end up with 789,000 NIS. Under "Mortgage and savings together," we end up with 988,000 NIS. That's 190,000 NIS, or 24% more savings.
Savings Strategies Combined with a Mortgage
Total Accumulated Savings Over the Years
In other words, depositing a smaller sum yields larger savings — thanks to the compounding effect.
- Even if we'd used the conservative savings track from the start, "Mortgage and savings together" would still have come out ahead, by 112,000 NIS.
- And if we'd stuck with the aggressive savings vehicle, "Mortgage and savings together" would have beaten "Mortgage now, save later" by 291,000 NIS.
The difficulties in implementing the "Mortgage now, save later" plan
The gap between these plans is likely to be even wider in favor of the mortgage-and-savings-together plan. Why is that? There are several reasons.
We won't save all the money that frees up
The robotic plan to automatically funnel every freed-up shekel into savings just doesn't square with how people actually behave.
The Keynesian consumption function describes a well-documented economic phenomenon: when our disposable income grows, our spending grows too — but not at the same rate. Part of every increase in disposable income goes toward new spending rather than savings.
John Maynard Keynes (1883–1946) was a British economist regarded as the father of modern macroeconomics. His theories fundamentally reshaped our understanding of the relationship between consumption, savings, and economic behavior.
Keynes helps explain why people who plan to "start saving once we finish the mortgage" so often find that the money they freed up gets soaked up by other expenses. It would go against human nature to simply save, year after year, every bit of income that's just opened up.
Something to think about: you've just paid off your mortgage. A big chunk of your monthly cash flow is suddenly free. How about a trip to Thailand? A new car? Renovating the house? Helping the kids?
What's more, are you sure you'll keep the contract you made with yourself? Won't your priorities shift over time? What makes you so confident that in 22 years you'll follow through on what you decided today? Our decisions are subject to dynamic inconsistency — they shift over time as our priorities change, in ways we can't predict today.
Our savings ride on market performance over fewer years
With the "Mortgage now, save later" approach, our savings hinge on investment returns over a very short window. If we're unlucky and our money goes in right before an economic crisis, we can lose precious time and watch our savings shrink.
What should you do?
But maybe the peace of mind that comes from paying off our obligations early is worth the money we'll lose? Unfortunately, we can't know what will matter to us down the road. But we can figure out what the right goal looks like to us today — the one we want to reach thirty years from now — and build our financial plan around it.
To help you figure this out, here are a few questions:
1. What's the overarching financial goal you want to reach by retirement age? Paying off your obligations as early as possible, or maximizing your capital?
2. Does a lack of experience, knowledge, or understanding of how to invest right now affect that overarching goal?
Reducing obligations and building up capital and wealth are two goals that pull against each other. Commit fully to one, and you give up the other.
So if you know your priority is to maximize your economic benefit and build wealth — but it's still not clear to you how to do that — that's fine! You have time to learn. The mortgage stage is a stressful one, and you don't have the mental bandwidth to take on another project. Our advice is to wrap up the mortgage process, and then, calmly, turn to your next financial project.
Good luck!