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  Dear
Dr. Don,
My question: Should we concentrate on paying
down our mortgage or start saving for our children's education?
We owe $200,000 on a home valued at $250,000 with a first and second
mortgage over 30 years. Our children are 12 and 7 years old. We
have no college or retirement savings. I am 41 and my spouse, 39.
-- Nicole Nest-egg
 Dear
Nicole,
Paying down the mortgage isn't a horrible strategy, since it will
increase the equity in your home and you can choose to use that equity
at a later date to fund college or retirement plans. Still, since
it's likely that you can earn higher after-tax investment returns
on a college or retirement savings plan than you pay in an effective
interest rate on your mortgage, I'd lean toward investing vs. paying
down the mortgage with additional principal payments.
If you or your spouse has a 401(k) plan at work
where your employer matches all or part of your contribution to
the plan, then you should contribute up to the limit of the company
match. Often the company will match 50 cents on the dollar up to
6 percent of salary. That means that if you put in 6 percent, they'll
match 3 percent. You immediately earn a 50-percent return on your
money. That's a much smarter move than paying down the mortgage.
Traditional or Roth IRA accounts are also good choices.
Both allow you to take money out of the accounts for qualified education
expenses without paying a penalty tax. Qualified distributions from
Roth IRAs, since they are funded with after-tax dollars, don't generate
a tax liability, as long as you meet minimum holding periods. Read
IRS
Publication 590, Individual Retirement Arrangements for more
information or consult with your tax professional.
I'm a little old school on this one. I'd rather see
your children borrow money to finance their education than have
you mortgage your retirement to put them through school. They're
the ones that are going to gain the economic benefits of that education.
You'll undoubtedly find a middle ground that will work for you,
but you need to find that balance.
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