Phase 6: Own the House and Grow Net Worth

What an extra payment actually buys

Every extra dollar of principal removes all the future interest that dollar would have generated. On a 30-year loan taken in the early years, the interest saved on an early principal payment can exceed the payment itself over the life of the loan.

One extra monthly payment a year typically removes four to six years from a thirty-year term. Rounding the payment up to the next hundred does less, but it does it every month and requires no decision.

• Make one extra full payment a year, or pay half the monthly amount fortnightly
• Round every payment up to the next hundred dollars
• Send windfalls straight to principal and confirm they were applied there
• Check the servicer is not holding extra money as a prepaid instalment

Should you overpay the mortgage or invest instead?

Paying down a mortgage is a guaranteed return equal to the loan rate, with no tax on it. Investing has a higher expected return and no guarantee. At a 3% mortgage rate, the maths favours investing for most people; at 7%, it is close, and the certainty starts to look attractive.

This step assumes 15% is already going to retirement, so the real question is what happens to the surplus above that. Both answers are defensible. What is not defensible is spending it.

Refinancing without resetting the clock

A refinance that cuts the rate and keeps or shortens the term can accelerate this step. A refinance that drops the rate but restarts a 30-year term usually increases total interest even though the monthly payment falls.

Compare total interest to the end of the loan, not the monthly payment, and include closing costs. Divide the costs by the monthly saving to get the break-even month, then ask honestly whether you will still be in the house.

Do not throw the emergency fund at the house

Equity is not liquid. A household that overpays aggressively and then loses income can be unable to pay a mortgage on a house it has nearly bought outright, and a lender that sees no income will not release equity.

Keep the three-to-six-month fund fully intact throughout this step. Overpay from surplus, never from the safety net.

What life looks like after the mortgage

Housing is typically the largest line in a household budget. Removing it changes what jobs you can take, how much income you need, and how quickly the last step of the plan compounds.

You still owe property tax and insurance, so keep those escrowed or set aside monthly. Owning outright does not mean a zero housing cost, only a much smaller one.

Set a number before choosing an account

Decide what you are funding: full cost at a public in-state university, half of it, or a fixed dollar contribution. Any of those is a legitimate answer, and the specific one is what makes the monthly figure calculable.

Published tuition is not the price most families pay. Grants and institutional aid mean the net price at many colleges is far below the sticker, so build the target from net price data, not brochures.

529 plans and the alternatives

A 529 plan grows tax-free and comes out tax-free for qualified education costs, and many states add a deduction or credit for contributions. It is the default choice for most families saving for college.

The objections are real but smaller than they sound: unused money can move to another beneficiary, cover apprenticeships, or, within limits, roll into a Roth IRA for the beneficiary. A Coverdell suits smaller amounts with wider spending rules, and a plain brokerage account offers total flexibility with no tax break.

• 529 plan — tax-free growth for education, possible state tax break
• Coverdell ESA — lower limits, broader qualifying expenses
• Roth IRA — contributions accessible, but it costs retirement room
• Taxable brokerage — no restrictions, no tax advantage

How much per child, per month

Work backwards. Take the target, subtract what is already saved, and divide by the months remaining, then discount for expected growth. A newborn has eighteen years of compounding; a fourteen-year-old has four, and needs a far less aggressive allocation.

Age-based 529 portfolios handle this automatically, shifting from equities towards bonds and cash as the start date approaches. That is the right default for most families.

What not to do in Phase 6

Do not pause retirement contributions to fund it. Do not borrow against a retirement plan for tuition. Do not co-sign a private student loan you could not afford to repay yourself.

And do not fund college at the expense of the emergency fund. A family that raids its safety net for a tuition bill often ends up borrowing at a worse rate later in the year.

Free money before saved money

File the FAFSA every year the child is in college, regardless of income; some aid is not need-based and some state programmes require the form. Apply for institutional scholarships at the college itself, which are usually larger than outside awards.

Community college for two years followed by transfer, in-state public universities, and employer tuition assistance all reduce the target far more than an extra $50 a month into the plan.

Track net worth, not income

Once payments are gone, income stops being the useful measure. Net worth — assets minus liabilities — is what tells you whether the year worked. Measure it on the same date each quarter and keep the history.

The Federal Reserve's Survey of Consumer Finances publishes household net worth by age and income, which is the only sensible benchmark for whether you are ahead or behind for your stage.

Where the surplus goes now

With no mortgage, the sums involved are large. Max out every tax-advantaged account first: workplace plan, IRA, and an HSA if you have a qualifying health plan, since it is the only account with a deduction going in and tax-free withdrawal for medical costs.

After that, a taxable brokerage account with the same boring index funds, held for decades. Property, private businesses and other assets are legitimate, but they are jobs as much as investments.

• Fill every tax-advantaged account to its annual limit
• Use an HSA as a long-term account if you qualify
• Invest the remainder in low-cost index funds in a taxable account
• Rebalance once a year, not on news

Giving on purpose

Giving works best as a line in the plan rather than a reaction to appeals. Decide a percentage, decide who receives it, and review annually.

Donor-advised funds allow a deduction in a high-income year with distribution over time, and giving appreciated shares rather than cash avoids the capital gains tax entirely. Both matter more as the amounts grow.

Protect what you have built

The risks at this stage are legal and medical rather than financial: liability claims, long-term care costs, and dying without documents. An umbrella liability policy is inexpensive relative to what it protects.

A will, a durable power of attorney, a healthcare directive and correct beneficiary designations on every account do more for a family than any investment decision at this point. Beneficiary designations override a will, so check them.

Spending it is allowed

The plan is not a vow of austerity. Deciding in advance what the money is for — time, travel, family, work you would do anyway — is what stops accumulation becoming its own purpose.

A sustainable withdrawal rate, often modelled around 4% of a starting balance with inflation increases, is the usual planning yardstick. It is a starting point for a conversation, not a guarantee.