Personal finance guru and radio talk show host Dave Ramsey uses a series of seven steps -- what he calls the "baby steps" -- to help people take control of their financial lives.
Ramsey's baby steps provide a common-sense approach that works for many people, but they makes trade-offs that favor motivation over financial efficiency. In particular, baby step No. 6, "Pay Off Your House Early," pits the motivation of having no debt against the financial reality that you can likely invest at a higher rate of return than the cost of your mortgage.
In the slideshow below, the benefits of paying off a mortgage early are compared to the historical returns seen from three different market-tracking index ETFs to show how that difference can add up to tens of thousands of dollars. The market-tracking ETFs are:
- Vanguard's Total Stock Market (NYSEMKT: VTI ) , which attempts to track the broad U.S. stock market;
- The SPDR S&P 500 (NYSEMKT: SPY ) , which attempts to track the S&P 500; and
- iShares MSCI EAFE (NYSEMKT: EFA ) , which offers broad exposure to developed-market economies outside of North America.
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