You are a wise young man. Option #1 is the one you want. If you NEED money for something, you should be able to re-borrow it. If there is a profitabe business venture pops up, it will be able to service a loan. Once the interest is paid out, it's gone. You can never get it back. Principal you can borrow again if you have a true need.

The only other option would be to put it into a non-farm investment and forget about it, with the intent of using it to fund your retirement.

Don't forget to thank your mother.