After much personal sacrifice, we just paid off our latest car loan, leaving us with only the mortgage and utilities as monthly bills. My fiancé and I want to use our money to the fullest.
I’m torn between paying our mortgage and investing. After our recent refinance, our mortgage interest rate is only 2.3%. We could get a higher return on stocks or real estate. My fiance wants to save in a traditional savings account and spend more on vacation because we have young children.
I am totally in favor of spending money on children, but I also want to use our money wisely. What would be the best financial decision for our family?
Paying off debts takes a lot of discipline, especially when you have young children. So I wish I could rain balloons and confetti on you to congratulate you on making this happen.
To pay off debt, especially when you do it fast, you often need a one-time approach. I know this because at the end of 2020, I paid off $ 12,000 of debt in 12 weeks to celebrate the new year debt free.
When you reach a great goal, sometimes you go through the “now what?” phase. Do not misunderstand. Having extra money to spend each month is a wonderful problem.
But resetting your brain can be a challenge when you’ve been putting all your energy and extra money into debt. Sometimes it makes sense to focus on multiple goals while taking much longer to achieve. Perhaps the hardest part is giving yourself permission to pursue non-financial goals.
I have the feeling that a part of you feels that splurging on a vacation would be an irresponsible thing to do with your money. I really hope I can convince you otherwise. Using your money to the fullest is not always about building wealth. Budgeting for the holidays and creating lasting memories for your family is certainly a worthy goal, especially after you’ve both worked hard to sacrifice.
The good thing about this situation is that you and your fiancé seem to be on the same page. They both want to save money and spend something on the children. You just need help setting priorities.
If the two of you haven’t sat down to review your budget, that’s your starting point. Find out how much you need to live versus how much you are contributing to be able to consciously spend excess money.
It does not say whether you have been saving or investing up to this point. A good rule of thumb is to save at least 20% of your income. If you don’t have much in savings or investments, your top two priorities are to create an emergency fund of at least three months in a regular savings account and contribute to your retirement accounts.
If you or your fiancé have retirement accounts in the workplace, make sure you are contributing enough to get the full equivalent from your employer. Otherwise, everyone can open a Roth IRA and contribute on their own.
Once you have an emergency fund and are saving for retirement, allow yourself to budget for fun things like vacations. That doesn’t mean you have to fly first class and stay in luxury hotels. If you’re concerned about overspending, you can start small with a budget for a long weekend road trip.
Unless having debt of any kind is causing you a lot of stress, I actually suggest that you make your mortgage payment the lowest priority here. If you were approaching retirement, my answer would be different because I would like you to reduce your expenses as much as possible. But since your children are young, I assume that retirement is a long way off for both of you.
A 2.3% interest mortgage is as low as possible. So I would take advantage of what are probably the lowest rates we will ever see. It’s best to invest that money in an index fund and allow it to compound over time.
Regardless of how you decide to prioritize, I think a little pressure needs to be taken off. You don’t need to figure out how to spend every extra penny you freed up tomorrow, although it may feel that way since you’ve just finished paying off your non-mortgage debt.
There is no one size fits all financial plan for your family. Aim to make wise decisions, rather than perfect ones. They both seem to be off to a good start.
Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your misleading money questions to [email protected].