Lacing up for the last long stretch to the finish line. (I won’t forget my other shoe.)
DH = Dear Husband
Trouble hitting our stride
We’ve been having trouble hitting our stride in this last long stretch of our debt repayment. After paying off all consumer debt ($21,000) and all business debt ($81,000), we’re left with:
- an emergency fund to save
- long-term retirement to invest in
- our remaining mortgage to pay off
We’re following Dave Ramsey’s steps as outlined in his book The Total Money Makeover, and I found our mission a lot more clear when it was all about paying off all non-mortgage debt (step #2). Since savings have become a significant part of our remaining steps, I’ve been conflicted.
- What will be covered by the emergency fund?
- What won’t be?
- Will there be a definite line between our short-term savings and our retirement investments?
- Should our long-term investments be untouchable (in Canada, that means RRSPs*)?
- Or something from which we can withdraw if needed (TFSAs*)?
- How much should we be putting against the mortgage as we save?
- What do we do with extra money when DH has a good business month?
- Do we cut back on savings or on the mortgage payment when he has a slow month?
When I don’t have clarity about where things are going, my financial mind easily slips back into the chaotic mush that it was when I chose to keep it in the sand. Yes, we’re trying to pay off the mortgage. Yes, we’re trying to save and invest. But what does that look like? We’ve been trying to figure that out for months now. And I’m happy to say that we’ve got it.
We just renewed our mortgage, and in March, our new agreement will take effect. It’s a 4-year term for the remaining $114,000 owing, and our hope is that we’ll pay it off early. We’ve increased our monthly payments from $1,087 to $1,500. We have the option to pay extra each month to a maximum of $3,000. We have the option to put down a single lump-sum amount each year to a maximum of $18,000. We also have the option of skipping one payment per year – more than one if we’ve put down extra payments in that same year, to a maximum that equals the total in extra payments.
For our savings, we have 3 destinations.
- The emergency fund to cover 3-6 months of expenses in the case of a loss of income.
- The car fund. Our 2011 Ford Focus is going strong, but we also have a 1999 Dodge Caravan. It might last another 17 years (let’s hope!) but it could also conk out any time now.
- The furnace/AC fund. Our furnace and AC are going to turn 18-years-old this year. Again, we’re facing conk out at any time.
The line between e-fund & other savings?
The line between short-term savings & long-term investments?
The thing is, if our furnace died today, that would be an emergency (-40 with the wind chill). We would not be in a position to say, “We’ll just have to wait until our furnace/AC account is funded after the e-fund is full.” We would have to take from any and all savings accounts to pay for it.
The other thing is that once we have our e-fund fully saved, we won’t be able to say, “Done!” We’ll still have to keep saving for the other two accounts. We will need a very significant amount of accessible money relatively short-term before we start investing long-term.
So how do we play that out? And how do we play it out with our mortgage payoff goals on top of it?
Strategy for a “normal” month
In a normal month (what’s that?), we will put a fixed amount into our savings accounts which are all in TFSAs. I can’t tell you what that amount is because although DH is OK with me sharing our debt numbers, he’s not OK with me sharing our savings numbers. I will tell you that the amount equals 15% of DH’s gross income plus 5% of my gross income. 10% of my gross income is already being invested in my pension plan, so that means we’re on track to abide by Ramsey’s recommendation of investing 15% of gross income as we pay off the mortgage.
As I’ve said, once our e-fund is full, we’ll still need to save for the short term, so we’ll keep saving/investing in TFSAs until all 3 funds (emergency, car, furnace/AC) are at their target. At that point, we’ll start dividing our investments between our long-neglected RRSPs (in which we haven’t invested for 12 years – since DH’s career crisis) and more TFSAs. So in answer to the question, “Will there be a definite line between our short-term savings and our long-term retirement investments?” the answer is “No.” There will be a wide fuzzy line representing a large amount that could go either way.
In that same normal month, we will put an extra $700 against our mortgage, bringing it up from $1,500 to $2,200.
Strategy for “abnormal” months
When a month is not normal, this is what we’ll do:
If DH has a whopper month of business, we will put all extra income against the mortgage to a maximum of $3,000. Any additional extra money will go into yet another fund: one that will hopefully accumulate into a large lump-sum that we’ll be able to put against the mortgage once per year. So all extra income will target mortgage repayment.
If DH has a slow month of business, we will not put anything extra against the mortgage. If we can’t manage our payment of $1,500, we will …
- supplement with money saved in the “lump sum” fund – and if there isn’t any, we will …
- put less into our savings than the fixed monthly amount – and if there still isn’t enough, we will …
- skip a mortgage payment.
Our “normal” mortgage payments of $2,200 per month won’t bring us to our finish line within less than four years. Our hope is that the “abnormal” good months will see us to that goal.
Does this all make sense to you? I hope it does, but I guess the important thing is that it makes sense to us. With savings and investments in the mix, our debt-repayment pace will be slower than it was before, and there’s still such a long way to go. But if that pace is steady, it won’t matter that it’s slower. We’ll still be making progress on this last long stretch to the finish line.
Do you have trouble finding the lines between savings and debt-repayment? Long-term investments and short-term savings? Your comments are welcome.
* RRSP (Registered Retirement Savings Plan) contributions are similar to 401(k) contributions in the US. The investment is not taxed until it is withdrawn, so it only makes sense to withdraw in retirement. A TFSA (Tax-Free Savings Account) is saved with after-tax money. There is no taxation upon withdrawal, so these funds are more flexible. It makes sense to withdraw either after retirement or before if needed.