Paying off The Mortgage: Start of Steady Pace for The Last Long Stretch

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.

Our mortgage

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.

Our savings

For our savings, we have 3 destinations.

  1. The emergency fund to cover 3-6 months of expenses in the case of a loss of income.
  2. 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.
  3. 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.  

 

 

 

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27 CommentsLeave a comment

  • I had trouble deciding which is best as well, so I talked to Shannon from Financially Blonde, who kind of walked me through my goals and gave me some suggestions. It helped to just kind of have a second party’s opinion who works in that field.

    • I think that Shannon is someone anyone could completely trust for that kind of advice. We might not have taken so long to figure it out if we had consulted her. Our second party influence has always been Ramsey, but it can definitely clarify things when you actually talk to that party.
      (I hope your taxes are all in good order now, Tonya: )

  • We struggle with this question, too — whether to pay off the mortgage faster or put extra money into other funds (in our case, our e-fund is full, but we’re working hard to build up our taxable investments for early retirement). I think being totally debt-free (no mortgage) is priceless, and you can’t put a number on the peace of mind that comes with that. But, to reach our other goals (and your other goals), it’s also important to build up savings or investments. So our answer to the questions tends to change all the time — sometimes we put extra toward the mortgage, sometimes extra toward investments!

    • I’m kind of glad to hear that coming from you! I consider you to be one of those super-wise pf types who will retire early thanks to your frugal living and intentional focus on investments. For us, the main reason that we’re going to prioritize mortgage-repayment is that I have such a good pension plan. Pension plans are a dying breed, and those of us who have them are extremely fortunate. DH’s retirement savings are not great, so we will focus there as well. But the fact is, if we play it wisely, we could both live on my pension as long as we have no debts to pay.

  • It has been an interesting time for us since completing our consumer debt repayment. Just when we finished our e-fund and were hoping to really start to tackle college and mortgage, a job loss happened. Now gainfully employed we are reevaluating our numbers. Trying to find the right balance between all the competing goals. When it was just debt repayment it was easy, sort of.

    • I know what you mean by “sort of”, Brian. It was definitely more simple when it was all about debt-repayment. Sounds like you’re at the same place we are. I’m sure your strategy will be quite different from ours. Personal finance is personal – there has to be a right fit for the people and situations involved. I wish you well in figuring out how you are going to approach the different goals you have for your family.

  • This actually sounds like a great plan! The only thing I might recommend is that you perhaps try to give the YouNeedABudget.com philosophy a try. Basically, you live on last month’s income, and the reason for that being so that you know without a doubt that you’re making the best choices with your income. It’s very nice if you have irregular income (like we’ve recently started).

    • I think that’s a good idea, Hannah. Rather than doing our best to guess what our income – DH’s really – will be, we would instead know what we were dealing with – our income from the previous month. Another good idea. Thanks!

    • Oh, I’m sorry Kay! I was trying to spell it all out clearly. I’d be interested in knowing which parts confused you. Perhaps the RRSPs? They are like your 401(k).

    • I don’t think that I have ever prayed about the details of our budget. I tend to pray in “big picture” terms. But the details are where I get stumped – so why wouldn’t I pray about them? Thank you Laurie : )

  • My wife’s car of many years is a 1998 Ford Expedition. The transmission started to act up right before Christmas. We mostly just need a town car that occasionally needs to go on the interstate. So to avoid a car payment for a new family car, I decided to sell my Mustang and we are going to buy a good used car with half the proceeds & put the rest in savings. We didn’t feel it was the best long-term decision to pull from our emergency fund to buy a new family vehicle, just to keep my hot rod.

    • Good move, Josh! That is admirable! So you’re going from 2 vehicles to one (or do you still have that ’98?), and you’re trading in your sexy Mustang for a reliable used car – and adding to your savings to boot. I am going to remember this when our van goes. There are plenty of options. You have clearly picked a very good one.

  • I constantly struggle with this. I wanted to get Tim’s dental implants saved for. Now I want to build up savings — but I need to start getting serious about retirement! And I want to pay off the mortgage early. I’m going to finally make retirement take precedence over that, but it’s a battle.

    I hope you’re able to pay down that mortgage in less than 4 years. That’s huge! I don’t know how people with big mortgages deal with it. We struggle and with a little extra, we’re still only paying $700.

    • One of the potential problems with sharing numbers is that it can make people start to compare – and I don’t want that. Given your income and your expenses, not to mention your younger age, your numbers and ours are bound to be different. There’s a whole weighing of all considerations that goes into prioritizing different financial goals, and each household will strike a different balance. It’s a tough exercise! And I must say I’m heartened to see that even seasoned pf types struggle to determine a blueprint for their allocation of money. All the best in deciding upon yours.

  • It’s always a balancing act in my opinion. I typically look at the interest rate. I prefer to invest if the interest rate is low enough. But if it’s high interest debt it’s best to focus on getting rid of it rather than investing.

    • The interest on our mortgage is low – 2.59% – but I think that age factors into the balancing act that you refer to. Any mortgage – even a low interest one – becomes less tolerable the older you get. Add into the balance the fact that I have a very good pension plan, so that although investments are very important for us, they’re not quite as important as they are for those without a pension plan. Thanks, DC.

  • It’s a great idea to have such a well thought out plan for the unknowns. It’s so easy to just have an emergency fund and classify just about anything as an emergency, but to separate common repair expenses and plan accordingly for them, you put yourself in the best position. Best of luck to you as you continue on your debt repayment journey!

    • Thanks, Latoya. I hope that we’re able to save up for expected expenses in time. That way, when the car or the furnace dies, it won’t be an emergency at all. You point out something very true about a tendency to “classify just about anything as an emergency.” I look forward to a changed definition of “emergency” as our savings grow.

  • We absolutely struggle with this question of how much to prepay the mortgage vs. invest for retirement/kids’ college. Ultimately we followed the advice offered by J.Money: when you’re faced with two good financial options, do the one that excites you more. That has usually been debt payoff, though when stocks took a dive we directed extra funds that way for a month. Being debt free really appeals to us, even if the math isn’t 100% in its favor. To us feels more straightforward and flexible to clear debts first if possible.

    • I like that bit of wisdom from J. Money! I hadn’t come across it before, so thanks for sharing it, Kalie. It sounds like we’re on the same page in feeling more pumped about freedom from debt. Math doesn’t operate in a vacuum. Where there is a psychological boost, all sorts of math can happen.

  • Our biggest financial “stresser” (mine at least) right now is finding the balance between investing and saving for a house down payment. Currently, we’re only investing thru my employer (generous match) and my wife’s Roth. But stopped contributing to my Roth so more can go towards the house. It’s driving me nuts and I’m always second guessing. Because I want to set us up nicely when it comes time to get a new house (2ish years) but also want to get the most bang for our buck investing-wise. Ahh!!

    • I’m sorry that it’s driving you nuts! But I definitely understand. Don’t let that angst stick around for too long. It’s goes completely against what financial peace is all about. If you look at what J. Money said (see Kalie’s comment) and ask yourself the question, “What am I more excited about? Saving for a house or investing?” perhaps you’ll be able to give yourself permission to lean one way or the other without the self-doubt part?

  • Sounds sensible, right? And it is, except for one thing. Young couples would achieve a better financial balance by investing that extra cash for retirement than using it to pay down a mortgage that will gradually disappear all on its own.

    • Thanks for your comment, Ellsworth. We aren’t a young couple, and we’re eager to be completely debt-free by the time we retire. We’d like to be free to make that choice within 3 or 4 years. That’s why, although we ARE saving a substantial amount, our priority is towards debt repayment. (Plus, I have a good pension plan.) As for young couples, I’m convinced that debt-freedom is a fabulous goal in their case too. Financial balance is very hard for many of us to determine, let alone strike, and there is a range of opinion as to what the ideal balance is. Yours and mine differ. And that’s OK. I welcome your feedback.

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