Our Fast Track To Financial Freedom
I spent most of my twenties paying off student loans and credit card debt. When I reached my thirties, my financial priorities shifted from paying down debt to saving for the future, with an eye towards financial freedom.
We want to find the right balance between saving, investing and paying down our mortgage. After our financial goals are met, we still want a bit of cash left over to go out for dinner once-in-a-while and take a vacation.
So after making the final payment on our student loans last year, it was time for us to create some new financial goals. I sat down with my wife to look at our personal budget and decide what to do with our extra income.
We came up with these four financial priorities:
- Be mortgage free in 15 years
- Max out our TFSAs
- Pay for our daughter’s post-secondary education
- Build a bigger emergency fund
Once we identified our goals, we needed a path to get us there. After all our bills are paid, we have an extra $2,000 per month to work with. So we came up with our fast track to financial freedom.
Here’s our 40/40/10/10 savings solution:
Increase our mortgage payments
We ran the numbers on what it would take to pay off our home in 15 years. We had to increase our mortgage payments by $800 per month in order to meet this goal.
Now we take advantage of our mortgage prepayment privileges and direct 40% of our extra income toward paying off our mortgage ahead of schedule.
Related: Why A Mortgage Payment Vacation Is A Bad Idea
Max out our TFSAs
Since I belong to a defined benefit pension plan, I don’t have much RRSP contribution room to work with. This means the bulk of our investing will be done using our tax free savings accounts.
My wife and I each have $5,000 in TFSA contribution room, so we are putting $800 per month – 40% of our extra income – into our TFSAs and investing in blue-chip dividend stocks and REITs.
Related: Using Tax Free Savings Accounts In Retirement
Make RESP contributions
We want our daughter to get through University without the burden of student loan debt, and contributing to an RESP account is the best way for parents to help. The government kicks-in one dollar for every five dollars you contribute, to a maximum of $500. A guaranteed 20% return is tough to beat!
We’re putting away $200 per month – 10% of our extra income – into RESPs.
Build a bigger emergency fund
I never kept a big cash emergency fund when I was in my twenties. However, now that I have a young family to support, I prefer to have a few thousand dollars tucked away in a high interest savings account for peace of mind.
Each month I transfer $200 into my savings account with ING Direct.
A Balanced Approach To Financial Freedom
Some people prefer to pay off their mortgage as quickly as possible, while others go all-in with their investments. We’re taking a more balanced approach on our journey to financial freedom.
Related: When Interest Rates Are Low Should You Pay Off Debt Or Invest?
We’re lucky to be able to live frugally in a fairly inexpensive city, and to have a healthy cash surplus at the end of the month. The key is to make the most of your savings by charting a path to achieve your goals.
I love this plan and I think it’s quite impressive! I’m not sure how other people do it, but breaking things down into percentages based on goals is exactly how my wife and I divide up our “disposable”/extra income.
Instead of only focusing on one thing I think it’s important to spread it out. Depending on the budget, I even recommend to have a small percentage for increased spending money. We have a pretty tight budget, so this is something we make sure to add in (it’s typically 10% of the “extra” money).
@WorkSaveLive – good point about the spending money. I tend to allocate too much toward our financial goals and forget about keeping some cash on hand for spending on those little things (they can add up in a hurry). Our budget is pretty flexible when those things come up.
That is a great plan. I know a lot of people think its best not to make extra mortgage payments unless you have a very large emergency fund established because making those extra payments doesn’t lower your monthly expenses.
It looks like you will be in a great place 15 years from now.
@DSO – we’re in a good place to be able to make additional payments on our mortgage; we want to take advantage of it while we can.
We can always lower the payment if we needed some extra cash flow.
Love this plan. I am a big fan of paying off the mortgage as soon as possible.
Love the breakdown! Goal-setting is so key.
I’m recently out of debt myself, so I’m trying to max out my TFSA these days. I’ve been at it for a few months now and I still have around $15,000 of contribution room!
@Stephen – congrats on becoming debt free! Good luck maxing out your TFSA; it’s a great way to save.
If you are using a high interest savings account, you are wasting your money. Not only do these accounts pay less than inflation, but you pay tax on 100% of the interest earned and you pay tax at your highest marginal tax rate. So you lose and you lose. Consider a high quality preferred stock – the price of the stock does not vary much so you are not shouldering much risk in terms of having to cash at a specific time and the dividend benefits from the dividend tax credit.
Maxing out the TFSA is a smart idea, especially for young people who can reasonably expect to make a good income later in life. Use this rather than the RRSP, IF YOU HAVE TO MAKE A CHOICE. The RRSP is more beneficial when your income is higher (and when you are more likely to have the cash to do both the RRSP and the TFSA). And if you have a VERY low interest rate on your mortgage, paying it off early may not be as beneficial in the long run as maximizing your TFSA where the rate of return can well be expected to be higher.
@Keith – We keep a few thousand dollars in a high interest savings account for emergencies. I realize that rates are low – and when you factor in inflation we’re probably treading water at best – but we’d rather keep our emergency savings safe and liquid, and ING beats stuffing cash under the mattress.
80% of our extra income is going toward extra mortgage payments and maxing out our TFSA. We think those are the two best options for us to achieve financial independence.
After being in the US for 10 years, I must admit that the TFSA’s are amazing, and beat out on the US’s Roth IRA equivalent. The TFSA’s should be the first vehicle that anyone in Canada should fund as it can be accessed at any time (doubles as an emergency fund), and grows tax free, as well as being tax exempt when pulled out. In actuality, when retiring, the TFSA may be used as a great retirment vehicle as it should be (barimng no emergencies and/or until you can build up other emergency funds), should be the very last thing you ever pull out. If you reture when you are 60, you will probably live another 20 to 30 years. So why not pull out your RRSP (once converted), and allow that TFSA to continue to grow another 20 some years, as there is no time limit to converting them or pulling them out. TFSA,for either boomers, x-generation or millenials, is the number one investment/retirment vehicle, if used properly.
@Michael – I agree 100%. We plan on melting down my RRSP in my late 50’s/early 60’s but keep saving inside the TFSA for as long as we can. Then we’ll have three income streams in retirement: Pension, RRSP, and TFSA.
It’s a great plan Echo, and I would expect nothing less! The interesting part to me, and I think you’ll agree, is that it isn’t really that complex right? I know you’re a fan of index funds, so I’m sure your investments are nothing crazy… Why is this sort of plan so hard for people to understand? I really don’t get it. I’m trying my best to get a financial literacy going in my school division, but this stuff is straight forward, and has such great benefits.
@TM – thanks! It’s easy when you break it down into just a few goals. We asked ourselves what is really important and then came up with a plan to get us there.
I think it all starts from having a budget and knowing where your money goes. We wouldn’t know that we had $2k/month left over after our bills were paid if we didn’t track it. And, in my opinion, just saving 10% and spending the rest is not a plan.
I think this is a very solid plan. You shouldn’t have any trouble since you have taken the time to really plan it out.
We are working on coming up with our own plan right now too. We need to decide where we want to go in the next 3-5 years.
This really is a great plan – simple & effective. I have been giving mortgage advice for years, and when I have presented customers with pre-payment options to help pay down their mortgage debt faster, most often they will express a desire to hold some cash reserves for a rainy day. A good financial plan includes a rainy day fund, however what I often see is once a customer increases their mortgage payment, even slightly, they are somehow able set this new payment into their budget quite comfortably, by adjusting their lifestyle- mind over matter!
Further with some lenders offering flexible payment features, like payment reduction or payment vacation, mortgage customers can comfortably pay down their mortgage ahead of schedule, with the comfort of knowing that if life throws them a curve ball and they need to reduce their mortgage payments or take a short break, they can!
@ Farhaneh – thanks for stopping by. It would be easy for us to stay on our scheduled amortization and keep the $800 a month as cash flow. But we have budgeted for everything we need in our day-to-day life and anything extra would just lead to wasteful spending.
Better to get ahead now while we have the means to do so.
Love this plan! I don’t have a mortgage yet, but I’m using a similar weighting to figure out how much home I want to buy while still being able to contribute to retirement, an emergency fund and making an extra mortgage payment each year. It’s a more realistic measure than what the bank says I can afford!
@ Beth – you’re right. If the cost to service your mortgage, property taxes and home maintenance takes up all of your income and you have nothing left over to put away for retirement, that’s a problem.
Sounds like you have a great plan for your home purchase. Good luck!
This works great for most people but my current scenario is 2 properties where 1 is being rented and at the rates I am paying I am trying to make more $$ in my RRSP and TFSA accounts.
In saying that the capital gain you can make on the sale of a house is also something to consider.
If you ever wanted to sell your house (5-10 years) you would not pay tax on the gain and can invest money elsewhere.
It’s a great plan Echo, and I would expect nothing less! The interesting part to me, and I think you’ll agree, is that it isn’t really that complex right? I know you’re a fan of index funds, so I’m sure your investments are nothing crazy… Why is this sort of plan so hard for people to understand?