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.
