Today’s guest post comes from Melanie. She is a Human Resources professional in the Toronto area who is married, with two young children. She blogs about financial life as a family of four and the challenges that come with it at Finance For Four.
I know – it’s hard to feel bad for someone when they tell you that they have extra cash, and they’re not sure how to spend it. If someone had presented me with this scenario while I was paying down all my consumer debt, I would have had a hard time trying to keep a straight face while trying to help them with their tough “scenario”. And if I was still paying down my debt, the answer is that it all would have gone straight to the debtor of choice!
But, fortunately, now that I have paid down all of my consumer debt, and my husband will be receiving his annual bonus from his company, we are faced with that very question – what to do with the extra money. Both of us agree that it cannot be absorbed into our regular cash flow. But we are unclear as to what we want to do with it. A big part of us wants to spend something on the house – we desperately need new couches, we would love to replace our ripped linoleum kitchen floor with ceramic tile (and add a backsplash while we’re at it), and we were so strict while we were paying down our debt that we hadn’t been spending anything to improve the inner appearance of our house. But the other part of us feels that we should be acting “responsible” with this money, and choosing to either pay down the mortgage, or invest the extra cash. We could also do a combination of both the reno and the responsible part. But how to decide?!
Currently we are “between” financial advisors. With two small children, I have neither the time nor the energy to learn how to manage my own investments on an active daily basis. This doesn’t mean that I don’t know what’s going on with our financial picture – but I don’t have the knowledge to actively invest our dollars on a daily or weekly basis. We have been asking friends to recommend their financial advisors and going through sort of an interview process to determine which one best fits our needs, and can help us maximize our savings potential. This is a question that I love to ask them to see what their response is. I don’t think that there is necessarily a right or wrong answer – but I really like to see the reasoning behind the answer that they give.
The argument towards prepaying the mortgage is pretty obvious – pay extra towards the principal on your mortgage, and you save a boatload of interest. Especially true in the first five years of paying down a mortgage, when you are primarily paying interest rather than principle (Usually I need to have had at least one glass of wine before I venture to look at my annual mortgage statement!) However, there are also many who feel that paying down the mortgage versus putting the money in your RRSP (read: similar to 401K but Canadian Style) is not the best long term investment. Depending on the return that your investment can achieve, over the course of the next ten years, this extra cash may work harder for me in an investment capacity.
In some ways, I have to think: What Would Ninja Do?
After some serious pondering, we decided to spend about half of the bonus on our house. The new leather couches are awesome, and the kitchen renos, as you can see below turned out amazing….
Now we have about half of the bonus left and are leaning towards going with the mortgage payment this time around. Since this is an annual salary, maybe we could split it up – invest one year, prepay the mortgage the next? I will leave it open to Ninja’s wise readers to provide their input and opinion on what they would recommend. Have you faced this situation before? Which did you choose? Which would you choose if you had the option, and why?