I’ve freed up an extra $100 in my budget. Do I put it in RRSPs or against the house? Our family income is $90,000, we’re putting $600 into RRSPs, an extra $450 on the house right now.
The listener, let’s call him Greg, is in a 40% tax bracket and in his late 40s. What he didn’t put in his first e-mail is that he’s got a car payment of $250 for 2 more years, a snowmobile owing $2,000 and a boat at $3,000.
Becoming debt free is ALWAYS ahead of savings. In a leaky boat, fix the leak or all the bailing in the world won’t get you anywhere. Greg’s on track to be debt free in two years or so.
If he takes the $100 extra, stops the $600 RRSPs and diverts the $450 from the extra house payments, that’s $1150 a month. The debts get listed smallest to largest, then make minimum payments on all but the smallest debt. Does that make sense?
That pays off the snowmobile in two months. The $1150 and now the freed-up snowmobile money of $200 a month goes onto the boat. That’s now a $1350 payment and clears it off in two more months. Now the boat payment is gone and that $200 a month is added to the $1350, making it $1550 towards the car and it’s gone in three months.
Seven months from now, or February 09 he’s debt free but the house and has $1550 freed up. THAT is some serious money. Now we’re not talking about a spare $100, and $1550 now gets broken down into retirement savings and paid on the mortgage.
A half a step back has jumped Greg tons of steps forward, saved about $4,000 in interest and got him debt free a year and a half ahead of schedule.
A big section of the debt chapter in the It’s Your Money book walks you through this process very simply. Smallest debt to largest, minimum payments on all but the smallest and every one that’s paid off gets rolled into the next one.
Think of Greg in February when he’s got almost $1,600 a month going to pre-pay his mortgage or freed up that $20,000 a year into savings! Oh, and Greg got one more piece of advice: Never buy toys or cars again unless you can afford to pay cash for them.