I have been re-assessing my financial priorities and decisions lately.
There is an incredible satisfaction coming out of achieving a financial goal; now I have a great budget that works for me; my chequeing account is on the positive side; my emergency fund (aka TFSA) has a good sum of funds accumulated; and I have increased my biweekly RRSP contributions (to take advantage of the low market and to pay off the HBP faster) as I am getting a little salary increase in April.
I have another little increase coming up in September. My plan is to put the extra amount into my mortgage. So I will increase the biweekly payment beginning of September. I am feeling good about this, too.
I have been trying to project my next year and what I would do with the money I would save over the year. Would I increase my mortgage payments? My RRSP? Or my TFSA?
I am not sure what would be the best for me; they all have cons and pros. A balanced act would be desired I guess. Here are the cons and pros I can think of:
RRSP (registered retirement saving plan):
How would I would like to make the extra contributions: Lump sum contributions to directly pay off the HBP (home buyers plan withdrawal that I have had as a part of my down payment).
Cons: Once the contributions are done, I may not have access to these funds unless I take the risk of penalty of early withdrawal.
Pros: The market is down and it is the best time to make investments for long term. Plus, I gotta pay back my HBP anyhow (i.e. I consider it debt), so early payments are better.
TFSA (tax free saving account):
How would I like to make the extra contributions: Lump sum contributions. I have still contribution room, which I believe will take me another 3-4 years to maximize with the amount of contributions I make now.
Cons: none that I can think of. I am just not sure which one is better; to contribute to TFSA or to RRSP/mortgage? I am inclined towards RRSP or mortgage payments more than contributing to TFSA at the time being. But, this is likely to change over time.
Pros: TFSA is liquid and I can have access to it anytime I want. This gives a huge peace of mind as I may need money for emergencies or important things, like serious home repairs. So, if I have a surplus of funds and nothing better to do, why not to invest them in TFSA? My current TFSA plan is extra safe; it does not earn much but it does not lose much, either. I am opening a new one next week which I would like to be a little bit more aggressive (high risk category). It will be small at the beginning but I am planning to contribute to it from now on so that it may have a chance to grow over time. This TFSA will be hopefully for long term investment.
How would I like to make the extra contributions: I would like increase my mortgage payments over time. I am thinking from September on, if things go ahead as projected, every time I get a salary increase, it would be nice to increase my biweekly payments. One thing I am scared of is whether or not in case something happens I am allowed to reduce it. If that is not possible, then the lump sum payments seem to be the best option.
Cons: Once the funds are paid, I may not have access to them in case I need liquid funds. That is why my TFSA accounts are so important to keep healthy.
Pros: Knowing that the debt is reduced and there will be a better motivation for me to pay it off in a shorter time. There is a psychological part that works for me; if the debt is small, I can get more excited and committed to pay. I am not sure when I can fully pay it off, but I hope it will not take longer than another 10 years.
And how am I going to find out whether I have extra funds to supplement my RRSP, TFSA, or mortgage payments (if lump sum)?
That is where the chequeing account becomes important. I would like to ideally keep around $5K in it to be able to handle the fluctuations in budget and extra/unexpected needs. But, whenever it is bigger than that I can decide to make the lump sum payments. The best time to decide is the fall; between September and December. I have some lump sum payments in summer and then in December (for insurance and others). That means after these expenses if I still have a surplus in this account, then I will have an opportunity to make lump sum payments to my choice among RRSP, TFSA, or mortgage. Then in winter, I can start saving and accumulating for the coming lump sum payments for insurance in summer and December.
I guess that is a good plan for now. I hope things will move on as I project them. If not, I am ready to re-assess and adjust.
All is well for now.