When you are on any kind of “plan” it helps to have a tangible goal. If you want to lose weight, for example, it’s helpful to decide exactly how much you wish to lose so that you can gauge your progress and keep motivated. Last year we aimed to “start saving money” but with no tangible goal in mind it was hard to gauge the consequences of overspending (and thus made it easier to spend).
I spent much of the evening last night going over various savings scenarios. We do have a bit of debt (most of it the new car we bought this past June), and I played around with different schemes for saving and reducing debt in order to achieve the goals we’ve set for ourselves. Dave Ramsey (and many others like him) suggest that paying off debt is the first thing you should do, and in principle I agree with that. But when you are dealing with low-interest loans and not credit card debt it’s not always prudent to pay things off before starting a savings plan.
For example, we chose 3 year financing for our car purchase with a low 3.9% interest rate. The total cost of financing the loan (i.e. all the interest) will be about $2500. Now we could put all our money towards paying off that loan quickly, but it would save us less than $2500. On the other hand, by putting that money into an RRSP contribution (for which Husband’s company matches funds) we save far more money than paying off the car loan would get us.
Of course, the one factor that isn’t considered here is the “cost” of being wedded to a monthly car payment for three years. It not only limits the monthly amount we could contribute to a mortgage payment, but it also means that Husband will be obligated to remain close to his current salary for the duration of the loan. Our plan to move away from the city will likely come with a reduction in Husband’s earnings and it would be nice if we didn’t have to factor in that car payment as well.
So…I worked out a plan where we simply continue with our RRSP contributions as well as a monthly payment to our savings account. At the end of this year we will have enough money to pay off all our debts (save a small student loan that, for numerous reasons, really isn’t worth paying off early) and still have enough left over for a healthy downpayment. We’ll be ready to buy AND we won’t have a huge car payment to make, which means we could be ahead of where we are now even if Husband’s salary is cut by a third!
And now there is something concrete with which to measure progress and against which to weigh decisions. For example, if we go $200 over budget one month, we’ll be short of our goal by $200 and I’ll have to find a way to make up for that. If I feel like buying something expensive I’ll have to ask myself how I plan on making that up so that we reach our goal. I’m very confident that this is going to make it much easier not to spend on stuff we don’t need.