Should we invest or spend more money on vacation?

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    Dear Penny,

    After many personal sacrifices, we have just paid off our last car loan, leaving only the mortgage and utilities as monthly bills. My fiance and I want to make the most of our money.

    I’m torn between paying off our mortgage and investing. After our most recent refinancing, our mortgage rate is only 2.3%. We could get a higher return from stocks or real estate. My fiancé wants to save in a traditional savings account and spend more on vacation because we have young children.

    I am all about spending money on the children, but I also want to use our money wisely. What would be the best financial decision for our family?

    -Perplexed Planner

    Dear at a loss,

    Paying off debt takes a lot of discipline, especially if you have young children. I wish I could rain the balloons and confetti on you to congratulate you on this happened.

    Often times, paying off debt, especially if you do it quickly, requires a determined focus. I know this because I paid off $ 12,000 in debt in 12 weeks at the end of 2020 to celebrate the new year debt free.

    Sometimes when you achieve a big goal you go through the “now what?” Phase. Do not get me wrong. Spending extra money every month is a wonderful problem.

    Resetting your brain, however, can be a challenge when all of your energy and extra money is in debt. Sometimes it makes sense to focus on multiple goals at the same time that will take much longer to achieve. Perhaps the hardest part is giving yourself permission to pursue goals that are not financial.

    I have a feeling that part of you feels like being on vacation would be an irresponsible thing to do with your money. I really hope that I can convince you otherwise. Making the most of your money isn’t always about building wealth. The budget for vacation and memory of your family is certainly a worthy goal, especially after you both worked hard to make sacrifices.

    The nice thing about this situation is that you and your fiance sound like the two of you are on the same page. They both want to save money and spend something for the children. You just need some help setting priorities.

    If the two of you haven’t sat down to check your budget, this is your starting point. Find out how much to live on and how much to bring in so you can spend those excess dollars mindfully.

    They do not say whether you have saved or invested by this point. A good rule of thumb is to save at least 20% of your income. If you don’t have a lot of savings or investments, your top priority is building at least a three-month emergency fund in a regular savings account and adding to your retirement accounts.

    If you or your fiancé has a retirement account, make sure you are making enough contributions to reach your full employer match. Otherwise, you can open a Roth IRA and make a contribution yourself.

    When you have an emergency fund and you are saving for retirement, give yourself permission to budget for the fun things like vacations. That doesn’t mean you have to fly first class and stay in luxury hotels. If you’re worried about over-spending, you can start small with budgeting for a long weekend road trip.

    Unless you have serious debt, I would recommend that you make paying back your mortgage your lowest priority. As you approached retirement my answer would be different because I want you to keep your expenses as low as possible. But since your children are young, I assume that retirement is a way out for both of you.

    A 2.3% mortgage is as low as possible. So I would take advantage of probably the lowest rates we’ve ever seen in our life. You’d better invest that money in an index fund and let it compound over time.

    Regardless of how you decide to prioritize, you need to take some pressure off yourself. You don’t have to figure out how to spend every penny of the extra money you freed up tomorrow – although it may be because you have just paid off your non-mortgage debt.

    There is no single financial plan for your family. The goal is to make smart decisions rather than perfect ones. It sounds like the two of you are off to a great start.

    Robin Hartill is a certified financial planner and senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].


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