Dear Penny: We Just Paid Off Our Debt. Do We Invest or Splurge on Vacation?

A couple sit in a wading pool in their backyard.
Getty Images
Dear Penny,

After much personal sacrifice, we just paid off our last car loan, leaving us with only the mortgage and utilities as our monthly bills. My fiancé and I want to utilize our money to its fullest. 

I’m torn between paying down our mortgage and investing. After our recent refinance, our mortgage interest 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 vacations because we have young children. 

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

-Perplexed Planner

Dear Perplexed,

Paying off debt requires a ton of discipline, especially when you have young children. So I wish I could rain down the balloons and confetti upon you to congratulate you for making this happen.

To pay down debt, especially when you’re doing it fast, you often need a single-minded focus. I know this because at the end of 2020, I paid off $12,000 of debt in 12 weeks to celebrate the new year debt-free.

When you hit a big goal, sometimes you go through the “now what?” phase. Don’t get me wrong. Having extra money to spend each month is a wonderful problem to have.

But resetting your brain can be a challenge when you’ve been putting all your energy and extra money toward debt. Sometimes it makes sense to focus on multiple goals at once that it will take you much longer to achieve. Perhaps the hardest part is giving yourself permission to pursue goals that aren’t financial.

I get the sense that part of you feels like splurging on a vacation would be an irresponsible thing to do with your money. I really hope I can convince you otherwise. Using your money to its fullest isn’t always about building wealth. Budgeting for vacations and making lasting memories for your family is certainly a worthy goal, especially after you’ve both worked hard to sacrifice.

What’s great about this situation is that you and your fiance sound like you’re both on the same page. You both want to save money and spend some on the kids. You just need some help setting priorities.

If the two of you haven’t sat down to review your budget, that’s your starting point. Figure out how much you need to live off of versus how much you’re bringing in so that you can mindfully spend those excess bucks.

You don’t say whether you’ve been saving or investing up until this point. A good rule of thumb is to save at least 20% of your income. If you don’t have much in savings or investments, your top two priorities are building at least a three-month emergency fund in a regular savings account and contributing to your retirement accounts.

If you or your fiance have workplace retirement accounts, make sure you’re contributing enough  to get your full employer match. Otherwise, you can each open a Roth IRA and contribute on your own.

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

Unless having debt of any sort causes you serious stress, I’d actually suggest that you make paying off your mortgage the lowest priority here. If you were approaching retirement, my answer would be different because I’d want you to get your expenses as low as possible. But since your children are young, I’m assuming retirement is a ways off for both of you.

A 2.3% interest mortgage is about as low as you can go. So I’d take advantage of what are probably the lowest rates we’ll ever see in our lifetimes. You’re better off investing that money in an index fund and allowing it to compound over time.

Regardless of how you decide to prioritize, I think you need to take a bit of pressure off yourself. You don’t need to figure out how to spend every cent of extra money you’ve freed up tomorrow — though it may feel this way since you just finished paying off your non-mortgage debt.

There’s no one-size-fits-all best financial plan for your family. Aim for making wise decisions, rather than perfect ones. It sounds like you’re both off to a good start.

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