The Best Use of a Bonus

Woohoo! My wife has just called me from the office with news that she's going to get a big fat bonus check in September!

Now, there's never a lack of things that can be done with extra cash, especially now that we're parents, but we're thinking both long term and short term. In the short term, there is a long overdue vacation which will now be scheduled in September. A week away should recharge everyone's batteries -- not that Number 1 son requires any recharging, but his parents certainly do.

However, once we've indulged a whim or two, we've earmarked about half of the rest for our mortgage. Yep, our mortgage.

Think we sound dull? Well, perhaps we are, but you might want to reconsider that opinion. When our mortgage comes up for renewal in the fall, if we dump a lump sum at it, we'll get the instant benefit of reducing the size of our mortgage. That means our interest costs will go down. It also means that we will save thousands over the life of the mortgage loan in interest costs. Best of all, it also means that we can be mortgage free faster.

Now, you might wonder why mortgage free faster is such a big deal. After all, you're used to making your monthly (in our case, biweekly) payment, and it's no big deal, right? Well, let's just think about that for a moment, shall we? In our case, my wife and I would have about another $800 a month in our pockets. That's just shy $10,000 a year. We could take a really nice vacation in the Caribbean or Mexico every year for $10,000. We could be doing a lot more saving with an extra $10,000 around. We could be living with a lot less stress with an extra $10,000 around.

Pick the reason of your choice: retirement saving, extra cash for hobbies, renovations for the house, better vacations, more "toys". Whatever your incentive, being mortgage free just makes sense! Frankly, in our case, we'd likely pay for someone else to do some of the chores around the house that we really don't like. How about a lawn care service? (My brown lawn reminds me that this wouldn't be a bad idea.)

I don't think anyone can argue with the advantages of more money in pocket.

What if you don't have a job where you get a bonus? Here's an idea which is often touted by financial planners: Take your income tax return, and put that against your house. If that seems like too much drudgery when you finally get your hard-earned money BACK, then why not use half of it towards the mortgage and the other half for something indulgent? Even if all you do is put an extra couple of hundred on your mortgage every year that way, it adds up. And it adds up surprisingly quickly. Why? Because every time you put extra money against your mortgage, you directly lower the principal. It doesn't work that way with your regular payment. With your regular payment, part of the payment goes to interest costs, and only part actually reduces the amount of the loan. In the early years of your mortgage, up to 80% of your payment can be INTEREST! Anything you can do to drop your interest costs helps. And putting money directly against your principal drops your interest costs.

The bonus in the end? You could pay off your mortgage YEARS earlier. Honestly. I'm not kidding. You can do this, even with only a couple extra hundred directly against the principal every year. If it seems too good to be true, check it out with a financial planner. They'll give you the same news.

Because Number 1 wife will be off on maternity leave by January, our plans to pay off our house early will likely have to take a back seat for next year. Still, we figure we can be mortgage free in 10 years or less. And since we will have 2 children soon, having some extra money in pocket could also be helpful for soccer league, hockey equipment, ballet shoes...

Michael

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