Cash sitting in the bank -- invest it or pay down the mortgage?

[prarieboy]

Originally Posted by tvp2003

I was told that a moderately aggressive portfolio (which was recommended for a 5 year window) makes about 6-7%... which is obviously better than 5.1%, but the latter is essentially guaranteed and tax free (important now that I'm in a high tax bracket - yay!).

P.S. Thanks to everyone for their input

It's nice to get to the point in your life when you have some money to spend.

A couple things you mentioned made me want to comment.
1. You are in a high tax bracket.
- don't forget to consider how much will be taken from you when you withdraw the money. 30% is quite likely if it's in an RRSP when you withdraw it so your possible 7% taxable return becomes 5%. You will get a tax refund so consider putting that money on the mortgage as an extra payment.
-If you invest it outside of an RRSP you'll have to pay Capital Gains, Dividend or Interest tax when you withdraw. I don't want to do the math but you should.

2. You are looking to reduce your mortgage payment in 4-5 years.
-Paying down your mortgage is the only way to do this. If you make a lump sum payment now, your done. 5.1% in the bank.

Leveraging the equity in your home to invest seems a little risky for you IMO. It's true that the interest cost to borrow money for an investment is tax deductible but you could in fact be faced with the reality of having your investment fall in value. Your $10,000 nest egg could become $8,000 and you'd still have to pay the debt on the $10,000 loan for example.
To me this seems like a better strategy for long term money but I am of the mind that you can't make money if you lose it. (ie very consevative)

As I said when I started this post, It's nice to get to the point in your life when you have some money to spend.

[Slava]

^ Some reasonable points here prairie boy, but nothing that a decent planner can't overcome! Firstly the capital gains issue is rather easily made moot by a corporate class fund. This will defer the tax as long as you remain invested in that series of funds. Further, no matter how the gains are earned (be they dividends or interest) they come out as a capital gain. This is much more tax favrouable.

Leveraging is riskier, no question about that...you're investing with borrowed money. That being said however, investing for the longer term in a diversified portfolio without margin calls reduces this risk.

[tvp2003]

Thanks for the info folks. After years of school and paying out debts and student loans, I agree it's a good position to be in -- if we had bought our house a year earlier we'd probably be laughing. On the whole, we are good savers but pretty green when it comes to investing. Some of this stuff is already getting over my head, but I guess that's why there are professionals out there that handle this kind of thing

MoneyGuy: After employment income, my tax rate on any investment income would be 36% (26% federal plus 10% provincial). This year, I'd be looking at somewhere around $10-20K to play with; my mortgage lets me pay off up to 20% per year without penalty (on a $280K mortgage); I guess that's an important detail!

EDIT: I just remembered that my wife is the one buying the investments, because she gets taxed at a lower rate (I think she's right on the border between 15 and 22% federal tax).

A couple of you have mentioned paying down the mortgage and then borrowing it back to invest and writing off the interest -- I'm assuming this would require a separate tax vehicle of some sort. Plus, if it involves a HELOC, I don't think we have enough equity to qualify for that yet (I think you need 25%). In any event, I'm not sure if we want to leverage ourselves too much right now -- maybe in a few years when I'm a little more established in my work and things are little more stable (which will allow us to think longer term for an investing strategy).

Also, the money in our RRSP is staying there -- I'm not sure if that's what you meant Prairieboy, but we're not planning on withdrawing those funds in 5 years, just the non-registered investments (assuming the markets were still good and the math made sense).

[prarieboy]

Originally Posted by tvp2003

Also, the money in our RRSP is staying there -- I'm not sure if that's what you meant Prairieboy, but we're not planning on withdrawing those funds in 5 years, just the non-registered investments (assuming the markets were still good and the math made sense).

I was refering to the money you currently were wondering what to do with. I meant if you invested it in an RRSP investment to get a tax refund and then withdraw it when your mortgage came due in 4-5 years.
Nothing beats a calculator and an understanding of what money you will be left with when all is said and done to help with these decisions. As Slava pointed out a GOOD financial advisor should go along way to helping you, a bad one could hurt your bottom line and leave you worse off than when you started. Educate yourself as much as possible so you can have more meaningful discussions with your advisor instead of taking advice for face value.

[Bobblehead]

New budget just had a new type of savings account announced today.

It allows every person to to put up to $5000 in a special bank account and have it gain interest tax free. You don't even need to report when you withdraw the money.

So this is very similar to an RRSP, but to promote personal savings.

[Bobblehead]

Originally Posted by fotze

That is $5000 per year assuming the budget is passed and all that jazz. Interesting.

You don't get to claim it on your tax return - this is after tax money. Then again, all interest is sheltered AND tax free as it is withdrawn.

From the preliminary numbers I have seen, the return is similar to an RRSP. This is all pretty preliminary, but that is how it appears to be shaping up.

[Tron_fdc]

So how the heck do you find a GOOD financial advisor? Anyone have any tips?

[Cowboy89]

Originally Posted by Bobblehead

New budget just had a new type of savings account announced today.

It allows every person to to put up to $5000 in a special bank account and have it gain interest tax free. You don't even need to report when you withdraw the money.

So this is very similar to an RRSP, but to promote personal savings.

From Government website:

Tax-Free Savings Account (TFSA)

Canadians need all the help they can get to save money.
The TFSA will allow Canadians to watch their savings grow tax-free throughout their lifetimes.

Canadians can contribute up to $5,000 every year to their TFSA and carry forward unused room to future years. There is no lifetime limit and no tax on investment income earned, including capital gains.

The TFSA can be used any way you like—for example, to buy a new car, pay for an emergency, finance a child’s wedding or bankroll a dream family vacation.

I'm very happy about this. Great plan to help Canadians save and invest more money. Should do wonders long term economically and productivitywise.

[Bobblehead]

Originally Posted by Cowboy89

From Government website:

[B]

I'm very happy about this. Great plan to help Canadians save and invest more money. Should do wonders long term economically and productivitywise.

I'm kind of curious where people will divert money from in order to put here. While I'm sure this will be an incentive to many to begin saving, it will also get people who already save to now put $5K of money they would otherwise be investing (in T-Bills, or whatever short term interments) into one of these accounts.

[tvp2003]

Originally Posted by prarieboy

I was refering to the money you currently were wondering what to do with. I meant if you invested it in an RRSP investment to get a tax refund and then withdraw it when your mortgage came due in 4-5 years.
Nothing beats a calculator and an understanding of what money you will be left with when all is said and done to help with these decisions. As Slava pointed out a GOOD financial advisor should go along way to helping you, a bad one could hurt your bottom line and leave you worse off than when you started. Educate yourself as much as possible so you can have more meaningful discussions with your advisor instead of taking advice for face value.

Oh, I see. I've already maxed out my RRSP's, so I'm good there. I agree that I need to start reading some books and figuring things out -- it wasn't a big of a priority when we were starving students and had to pay off our debts/loans, but I suppose we don't have any more excuses.

[MoneyGuy]

Originally Posted by Tron_fdc

So how the heck do you find a GOOD financial advisor? Anyone have any tips?

There are two great ones who hang out on this site.

[Slava]

Originally Posted by MoneyGuy

There are two great ones who hang out on this site.

!!

[Jagger]

Well for me I decided to pay down the mortgage. I've been fairly aggressive with this to the point of being mortgage free in less than 6 years now. I think, overall, I've knocked about 10/11 years off the mortgage so far. However, I didn't go the lump sum route, just increased the frequency (weekly) and bumped up the payment. I then used the equity to get a LOC for a vacation property. I do have some RRSP's, of course, but I haven't really focussed on them yet. Paying down my mortgage has always been my main priority.

[simmer2]

Originally Posted by firebug

You can either eat well or sleep well.

~firebug

Love the quote.

I would buy a business with your money. ROI is 100% if financed properly. Invest $300K of your own money, get $300K in cash flow your first year kinda deal.

[Bend it like Bourgeois]

Originally Posted by simmer2

Love the quote.

I would buy a business with your money. ROI is 100% if financed properly. Invest $300K of your own money, get $300K in cash flow your first year kinda deal.

Where do you find that business?

[edn88]

So, if you do the math (and I won't profess I did it right) and depending on you tax bracket... let's say you put $10K into RRSP or $6000 onto your mortgage (they end up being the same after you get your $4000 tax refunt.

After 10 years, the RRSP is worth around $14K with a 3.5% rate of return, inside your mortgage it is worth $10.8K. So it depends on your marginal tax rate when you take it out. If you are paying 25% then your RRSP is actually worth just a little less at $10.6.

I think someone suggested putting a chunk of money on your RRSP and use the tax refund to pay down your mortgage.

The good news about paying down your mortgage early is you will get extra cash flow sooner (which if you are disciplined) is a good thing.

Paying into your mortgage means you will not have to live off your kids when you are old!

[MoneyGuy]

Originally Posted by simmer2

Love the quote.

I would buy a business with your money. ROI is 100% if financed properly. Invest $300K of your own money, get $300K in cash flow your first year kinda deal.

That can be very risky and very labour intensive. I've seen folks run their own business working day and night. Businesses do fail. Running a business means hitting for the fence a lot and striking out a lot. I'd try to win the game with singles and doubles and good base running and strategy.

[Flash Walken]

Originally Posted by edn88

Paying into your mortgage means you will not have to live off your kids when you are old!

Wait, so you're saying that's not the desired retirement plan?

...I've made a big mistake.

[simmer2]

Originally Posted by MoneyGuy

That can be very risky and very labour intensive. I've seen folks run their own business working day and night. Businesses do fail. Running a business means hitting for the fence a lot and striking out a lot. I'd try to win the game with singles and doubles and good base running and strategy.

That's why you need to screen which business you are buying. If you set out criteria and only go after companies with those criteria, then it's not that risky. And a lot of folks that run their own business have one that is too small to be self-sufficient. That's why it is good to go after a company that has a bit of size to it. 8-10 employees kinda thing.

Obviously, it isn't for everyone either. Sometimes, like you say, folks are better off going for "singles and doubles" because they are more comfortable with those. And you can do very well with those investments if you are smart and have a good advisor.

[simmer2]

Originally Posted by Bend it like Bourgeois

Where do you find that business?

All businesses are for sale, you just need to find a motivated seller and finance the deal properly.