Canadians naive about how long they’ll be in debt

[Slava]

Well you write off the interest cost. So say 3.5% minus 39% = the rate I used.

The tax on gains is hard to factor here because it depends how you receive them and when. Could be straight capital gains, dividends or interest and depending on that characterization the tax rate differs. In some cases there is no distribution at all, depending on the structure. For this we don't need to get into all that though; its a message board and not somewhere where anyone should be making firm decisions on these kinds of strategies. Its completely not prudent IMO.

I also noted above though that the pure return of a lot of different holdings have made you more than 3.5% over the last decade or five years though. Its a low hurdle rate at this point because rates are low.

[AMG_G]

All this talk is in theory only but in my actual case its real to me. My coworker and I both got a 20k bonus a few years ago. He chose to invest his 20k into sino forest and I put my 20k into my mortgage. Yes he made money initially (he made sure I knew about it too) but then things went apesh*t. He lost it all and cant claim the cap loss because he put it in his TFSA. I on the otherhand am mortgage free now and I also make sure he knows about it too. Not saying that I dont invest either, I still max my Tfsa and rrsp yearly.

[Slava]

Sino Forest isn't a fair example though. It's one of the worst choices an investor could've made. I understand that investors make those decisions, but just like if he invested everything in Adams Golf a few years ago and tripled his money, its not representative of the strategy.

Instead, a straight medium risk asset/asset class would've given a better idea of what an outcome could be on a more consistent basis.

[Fire]

The safer play is paying off the mortgage first. Sleep better at night.

[The Yen Man]

There's no right or wrong answer. It just depends on how risk adverse you are. If you like to play it safe, put it in the mortgage. I know people who hate not investing their money in something as they feel it's a wasted opportunity. For them, it's better to always invest the money.

[flamesfever]

One of the old sayings was, "Life begins when the mortgage is paid off, the kids leave home, and the family dog dies".

For me, the first one holds true, It gives you so many options, and a sense of security knowing that you own your house outright, with no strings attached. I think, for most people, one of their highest priorities should be to pay off the mortgage as soon as possible.

As for the kids leaving home, that's not true. The things I miss most is the noise and chatter at the dinner table, and the hustle and bustle of people coming and going. It becomes far too quiet when they leave.

As for the dog, one of the smartest things I did in retirement was to get a dog. I have found that not only does it add a great deal to one's life, but
keeps you healthy by taking him on his daily walk...which he never ceases to remind you of.

[Rudee]

I'm in my early 40's and paid off my mortgage recently. No better feeling than not having a mortgage payment each month. I'm able to save around $3500 each month after my other basic expenses are covered. Freedom 55 is something that is now definitely achievable for me. I have no kids, so that also helps in terms of savings.

[V]

I don't really understand the mentality of paying down your mortgage. I'm 33 and my mortgage is roughly double the size of my total investment through various accounts of varying liquidity and risk. Based on fairly conservative estimates in 5 years I should have more money in my investment accounts than I'll have borrowed against my house. As far as I'm concerned, that's equivalent to having my mortgage paid off.

And then the investments should continue to grow while the mortgage shrinks.

So if at some point the cost of carrying a mortgage becomes unreasonable I'll be able to shift my more liquid assets on to my mortgage, or in times like this I can do the opposite and allow my money to grow more effectively.

I just don't see debt as that bad a thing if you can service the debt while the money grows elsewhere.

[flamesfever]

I seem to recall long ago this big Texas oilman telling about his youth, travelling from rig to rig playing marbles with the other kids. He had this one big marble (I forget what he called it) that allowed him to continually win marbles from the other kids. And he was always careful to never risk losing his big marble. I believe the lesson was that you shouldn't gamble with, or expose to losing, the basic things that make you most secure, happy, and successful in life...and IMO a man's house would be one of those things.

[V]

That's awesome. I'm going to use that one day.

I'm not sure it's relevant, though, unless you're saying that having a mortgage is exposing your house to lose it.

[Azure]

Either way you look at it, paying off your mortgage faster erases x amount of dollars that you have to pay to someone every month. Most people call the mortgage a cost of living. Probably true. But I'm sure most people would LOVE to lower their cost of living but not actually change anything they do, and have excess money at the end of every month.

[flamesfever]

Originally Posted by V

That's awesome. I'm going to use that one day.

I'm not sure it's relevant, though, unless you're saying that having a mortgage is exposing your house to lose it.

I've always believed that the best investment is something that is basic to your needs and well being, and which will appreciate with time. A house would fall into that category. With house prices highly inflated and high personal debt, I fear a significant correction in prices may cause many to lose their homes, especially if interest rates begin to normalize. Therefore paying down the mortgage will create more equity, and make people less vulnerable. I can't imagine the amount of agony, people in the US must have gone through, in losing their homes.

IMO to take the money, you would pay on the mortgage, and invest in other things, is too risky at this point in time. However, I am much older, and can't take the risks a 33 year old can take.

[chemgear]

We've got quite a number of guys (and gals) clearing six figures. Still surprised how many of them go paycheck to paycheck or tap the LOC hard. They are fairly young though, lots of time to turn things around I guess.

[ripTDR]

in the past as a young guy, i did make mistakes without caring about the future. now i'm a bit older Ive had to work my ass off to make up for it. i make good coin, and even though i am late in the game, i still have more money than quite a few that i work with, cause they have to pay for one or two or more failed marriages

[Traditional_Ale]

This is the most depressing thread on CP. It's almost like "if you can't own something, might as well owe something."

[Flames in 07]

Originally Posted by flamesfever

I seem to recall long ago this big Texas oilman telling about his youth, travelling from rig to rig playing marbles with the other kids. He had this one big marble (I forget what he called it) that allowed him to continually win marbles from the other kids. And he was always careful to never risk losing his big marble. I believe the lesson was that you shouldn't gamble with, or expose to losing, the basic things that make you most secure, happy, and successful in life...and IMO a man's house would be one of those things.

I agree with the other guy who says it's a cool story but not relevant. The question several posts ago was evaluating a mortgage prepayment vs some other kind of investment. If he doesn't make a prepayment he's not going to lose his house. Your analogy works better if he was thinking about taking out a 2nd mortgage to invest.

The safe thing to do is probably work at prepaying the mortgage, no matter how cheap his mortgage rate is. However if you have some ability to invest (thy guy who throws it all on Sinoforest is the opposite of this) and you have some goals about getting ahead then why not develop an investment strategy.

What's funny to me is how naively people were adding VAR, or in general risk to their lives 6 years ago, and now many people are absolutely allergic to any kind of risk whatsoever. The truth is somewhere between the two extremes we have seen in the last decade.

[1stLand]

Not sure why this thread turned into a discussion about investments. The thread title states "Canadian's naive about how long they'll be in debt", not "Canadians looking for better investment options"

Most Canadians don't have any savings at all, so not sure why investment guru's are chiming in and advising whether its better to make investments above paying off one's mortgage.

RRSP's and Investments are overrated. Effective in reducing your tax liability, but useless if used solely as your retirement strategy.

Pay off your mortgage first!

Quit buying Shi* you dont need!

[Slava]

Originally Posted by 1stLand

Not sure why this thread turned into a discussion about investments. The thread title states "Canadian's naive about how long they'll be in debt", not "Canadians looking for better investment options"

Most Canadians don't have any savings at all, so not sure why investment guru's are chiming in and advising whether its better to make investments above paying off one's mortgage.

RRSP's and Investments are overrated. Effective in reducing your tax liability, but useless if used solely as your retirement strategy.

Pay off your mortgage first!

Quit buying Shi* you dont need!

I was just answering a question that was posed in the thread. Not sure why a thread that was started months ago is a big deal if it gets derailed now though.

[Cowboy89]

Originally Posted by 1stLand

Not sure why this thread turned into a discussion about investments. The thread title states "Canadian's naive about how long they'll be in debt", not "Canadians looking for better investment options"

Most Canadians don't have any savings at all, so not sure why investment guru's are chiming in and advising whether its better to make investments above paying off one's mortgage.

RRSP's and Investments are overrated. Effective in reducing your tax liability, but useless if used solely as your retirement strategy.

Pay off your mortgage first!

Quit buying Shi* you dont need!

I think the point a lot of the 'investment gurus' have is that there are more options than simply the default option of paying off your mortgage everytime you have extra cash.

[chemgear]

Bump for a new FP article today:

http://business.financialpost.com/20...n-they-retire/

About half of Canadians expect to be in debt when they retire

The Manulife survey also found that many still struggle with financial literacy. For example, one-quarter of respondents didn’t consider mortgages or auto loans to be part of their overall debt.

Throw in concerns that Canada’s housing market may be overpriced, and the likelihood that interest rates will rise in the coming years, and several additional levels of risk could be introduced into the financial equation. “Canadians have been lulled into this sense of security because they’re paying 3% or less on their mortgages, but that could change very quickly,” Lunny said.

“People don’t have long memories and if their only reference period is the last five years or so, since the financial crisis, they better be prepared for it.”

Using home equity as a “fallback plan” suggests some Canadians are struggling to balance retirement with paying down debt, Manulife Bank CEO Rick Lunny said in an interview.

“If people think they’re going to take out second mortgages and larger mortgages when they retire, that’s a pretty concerning view and evidence of no financial plan whatsoever,” Lunny said.

Debt problems are nothing new for most Canadians and neither are the surveys which conclude that most people aren’t properly saving for the future.

TD Insurance released findings last month which said 39% of Canadians would run into financial problems if they were forced to stop working due to a sudden illness. The figure rose to 44% for respondents under the age of 35.