HOW TO GET THE MOST OUT OF YOUR MONEY
Trying to decide what’s the best move can be difficult…. and I must admit, this is not an easy subject to tackle. There are so many opinions…. But it’s important enough that I’m going to put my 2 cents in. My final recommendations are listed at the bottom if you want to fast forward…
First, let’s come to an understanding that we are all different and have different needs…. you must ask for professional opinions and make up your own mind. Having said that, I think that for me, this is actually a very easy decision.
RESP If you have kids, put money into an Registered Education Savings Plan… the govt gives you 20% on a max contribution of $2500/yr per child.. that’s $500 of free money… Just be careful to not invest in any risky funds or stocks… you’re making 20% return already… don’t get greedy.
TFSA If you have some extra cash, then yes, put those funds into a Tax Free Savings Account. You can contribute $5,000 per year and any unused contribution limit carries forward each year… and the good news is that whatever investments are allowed for RRSPs are also allowed for TFSA. Funds can go in and come out and grow tax free. But I wouldn’t be putting too much in here while you still have a mortgage… Pay your mortgage off first.
RRSP An old favorite for many. Millions of Canadians have contributed to RRSPs in an attempt to be masters of their future and retirement. Mutual Funds have become a favorite investment within RRSPs. But now let me ask you… how has your RRSP performed for you? For most of us, that answer comes with some profanities…%@!)*&%!!! or something like that.
RRSP contributions are tax-deductible… and higher income earners will benefit greater…your funds can grow, tax-free… but you must pay taxes when you withdraw the funds. At age 71, you have 3 options…-transfer to a Registered Retirement Income Fund, -buy a life annuity (better when interest rates are high), -or take the cash (bad choice as you will have to include those funds as income in one tax year which will result in large tax bill.)
RRSPs are a way to grow your investments, tax-free, and defer paying the tax… but you will have to pay the tax… make no mistake about that…
MORTGAGE PREPAYMENT Probably the least exciting but the best choice for many.. just pay down your mortgage… your mortgage is not tax-deductible, unless you have a mortgage on an investment or rental property. Get rid of that mortgage faster..make prepayments… even little prepayments done regularly will make a difference…. On a $300,000 mortgage, a $3,000 annual prepayment will shorten your amortization from 25 years to 20 years, 10 months. Based on today’s 3.29% mortgage rate, that’s a savings of over $28,000. Hey, a $28k return on a $45k investment isn’t bad.
ONE MORE OPTION…INVEST IN REAL ESTATE Sure, we’ve all seen property values go up over the last few years… actually, they’ve gone up over the last 12 years.. this is a long bull market for real estate… and there will probably be a correction. But if you buy a rental property, you should plan to hold it for the long-term… 7 years or more… that’s usually enough time for any price correction to reverse itself. Rental properties are popular today because mortgage rates are low and vacancy rates are even lower.
Another way to invest in real estate is through private mortgages. Private mortgage rates run from 10% to 15%. It takes a little more knowledge and experience to understand this investment, but it could be worthwhile.. Just be careful to get as much information as possible before making any 2nd mortgage investment decision. These are RRSP eligible too. This subject will have to be covered in greater detail as there is a lot more to it.
FINAL DECISIONS. For me, RRSPs just haven’t performed well… And maybe I haven’t invested wisely…. One thing is certain, my Investment Advisors and Fund Managers all won… they take their cut off the top… Not all Investment Advisors are alike, but I seemed to have hooked up with those that talked a better game than they could deliver. Here’s a question… were you ever put into a Deferred Sales Charge (DSC) mutual fund? You know, the funds where you can’t exit the fund family for 5 or 6 years without paying a hefty penalty? I know several friends and clients that got pushed into those funds…. not one of them is happy… I am staying away from these funds…
In case you can’t tell, I’ve lost my faith in mutual funds and decided to manage my own money.. and guess what? I’ve done better than any advisor I know… I’m sure there are good advisors out there…but I’ve just decided that no one will care more about my money and future than me…
It’s time to take charge of our money…. so here are my suggestions…
- Put money into an RESP… if you have kids, this is a no brainer… make sure to park that money in a safe, low risk investment… remember, you already made 20% with the govt’s contribution….let’s not get greedy.
- Pay off your mortgage. Make lump sum prepayments… anything.. something is better than nothing… and try to increase your regular payments… this will accelerate the retirement of your mortgage.
- If you have to invest in stocks or funds then put this into a TFSA…
- Invest in real estate… it’s not exciting.. it’s not sexy… but history tells us it goes up over the long run…
- RRSPs… putting them last on my list… I’m just not a fan of them… if you have other cash, why not invest it elsewhere… but if you have to put money in RRSPs, play it safe.. this is your future, your retirement… don’t gamble with it.
- Seek professional advice…. if you’re not sure what to do, get some advice… if you don’t have anyone to turn to, feel free to contact me… if I can’t answer your questions, I’ll direct you to someone who can.
