Should I Pay Down My Mortgage or Invest in the Market (Part 2 of 2)

Posted on August 22, 2008 at 11:58 am 
Filed Under Financial Markets, Financial Planning, Investment Planning, Mortgage Planning | Leave a comment

In my last post, I discussed my perspective of whether to pay down your mortgage sooner with your extra cash flow, or whether to invest that money in the market. In this post, I thought I would share an alternative reason as to why I choose to invest in my RSP’s with extra cash flow rather then pay off my mortgage with that same amount of money. 

The strategy I’m referring too is to invest your extra cash flow into an RRSP on a monthly basis. Each deposit will go towards your total RRSP contribution for that year and thus create an annual tax deduction. If you are like most Canadians, you will then receive a tax refund sometime in the early part of the following year that you can then put directly against the principal of your mortgage. This strategy allows you to grow your RRSP and also pay down your mortgage sooner.

Your Take-Away:  Think of it this way. If you have $10,000 to put against your mortgage, why not put that into your RSP and create a tax deduction of $10,000? If you are in the highest tax bracket of 46%, you would receive a tax refund of $4,600 which you could then put directly into your mortgage. Right off the top you have turned your $10,000 into $14,600 and have both grown your RRSP and also reduced your mortgage debt.

In the end, sticking to your regular mortgage payment plan or paying it off sooner becomes a matter of preference and a decision based on “Opportunity Costs”. Only you can make that decision, but if you can handle a bit of debt and stay with your original plan, why not take advantage of a market that is largely “on sale” today?!?

Until next time, have a Fantastic Friday.

Chris

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Should I Pay Down My Mortgage or Invest in the Market (Part 1 of 2)

Posted on August 21, 2008 at 3:29 pm 
Filed Under Financial Planning, Investment Planning, Mortgage Planning | Leave a comment

One question I deal with on a regular basis is “Should I pay down my mortgage with excess cash flow or invest that money into the market?” There are definitely different schools of thoughts on this topic, so I thought I’d share my personal perspective.

With the cost of borrowing being so low today (call it 5.45% for a 5 year fixed mortgage), I’m confident that it is quite possible to earn a larger rate of return in the market then to pay off my mortgage sooner. Lately that doesn’t seem to be the case, however I’m still confident that I will earn a better return by investing in the market over a five year window, which is a typical term for most mortgage owners. A general rule of thumb for me is to ask myself if I can earn more then it costs me to borrow. If so, then I’ll take as much debt as I can.

Your Take-Away: This is clearly not a strategy that works for everyone, especially if you invest in GIC’s or Money Market accounts, because you won’t be returning a greater percentage then what you are paying for your mortgage. The other factor to consider is that if you are tremendously opposed to debt, there is no point holding extra debt if it’s going to bother you and always be in the back of your mind.

Until next time, have a Terrific Tuesday!

Chris

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Financial Mistakes Couples Often Make - VIDEO

Posted on August 12, 2008 at 4:55 pm 
Filed Under Financial Planning, Investment Planning | Leave a comment

It makes my life much easier to find a qreat video to post, and this one is no exception.

David Bach was recently interviewed on The Today Show and discussed common financial mistakes that many couples make. Although this is an American based talk show, the information he provides can be tremendously useful for you in terms of credit card debt, spending habits, and tracking your expenses.

Enjoy!

Until next time, have a Terrific Tuesday.

Chris

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Inadequate Life Insurance Leaves Spouse With Less - VIDEO

Posted on August 11, 2008 at 10:31 am 
Filed Under Financial Planning, Insurance Planning, Personal Insurance | Leave a comment

I came across this short video on YouTube talking about how much and what type of life insurance may make sense for you and your family.

What was very interesting was how much this reporter recommended each family consider insuring themselves for. The key he says is that there is no definitive answer for everyone, but that a true needs analysis be completed and reviewed on a regular basis. After all, how can you know how much coverage you need if you haven’t gone through the process of using a Financial Needs Analysis to help you determine that number.

Take a look at the below video to learn more about how much you need, how much your family could be out if something happened to the primary income earner, and what type of life insurance products are available.

This is a great life insurance summary in only one minute and 46 seconds.

Until next time, have a Magnificent Monday!

Chris

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What’s Happening with Fannie Mae and Freddie Mac

Posted on July 24, 2008 at 4:32 pm 
Filed Under Financial Markets, Financial Planning, Mortgage Planning | Leave a comment

The U.S. credit crisis is well under way, and two of the biggest names in asset backed securities are Fannie Mae and Freddie Mac.

When these two institutions make the news because of their risk of insolvency, there is no question that they spark some interest and in turn, some fears. In fact, these two company’s are now being referred to as the “epicenter” of the U.S. financial crisis, and dominate the market for U.S. housing finance. Consider them a much larger company similar to that of CMHC and GE. If they did not exist, housing prices would continue to fall at a much larger rate then we’ve seen even to date.

What most are not aware of however, is the fact that Mae and Mac are no longer simply a ”too big to fail” American financial institution. Over the years, these two institutions have become central to what has turned U.S. mortgages into securities held by the world’s central banks. In fact, statistics show that these central bank’s hold up to $925 billion in these types of securities around the world.

Your Take-Away: It is impossible to predict the future of our economy considering the recent volatility we have all seen over the past 12 months. What we can say however is that although both of these institutions are definitely in a financial crisis, the fact remains that we are confident that the U.S. Goverment will be forced to inevitably step in and provide a possible solution for what has and is happening. If they don’t, they would be solely responsible for a further global economy slow down to the tune of multi billions of dollars.

Again, there is no way of predicting with absolute certainty that Fannie Mae and Freddie Mac will eventually get themselves out of their current financial situation. If they don’t however, we will be dealing with a possible global catastrophe that no one in the world would want to see. Better yet, the last country that would want to allow that to happen would be the U.S. based on the fact that they would be the primary reason for a further decline in global economies.

Until next time, have a Terrific Thursday!

P.S. For a far more in depth read of this story and the details involved, please visit http://blogs.cfr.org/setser/2008/07/12/too-chinese-and-russian-to-fail/

Chris & Elisseos

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Is Your Money At Risk if Your Bank Goes for Broke?

Posted on July 18, 2008 at 6:11 pm 
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It’s not news for most that some banks in the US are running into severe financial difficulties. What may be news however is that the CIBC may be on the brink of financial insolvency themselves.

Earlier this week, Dundee Capital Markets released a report explaining how CIBC could actually become insolvent. After all, many Canadians are taking their money out of their banks and putting it “under the mattress” where at least they know they won’t lose any money outside of their “inflation losses”.  John Aitken is an Analyst with Dundee Securities and he says “Financial services consolidation is closer than most investors would allow, and significantly closer than it was even three months ago”. It’s happened before with financial institutions, in fact 43 times before since 1969.

 Your Take-Away: The question most are asking then is what happens to my money if my bank happened to go under? In Canada, we are lucky to have the Canadian Deposit Insurance Corporation (CDIC) who will protect deposits up to $100,000 per depositor with each institution. In other words, if you have less then $100,000 with a bank that goes insolvent, you are guaranteed to get your money back. If you have more then that magic number, you will max out and lose any of the excess above and beyond the protection you are provided.

That said, it may be a bit early to start moving money from one institution to ten others in order to be free to claim with CDIC in the event of an insolvency, but I would suggest not going into this time in the market blindly. Talk to your Advisor, Bank Manager or even Accountant and determine if this is something you should consider. It’s a lot of work, and most likely for nothing considering that most realize that Canadian Financial Institutions are much further ahead then the US, but if nothing else, it doesn’t hurt to know your options.

Until next time, have a Wonderful Weekend!

Chris

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40 Year Mortgages and 100% Financing No More

Posted on July 11, 2008 at 5:07 pm 
Filed Under Financial Planning, Mortgage Planning | Leave a comment

Earlier this week, the Department of Finance announced that they were going to put a halt on 40 year mortgages and 100% financing.

As is usually the case with a decision of this nature, many are wondering whether this will be a good or bad thing for both the end user and the economy. According to Pascal Gauthier, a TD Bank Economist, “The five-year reduction in amortizations is expected to have a minimal impact — but the 5% minimum down payment could cut into the number of first-time homebuyers in the market.” Clearly the biggest concern is will the economy suffer with fewer people being able to purchase a home who would have otherwise been forced to take advantage of the 100% financing option?

Your Take-Away: Although this decision could slow down the economy in terms of first time home buyers, I personally can’t help but agree with the direction the Department is heading. After all, the credit crisis we are seeing in the US is due in large part to the very liberal mortgage financing American banks were offering, and we all know how much of an impact that has had. We may see a slow down in new new home buyers jupming into the market and thus even new home starts, but I’d rather deal with that smaller pain now then the potentially devestating pain we could experience if we were to ever fall into the same traps that the US is currently dealing with.

The long and short, a 40 year mortgage is not tremendously more different or dangerous then a 35 year mortgage. However, I am confident that 100% financing can bring with it the potential of catastrophic results and I’m confident that this will be the right decision in the years to come.

Until next time, have a Wonderful Weekend!

Chris & Elisseos

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What is Happening to our Economy?

Posted on July 7, 2008 at 6:22 pm 
Filed Under Financial Markets, Financial Planning, Investment Planning, Retirement Planning | Leave a comment

No doubt you have read or heard that the TSX tumbled 500 points last week and started this week off tumbling yet another 300 points as of the end of day today.

There is no doubt that these times can be a little scary or overwhelming for anyone with money in the market, regardless of their knowledge or experience. According to Eric Bushell, Senior Vice President at Signature Global Advisors, “The implications of the U.S. credit shock migrating to the world are beginning to be understood.” What’s interesting however is that he goes on to say “Our expectation of a global growth scare remains intact, only now it will be accompanied by a global inflation scare. This double whammy is not to be feared, it will be a time to buy.”

Your Take-Away: You have every right to be weary of what is happening both in Canada around the world. After all, consumer spending is down which impacts manufacturing, shipping and multiple other industries. As well, with inflation on the rise, it poses yet another concern for investors. The econonmy is definitley hurting, and will most likely continue to do so for some time now.

That said, we have been here before. Depending on your age, we have all seen the rise and fall of the markets and the incredible fear that creates. As Bushell himself says, we cannot argue that we are heading into some very rocky times, but as opposed to running and hiding until the markets recover, he is planning on using this opportunity to buy and add to his position in the market rather then sell and create more cash.

In other words, things will get tough for a while, but don’t be afraid to look at ways to take advantge of the current status of the market, rather then just thrown your hands up and hope for the best.

Until next time, have a Magnificent Monday.

Chris

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Diversify, Diversify, Diversify!

Posted on June 26, 2008 at 12:49 pm 
Filed Under Financial Markets, Financial Planning, Investment Planning | Leave a comment

Diversification is one of those “hot button” words that we hear so much about in times like these, but it may just happen to be one idea that is worth understanding.

The word diversification is defined by www.investopedia.com as “A risk management technique that mixes a wide variety of investments within a portfolio.” They go on to say “Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others.” Some big words for sure, but the most common phrase used for this term is “don’t put all your eggs in one basket”. John Paul Getty once said that he’d “rather have 100 employees earning him just one dollar then one man earning him one hundred dollars”. I’m guessing he understood the theory of diversification very well, even beyond his personal investment portfolio.

Your Take-Away: There is absolutely no question that we have all seen the incredible volatility that has been taking place in the world economy over the past 12 months, and the last couple of weeks has been no different. It is hard to watch your portfolio go up and down like a yo yo at times, but that is just part of the game if you hold any money in the market at all. The reason you made the choice to invest the money you did then should be no different then it is now, despite what you’ve experienced over the last few months.

Take advantage of this market and really review whether your portfolio is well diversified. Things to look at would include an appropriate balance between income and equity funds, regions like the US, Canada and world, and even asset classes such as resources and financials. Diversification is the one thing that could help to prevent you from huge swings in a market like this, so it’s definitely worth ensuring that your portfolio has taken advantage of this wonderful strategy.

Until next time, have a Terrific Thursday!

Chris

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Being Thrifty is Cool Again, or Is It

Posted on June 23, 2008 at 5:40 pm 
Filed Under Financial Planning, Investment Planning, Retirement Planning | Leave a comment

Many of us think of our “thrifty friends” as cheap or self pleasing. Maybe they are the smart ones though.

I know that I used to have a very negative view of those people I would call thrifty, but I’m starting to think they knew something I didn’t. Of course it is possible to go to far to one extreme and make thriftiness a characteristic that hinders relationships, but I don’t think that is the case for everyone. If you look up the word “Thrift”, the Canadian Oxford dictionary defines it as “prudent financial management.” I can’t help but think that I would have no problem with my friends using that definition to characterize me.

An article was recently wrtten in the Financial Post and stated that many of us are “just two paycheques away from bankruptcy”. If that’s the case, what’s wrong with being thrifty if for many the alternative is bankruptcy in the case of an unexpected illness, injury or loss of job?

Your Take-Away: I know for myself that learning to be more thrify is something I will take very seriously. After all, I don’t believe that means never having any fun, staying locked up with the lights off to save energy, or even giving up on creating memories for the purpose of saving for the future. Instead, I take that as a challenge to simply save first, and spend second without using credit to do so. After all, almost every one of us could afford to put a small percentage of our income aside, if we really wanted too and if we created the right habit.

So, my suggestion is to seriously take a look at where you are, where you want to be, and how your spending habits match your goals. More often then not, you will probably find that your spending habits say something entirely different then your “assumed spendind habits”. Maybe now is the time for you to consider answering the question “What does thrift mean to me?”

Until next time, have a Magnificent Monday.

Chris & Elisseos 

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