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

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

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

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

Financial Mistakes Couples Often Make - VIDEO

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

What is Happening to our Economy?

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

Diversify, Diversify, Diversify!

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

Being Thrifty is Cool Again, or Is It

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 

The Truth about MER’s

I’m not going to write a post to simply try and justify the benefits of MER’s, however I do want to try and expose why they exist and why they can make sense.

The term “MER” stands for Management Expense Ratio and is the fee that many Fund Managers and Companies will take from the fund return of those who invest with them. After all, their objective is generally to make you more money then you could make on your own and for that, they deserve to be paid. This is no different then any of us collecting  a pay cheque for what we do day in and day out.

There is no question that MER’s are a cost to you as an Investor, but I do believe that they can be worth it depending on the fund and Manager of choice. For example, if you are diligent in searching the market for strong funds that have consistently outperformed their benchmark and which have almost removed the need to constantly watch your portfolio on a daily basis, wouldn’t you agree that it can make sense to pay someone else to do the work for you? The flip side however is that you may end up in a fund that rarely if ever out performs the benchmark in which case you would be far better off to simply put your money in Exchange Traded Funds.

Your Take-Away: If you choose to create and manage your own stock portfolio and are consistently making wise decisions that result in postive returns above and beyond the bench mark, then good on you. There is absolutely nothing wrong with managing your own money assuming you have the time and expertise to do so, and I would never suggest anything different. For the majority of people however, this is not the case which makes choosing a strong Manager and fund or series of funds of the utmost importance.

When you are looking at funds that you could purchase, consider the following as a starting point:

  1. What is the total MER compared to its peer group?
  2. Is there a performance fee in addition to the MER?
  3. Is the expense component fixed or variable from year to year?
  4. Who is the Fund Manager and what is his track record over a decade or more?

Although this is not an exhaustive list of questions to ask, it is definitely a great place to start. CI Investments was the first Mutual Fund Company in Canada to fix their MER and many are now following suit. That is definitely a positive for those of us who don’t want to have to worry about our MER going up every year.

Until next time, have a Terrific Thursday!

Chris

What is “The Latte Factor”?

You have heard me reference David Bach many times, and this post is no exception.

Bach is the author of “The Automatic Millionaire” which is a National Best Seller. His primary premise is to make everything automatic from your retirement savings to your dream savings. Before doing that however, he recommends that you walk through his process that he calls “The Latte Factor”. Simply put, Bach encourages you to track every penny you spend in a day from coffees to periodic lunches to groceries and then evaluate the amount of money that was not necessarily urgent. In other words, determine what your latte factor is by defining how much of your daily and/or weekly spending you can start saving instead of spending on non-essential items.

Your Take-Away: I’ve included a link directly to the “Latte Factor” because I believe this is an extremely useful exercise for anyone to walk through. In fact, both my wife and I have used it before and will be using it once again in the very near future. There is no question in my mind that if you follow the instructions, track everything you spend and then simply sit down and review what you could have lived without, you will be shocked at the money you could be saving if you truly wanted too. 

If and when you take advantage of this very useful tool, please do let me know what it works out for you and what you thought of the exercise.

Until next time, have  a Wonderful Wednesday!

Chris

Become a Millionaire!

An article was recently published at www.cnnmoney.com sharing the story of two US Army Captains.

Although this story is US based, it is amazing to see how relatively simple it can be to become a Millionaire. In the article we learn about two Captains who have decided to live off one of their salaries and invest the other so that they can retire as Millionaires. It may sound tough to do, but as you read you will notice that it really isn’t all that complicated. In fact, they spend $800 a month on entertainment and “going out” and even own a small plane that they are restoring. Doesn’t sound too bad does it?

Your Take-Away: You CAN have your cake and eat it too. After all, their family income is not necessarily huge, but they have chosen to make the right decisions with what they have to work with. If we can learn anything from this article, start wtih this:

  1. Define your goals clearly
  2. Make your savings plan automatic
  3. Find a balance and enjoy life as much as possible

As one of my closest friends says, “it’s all about the memories”. After all, what’s the point of having money if you aren’t enjoying it, and I would venture to say that this young couple has found a balance that works perfectly for the two of them. What is the perfect balance between saving and spending for you?

Until next time, have a Magnificent Monday!

Chris & Elisseos

Stay Put in our Volatile Market

A recent comment by Fred Pynn, CIO at Bisset Investment Management, couldn’t be more poignant.

“It’s time to sit back and ride out the storm,” he said. He went on to say “The biggest mistake that investors make is overreacting to short-term market volatility. That has probably the biggest negative impact on long-term wealth to investors.” His counterpart, Brent Smith, who is the CIO at Fiduciary Trust Company also commented by saying “The worst is likely behind us, and the majority of the downturn is in the past.”

Your Take-Away: Whether you believe what either Pynn or Smith say to be truth, market volatility is a guarantee in life. It is essential to go back to your original invesment plan, often provided in the form of an “Investor Policy Statement”, that clarifies your risk factor, comfort level and long term plan. If what you chose at the time of making your investment decisions worked then, why should it be any different now considering you probably knew the markets were going to move up and down?

Seeing your portfolio go down in value is never fun, and I’d never pretend that it is. What I will say however is that it is part of being an investor and the good news is that the markets always come back, at least according to history which is our best indicator of the future.

Until next time, have a Terrific Thursday and a very Happy Valentine’s Day with your significant other!

Chris & Elisseos

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