# Consumer Debt Free! Whats next?



## sharp21 (Aug 6, 2009)

Hi all
Great site here, love the Canadian content! Ive been visiting MJD for quite a while now, but this is my first time in the forum.

I am at a bit of a financial turning point in my life & am looking for some insight. 
Here is the lowdown: 
1. Married w/ baby on the way.
2. Gross $135k last year, on track to about the same this year.
3. $280k mortgage @ 3.25%. 1 year term, comes up in February. Purchasedthe house for $300 about 1.5yrs ago & it is now probably worth... $280k. Got to love Alberta real estate!
4. Zero consumer debt! We hammered down for the last couple of years to kill this, which is why I haven't been investing anything.5. $3500 in TFSA & will definitely get to $5k by December. No other investments or cash holdings. I have 2 Lines of Credit for a total of $15k,with no balance. 

Paying off the debts has been my focus for so long & now that I am entering this next stage I need to come up with a solid plan of attack.
Goals:
1. I want to get enough equity into the house to start making use of theSmith Manouver.
2. Start contributing to my RRSP, to bring the taxable gross down & to setup for the future.
3. Start RESP & contribute enough to get the maximum amount from the gov't.
4. Eventually buy a bigger house, but keep our current house as a rental.(This is my long term goal...) 

Basically I am wondering how to best bring my taxable income down, while still building equity in the house as quickly as possible so I can start theSM going. 

A couple of contributing factors:
1. Wife stays home, so there should be a nice deduction there! Plus forthe lil guy.
2. Ive been paying an extra 15% on the mortgage from the beginning & intend to increase that now that I have killed the car payments.
3. I work out of the country & qualify for the Offshore Employment TaxCredit. In a nutshell, this means that I get a big refund every year, withthe end of the year all said & done tax obligation around 15%. 

This refund has mostly gone to debt reduction in the past & will now gotowards house, SM, RRSP's, etc, but am not sure how best to utilize it. 
S.


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## OhGreatGuru (May 24, 2009)

sharp21 said:


> Goals:
> 1. I want to get enough equity into the house to start making use of theSmith Manouver.
> 2. Start contributing to my RRSP, to bring the taxable gross down & to setup for the future.
> 3. Start RESP & contribute enough to get the maximum amount from the gov't.
> ...


Congratulations, you have taken the first major step towards financial security/independence.

1. No comments on Smith Manoeuvre, but I do believe paying down your mortgage is one of your best investments. If you are working outside the country, I'm guessing you're in some kind consulting/contracting field where your year-to-year income may not be terribly secure. Reducing your mortgage reduces the amount you need to get by if you have bad year.
2. With you having such a high income, and wife currenly stay-at home, it may make more sense to put the money in a spousal RRSP. The deduction to you will be the same, but the retirement income will be in her name. The goal should be to equalize retirement incomes. (Not as important as it once was since they introduced pension splitting, but who knows if they will keep it.) Sit down and try to forecast what your retirement incomes might be - for example will wife be going back to work someplace with a pension plan?
3. RESP is a good idea.
4. No comments on future housing needs, except increasing your equity in your current home will make an up-trade more affordable.


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## PMREdmonton (Apr 6, 2009)

I would suggest:

1. Set up an emergency fund that covers 3 months of expenses - TFSA is a good place to start with this.

2. Start maximizing RRSPs before investing in other non-registered accounts. You likely have built up some space over the years.

3. With whatever is left over, start hammering away at the mortgage.

4. I would suggest waiting on Smith Maneuver until you have enough non-registered assets that you are not putting where your family lives at risk.


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## sprocket1200 (Aug 21, 2009)

fantastic advice about an emergency fund!

i would also maximize TFSA (you can hold emergency funds in safe GIC and 'new' funds invested for better returns)

I would check out any calculators that discuss whether to paydown mortgage or invest. there will be risk/reward to consider. try taxtips.ca for this info.


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## sharp21 (Aug 6, 2009)

Thanks for the replies, much appreciated!

With a little windfall at work I have now filled both TFSAs. Mine is currently in an ING account earning 3%, while the wifes will be in something with a greater return. I plan on doing that every year, keeping mine easy to access for emergencies (GIC next year probably) while hers will be a more aggressive investment. That should cover the emergency fund while still making good use of it.

My big dilemma now is Mortgage vs. RRSP.
Working in the US, my company pays my US tax (full rate). This will get taken back to Canada & be applied against my Cdn tax, so effectively I am getting most of my tax paid for me.

Does it still make sense to get RRSP's in this position? 
S.


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## sprocket1200 (Aug 21, 2009)

better see an accountant about the tax situation, but if tax is paid RRSP may not be worthwhile.

as for your emergency fund TFSA. don't forget emergency funds are generally only to cover a few months of expenses. after that you can be more aggressive with the rest of the TFSA funds in your account.

I too have the ING TFSA. started with ISA @3%, then dollar cost averaged over to their TFSA streetwise balanced growth fund. YTD we are 13% up. I never saved in ISA (just has pennies now) for emergency cash as I figured market would only go up from such lows. so far so good!

get ready for October 1st when I expect ING to announce a similar program to last year when they double interest to effectively cover the TFSA. it was a great program and got my money with them early. as far as I know they were the only ones to do this.


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## sharp21 (Aug 6, 2009)

Im talking to my accountant about the taxes. Its a little murky, as I have to file in the US, then apply the foreign tax credit to Canada... There is little recourse to getting back any of the US tax, so if it is taxed at say 35% & that covers my Cdn tax in full, then it seems that RRSP's would be a bad idea...
When I get next years taxes back Ill max out the Tfsa's first thing, just in the ING account, which will be the emergency fund complete.
S.


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## dogcom (May 23, 2009)

The RESP is a good idea because the money does add up fast with the government kicking in. Although you have to be careful that you have control of it and not be pulled in by companies that will bug you when your baby is born.

Keep paying down the mortgage is the best and easiest investment. Other then that keep filling your TFSA in safe investments for now so you have a cushion should things go wrong.


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## sprocket1200 (Aug 21, 2009)

HI Dogcom,

at what point is it NOT a benefit to pay down the mortgage vs invest? and once there is enough 'emergency cash' in the TFSA what do you recommend investing in there and why?

We are also maxing the RESP, but what happens if they kids don't use it when they get to college age? are there any penalties or risks?

Thanks for your help.


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## dogcom (May 23, 2009)

One would always hope thier children go on to higher education but if they don't here is one link you could read http://www.ehow.com/how_2214467_avoid-penalties-resp-account.html.

On the mortgage vs invest question it is almost always better to pay down the mortgage because there is no risk in doing so. You have to earn a return on your investments greater then the mortgage interest and the tax you would pay on that gain.

Of course you could buy high paying dividend stocks that have shown to raise thier dividends on a year over year basis. This looks like an easy plan but what if the dividend stocks you own share prices drop like they did in 2008. Or they could decide to cut thier dividend like Manulife did http://www.financialpost.com/news-sectors/story.html?id=1867268.

The best thing to do would be to invest in a couch potato type of plan and paying a small amount like $100.00 a month and let that grow over the long term. This way your in the market and learning while most of your money is going to the mortgage.


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## sprocket1200 (Aug 21, 2009)

the dogcom,

the RESP link is confusing on points 1 and 5. 1. says heavy penalties apply for for withdrawals. 5. says withdraw contributions, payback grants and avoid penalties. so are penalties still applicable on the growth? plus income tax payable on it too? too many unknowns me thinks.

as for mortgage vs investments. i guess investments win right now easily. mortgage rate is 2% so only need to earn 3.3% to beat tax (top marginal bracket). We are averaging 14% this year on new money so it is good we stopped double paying the mortgage and went to minimum payments...


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## dogcom (May 23, 2009)

On taxes, I am not sure because I hate dealing with taxes, but it is important.

On investments how do you know it is so easy to beat 3.3% guaranteed. Right now it looks like a slam dunk, but it is not that easy. Last year 3.3% looked like heaven on earth.

If you ask this question on the short term then you need to learn alot. By the way it is good you are concerned and this is how you learn.


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## sprocket1200 (Aug 21, 2009)

yes, this is all about learning. the more I live, the more I learn.

this site is great as direct thoughts can be 'evaluated' by more knowledgeable persons.

the beauty of the mortgage vs investment idea is that since I am not leveraging but using the 'excess' mortgage payment to invest, it can be changed monthly without issue.

that is one reason i love stocks, bond, GIC, etc. changes can be made on the fly and amounts can be small enough to purchase when prices are low. I have avoided real estate investments because of the large 'bet' that is required in a SINGLE asset. try getting rid of a house in a month or who has the guts to buy one now when prices are very good, but may fall again...

falling stocks? bought them as they dropped and as they rose


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## sharp21 (Aug 6, 2009)

What if I have a hot stock tip?

Kidding, kidding...

Im still waiting to hear back from the accountant but I will likely try to do a combination of the 2. I need to own more of my house! But want to invest as well. 

The 10k in the tFSA is a good start, then Ill dollar cost average on something else.

Ive also been watching stocks in google finance to get a feel for that
S.


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## sprocket1200 (Aug 21, 2009)

sharp21,

I can feel for you about owning more of the house. I am in a very similar situation as yourself (16 month old twins) and the desire to pay down mortgage is overwhelming. I always try to take birds eye view and maintain my focus on overall wealth. this is the real goal.

If you are just starting out in this 'game', look for book recommendations on here then head to the local library. generally, all the books are there.

I too have thought about renting our house after buying another, but the numbers don't quite add up for me. don't be misled by the TV hype of RE (though any investing is better than consumer debt!) we live in a hot market on Vancouver Island. Our house value doubled from when we bought it in 2002 to the peak in 2007. sounds great right?

Nope, I calculated the annual compounding then took off costs that everyone conveniently ignores... property taxes, interest, repairs (hardly any). total return? a measly 8%. the investment portfolio for that period? over 12% (net), all DCA no big wins.

now on a house of about $450,000 I would expect a return of nearly $45,000 on that amount of an investment.

If I rent it, at say $2500 a month (don't think i would get that) gives $30,000 per year. then i subtract prop taxes, repairs, interest, etc. and end up down near $20,000. A brutal return for a lot of work and worry...


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## dogcom (May 23, 2009)

On real estate vs stocks, real estate almost always comes out ahead because we don't trade it like stocks, so we hold it, pay attention to it and fix it up. 

Holding a portfolio of quality dividend growing stocks is usually the best way to go because it is easier to do the above except the fix it up part.


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## sharp21 (Aug 6, 2009)

Im trying to pull off a mix of the two.
We'll see how it goes...
S.


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