# Rookie Investor - Should I Max RRSP Contribution?



## retire-early-please (Jan 25, 2011)

I just found this forum this week, it looks great. I am a rookie at EVERYTHING financial, having grown up in a family with very little, but I have been fortunate enough to land an amazing job in sales and I need to educate myself on how to make the most of my income. 

I have a rough idea what I am doing, but I would be thrilled if anyone here could provide input to steer me in the right direction.

Details: Age 35, wife, two children under 5.
My wife and I both make $105,000/yr ea.
Assets:
$13,000 cash
$60,000 in RRSPs
Debts:
$440,000 mortgage, house worth approx $550,000, mortgage 3.5 years left fixed at 3.4%
$25,000 line of credit - paying about $2000 per month to reduce this

I am contributing about $8,000 per year to RRSP. My wife is contributing about $16,000. Both are through our employers programs where they contribute also.

I am trying to find out the best thing to do with our cash. I am considering putting it into RRSPs. I have $14,000 that I can claim in child care payments, so my wife can use that and I can use the RRSP contribution to get a decent return.

Does this seem like the best course of action? I can use both returns to reduce the line of credit.

Should I consider borrowing to contribute more to our RRSP? We both have tens of thousands of dollars in allowable space, we just started contributing a couple of years ago.

Paying the mortgage down is another option, I assume this is what I will work on next when the line of credit is gone.

I am happy to provide more info and welcome any feedback.

Thanks!


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## HaroldCrump (Jun 10, 2009)

Hi Retire-Early-Please,

So your combined household income is $210,000 - correct?
How long has it been at/around this level?
At that income level, I find it surprising that you have that kind of debt.

I'm not passing any judgements and we don't know your personal circumstances, etc. but at that income (and tax) level, your debt is costing you dearly.
You are nearly $500,000 in debt, including your mortgage.
Even for someone with your household income (actually, _especially_ for someone with that income), it is too high.

I suggest forget about RRSP for a year or two, even though RRSP contributions at that tax level gives you a very solid return.
Keep doing whatever minimum is required to get the employer match - don't lose that.
But don't put in anything extra.
If you expect to continue making the same, or higher, income for the next few years, you can catch up later and recover your taxes.

For this year, try and pay off the LOC at least.
The other red flag is that your cash reserves are too low.
$13,000 for a family requiring $210,000 gross income is nowhere near enough.

Can your family get by on one income?
I have no idea where you live and what your expenses/lifestyle are, but $105,000 is a good income by most standards.
Therefore, if you can, try and get by on one income for the next 2 years.
You will be surprised what a big boost that will give your financial situation.
With all the after-tax second income saved, in one year your LOC can be paid off, your cash reserves can be increased substantially.

Starting year 2, you may start catching up on RRSP.
And/or consider RESP for your kids.

Hope this helps.


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## retire-early-please (Jan 25, 2011)

Thanks Harold!

Our lifestyle is not extravagant so one income might be OK for us. The only luxury item was putting our kids in an expensive private daycare. We decided that if my wife couldn't be home with them, we would use the good money we were making to give them the best start we could. We have no family support raising them, so we wanted to maximize the care they got during the day. The cost was about $24,000 per year combined. At the time we started this plan, we really couldn't afford it, the line of credit debt is due to trying to catch up and pay this expense. 

We have had good jumps in income the last few years so this is our first year at this level. I expect to be able to maintain or increase this level.

Prior to that in our 20s, our problem was very poor money management, paying more for our wedding than we should have and paying off student loans of $75,000 combined. What we learned at home didn't help our cause, but at the end of the day we are responsible for not making the right decisions in our 20s. I am not going to bemoan it though, I just need to start making the right decisions today 

I appreciate the advice.


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## MikeT (Feb 16, 2010)

What's your interest rate on your line of credit? Do you have car loans as well?


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## Four Pillars (Apr 5, 2009)

I'd say you are doing pretty well.

Harold is right - that is a big mortgage. However, it sounds like you are focusing on the LOC which is a good move.

After the LOC - it's impossible to know if it's better to contribute to RRSP or pay down mortgage quicker - I really like both. 

I tend to agree with Harold that maybe putting more into the mortgage (via extra payments) than into RRSP contributions makes sense.


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## the-royal-mail (Dec 11, 2009)

Welcome to the forum!

I am impressed at your household income. That puts you in a high earner's category for sure. No doubt you have worked very hard to get to where you are today. And I think we have a bit of work to do to organize your finances. Pull up a chair. 

IMO you should not be putting any further money into your RRSP at this time. You've already got $60K in there, which is a very respectable number. Let's put that aside for the time being.

I think your keyword needs to be *SAVE*.

You do not need to allocate the money right now, but I would like to see some savings goals established. And needless to say, a cash reserve plan in case of a rainy day.

IMO your focus for the next 12 months should be to establish these two things. Then set some goals for the future. Examples:

1. retire early
2. new car
3. some other big ticket expense or purchase


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## Plugging Along (Jan 3, 2011)

My random thoughts are:

Pay off your line of credit first and as quickly as possible. 
Once this is done, I would use that monthly amount that you were using to pay your line of credit, and put about 1/2 into your mortgage, and 1/4 into your emergency savings, and 1/4 into your RRSP. (make sure it's automatic) Take your tax refunds, and put it towards your saving until you have that beefed up. 

I like doing a combined approached (assuming no other debts than mortage) for mortgage and rrsps. I find tackling both at the same time psychologically works as you don't feel it's overwhelming when you're so behind, and it's my other way of diversification. 

I would also really try and cut down your expenses so you can be on one income, even with the expensive daycare.


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## Pigzfly (Dec 2, 2010)

I second the "LOC" then highly liquid/safe savings plan.

What is the rate on the LOC vs the mortgage? You may want to slightly increase your payment on the mortgage as well, depending on the rates. I assume the LOC is variable? 

I would recommend against borrowing to fund your RRSP, kill some of your debt first in order to build net worth.

You said your income has increased, I assume the kids have swallowed some of this? If you can live on a single income as Harold suggested, you could rapidly improve your financial situation by having such a large amount to save/invest!


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## retire-early-please (Jan 25, 2011)

Thanks for the advice everyone. My wife was thinking that paying off the LOC was the best bet, so she must be on the right track! 

The LOC is 6% interest. We have no car loans or other debt. Her car is only 7 years old so I am hoping we can get a few more years from it, I drive a company vehicle.

Looking at some numbers this morning, I think we can have the LOC paid off by the summer, so maybe I will make that my first goal.


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## larry81 (Nov 22, 2010)

For now ,your priority should be to clear the LOC asap, 6% !!!


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## MikeT (Feb 16, 2010)

Ya, hard to beat a 6% guaranteed return.

I'd still contribute enough to the rrsp to get the full match from the employer though.


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## HaroldCrump (Jun 10, 2009)

MikeT said:


> Ya, hard to beat a 6% guaranteed return.


The "return" is actually more than 6% since the loan is not tax deductible.
The poster is obviously in the highest tax bracket therefore (assuming Ontario) he needs to earn $146 for every $100 to be paid in interest.


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## sprocket1200 (Aug 21, 2009)

6%? wow, try this on for size.

more like 10% when you only keep 60% of your marginal income in that tax bracket (40%).

with the high income i would also max RRSP and TFSA (for emergency funds first). there is lots of cash here for everything...

shoot for paying off your mortgage in 10 yrs, beg borrow and steal to do it. you will be super happy with the choices in life that gives you...


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