Saving vs paying extra on mortgage

[tonytiger55]

Im on the other side of the opinion. If investing is complicated and you don't get it. Go the other route.

If you have enough emergency fund to cover you for at least a year. Then write down some goals for the next five years. Also figure out what else you may need five years down the line, car, kids, holidays, furniture etc.
Then dump the rest on the principle of the mortgage. Pay it off early. Its what Asians/East Indians do.

[msommers]

$1,000 only in savings gives me anxiety lol.

Maxed out EI is a net of bi-weekly $1,000 payout if you need it, FYI.

[rx7boi]

It's a good point that there are life milestones which cost money and it's wise to incorporate these into your long term plans.

To be fair, alot of Asians/East Asians have multi-generational households where they just take money from each kid and attack the mortgage aggressively and then go the real estate route. Rinse and repeat until you have multiple properties is what I commonly see in these families.

[A790]

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$1,000 only in savings gives me anxiety lol.

Maxed out EI is a net of bi-weekly $1,000 payout if you need it, FYI.

He said $1k in emergency savings plus another 6 months of expenses as regular savings. Seems healthy to me.

Also, @rx7boi , I wouldn't say I'm "good" with money. There are much savvier people on here. I am disciplined, though, and that is about 90% of what investing is about.

We've got 6 months of living expenses at our "daily" budget, 12 months if we went to a "bare minimum to cover the bills" budget.

RE: mortgage vs. investments, I think it depends on your financial circumstances and how much equity you already have in your home. If you put 5% down, for example, making prepayments on your mortgage may be a smart idea to save money at renewal time. Plus, given the recent trends of deflation in Calgary RE values, insulating yourself against the prospect of being underwater on your mortgage is not a bad idea.

We prepay our mortgage every year via a token amount after we have maxed our RRSP/TFSA contributions. Usually $5 - $10k. On our acreage, with a much higher balance, we will be directing probably $20k its way this year. And next. And so on. To me, having a $700k mortgage isn't a fun time and so I want to bring that down ASAP.

Buuuut my priority will always be our liquid portfolio. It costs money to gain access to the equity in your house. It costs nothing to sell something from my TFSA.

In a way, I view the TFSA as a secondary "holy fuck I'm running out of options" savings account... but the circumstances would have to be dire for us to touch it.

Also, VGRO gained just under 19.5% last year when you factor in divvies. Not bad for set and forget.

[bjstare]

Unless I missed it, how has nobody linked this yet? OPs answers about easy investing are here:

https://forums.beyond.ca/threads/411...my-investments

[Buster]

@A790 hints at another point: contributing to RRSPs reduces your liquidity almost as much (or maybe more, depending) on contributing to the mortgage. Chasing the compound interest and tax savings of an RRSP contribution can backfire if you run out of cash and need to pull money out of it early. Obviously this changes depending on your tax bracket etc.

[rx7boi]

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Also, @rx7boi , I wouldn't say I'm "good" with money. There are much savvier people on here. I am disciplined, though, and that is about 90% of what investing is about.

There are definitely a good amount of other Beyonders who are also knowledgable. It was just more to illustrate a point that from our discussions, it impresses on me that you have both discipline and vision so naturally that came to mind.

[A790]

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@A790 hints at another point: contributing to RRSPs reduces your liquidity almost as much (or maybe more, depending) on contributing to the mortgage. Chasing the compound interest and tax savings of an RRSP contribution can backfire if you run out of cash and need to pull money out of it early. Obviously this changes depending on your tax bracket etc.

Very true. Most people are better served by maxing their TFSA's first before looking at RRSPs. RRSP money is expensive to get at if you need it, so it shouldn't be your backup...

- - - Updated - - -

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There are definitely a good amount of other Beyonders who are also knowledgable. It was just more to illustrate a point that from our discussions, it impresses on me that you have both discipline and vision so naturally that came to mind.

Ha, it's funny you say that because I definitely leave our coffee dates thinking the same about you.

Speaking of which, we are overdue.

[rx7boi]

I would also say that the TFSA is relatively easy to max since total contribution room since inception is just a hair under 70k.

I look at my RRSP contribution room and think about what I'd have to cut out of life to max it out haha.

re: coffee, agreed! Things are crazily busy but will reach out soon and catch up!

[ExtraSlow]

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Hmmmm maybe it's time I do a bit more research. I've looked at that thread a couple times but I just cant wrap my head around it. Is there an investing for dummies book? Lol

Paying down your mortgage is a simple, and low risk investment for "dummies". There's a lot of opinions out there, but if you are looking for a long term investment, paying down your mortgage is the simplest and easiest to understand, and doesn't require much strategy, which I personally feel most people are terrible at.

[Gainsbarre]

I'm on this subreddit almost everyday and this advice is pretty spot on: https://www.reddit.com/r/PersonalFin...ki/money-steps . Have a budget to know where you money is going, have an emergency fund, pay of high interest debt, take advantage of employer matching RSPs (if any), pay off other debt, save.

There's been a rise in High Interest Savings Accounts (HISAs) these past few years to the point that imo they have rendered term deposits/GICs/government bonds obsolete for your average retail investor - you can get a much higher interest rate (e.g. 2.8% and 3.3%) in HISAs now and they're far more liquid - a great spot to keep emergency funds. The main point of an emergency fund (and why it's so high up on that money steps list) is so that it can be used to cover unexpected expenses without the need to taking on debt (debt that can have the potential to snowball). A handy list of HISA and their rates can be found here: https://www.highinterestsavings.ca/chart/

The three books on this list are great and are all straightforward, self-contained reads: https://www.reddit.com/r/PersonalFin...i/reading-list - I like Millionaire Teacher the best - the initial few chapters talk about getting into the right mindset and having financial discipline when it comes to money (similar to what Thomas J. Stanley advocates for in "The Millionaire Next Door") before jumping into long term saving/investing. Hallam talks extensively about passive index investing, and I do think it's the way to go for the vast majority of the population and if you're just starting out with investing.

As for the mortgage, after establishing an emergency fund (keeping a few thousand in an HISA) and maxing out my TFSA/RSP I personally took advantage of my prepayment without penalty option with my mortgage - it allowed me to attack the principal of the mortgage directly, lowering the interest on all future payments. I agree that interest rates for mortgages are still low, but from a psychological standpoint I enjoyed paying off my mortgage rapidly.

[A790]

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I'm on this subreddit almost everyday and this advice is pretty spot on: https://www.reddit.com/r/PersonalFin...ki/money-steps . Have a budget to know where you money is going, have an emergency fund, pay of high interest debt, take advantage of employer matching RSPs (if any), pay off other debt, save.

There's been a rise in High Interest Savings Accounts (HISAs) these past few years to the point that imo they have rendered term deposits/GICs/government bonds obsolete for your average retail investor - you can get a much higher interest rate (e.g. 2.8% and 3.3%) in HISAs now and they're far more liquid - a great spot to keep emergency funds. The main point of an emergency fund (and why it's so high up on that money steps list) is so that it can be used to cover unexpected expenses without the need to taking on debt (debt that can have the potential to snowball). A handy list of HISA and their rates can be found here: https://www.highinterestsavings.ca/chart/

The three books on this list are great and are all straightforward, self-contained reads: https://www.reddit.com/r/PersonalFin...i/reading-list - I like Millionaire Teacher the best - the initial few chapters talk about getting into the right mindset and having financial discipline when it comes to money (similar to what Thomas J. Stanley advocates for in "The Millionaire Next Door") before jumping into long term saving/investing. Hallam talks extensively about passive index investing, and I do think it's the way to go for the vast majority of the population and if you're just starting out with investing.

As for the mortgage, after establishing an emergency fund (keeping a few thousand in an HISA) and maxing out my TFSA/RSP I personally took advantage of my prepayment without penalty option with my mortgage - it allowed me to attack the principal of the mortgage directly, lowering the interest on all future payments. I agree that interest rates for mortgages are still low, but from a psychological standpoint I enjoyed paying off my mortgage rapidly.

To be contrarian to the above, which is fine advice, my HISA interst rate is higher than my mortgages. I prepay as an insulator, but given I earn more in interest from my HISA than I pay, I tend to contribute there.

Also, I was under the impressions that the interest you paid on your mortgage doesn't change until renewal (IE- your payments are what they are, and the prepayment reduces the principle balance but doesn't otherwise reduce interest). Am I incorrect in this assumption? If so, that changes my approach somewhat.

[Chandler_Racing]

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Paying down your mortgage is a simple, and low risk investment for "dummies". There's a lot of opinions out there, but if you are looking for a long term investment, paying down your mortgage is the simplest and easiest to understand, and doesn't require much strategy, which I personally feel most people are terrible at.

Paying down the mortgage is never a bad strategy and while rates are very attractive now they won't be that way forever. How many people would be insolvent if rates moved up 2% or what about 5%?

Having a substantial mortgage over your head (even when making healthy contributions to other investment vehicles) is a huge driver of stress.

With that said, I am amazed at how calm people are with minimal savings. I keep ~3 years of cash on hand but maybe it's the accountant in me...

[msommers]

A year of savings seems reasonable and responsible. 3 years is excessive...but better over-prepared than under

[blairtruck]

I dont know what the smart thing to do was. But we have been doing double payments every month and the yearly 10% to principle.
113 Days left of the mortgage. took 13 years to pay off.

[Gainsbarre]

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your payments are what they are, and the prepayment reduces the principle balance but doesn't otherwise reduce interest

That is correct - sorry if I wasn't clear. The amount of my reoccurring payments remained the same, but with every prepayment made, TD sent me a paper statement informing me that I had paid the amount of my prepayment towards the principal, thus lowering my balance outstanding. In crunching the numbers I noticed that this prepayment also lowered the interest paid on every subsequent reoccurring mortgage payment - which is true of any mortgage payment, but because the prepayment takes a bite right out of the principal I suppose that, psychologically at least, I was taking a bigger swing at paying off my mortgage through prepayments (payments towards principal only) than through the regular reoccurring payments (payments towards principal and interest).

There's a lot more competition in terms of companies wanting to park your money in their HISAs these days, and with their added liquidity/flexibility it can (and often does) make perfect sense to put prepayment money into an HISA instead.

[ExtraSlow]

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With that said, I am amazed at how calm people are with minimal savings. I keep ~3 years of cash on hand but maybe it's the accountant in me...

I keep zero cash on hand. and I'm calm as heck. Well, until kilramos gets me fired up, then I'm yelling at my monitor.

[rx7boi]

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I dont know what the smart thing to do was. But we have been doing double payments every month and the yearly 10% to principle.
113 Days left of the mortgage. 13 years to pay off.

Goddamn son haha. You're not just pounding away at it, you're piledriving that mortgage like a bunny rabbit.

[pheoxs]

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Paying down the mortgage is never a bad strategy and while rates are very attractive now they won't be that way forever. How many people would be insolvent if rates moved up 2% or what about 5%?

Having a substantial mortgage over your head (even when making healthy contributions to other investment vehicles) is a huge driver of stress.

With that said, I am amazed at how calm people are with minimal savings. I keep ~3 years of cash on hand but maybe it's the accountant in me...

Although true, Canadians are so heavily leveraged that interests rates can't go up 2% anywhere in the near future. It would cause so much insolvencies that our economy would crash and bring rates back down. So much of our economic growth depends on real estate at this point that they are basically trapped into low interest rates. That being said they could creep up a bit but I don't see any way they could even break 3% in the next decade with how much we are tied to the US and them turning towards a recession.

[roopi]

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With that said, I am amazed at how calm people are with minimal savings. I keep ~3 years of cash on hand but maybe it's the accountant in me...

How much food do you have in your underground bunker though?