Saving vs paying extra on mortgage

[B.Spilner]

So this has come up a few times with the wife and I, we keep about $1000 in savings, and anything above that gets transferred directly to the mortgage.

Our thought is, why save when were paying the bank interest on the mortgage and we can chew that down over time.

Were debt free, and have loc and cc for backup.

What would you do in our case? Should we have a better "pillow" of savings?

Thoughts?

[pheoxs]

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So this has come up a few times with the wife and I, we keep about $1000 in savings, and anything above that gets transferred directly to the mortgage.

Our thought is, why save when were paying the bank interest on the mortgage and we can chew that down over time.

Were debt free, and have loc and cc for backup.

What would you do in our case? Should we have a better "pillow" of savings?

Thoughts?

The only concern would be is if one of you get laid off and you need to live off savings for a while. You can't withdraw money paid onto a mortgage and if you have to start racking up the LoC that adds up quickly.

If you have a bit of a cushion sitting in a TFSA (which can be invested at a nice return) then at least you have that to draw down without incurring interest if you run into a few month hardship.

With how rates low are right now and how well the stock market has been doing, the last while its been more profitable to invest in my TFSA than it would be to pay down a mortgage. (Though the stock market is unpredictable and could drop at any time)

[ercchry]

I’d be maximizing rsp and tfsa first, then mortgage... tax savings add up

[taemo]

1000$ in saving is not enough, I would be more comfortable having 2-3 months worth of saving readily available in case of an emergency or job loss.

regarding saving/investing vs mortgage payment, it all depends on your risk tolerance.
if you know how to save/invest then it can out weight the bank interest, but there's also the stress free lifestyle of not having mortgage debt.

personally I'm in between, I'm saving but I'm also putting extra on the mortgage. we would like to be mortgage free in 5-10 years.

[Mostwanted]

What my fiance and I have done, was save at least 6 months of emergency funds which covers the cost of the mortgage,car payments,utilities, recurring bills etc.. It started out as 6 and now turned over 1 year worth of emergency fund.

After that we aggressively started paying off anything that we owed without doing much saving besides RRSP,TFSA, vacation/car parts money etc. Depending on the stability of your position at work, you might not need to have 1 year of emergency funds.

[Mitsu3000gt]

If you're debt free why are you asking about paying down a mortgage? I'm confused.

In my opinion if you can make more than your mortgage rate in investments (or are likely to), don't pay down the house. You're just giving up free money at that point. Mortgage rates are so low that most people should be able to outperform them with basic ETFs. Max out RRSP and TFSA, and do the mortgage last. Obviously that would change if rates increased significantly but right now that's what I'd do with all these mid-2% mortgages.

[civicHB]

$1,000 seems on the low end. What would happen if you have a major unexpected expense in the $5k range? I guess you do have an LOC that could be used.
How about if you have an unexpected job loss and no income replacement for a few months? would you use your LOC?

You seem to be handling your money well as you have no other debt, so maybe 6 months of expenses saved is extreme, but maybe between 3-6 months as a middle ground.

[B.Spilner]

Were not interested in doing the stock markets or "gambling" with the money, I just dont understand it enough to really get into it.

We do contribute to rrsp plus have about 20k in rrsp currently.

I also should add that I'm a small business owner with always 80k+ sitting in there as a "just in case" for the business. Which also can easily be taken out as a dividend.

So maybe we should be upping the savings to 2-3 months of take home wages.

[B.Spilner]

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If you're debt free why are you asking about paying down a mortgage? I'm confused.

In my opinion if you can make more than your mortgage rate in investments (or are likely to), don't pay down the house. You're just giving up free money at that point. Mortgage rates are so low that most people should be able to outperform them with basic ETFs. Max out RRSP and TFSA, and do the mortgage last. Obviously that would change if rates increased significantly but right now that's what I'd do with all these mid-2% mortgages.

Debt free minus the mortgage is what I meant. Would really like to be mortgage free by time I'm 50, currently 36. Just bought a 600k house.

[pheoxs]

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Were not interested in doing the stock markets or "gambling" with the money, I just dont understand it enough to really get into it.

We do contribute to rrsp plus have about 20k in rrsp currently.

I also should add that I'm a small business owner with always 80k+ sitting in there as a "just in case" for the business. Which also can easily be taken out as a dividend.

So maybe we should be upping the savings to 2-3 months of take home wages.

There's a investing thread on here in the finance section, might be worth while to take a read.

Basically you wouldn't invest in individual stocks but rather an indexed fund. All it does is track the market, so if the market goes up it goes up, if it goes down then it goes down. You don't risk the chance of investing in Nissan and then they go bankrupt because of their shitty R&D. It basically averages out the risk across the entire market rather than picking individual winners and losers.

Like the S&P500 has gone up 65% in the last 5 years (So ~10% per year) versus paying down a 3.5% fixed mortgage is a huge difference.

[B.Spilner]

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There's a investing thread on here in the finance section, might be worth while to take a read.

Basically you wouldn't invest in individual stocks but rather an indexed fund. All it does is track the market, so if the market goes up it goes up, if it goes down then it goes down. You don't risk the chance of investing in Nissan and then they go bankrupt because of their shitty R&D. It basically averages out the risk across the entire market rather than picking individual winners and losers.

Like the S&P500 has gone up 65% in the last 5 years (So ~10% per year) versus paying down a 3.5% fixed mortgage is a huge difference.

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

[pheoxs]

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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

This might help

https://canadiancouchpotato.com/getting-started/

[B.Spilner]

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This might help

https://canadiancouchpotato.com/getting-started/

You must spread some Reputation around before giving it to pheoxs again.

Thanks! Will def take a look!

[suntan]

Take that money you've saved and sell naked calls.

[ercchry]

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Take that money you've saved and sell naked calls.

I think you’d have better luck selling puts haha

[CompletelyNumb]

I was always told there were two reasons to pay extra on a mortgage: 1) you're bad with money, 2) you for some unknown reason don't want to do any sort of investing.

CCP linked above is a great place to start. Whether you lean on RRSPs or TFSAs is unique to your situation, but most people will benefit from TFSA. This thread is actually full of good advice for most: https://forums.beyond.ca/threads/411...my-investments

[rx7boi]

This is the system I've read about and try follow relatively closely. Everyone's got a different path so I'm just sharing what I've found to work for my wife and I currently.

$1000 for last resort emergency fund and then 3-6 months of living expenses set aside. After that, pretty much anything that's left over after daily living/discretionary goes into investing. It doesn't leave much for paying down the mortgage but we're likely going to scale down investing once finish up maxing out both TFSA's and we're comfortable with our RRSP amount. As Mitsu said, market trends play a role in how we decide our financial risk.

On Beyond, you'll get all sorts of "best math" advice to maximize gains down to tenths of a percent but I like to reiterate that fiscal responsibility isn't always about math as much as it is about applying consistent behaviour. Some people could benefit from a way more structured plan, in which case it would be 15% of your gross annual income goes into investing and the rest goes into the mortgage. After you pound out that mortgage, you'll have so much more money every month but I think it's wise to always be investing along the way.

But yeah, like @pheoxs said, start with couch potato. If you just want a TL;DR, just know that even guys like @A790 who know what they're doing put money into VGRO and call it a day, so if you filter out the noise it's not all that complex at the end of the day haha.

[Mitsu3000gt]

Most people I know just want "set it and forget it" solutions, and simply aren't interested in any sort of complicated or high effort investing. The generic advice I give is to buy VGRO, and max out RRSP and TFSA before turning to the mortgage. As you get older, look at ETFs like VBAL or VCNS as you slowly become less risk tolerant towards retirement. That's pretty much what I do myself as well, though I have a lot of Vanguard ETFs that were around before VGRO existed. Once VGRO came out, I switched over to it pretty well right away back in early 2018. Not saying that is the right answer for everyone, but I think it seems to fit a lot of people's lifestyles in the current market. Obviously if mortgage rates all of a sudden were 10-15% again, priorities would be a lot different.

[Kobe]

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$1000 for last resort emergency fund and then 3-6 months of living expenses set aside. After that, pretty much anything that's left over after daily living/discretionary goes into investing. It doesn't leave much for paying down the mortgage but we're likely going to scale down investing once finish up maxing out both TFSA's and we're comfortable with our RRSP amount. As Mitsu said, market trends play a role in how we decide our financial risk.

This for 4-6 months of living expenses set aside in case! (I like using 4 rather than 3) but having funds set aside is key in case of unemployment for a period of time.

[rx7boi]

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Most people I know just want "set it and forget it" solutions, and simply aren't interested in any sort of complicated or high effort investing. The generic advice I give is to buy VGRO, and max out RRSP and TFSA before turning to the mortgage. As you get older, look at ETFs like VBAL or VCNS as you slowly become less risk tolerant towards retirement. That's pretty much what I do myself as well, though I have a lot of Vanguard ETFs that were around before VGRO existed. Once VGRO came out, I switched over to it pretty well right away back in early 2018. Not saying that is the right answer for everyone, but I think it seems to fit a lot of people's lifestyles in the current market. Obviously if mortgage rates all of a sudden were 10-15% again, priorities would be a lot different.

For sure. IMO it's diminishing returns when you're getting to that level of complexity. For those that are savvy enough or have the time/motivation to put into the endeavour I am sure it can pay off handsomely in the long run.

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This for 4-6 months of living expenses set aside in case! (I like using 4 rather than 3) but having funds set aside is key in case of unemployment for a period of time.

Thanks haha and agreed 100% that is the rationale for the 4-6 months.. Just echoing my sentiments for what's already been wisely mentioned in earlier posts as well.