Borrowing Money Is Not For Me

Posted on 2014 03 31 by BetCrooks

For years I had no idea what our net worth was. I never bothered to add it up and find out. I didn’t particularly feel I needed to because I knew one thing clearly: our only debt was our mortgage. It’s been even simpler for a few years now because we no longer even have a mortgage. Whatever our net worth is, it is a positive number. I’ve been slowly realizing I’m in the minority among my friends, but not my relatives, because borrowing money is not the right choice for me.

Should I Get an RRSP Loan and Catch Up My Contribution Room?

I’ve seen various articles on the topic of RRSP loans this year. It’s a subject that comes up every January. For years, our RRSPs were topped out. Then we married and wanted to have kids. (Cue the ominous music.) During those wanting and getting kids early years our RRSP contributions dropped off significantly. That left us with a big chunk of unused RRSP contribution room.

As you can imagine, that resulted in some hopeful calls from our banks asking if we’d like to take out a RRSP loan and catch up.

I couldn’t for the life of me imagine why. Yes, it would get the money into the RRSP a few months or maybe a year or two earlier. That’s the only benefit I could see, though.

Instead, we contributed the money we would have had to use to pay a loan into our RRSPs. We used the refunds to put into our RRSPs too. Within the time it would have taken to pay off a loan, we had our RRSPs topped up. There’s only one thing we didn’t pay: interest on a loan.

Admittedly, if we’d happened to get a loan and invested most of the new contributions in a low-fee ETF mirroring the entire stock market in, say, March 2009, we might have ridden a wave up to dizzying heights. But with our luck, we would have put it all in about February 2008 and had to wait till 2011 just to break even. And pay interest for the privilege!

Instead we put in steady amounts through all those highs and lows and overall we’re ahead. That’s fine with me.

Should I Get a HELOC and Remodel the Bathroom?

We live in an older home, which suits us because we’re about the same vintage. It does mean that gradually rooms need to be significantly updated. Forty-year-old enameled iron sinks start to corrode. Water eventually sneaks its way behind shower tiles and erodes the drywall. Mirrors get that funny greenish cast and lose the coating near the edges. Governments pass laws making it illegal to manufacture light bulbs for your fixtures!

So a couple of years ago we planned out what needed to be done to our ensuite bathroom which has a fully tiled shower “room.”

Then, while driving to pick up our Rescue Pigs the car behind us decided that despite the fact all four lanes of the highway were parked they would try to find a path forward. You can guess that wasn’t good for our 2008 Camry, although many blessings upon us all none of the passengers of the three cars involved suffered lasting injuries.

Our insurance company was great and did the best they could but even so, they weren’t prepared to pay for a brand new car for us. So we did. Yes, in cash.

What cash?

The cash we had carefully saved for the ensuite bathroom remodelling.

Now given we had no debt and no mortgage we could easily have obtained a HELOC and remodelled the bathroom anyway. Let’s say we would need $20 000 to do the bathroom. I’ve seen people throwing around numbers like 3.5 to 4% for a HELOC.

Let’s say I could pay it off in 1 year but not till the end of that year. (Maybe because of an annual performance bonus or something.)

That would mean I would pay $700-800 to get the bathroom done a year earlier.

Why on earth would I want to give the bank that kind of money? Sure, I own shares so I’d get some of it back in my increased dividends, but even so. That’s about $2/day for a year.

It might be different if we HAD to get the bathroom done. But it’s still fully functional, just very aged. (We may be Chemicals but we can still keep a bathroom waterproof and a shower, basin and toilet functional. After all, we did attend SOME of the same courses as you handy Mechanicals.) (I assume you Civils are too polite to even be thinking rude thoughts about us; And you Electricals are too busy designing new light fixtures.)

Instead of paying the bank anything, we’ve been saving the money we would have needed to pay back the HELOC. We’ve now got enough to start the job. And, hey, I could even spend $700 more for a fancier brushed-nickel shower set. I won’t, but I could!

I’d strongly suggest anyone considering using a HELOC for a home improvement run a quick reality check on what the added cost per day would be because of the interest costs. Unless the work actually needs to be done, it’s probably better to just save the money until you’re ready: after all, if you can pay a HELOC you can pay a savings account.

Is Borrowing Money to Buy a Car Worth It?

Well, that one gets really tricky and the answer has to be customized to fit the person asking.

I have never borrowed money to buy a car. Admittedly, that means I did not own a car until I was 27 years old. (Actually I was almost 28.) But I was lucky enough to be able to always find some kind of apartment within public transit/walking/biking distance of my job. I did make a huge effort to find some of those apartments and had to accept some things that weren’t perfect but it was an option for me. And I rented for car-worthy weekends and vacations.

My husband had to borrow money for his first car. He was a new graduate working in a rural community in the oil patch and he needed to provide his own transportation to remote work sites. He bought only the amount of vehicle he needed and he paid off the loan as quickly as humanly possible. Since then he’s always been able to save what he needs for the next vehicle before he buys it.

I know others who live rurally and while it’s theoretically possible they could manage without a vehicle, it’s not practical. On the other hand, I know people who live in downtown Toronto and Vancouver who drive Ford 150s and never leave the city. You can guess which ones would get my sympathy about needing a car loan and which ones would be raising my eyebrows.

What About Borrowing Money to Buy a House?

The one time I borrowed money was to buy a house. We bought a house we could afford to carry on one of our incomes, in the event of yet another layoff, down-sizing, right-sizing or diagonal-slice.

To me, though, it didn’t seem like borrowing money. It seemed like the bank owned a house and we were renting it from them. We were used to renting so it was no hardship to watch the money vanish from our bank account every two weeks. From time to time we threw in a lump sum payment. Whenever we renewed our term, we kept our payments the same even though our required payments kept dropping with the reducing interest rates.

It didn’t bother us to have a mortgage because we knew we could sell the house (or just walk away from it) at any time. We might never get a cent from it but we wouldn’t get a cent if we moved out of an apartment either.

Then one day, poof, the home became ours. That was exciting!

How Do You Feel About Borrowing Money?

What’s your attitude toward borrowing? Do you only borrow for something you need or do you prefer to speed up gratification by buying a bit ahead of time? Please share your views with a comment.

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Do you think the government is right in making us trash our 50-year-old light fixtures? Does the electrical-usage savings of a mercury-laden light bulb justify the wastage of throwing out a vintage fixture and mining, smelting, moulding, packaging, and shipping a new fixture from probably half-way around the world? Please share your views with an insightful comment.

What’s the Right Way to Invest? TFSA first? RRSP first? Pay down the Mortgage? Non-Registered Account? Gold? Real Estate? Help!

Posted on 2013 11 06 by BetCrooks

It fascinates me, like watching an unwary insect zig-zagging towards a waiting trap-door spider, to hear people asking what is the correct way to invest. Listening to and reading the answers to their frantic questions makes me even more uncomfortable. I don’t believe there is any one, correct way to invest. There are just too many variables. I think most people would be much better off in they could just relax a bit. There are many paths up the mountain and the view from 9,789 feet up is pretty close to that from 9,804.

Should I Max Out my TFSA First?

This is a common question. The answer though is a moving target.
TFSAs were only created 5 years ago. So the first year they were offered, you could max your TFSA with a $5000 contribution. When the “max” was that small, the consensus answer was yes, max out your TFSA first.

Even in 2014, the maximum someone who is 23 or older that year can contribute to a TFSA is $31,000 and that assumes they have contributed nothing ever (or have withdrawn everything from every TFSA they have in 2013).

$31,000 is still an achievable number, so it may be a good idea to max out a TFSA first.
But soon, that number will climb up to $50,000 or higher. At what point do you start to contribute to an RRSP as well as a TFSA?

Instead of a simple answer, it becomes necessary to consider a variety of factors:

What is your salary?
What is the expected change in your salary over the next 10-15 years?
Are you an impulsive spender?
Do you intend to buy a home (house or condo, etc.) soon?
Do you have debt? What kinds?
Are you planning to marry soon?
Do you have dependents (children, aged parents, disabled spouse, etc.)?
What income tax do you pay?

I’ll have to discuss some of these factors in a separate article. This one’s about the many paths up to that peak.

Should I Max Out my RRSP First?

This is probably the second most common question. It becomes the first during “RRSP Season” from January to February each year.

Many answers were written before the TFSA was invented and those answers have not been updated to account for this new investment possibility. Be wary and check the date of the information, especially in books.

One of the most common errors I see is people saying “Wait to contribute to your RRSP until you’re in a high tax bracket.”

They don’t seem to understand that contributing to your RRSP (and reporting your contributions on your annual tax return) and claiming the deduction for your contribution are two different things.

I could contribute to my RRSP in June 2013. I would have to report the contribution, with receipts, on my income tax forms for 2013. But I could wait till 2025 to claim the deduction to reduce my taxable income and to reduce my payable taxes (and maybe get a tax refund!). I just have to fill out Schedule 7. I could even wait till 2035!

One of the most common errors of omission I see is people not saying “If you are in a low tax bracket and you will probably be in a low tax bracket all your life, it’s better to save in your TFSA because it doesn’t affect your OAS and GIS eligibility and payments.”

That’s right: the real kicker is for very low income earners. If someone is going to have income of less than $15,000 (in 2013 dollars) in retirement from their pension, CPP, interest income on their investments, etc, they do not want to have a RRSP. Money coming out of the RRSP will reduce how much OAS or GIS they are entitled to receive. Money coming out of a TFSA will not reduce those payments. (At least it won’t as the rules are written right now. My cynical side expects that to change in the next 20 years.)

I need to explain these things in more detail in a separate article as well. But again, what I’m trying to say here is that there is no one simple, correct answer for everyone. Each person is unique and the best path for each person will vary.

Should I Pay Down My Mortgage First?

Again, this one used to be a no-brainer. People bought a house with a 50%+ down payment. They had a 25-year mortgage and they had 30 years till retirement. The interest rate on the mortgage was 7%+ and the interest rate on their GICs was 5%. There were no TFSAs. Their Pension Adjustments (PA’s) were so large because they had defined benefit pensions that they could only contribute $2,000 or less a year to a RRSP. They swore to everyone that they only planned to leave their home “when they were carried out in a box.”

In their cases, yes, paying down the mortgage made complete sense.

Now people are buying homes with tiny down payments. Some homes cost 5-10 times their owners’ annual gross salaries. They are buying them with a 25-year mortgage and 10 years till retirement. The interest rates, though, are low. They plan to down-size, right-size, convert to a rental property, flip or sell them to developers looking to drop a huge in-fill house on the super-sized lot.

It’s no longer a simple: “Yes. Pay off the mortgage first.” answer.

Real Estate? Gold? Non-Registered Accounts? RESPs?

The internet and the “celebrity-style” investment reporting on most news networks has just increased the confusion. The media is always buzzing about making millions in real estate, protecting yourself from world-wide-economic-collapse buy loading up on gold, avoiding the convoluted tax implications of registered accounts by keeping simple and investing only in non-registered accounts, and even using your kids’ RESPs as tax shelters for personal spending funds for their parents.

Argh!

So many choices, so much noise, so many ways to go wrong, lose money, not keep up with your peers, never get to retire, never get to travel, never succeed.

Enough.

I’ll repeat myself:

There isn’t any one correct way to invest. Many paths will lead to the same destination.
You don’t have to “get it right.” There is no wrong.
You don’t have to agonize and get paralyzed by all of the choices.
You will not be judged and found wanting.

Pick a path. Practically any path. Almost every one will lead you gradually up the mountain slope.

Don’t worry so much. The paths all criss-cross multiple times on the journey up. You can switch paths. You can even send some of your investments up one path while the rest of them follow another.

There are only a couple of choices that you must make:

Save money.
Don’t stay in debt.
Invest that money you save at a rate that exceeds inflation so it at least keeps today’s value.

Don’t worry about making the most possible profit from your money. No one knows how to do that successfully every time. Just try to make some profit and stop expecting perfection from yourself and your investments.

And try to tune out the endless stream of information that tells you “You’re doing it all wrong! Do it my way!” If you’re saving money, you’re doing it right.