Canadian Personal Finance Blog

Archive for February, 2006

Case 3: Refund to the Mortgage

Tuesday, February 28th, 2006

So this scenario is a little artificial, in how I calculate the payments over the year. I am assuming a single lump payment a year, and throwing your refund directly onto the mortgage principle. No one has a mortgage like this (ok maybe someone does, but I don’t know them), and typically if you are paying monthly or bi-weekly, a lump sum payment of $300 in the middle of the year, may actually be better (depending on how your interest is calculated and compounded). Just note the data here, and think about it:

Savings Rate	1.00%
Yearly Input	$1,000.00
RRSP Return	5.00%
Tax Rate	30.00%
Mortgage Rate	6.00%
Mortgage Balance	$110,000		Payment	$9,590.30

Year	To RRSP	Total RRSP	Refund to Mortgage	Mortgage Balance	Extra Pay Down
1	$1,000.00	$1,000.00	$300.00	110000	110000
2	$1,000.00	$2,050.00	$300.00	$107,009.70	$106,709.70
3	$1,000.00	$3,152.50	$300.00	$103,839.98	$103,221.98
4	$1,000.00	$4,310.13	$300.00	$100,480.08	$99,525.00
5	$1,000.00	$5,525.63	$300.00	$96,918.58	$95,606.20
6	$1,000.00	$6,801.91	$300.00	$93,143.39	$91,452.27
7	$1,000.00	$8,142.01	$300.00	$89,141.70	$87,049.10
8	$1,000.00	$9,549.11	$300.00	$84,899.90	$82,381.75
9	$1,000.00	$11,026.56	$300.00	$80,403.59	$77,434.35
10	$1,000.00	$12,577.89	$300.00	$75,637.50	$72,190.11
11	$1,000.00	$14,206.79	$300.00	$70,585.45	$66,631.21
12	$1,000.00	$15,917.13	$300.00	$65,230.28	$60,738.79
13	$1,000.00	$17,712.98	$300.00	$59,553.79	$54,492.81
14	$1,000.00	$19,598.63	$300.00	$53,536.72	$47,872.08
15	$1,000.00	$21,578.56	$300.00	$47,158.62	$40,854.10
16	$1,000.00	$23,657.49	$300.00	$40,397.84	$33,415.05
17	$1,000.00	$25,840.37	$300.00	$33,231.41	$25,529.65
18	$1,000.00	$28,132.38	$300.00	$25,634.99	$17,171.13
19	$1,000.00	$30,539.00	$300.00	$17,582.79	$8,311.09
20	$1,000.00	$33,065.95	$300.00	$9,047.45	$0.00

So what does this tell us? Well if you put your money in your RRSP, and then take the refund you get, and put that on your mortgage, you should shorten your Mortgage by at least 1 year (on a 20 year mortgage), if not more.

Tomorrow, which is the BEST way to work with your RRSP? –C8j

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Case 2: Refund to RRSP as well

Monday, February 27th, 2006

So, if we now say, hey, this whole idea of putting money away for my retirement over the next 20 years, would even be better, if I took my refund and put it in my RRSP as well, let’s see what might happen with our RRSP. Note that since you are doing this, your RRSP refund gets bigger each year because you put more in your RRSP (clever eh):

Savings Rate	1.00%
Yearly Input	$1,000.00
RRSP Return	5.00%
Tax Rate	30.00%


Year	To RRSP	Refund to RRSP	Total RRSP
1	$1,000.00	$300.00	$1,300.00
2	$1,000.00	$390.00	$2,755.00
3	$1,000.00	$417.00	$4,309.75
4	$1,000.00	$425.10	$5,950.34
5	$1,000.00	$427.53	$7,675.38
6	$1,000.00	$428.26	$9,487.41
7	$1,000.00	$428.48	$11,390.26
8	$1,000.00	$428.54	$13,388.32
9	$1,000.00	$428.56	$15,486.30
10	$1,000.00	$428.57	$17,689.18
11	$1,000.00	$428.57	$20,002.21
12	$1,000.00	$428.57	$22,430.89
13	$1,000.00	$428.57	$24,981.01
14	$1,000.00	$428.57	$27,658.63
15	$1,000.00	$428.57	$30,470.13
16	$1,000.00	$428.57	$33,422.21
17	$1,000.00	$428.57	$36,521.89
18	$1,000.00	$428.57	$39,776.56
19	$1,000.00	$428.57	$43,193.96
20	$1,000.00	$428.57	$46,782.23

So in Case 1 we had about $39000.00 put away in savings and RRSP, now we have $47,000 in RRSPs, not bad. So if you can, it would be good to take your Income Tax Refund and bash that back into your RRSP.

Interesting mathematical progression there, since your refund only increases up to $429.00 or so, far out.

Next what about Debt reduction here? –C8j

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Case 1: Put it in the Bank

Friday, February 24th, 2006

So this case is pretty simply. Our family has their $1000 per year extra going into an RRSP, and when they get the money back they put it in a savings account that pays 1% (yes this is not the best, but we need a baseline to start from).

Savings Rate	1.00%
Yearly Input	$1,000.00
RRSP Return	5.00%
Tax Rate	30.00%


Year	To RRSP	Refund to Savings	Total Savings	Total RRSP
1	$1,000.00	$300.00	$300.00	$1,000.00
2	$1,000.00	$300.00	$603.00	$2,050.00
3	$1,000.00	$300.00	$909.03	$3,152.50
4	$1,000.00	$300.00	$1,218.12	$4,310.13
5	$1,000.00	$300.00	$1,530.30	$5,525.63
6	$1,000.00	$300.00	$1,845.60	$6,801.91
7	$1,000.00	$300.00	$2,164.06	$8,142.01
8	$1,000.00	$300.00	$2,485.70	$9,549.11
9	$1,000.00	$300.00	$2,810.56	$11,026.56
10	$1,000.00	$300.00	$3,138.66	$12,577.89
11	$1,000.00	$300.00	$3,470.05	$14,206.79
12	$1,000.00	$300.00	$3,804.75	$15,917.13
13	$1,000.00	$300.00	$4,142.80	$17,712.98
14	$1,000.00	$300.00	$4,484.23	$19,598.63
15	$1,000.00	$300.00	$4,829.07	$21,578.56
16	$1,000.00	$300.00	$5,177.36	$23,657.49
17	$1,000.00	$300.00	$5,529.13	$25,840.37
18	$1,000.00	$300.00	$5,884.42	$28,132.38
19	$1,000.00	$300.00	$6,243.27	$30,539.00
20	$1,000.00	$300.00	$6,605.70	$33,065.95

So at the end of 20 years we have $33,000 in our RRSP and another $6600 in our savings account (and paying tax on the interest on the savings account too). This is not bad really, you now have almost $40,000.00 put away for retirement and a rainy day.

Monday, what if we use the refund wisely? –C8j