Canadian Personal Finance Blog

Bank of Canada Stays Pat

Experts, shmexperts! All the major sites were calling for a cut to 2.75% on the overnight rate, well the Bank of Canada saw some sense and held their ground and did not cut the rates this time. I think this is a good idea given the Inflation Boogie Man is out there and I suspect he is going to come and stay for a while too!

The comment from the Bank of Canada States:

If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.

Mortgage That’s the Ticket!

In my humble opinion, for me, I should be paying down my mortgage and debt load, and not concentrating on my retirement.

Until about 1 year ago, I had the potential to get a very good pension from my employer (the pension was capped and a new pension system put in place, although I still have some equity built up in my now capped pension), so I was actually investing heavily in a Spousal RRSP to ensure an income splitting model when I retire.

Currently I save about 8% of my income in RRSP or retirement funds (without including the new Pension that I am currently part of, that I am not sure what value it has yet).

Saving 8% annually approaches what I should be saving for my retirement as a minimum (last I heard most “experts” said 10% is a minimum you should save for your retirement). I suspect I am ok for retirement, whatever that actually means to me (given I don’t think I can retire for a long time, due to family commitments).

Wait a Minute, you said….

What do I mean by the title of this post then? I actually am on the “RRSP That’s the Ticket” side of the question of whether to invest in your retirement or pay off your debts? My answer is I think I made a mistake, and should have been much more aggressively paying off my debt load (which is not as low as it should be currently).

I make this statement as my opinion of how my debt load is affecting me. Let me be clear, carrying debt is making me sick, it keeps me up at night, it distracts me and worries me every day since I went into debt many years ago. I am confident this worry has affected my health directly, worrying about this debt and the scenarios that come from still carrying this debt, this late in my working career.

What should I be doing now is the next interesting question? I think I need to sit down with my wife and figure out how to change all of this, but we were going to do that anyhow given it is almost the end of this home finance quarter.

Well our amigo over at the Canadian Capitalist mentioned in his Friday update that the Star has an article about the “infamous” Smith Manoeuvre which talks about Frasier Smith’s method for getting the interest on your Mortgage tax deductible. If you remember I talked about this “risky” trick a while back here.

This is a risky game to play, since it assumes you can invest intelligently enough to not lose your stake, so be careful, and I am NOT recommending this strategy either.

A good quote from the Star Article articulates some valid concerns.

David Trahair, a Toronto chartered accountant, wrote a book urging Canadians not to invest in RRSPs before paying off mortgages and other non-deductible debt. He disapproves of swapping one loan for another.

“I recommend the total opposite, paying off your principal residence and not borrowing against it,” he says.

“It’s a high-risk strategy because you’re betting the farm that some investment adviser can do better than you can. You have a guaranteed return from getting rid of the mortgage.”

A while back I put up a post about the Smith Manoeuvre which seems to have caused a lot of hits for my site (I have figured out how to do that, so it is kind of cool to see what folks really think is interesting on my site). I do not condone this “tax twist” for Canada (those in the states I am sure are going, what do you mean you can’t write off your mortgage interest payments), but I was quite interested to see I get a lot of Google hits from this one little post. I have included the text for those who are too lazy to follow my link on top as well.

Folks,

Now here is a wild and scary way to try to hood-wink our tax collectors. Go to this site, but for the sake of everyone, don’t do this! Take the book out of your library and read what it entails, make your decision after consulting with folks who know what is going on (not just some nut bags BLOG!).

It sort of starts out oddly, assuming you have $20000 hanging around, but ok, I’ll bite, I have $20,000 hanging around (don’t tell my kids, please). Instead of taking that money and PLUNKING it down on my mortgage (or Line Of Credit in my case), BORROW $20,000 dollars to purchase some Equities (presumably stock), THIS you can write off the INTEREST on the loan, because you are INVESTING. Take the $20,000 you had and plunk it down on your mortgage, now suddenly $20,000 of your mortgage’s interest is now TAX DEDUCTIBLE! Wonderful eh? Well, what happens if you choose the wrong EQUITY (the way I am apt to do)? Evidently the government are looking into this as well, where if you take a loan out to buy EQUITIES they must make MONEY to be able to deduct the interest.

Anyhow, very scary stuff by me. Just plunk your money down, and save the $20000 up front! Just my opinion –C8j

Interesting, but again, please don’t run out and do this thinking I am saying it is a good idea, it is VERY risky!!!! –C8j

Well, in the first place, you are too late for this year to do your last minute RRSP stuff (sorry folks, my planning stuff isn’t always timely), but you can always start your RRSP work for next year, right now!

The data I mention are in the following posts: Case 1: Put It In The Bank , Case 2: Refund to RRSP, Case 3: Refund to Mortgage

I think what the plethora of numbers over the past few days has show is that:

1. Putting money in your RRSP is a good thing. The money is not just retirement money, it is “catastophe” money too, so if you have RRSP room, I would say use it.
2. Should I pay off my mortgage or max out my RRSP? Yes is my answer :-). Do either, but do at least one, is my advice. There isn’t a wrong answer here folks, both are good things and if you can do it, good for you!
3. An ideal “mixed” idea is to put your money on your RRSP, get your refund and then put that on your mortgage, and you then end up with a nice RRSP, and a mortgage paid off sooner. If you need my advice, that would be my suggestion.

If you want the excel spreadsheet to fool around with it, send me an e-mail and I’ll mail it to you (it’s pretty straight forward).

More real life rants to come. Happy Ash Wednesday, enjoy Lent. –C8j