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Dear Rob: 'Am I headed for financial ruin?' Add to ...

Buck: What would you suggest as the best investment to hold in a self directed TFSA?

Rob Carrick: Buck, let me ask you a question to start. Do you have an emergency fund, which is to say a safe, secure bit of money you could draw upon if you lost your job, the house needed a new foundation (don't laugh -- it happened to a neighbour) or some other such surprise expense? If not, then the best investment to hold in a tax-free savings account is a high interest savings account. By that, I mean a no-free savings account that these days would pay 1 to 2 per cent in interest. Way low, I know. But rates will eventually start rising again. Meantime, you've got a bulletproof source of savings.

You say you already have an emergency fund? Then think about maximizing the TFSA's tax-exempted attributes. You could stick a bunch of GICs or bonds in there and never have to worry about the big tax bite on interest income. You could also invest in stocks that pay dividends. If you put some good blue chips in your TFSA and left them for decades, then you could reasonably expect great tax-sheltered total returns (dividends plus share price gains) over the long term.

Michelle: I'm in my mid-30s and about to start a job with a company matching RRSP plan. I've never worked for any employer with any pension plan before. If I have a mortgage, debt of around $20,000, and RRSP of about $40,000 - should my priority be to pay off my debt first or to take advantage of the employer RRSP plan and try to max out the matching allowance available?

Rob Carrick: Michelle, you suggest here that your employer will in some way match your contributions to the company's retirement savings program. If so, you have to take advantage of this because it's essentially free money that will compound in your RRSP for three decades. Cutting down debt is a great goal, so why not calibrate your RRSP contributions in such a way that you have some money in hand to make periodic double-up or lump-sum payments on your mortgage.

I find it interesting how so many financial questions are phrased in an either-or way. As in, should I pay off my mortgage or invest? Let me answer with another question: Why not do both?

Rob in Orleans, ON: We have been using a home equity line of credit as our one bank account for many years (similar to Manulife One), mainly in order to pay down our mortgage more quickly and be able to access more $ for home renovations at the lowest possible rate - Bank of Canada Prime + 2%. We decided to spend on several renovation projects after considering the federal renovation tax credit and the ultra low rate available. Unfortunately, we recently received a notice that TD will be increasing their prime rate by 1% due to borrowing costs. This will begin on November 16th. They have offered a few deals if we lock in some portion. Questions: Is this real or just a money grab by the banks? What other options are available for low rates with flexible terms?

Rob Carrick: Hi Rob (cool name, BTW) Banks have jacking up rates on credit lines since the beginning of the year. They blame the global financial crisis, which they say has made it most expensive for them to raise the money they in turn lend out to customers. This is a true fact. Banks are paying more. But it must also be pointed out that banks are enjoying some pretty fat profit margins on some of their lending products these days. To answer your question, then, the higher cost on your credit line is partly higher costs for banks and partly higher demand for profits from banks. So whaddya do about it? Hate to say it, but there's not really much choice other than to suck it up and pay the higher rate. For one thing, I just haven't heard of any banks or credit unions who are offering lines of credit at prime (as in the old days, pre-crisis). Also, I have heard that it's somewhat more complicated to move a HELOC - that's bank-speak for home equity line of credit -- from one bank to another. That said, keep your eyes open for a return to price competition in the HELOC market. It should happen one of these days and, if it doesn't, I'll make a big, fat deal of it in a column.

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