Not all spending is bad. In fact, it can be very good to spend on items that have lasting value, such as a home or life insurance. It can also pay to put money into saving for retirement or education. Spending in these areas can be smart - even if you have to borrow to do so. Also, the interest on the loan may be lower than on other types of debt. You may even be able to deduct the interest from your taxes.
Here are five kinds of spending that may really pay off:
1. Buying real estate
- Allows you to put money in something that may be worth more over time. The average price of a Canadian home increased more than 77% between 1990 and 2005.
- May save you money over time. Once you pay off your mortgage, the cost of owning your property goes down.
- Provides tax advantages. There's no tax if you sell your main home for more than you paid. And, if you make a business of buying and selling real estate, you may be able to treat the money you make as business income. In this case, you'll pay tax at a lower rate.
- Creates income. If you buy extra property as an investment, you can rent the property to cover the loan and interest. You will have to pay tax on the income, but you can deduct all your costs, including the interest on the mortgage. However, when you sell, you will have to pay tax on any gains.
2. Buying insurance
- Protects you and your loved ones from loss of income later through life insurance, health insurance, and disability insurance.
- If provided at work, buy only if you want extra protection.
3. Saving for retirement
- Provides income for your senior years.
- Makes sure you have more money that you can get from government plans like the Canada Pension Plan (CPP) or a work pension.
4. Saving for your kids' education
- Helps your kids have a better future, since people who finish studies after high school have a better chance of getting a job and building a good career.
- Some education savings plans offer tax breaks.
5. Starting a business
- Can be a smart investment if you do your homework and if your business plan is sound.
- Needs careful planning, since most new businesses fail, and you don't want to spend a lot of money and have nothing to show for it.
Remember: Sometimes you have to spend money today to have a better future
The key is to spend your money on items with lasting value, and plan your spending with care.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
