The definition of an affordable home is one that leaves you room to save and invest while paying your mortgage and other costs of ownership.
But how, exactly, do you approach saving and investing when you’re just taken on the biggest financial responsibility of your life? This is the question a reader asked recently, just a week after buying a home. “As a homeowner (feels surreal saying it out loud), what's the right proportion or strategy of having cash in hand for emergencies versus investing in TFSA/RRSPs for retirement? Or, do I keep building cash to pay off my car loan or mortgage faster? Just looking to learn what is the right balance.”
As a homeowner of 27 or so years, I can report that the biggest financial adjustment of home ownership is not the regular mortgage payments. Rather, it’s the surprise expenses you incur to keep your house in good working order. So let’s say that starting an emergency fund should be the first priority for this new home owner. Even a few thousand dollars is a helpful cushion against a leaky roof, burst pipe or water-logged basement.
Next steps require some thought about raising a family. If there are plans to have children in the next few years, it makes sense to put some money away to top up maternity/paternity benefits and pay for baby equipment like a crib, car seat and stroller.
Putting at least a bit of money into tax-free savings accounts or registered retirement savings plans is ideal because the contributions will benefit from decades of compounding. Another benefit is that you learn early on to make room for retirement saving, rather than trying to cram it in later on in life. You’ll likely make more money as you get older, but your expenses will also rise. They call this lifestyle creep – you live better as you make more.
The lowest priority is paying down the mortgage. If you make accelerated bi-weekly mortgage payments, you’ll squeeze a 25-year amortization down to about 22 years. That’s a great start in killing off your mortgage. As for car loans, they tend to have exceptionally low interest rates these days. You can often get a bigger bang for your buck by investing for retirement than paying down a car loan.
Whatever mix of saving and investing this reader chooses, I suggest they implement their plan immediately by setting up automatic electronic cash transfers into savings and investment accounts every payday. Nothing soaks up extra cash sitting in your bank account like a just-purchased home.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Black Diamond Group Ltd. (BDI-T). The Contra Guys expect a “5-bagger” from this stock, which primarily rents and sells modular work-force accommodations and has been hampered by rough times. While its operations do extend into sectors such as construction, education and real estate development, among others, much of the firm’s revenues are dependent on the resource arena. It has cut debt and diversified, and better results are expected this year. (For subscribers).
David Rosenberg: Don’t let the stock market fool you – a recession is almost here
The buoyant stock market is signalling a healthy economy and many experts agree, but David Rosenberg says don’t be fooled: A recession looms just around the corner. In his view, central banks took too long to change course when they eased off their monetary tightening bias that, in the case of the U.S. Federal Reserve, saw nine interest rate hikes in a row. While both the Fed and the Bank of Canada, which abandoned talk of rate hikes altogether on Wednesday, are now on hold, the damage has already been done, the chief economist at Gluskin Sheff + Associates said at a speech in Toronto on Thursday. “The Fed has murdered every cycle. And I believe the Fed has murdered this one,” Mr. Rosenberg said. Tim Shufelt reports (for subscribers).
It’s not just record-high U.S. stocks feeling the Fed effect
Jewellery shoppers, home buyers, retirees and many others are feeling the ramifications of the Federal Reserve’s decision earlier this year to halt raising interest rates, at least temporarily. For some investments, it’s been for the better. For others, not so much. Stan Choe takes a look at which areas of the market are feeling the effects of the Fed’s decision. (For subscribers).
A blessing for dividend investors: Debt ratings giant S&P shifts view on Canada’s telecom giants
Rating agency Standard and Poor’s is relaxing its recent warnings about the debt burdens shouldered by Canada’s largest telecom companies, easing the financial pressure on BCE Inc., Rogers Communications Inc. and Telus Corp. as they spend tens of billions of dollars to build out their 5G networks. Tim Kiladze takes a look at what this means. (For subscribers).
Others (for subscribers)
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Ask Globe Investor
Question: I own Manulife Financial Corp. (MFC) shares in a non-registered account. I would like to place the Manulife shares into my self-directed RRSP as an “in kind” contribution without selling or triggering capital gains. Is this possible?
Answer: No. When you contribute shares in kind to an RRSP (or TFSA), for tax purposes you are deemed to have sold the shares at fair market value. So, if your Manulife shares have appreciated since you bought them, the transfer would trigger a capital gain.
If you transfer shares that have dropped in value, on the other hand, you cannot claim a capital loss. In that case, one option is to sell the shares, contribute the cash to your RRSP and then wait 30 days to repurchase the shares. This will get around the “superficial loss” rule and allow you to claim the loss for tax purposes.
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What’s up in the days ahead
Rob Carrick reports on three new ways to get a second opinion on your investment portfolio.
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Compiled by Gillian Livingston