Best way to save is to free up cash by paying off debts
TORONTO - Canadians worrying about where to put their savings and how to best manage their finances can keep things simple by focusing on the most important thing of all: paying down their mortgages.
"The house, that non-deductible debt, that is the killer," said Adrian Mastracci a portfolio manager with KCM Wealth Management Inc.
"If you can get rid of the mortgage in 10, 15 years, then you can focus your entire finances on the rest of the stuff, which is usually saving for retirement."
Debt, he added, is "the biggest thing that hinders the accumulation, because debt takes so much money away into the wrong areas... especially if the debt is not deductible, like the house mortgage or the credit card."
Non-deductible debt is any debt that does not provide any tax concessions - like credit cards and mortgages. Some student loans and home equity loans will allow the borrower to claim tax deductions.
"There's some big saving to be had by paying off a mortgage, and it's risk free: You control how fast it goes down, you control when you pay it off, there's no additional risk because it is your mortgage you have already," he added.
"It's boring - there's no excitement whatsoever to paying off debt - but it works like a charm."
A Bank of Montreal survey released this week suggests nearly half of Canadians feel anxious when they think about money matters, with more than half of those polled, 53 per cent, saying they believe they should be better able to manage their money.
Respondents with household incomes greater than $100,000 are not immune to feelings of anxiety, with 35 per cent reporting they have lost sleep worrying about money matters, found the BMO-Harris Decima poll, which was based on a random sample of 1,000 Canadians.
The most cited fear was not having enough money to retire comfortably, but other concerns included spending beyond one's means and outliving one's money.
To Mastracci, those concerns are one more reason to put money into debt.
Paying off non-deductible debt sooner, he says, means less of your money goes to interest and you come end up with more money to invest in your retirement later on.
Myron Knodel, director of tax and estate planning at Investors Group, also says it's important to invest in Registered Retirement Savings Plans, or RRSPs, even if you're trying to pay off your mortgage quickly.
"One of the approaches we've had in the past is: make your RRSP contribution but then use the tax refund that you receive and use that to pay down your mortgage more aggressively," Knodel said.
"The benefits of starting (an RRSP) early are significant (because) of the effects of the compounding interest."
For parents with additional savings, Knodel recommends getting a head start on a Registered Education Savings Plan for post-secondary education.
RESP contributions are not tax-deductible, but they allow savings to compound and grow tax-free until the child is ready to go full-time to college or university. It's also eligible for a Basic Canada Education Savings Grant, equal to 20 per cent on the first $2,000 in annual contributions.
"What is going to be coming beginning '09 is the tax-free savings account, and that is something that will have a particular attraction to many people simply because of its flexibility and non-taxability," Knodel added, referring to an initiative introduced by the federal government in the 2008 Budget, which will allow people to save or invest money without paying tax on the income earned and withdraw it tax-free.
For people with various kinds of debt, such as mortgage, a line of credit, student loans or credit card debt, Mastracci suggests starting with the highest rate first.
He also recommends having an emergency savings account, in case you lose your job, get sick or can't work.
But, he warns, that account should be with a different institution than the one you have loans or credit cards with.
"What you don't want is a financial institution to take the money that you saved up to pay out the loan automatically, because then you don't have any other options."
13:30ET 07-08-08
More Business
Search Articles
More CE Network Sites & Partners:
