In July I saw a 2.7% increase in my net worth for the month. Contributions to my tax-free investment accounts continue to be the driving force behind my net worth growth.
The markets recovered a bit in July 2015 after a stinker of a month in June 2015. I’ve mentioned it multiple times, but it deserves to be said again, no matter what happens with the markets, I will continue to buy investments.
Pay the Mortgage or Invest?
I’ll be close to maxing out most of my tax-free accounts at the end of 2015, which is great, but then a decision needs to be made whether I buy taxable investments or start to aggressively tackle my debt/mortgage – currently sitting at $160k. This is a good place to be, and if you’re in this situation or approaching it here’s the basic math behind the decision:
Option A) Paying down the mortgage would help me save on the interest I pay on this loan. Currently, interest rates are at an all-time low. I’ve always been a variable rate mortgage rate type of person, which has served me extremely well over the last 5 years – currently my mortgage rate is 2.1%. That means I’m paying approximately $3,300/year in mortgage interest.
Option B) If I were to continue to purchase investments any gains/dividends/interest from those holdings would need to be claimed and taxed when I file my annual tax return. At this stage in my life I’m more geared towards equities (rather than bonds or GICs), and typically over the long run equities have experienced an approximate 5-10% return annually. If I split the difference here and assume that number is 7.5% I need to factor in the tax on this. Let’s say the tax rate is 30%, which makes I can expect a 5.25% (7.5% x 70% after-tax factor) after paying the tax-man. This is a whole lot better than the 2.1% I would save on my mortgage interest, however, the risk is that maybe the market doesn’t return that 7.5%.
Right now I’m leaning towards Option B because of the big spread (5.25% VS 2.1%). Despite the potential risk of another downswing in the market, low interest rates continue to provide further incentive to put my money into the market rather than paying debt. Actually, I’d be all for a downswing because that would allow me to buy investments a whole lot cheaper.
The Importance of Keeping a Low Overhead
I was talking to a colleague at work the other day about his new house he had just bought. He admitted it was a bit more than he could probably comfortably afford, but for the next while he planned to really hunker down on the needless spending. Sure, the house was a bit bigger than he needed, but houses are a great investment, right?
After a couple minutes of detailing the floors, cabinets and counter-tops he started to describe the new dining room set and entertainment system. The house was also situated on a big lot, so of course he needed a new lawn mower as well. (I think you can see where this going…) By the time he mentioned the new leather couches I think he noticed a nervous tick in my eye… The great house investment he made has basically had the profits eaten away by his additional spending for at least the next few years.
I don’t think my colleague’s story is all that rare nowadays. It’s great to have nice new things, but it can become a bit of an addiction. This type of material overabundance is really no different than the obesity crisis – both can be equally crippling.
So how do we cut the fat in our spending mentality?
Taking stock of what’s important in your life is the starting point to putting your household on the path to financial prosperity. Is it really important that the counter-tops are granite? Does it matter that your car goes from 0 to 60 in 3 seconds flat? Sure, you might be able to afford it today, but at what cost tomorrow?
Taking account of my own life priorities has really shifted my thinking over the past few years, which has allowed me to save a whole lot more. Ultimately, what I value about personal finance is not having to worry about money and the freedom to make decisions without fear of having enough. Each dollar I save is another buck towards that certainty. Some may call this frugal, cheap or constricting but for me it’s the most gratifying way to live.
Below is my net worth update for July 2015: