July 2015 Net Worth Update

July 2015 Net Worth Update

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?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?

PRIORITIES

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:

net worth update July 2015

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11 comments

  1. Great article! Especially on setting priorities. I never actually thought much about it but now I see how every action we take affects our financial security. Really helpful information. Keep up the good work!
    Gin recently posted…How To Record An Electric GuitarMy Profile

  2. Priorities are imperative in understanding why you are doing what you are doing. We get so sucked up into a consumeristic lifestyle that I can almost hear the sucking sounds as people’s wallets are emptied. Thanks for the article!
    Duncan’s Dividends recently posted…BIG dividend raise!My Profile

    • Jonny

      Thanks for the comment!
      It’s funny, I can recall being a student and being completely broke but I was amazingly content with what I had – which wasn’t much! I think once you have all your basic necessities covered and a few luxuries to enjoy the rest brings in minimal utility (there’s that student education paying off with that term!)

  3. I enjoyed reading your article. I also like the fact that you are leaving it up to the individual to decide what is best for them. You have taken the option that you believe is right for you at this time and I hope it turns out to be the right choice.

    • Jonny

      Thanks Sheni – I think each individual needs to determine their risk tolerance when deciding between paying the mortgage or investing. The risk adverse individual should pay down the mortgage while the person with risk tolerance would invest. The middle ground would obviously be doing a bit of both!

  4. Are you worried about our cash position? While it is great to see your net worth be going up, I would be worried about not having enough diversification. I think with the market volatility that we are experiencing now, I would be wiry to throw money at investments.

    I’m waiting for a market bottom while building up my cash position. Would like to hear your thoughts.

    Have a nice day,
    Erik
    Erik @ A More Successful You recently posted…The Sunshine Blogger AwardMy Profile

    • Jonny

      Hey Erik – I’ve heard a lot of noise lately about the market being over priced (in terms of a lot of different factors).
      I could sit on some cash now or even sell some of my investments with the hope the market eases downwards. However, this would go against my strategy of consistently buying to reduce risk by dollar cost averaging.
      I’m fortunate right now to be saving close to 45% of my gross income, which means I’ll always be accumulating savings to contribute to investments.
      To me, waiting or altering this strategy would be timing or guessing the market which is something I try to avoid. Are you currently saving up cash or waiting for the markets to drop???
      Thanks for the thoughtful comment!

      • Jonny,

        Your strategy of dollar cost averaging is a strong one and I don’t think trying to time the market is a good strategy either. You have a strong strategy. I would just be worried in terms of an emergency occurring, whether that be market crash and buying low, an injury, etc.

        Right now, I am paying down student loan debt while simultaneously building an emergency fund. I hope to have about 10k in an emergency fund. After that, I hope to start building my investment portfolio! Should be exciting!

        Have a good day,
        Erik
        Erik recently posted…Book Review – The Personal MBAMy Profile

  5. This is my personal opinion but if your tax-sheltered accounts are maxed, I’d then divert almost all of the extra income to pay off the mortgage. Why? Right now, the interest rates are very low making it easier to accelerate the payments towards (any) debt. Once the interest rates rise, the cost of holding your mortgage will also go up. Do you feel that you may regret the paying off of the mortgage in 5 years when interest rates are 5%+ and the stocks have returned less than 4% over the next 5 years?

    No debt = more flexibility.

    Lastly, Over the next 10 years, I do not believe that equities will perform as well as they have over the last 25+ years simply because of the low-interest rate environment.

    • Jonny

      Poor returns in the stock market is certainly a possibility over the next decade.
      It’s true interest rates can only go up, but as to when that will occur, especially in Canada (where I live) that has an economy so dependent on oil, is anyone’s guess.
      My mortgage exposure is very limited right now, so no, I won’t be kicking myself if interest rates tick up in the next few years. It’s a risk I’m comfortable with I suppose.
      I think there’s a lot of uncertainty and worry out there right now for the same reason which you just expressed.
      Thanks a lot for the thoughtful comment!

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