It’s really a straight forward concept, but I’ve never really thought of it this way.

If somehow you ended up saving, or have $10,000 to contribute to your RRSP – instead of taking the refund (say you’d get back $4600 for that contribution) and spending it, you turned around and contributed it back into the RRSP again. You would then have $14,600 in your RRSP – AND you’d get back another $2,116 approximately (if you’re in the top tax bracket). That year you put that into the RRSP as well.. you’re now up to $16716 in your RRSP – and you have yet to re-contribute anything! This year, you get back $973 from the tax man for that refund and then you put that back in again.. you see where I’m going with this?

Eventually you’d have over $18000 from your original $10,000 working for you in your RRSP without having to anything – and hopefully that amount would be growing as well since it’s invested properly…. right??

To recap the years:

1. 10,000 in refund of 4600
2. 4600 in RRSP, get back 2116
3. 2116 in RRSP, get back 973
4. 973 in RRSP, get back 448
5. 448 in RRSP – buy dinner with refund

So let’s see now, $10000 year 1, $18000 year 5… hell that’s a 12.5% growth rate without making an investment at all.. not bad eh??

I’ve actually spoken to a few friends about this and they all agree that this is what was meant to be done with RRSP returns.. odd I never thought of it like this.. I know I have a LOT of room for investing into my RRSP – and I’m seriously debating going this route to maximize the return on my money.

Related posts:

1. Home Buyers Plan – Finally figured this out
2. RRSP Deadline is soon, and I’m making some moves.
3. Free Money! Make your Mortgage Tax Deductible – Intro to the Smith Manoeuvre

My current mortgage situation is that of a 5.10% interest rate for 2 more years, that said – I if I were to simply make the regular payments my mortgage would be paid off in 21 years, 7 months. That’s without any pre-payments which I try to make at least one yearly.

What’s worse is that if I was to refinance my mortgage right now – I’m stuck with a HUGE penalty of almost $5600. This is absolutely ridiculous if you ask me, but….

The new payment just sent to me is one that is variable rate and 35 years starting at 1.75% (Prime less 0.50). This makes the payment less than half of my current mortgage payment. For example if I was paying $1000 now, with this rate it would be $500.

So what advantage does that have? For me.. I see two things:

1. I keep paying the mortgage like I am right now – and I’m making a prepayment every 2 months. This would accelerate the pay down of the mortgage much faster than my current mortgage
2. With the $500 payment, it would seem that if some emergency happened that I would still be ok to ‘pay the bills’ which is obviously important.

So that’s why it’s not a crazy scenario once I took a hard look at it. Looking at this scenario again, it would appear that I would be able to make $6000 in prepayments every year without doing anything different if I kept my payments the same, and that’s without any other prepayment.

With the current mortgage that I’m in – I just calculated that for the coming 12 months I would pay over $6700 in interest! So the penalty I would incur would be a moot point really.

So what I’ve done now, is calculated what would happen if I made pre-payments of an extra $500 a month or $6000 a year on the 35 year amortization. This sounds like a lot, but in actual fact it’s no different than what I’m paying now, in fact it’s less. The results? I would have my mortgage paid off in 9 years if done bi-weekly and the rates stay the same. Obviously that’s not going to happen, but truth be told I can see them staying relatively low for at least the next 5 years, and by that time – I’ll have paid off over ½ the mortgage.

Would love to have other people comment on this idea, I don’t like jumping into any decision until I’m well informed.

Related posts:

1. Free Money! Make your Mortgage Tax Deductible – Intro to the Smith Manoeuvre
2. Tax Refund – What to do with it?
3. Hmm.. going to theme this blog more about budgeting

I filed my taxes last week via Netfile, and generally the turnaround for the cheque to come in the mail is around 2 weeks (if I remember well). Originally, and up until today.. I was thinking that the best way thing to do would be to put it on my line of credit, now.. I’m not so sure.

It’s a sizable amount which would definitely put a dent in my line of credit – but I have to think longer term here, and I have to think realistically. You see, I’m really good at paying off my line of credit lately when I get a chance. Every spare few dollars I have is going on there, I’m living fairly frugally in hopes that I’ll get it paid off sooner than later. That said.. the whole point of the Smith Maneuver is to pay off the mortgage with the tax refunds , as well as build up a portfolio of equities and investments in order to have a great head start when it’s time to retire. So now I’m stuck.

One one hand, I think the sooner that I get the LOC paid off the more I’ll be able to put down on the mortgage and get it paid off faster – on the other hand, I’m thinking that as soon as I DO get the LOC paid off, I’ll likely end up driving it up a bit again taking a trip or something and being back at square one.. but will I do that after having paid all of that debt off?

I think I’m going to need some assistance in this decision – hopefully I get some quality comments to aid in my decision as I search the net for answers.

Pay down debt vs Pay down mortgage… which to choose?

Related posts:

1. Free Money! Make your Mortgage Tax Deductible – Intro to the Smith Manoeuvre
2. Debt Repayment Update – May 2010
3. No Tax Reductions On My Main T-4 .. Len = Bummed

I had a few goals that I wanted to achieve with this money when invested.. and the criteria was as follows:

• low-risk
• low commissions
• automatic deductions? Or easy to purchase
• dollar cost average
• ability to get out at any time

The other day I was browsing the Financial blogs which I subscribe to, and noticed that The Financial Blogger had an article back on the 26th which detailed ETF’s which paid a dividend! I truthfully didn’t even know such a beast existed, but I immediately knew that I had found my new favorite investment for my HELOC (Home Equity Line of Credit) money.

As I read the list of ETF’s, I noticed that some of them had very high yield rates.. XTR (ISHARES CDN S&P/TSX INCOME) for example had at the time a 9.12% dividend yield! Wow! Now that’s the type of growth that I would want year after year.

To make a long story short, I have decided that as with most things.. if you want something done right, you have to do it yourself. So I’ve re-opened my account with Questrade, and funded it with $1000 of my HELOC. Since it’s a margin account, I’ve already made my first monthly purchase. I’ve purchased 151 shares of the FIE.A (CLAYMORE CN FINCL MNTH I ETF) at a %7.75 dividend yield. To be exact, I purchased the shares at $6.65, and it distributes a $0.04 dividend every month. So this month I’ve spent $1004.15 and will get $6.04 at the end of this month when the dividend gets issued.

Next month, I plan on buying another $1000 and then will receive $12.08 at the end of December. I entered a rough estimate of what I could make if I just used this fund, and just for fun, I averaged a horrible 2% gain over the lifetime I bought it.. check out the sheet:

I think I could live on the interest if I had $1.7 million in the bank.. now mind you, that’s when I’m 67.. and that’s 34 years away for me.. but on the other hand, that nice $354K when I’m 50 mark looks pretty darn tasty to me too Notice that this is also JUST my Smith Maneuver account, I also stopped at $98,000.

So looking at the stock itself, here’s it’s long term track record:

Now that price is a reflection of the NAV (which is in Mutual Fund terms, the price per share). Now that whole spreadsheet above is looking for a percentage gain of 2% a year (on top of the 7.75% dividend which is already being distributed.. in fact it used to be more before the big downturn in the economy last year)… so as you can see, over the course of the last 5 years, the ETF is certainly down.. but let’s use an example scenario in which hypothetically I would have purchased when it first came out in 2005.

Now keep in mind that this fund is down from $10 to $6.60 – a 34% drop in price! But then keep in mind that there are dividends distributed every month, as well as the fact that we were averaging in.

I did a quick spreadsheet up, and came up with the following numbers:

I would have invested $52,000 in the income trust if I stuck to the $1000 every month since this fund was opened. I would own 7101.54 shares IF I re-invested every cent I received from the fund (and that’s at 0.04 a month.. which is the lowest it’s been.. it used to be higher).

My portfolio would stand at $47012.21 as of the 6th of November ($47793.36 as of close today). So with a fund which has dropped 34% in less than 5 years, we would only be down $4206.64 or 8.1%.

Now I realize that this isn’t the perfect scenario, and no one likes to see numbers where they’re in the red.. however you have to realize the situation we just came out of (and a lot of people believe we’re going so sink back into!)

In any case, I don’t plan on using this as my sole ETF, however I do plan on utilizing a number of the dividend paying ETF’s as I begin my journey.. this is just the first one.

Related posts:

1. RRSP Deadline is soon, and I’m making some moves.
2. LYG – Buy/Write Strategy Update
3. Just posted my first buy/write strategy purchase – LYG.

Insert the simple answer.. there is no money I’m repaying… unless, of course.. I put money back into RRSP’s the last few years.

How it works, and I just realized this (how stupid do I feel), is that when I purchased my home.. I used $7200 of my RRSP’s to do it. The benefit of the Home Buyers Plan is that as a first time home buyers, I could do that tax free, as long as I “repayed it within 15 years”. Ok, that’s really not what happens, I don’t have to repay it in the 15 years, but if I don’t.. it would be just like I withdrew the money and got taxed on it… Be it over a 15 year period.

Confused? Well, so was I… so I’ll use this example now that I have it figured out.

For example.. I have 10,000 in RRSP’s in fund XYZ which I withdraw and use to purchase my first home. Now usually if I withdrew my $10,000 I would get taxed at my bracket which would be completely stupid as it defeats the purpose OF an RRSP (registered retirement savings plan). Anyhow, so since this is my first home, the government will let me withdraw it tax free. Thank you very much Mr. Gov’t for letting me spend my money on my down payment.

Now, after two years I get a statement from the gov’t (I think it comes in the tax bundle) saying that my repayment amount is $666.67 a year for the next 15 years.

What I originally thought, was that I have to pay 666.67 back.. however I also thought that if I had a refund of say.. $2000, that the $666.67 would be taken off of that, and put back into my original RRSP account. This is the not the case!

So if you make contributions to your RRSP.. the first $666.67 is going to be entered without the tax benefit you would usually get for an RRSP. This is how you ‘repay’ your original withdrawal, without any tax implications!

So for a few examples:

1. if I contributed $1000 into my RRSP account this year. I would only get the benefit of  $333.33 or whatever is left over after the $666.67 is taken out for repayment.
2. if I didn’t contribute at all into my RRSP, well I basically paid the tax on 1/15 of the $10,000 I withdrew for the down payment. Again, this would be just like if someone withdrew $10,000 to pay off a credit card, except the difference is that I would be paying 1/15 of the taxes each year I don’t repay.

See what I mean? So getting back to my real life example, I have $1200 approximately which I’ve repayed on my RRSP .. however since I actually haven’t contributed to the RRSP account (I’ve traded without a registered account), but still marked it on my income tax as my repayment each year. I’ve essentially paid taxes taxes just like if I would have just withdrew 1200 in RRSP money. Stupid mistake on my part.

So really, I could contribute $1200 to my RRSP account, and just file the check under ‘mistake’ as I won’t get the tax benefit from it as it goes to repay what I’ve already reported repaid. The good news is that I will likely do this to start my RRSP savings again.

I hope I’ve cleared up anyone whom has had or made the same mistake I did. It’s not a big deal, but always nice to understand how it all works.

More information can be found here on the Home Buyers Plan (government of Canada website) also I would highly recommend the article by Million Dollar Journey here.

Related posts:

1. USA First Home Buyers Tax Credits Information
2. How to make $8,000 from a one-time $10,000 RRSP contribution
3. RRSP Deadline is soon, and I’m making some moves.

As you may or may not know, I am currently employing the SM (Smith Manoevre) on my mortgage and I’m very excited to do so. In my opinion, right now is a great time to invest.. and there is no better way to build wealth then by deploying a leveraged strategy using OPM (Other Peoples Money!).  Again this is my opinion, and one which I know some agree with, and lots don’t agree with. However one thing is for sure.. I am going to try to make the best decisions with my own money better than anyone else, cuz no one else cares about it as much as I do!

That said, I was reading an older book.. from 1991 actually.. called ‘Wealth Without Risk for Canadians’ by Charles Givens and I came across a very interesting strategy in it.. #99 basically says (and I don’t have the book with me to direct quote), but “borrow money from the equity in your home to invest in stocks, mutual funds, even real estate.. and the borrowed money is tax deductible”. This is exactly what the SM states.. however this was written over 10 years before Fraser Smith released his book. Odd that Fraser Smith has been given credit for something that has been around for longer than 10 years eh?

Now being fair, I found Fraser Smiths book much more detailed on how to set up and employ the strategy, the tax tips, how to capitalize the interest in your Home Equity Line of Credit, etc. Basically it’s like taking the small blurb that Charles Givens wrote about, and expanding it and detailing it into an entire book.. and, for that matter.. and entire lifestyle as he now lectures and teaches about it. Crazy!

Speaking of the SM, I’m now in the process of trying to decide how I want to invest the equity of my home. I have a really good amount of money that’s sitting there doing nothing at the moment, and I don’t like that. Especially as I mentioned above, when I think now is the time to invest (for long term of course). So I’ve emailed my banker and I’m waiting for an email back. I want to set it up so that I automatically either transfer money out of the HELOC (home equity line of credit) to a broker for my own trading, or put it into a fund which I’ve researched enough and is looking good for future growth.

This is a hard decision to make… however I’m really starting to lean towards a brokerage, as I believe that I can not only beat what mutual funds can deliver, but also I have the ability to use hedging strategies like options. Another good point is that one of the good things about mutual funds is that they tell you what their markup is! So hypothetically, I could own pretty much the exact same stocks as all the top funds have.. and I can get that information for free! Ok, that’s it.. I just decided.. I’m doing this myself!

Related posts:

1. Free Money! Make your Mortgage Tax Deductible – Intro to the Smith Manoeuvre
2. Ok, so I’m all set up.. now where do I put my money?
3. Ok, back to money matters..