Mortgage, debt, investment: where you should put extra money

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For households that have some extra money at the end of each month, they might consider paying off debt, their mortgage, or beefing up their investment portfolio.

Interest rates have soared and the stock market has suffered a downturn this year, leaving some Canadians wondering where is the best place to allocate the extra money left over at the end of the month.

There’s no question that the rising cost of living has put a strain on the budgets of many households, but those who can keep their expenses low and maintain a positive cash flow may have to decide between putting those extra dollars toward their consumer debt. , mortgage or your investment portfolio.

Since each person’s life situation is unique, there are a number of factors to consider before deciding which area to prioritize.

One way to gauge the health of your finances and identify gaps that need to be addressed is by using the “priority pyramid,” according to Bruce Sellery, personal finance expert and founder of Moolala.

Modeled after Maslow’s Hierarchy of Needs, the Priority Pyramid is a hierarchy of financial fundamentals: having positive cash flow in your monthly budget, eliminating consumer debt, contributing to savings, optimizing tax advantages, investing and , finally, optimize the returns on investment.

“If you have credit card debt, you don’t have extra money. You may think you do. But you don’t,” Sellery said. Yahoo Finance Canada in a telephone interview.

Before a person can put extra money into a mortgage or investments, he says, paying off credit card debt should be a priority, since many cards carry an interest rate of around 20 percent.

Once the basics of budgeting are in place, like eliminating high-interest debt and setting up an emergency fund, Canadians can “earn the right to climb the pyramid,” he says.

mortgage vs invest

One of the factors to consider when faced with the choice between lump-sum payments on a mortgage or bolstering an investment portfolio is whether the mortgage rate is fixed or variable, Frank Gasper, wealth advisor and founder of CSR Wealth Management, said by phone. .

As interest rates skyrocketed this year, homeowners who had previously chosen the wildly popular variable rate have seen substantially more of their monthly payment go toward interest. Many have seen their amortizations lengthened or their payments increased to account for the higher interest rate.

However, for a homeowner who was able to secure an ultra-low fixed rate of two percent, for example, Gasper says it “doesn’t make sense” to pay the mortgage when investments offer a higher return.

“If your risk tolerance allows it, it’s a good idea to start putting money into the market,” he said. He added that even risk-averse investors can look to safer assets, such as guaranteed investment certificates (GICs), which currently offer returns of about 4.5 percent.

However, homeowners with a fixed rate may have to renew their mortgage in an environment of higher interest rates in the coming years, which could tip the balance to make lump-sum mortgage payments the smarter choice compared to investment, adds Gasper.

Sandy Yong, personal finance writer and author of the master of moneyHe also says that he prefers the option of investing, although he emphasizes that all financial situations are different.

“I would choose to invest in the stock market because you never know when the next time the market is going to go down double digits,” he said by phone.

“The market has been pretty down all year and could it go any lower? Yes, of course. It could get a lot worse, but if you have that long-term mindset where you’re putting this money into long-term, whether it’s for retirement or other long-term goals, then it’s hard to let this opportunity pass you by.”

The S&P/TSX Composite Index is down about 16 percent from its peak earlier this year as higher rates and concerns about an impending recession hit stocks.

money mindset

Sometimes the best option can come down to simple math, Moolala’s Sellery says, such as when the returns on the investment clearly outweigh the interest charged on the mortgage. However, with mortgage rates now hovering around five percent, the math is less clear.

“These days math goes head to head. So it doesn’t come down to math. It comes down to mindset, in my opinion,” he said.

“If the math is a wash or, you know, if you looked at your circumstances and it’s not clear, then it all comes down to mindset. What makes you feel better? Some people feel better with a lower mortgage balance.” . Some people feel better with a higher investment balance.”

Taking a holistic view, Sellery suggests that someone who wants to retire early might prioritize paying off the mortgage, while someone who intends to work part-time in retirement might be inclined to have a larger investment portfolio.

Meanwhile, CSR Wealth’s Gasper says that age and risk tolerance influence the decision-making process and that, especially for young people, there are three financial goals to strive for.

“If we’re talking about 30-somethings, then that’s an important factor. Increase your cash flow, pay as little interest as possible, and invest for the long term.”

Michelle Zadikian is a Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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