The year is going well financially (so far) and we have been able to save a decent amount in the past few months to put into the markets.
As you probably know, I was hoping to reach the contribution limit for both RRSP accounts and then start putting money into the TFSAs.
Related: Hidden Advantages of the TFSA
By the end of February we are hoping to have a combined RRSP contribution (for both RRSP accounts) of approximately $42,000. Assuming a marginal tax rate of 30%, this will generate a tax refund of about $12,500.
This isn’t quite at the contribution limit for both RRSP accounts, but its close enough for me. This year I avoided taking an RRSP loan to fully maximize the contributions because I am hoping to put the money into a TFSA instead.
Related: RRSP Loans – Positives and Negatives
Plans for the Tax Refund
I would have no problem taking an RRSP loan to reach the contribution limit, but this year it just doesn’t make sense for us.
The tax refund has been earmarked for the TFSAs, and within a year I am hoping to have about $35,000 in both accounts. I have some investments in my TFSA right now so my contribution limit is about $28,000 while my wife’s limit is a full $36,500 since she hasn’t opened one yet. We have a ways to go on both accounts so for us it makes sense to start earning some tax-free dollars.
Related: Smart Ways to Use Your Tax Refund
I considered putting the tax refund right back into the RRSP to make it even easier to reach the contribution limit next year, but I’d like to start finding a balance between the RRSP and the TFSA so that both can grow slowly over time.
Next year I would expect a similar situation for income and it will be hard to keep reaching the RRSP contribution limits each year, but I will definitely try.
Paying Down the Mortgage
As you can probably guess, paying down the mortgage is the lowest of the priorities right now.
With interest rates at rock-bottom lows, it makes sense for most people (including us) to invest the money in either an RRSP or TFSA rather than pay down the mortgage.
Related: Mortgage Basics Everyone Should Know
This is assuming the after-tax rate of return in an RRSP (or rate of return in a TFSA, since it’s not taxed) is higher than the interest savings from paying down the mortgage.
This wouldn’t make sense if you had a large mortgage balance/interest rate and were paying a significant amount of interest each year on a principal residence.
But in our case the mortgage rate on our house is 2.60% and the rate of return in an RRSP or TFSA is around 7%, so it really doesn’t make sense to make any extra payments towards the principal of the mortgage for us.
This would change if interest rates were to increase, and in December I will be renewing the mortgages on both the rental property and the house. If interest rates were to spike then more money would start to be allocated to paying off the mortgage on our house and less money would be used to invest.
Building an Emergency Fund
I always advise people to keep a small emergency fund of cash available to use in case something unexpected comes up, and my finances are no different.
We currently have about $5,000 set aside for an emergency like a car repair, house repair or anything else that needs to be dealt with right away.
The emergency fund is fairly low right now so I plan on building this up over time so it can grow, but it’s not likely to grow as quickly as the RRSP or TFSA simply because the money isn’t being used to invest.
How is your financial progress so far in 2015?