What's a better use of money; investing in your business or

[shellysoda]

paying down mortgage, getting an rrsp? I always thought that putting more money into your business would pay off in revenue. However I'm thinking that it's probably a god idea to split up your investments (pay some to mortgage, some to business, some to rrsp). Any thoughts on this? I'd love to hear what others are doing :)

[Canucklehead]

not doing it yet but just discussed this with friends over dinner a couple of hours ago....

1. pay down mortgage and other debts using non-rrsp investment money
2. borrow to buy investments because mortgage interest expense is not tax-deductible
3. continue to max rrsp contributions unless net savings is greater when paying down mortgage

[Bullseye]

paying down mortgage, getting an rrsp? I always thought that putting more money into your business would pay off in revenue. However I'm thinking that it's probably a god idea to split up your investments (pay some to mortgage, some to business, some to rrsp). Any thoughts on this? I'd love to hear what others are doing :)

It would depend entirely on what kind of reurn on equity you'd get by investing in the business.

Too many factors, not enough data, to be able to say.

[brendonp]

not doing it yet but just discussed this with friends over dinner a couple of hours ago....

1. pay down mortgage and other debts using non-rrsp investment money
2. borrow to buy investments because mortgage interest expense is not tax-deductible
3. continue to max rrsp contributions unless net savings is greater when paying down mortgage

Canucklehead - look at the "Smith Manoeuvre" for help on #2! It's not for everyone, but it can make a good chunk of your mortgage interest tax-deductible. Basically you "borrow" back your mortgage payments and invest the money - money borrowed for investment purposes is tax deductible!

Bullseye - Most things are really just a numbers game that you can sort out using a calculator (or Excel). If you make more on your investments then the price of your mortgage interest, you're better off investing.

Once you've played the numbers, you then merely need to step back and look at your tolerence for lifestyle and debt. This is where everybody feels a little different. Personally I sink more money back into my business right now then into investments, because I have a greater return in my business then in my investments. That being said, I sink more money into investments then into my house payments because interest rates are still relatively low (and my current "housing" deductions outstrip my mortgage interest payments!). A good accountant is also worth their weight in gold!

Cheers,

Brendon

[Bullseye]

Brendon - that was what I meant, we need more info from the OP to be able to say what is the best use of money.

I realize it's quite possible to calculate out which is best, once you have the data, me being an accountant and all. ;)

[brendonp]

Brendon - that was what I meant, we need more info from the OP to be able to say what is the best use of money.

I realize it's quite possible to calculate out which is best, once you have the data, me being an accountant and all. ;)


Bullseye - sorry, I meant to address the comment to the OP - not to you - I agree with what you were saying! :)

[Canucklehead]

Brendonp - thanks for the info. Smith Manoeuvre eh? Hmm...it almost sounds sneaky! LOL

[brendonp]

Brendonp - thanks for the info. Smith Manoeuvre eh? Hmm...it almost sounds sneaky! LOL

It is a bit sneaky, I suppose. I actually met "Smith" at a seminar last year - interesting guy. I listened to his talk and was surprised that some many people just didn't get what he was saying - everyone seemed skeptical about their ability to outperform the interest rate on their mortgage - which is really easy, given that it's actually only the amount of interest that you pay minus your tax rebate at the end of the year that you need to outperform -

Example- if you're paying 5% interest on $200k you'd be paying 10k a year (assuming for the sake of argument nothing was compounded), but you could deduct 10k from your income tax. If you save 4k income tax, you've only "paid" 6k in mortgage interest or effectively 3% (Naturally, you sink your 4k back into your mortgage and "re-borrow" it!). Over time, it should be relatively easy to make for then 3% on your investments... Naturally everything fluctuates and this is a gross simplification, but it illustrates the point!

In any event, it's also much easier out in western Canada - I only found a handful of lending institutions in Ontario that had their computers set up to automatically transfer your "loan" from the bank every month to your investments - you can do it manually, but you have to be deligent about it.

Tons of information online about this...

Enjoy!

Brendon

[Bullseye]

Keep in mind that you have to actually have enough investments outside an RRSP to pay off the mortgage before you can do this, and that not all money borrowed for investing is deductible, there are rules for it.

[grant]

Example- if you're paying 5% interest on $200k you'd be paying 10k a year (assuming for the sake of argument nothing was compounded), but you could deduct 10k from your income tax. If you save 4k income tax, you've only "paid" 6k in mortgage interest or effectively 3% (Naturally, you sink your 4k back into your mortgage and "re-borrow" it!). Over time, it should be relatively easy to make for then 3% on your investments...
If this is the message you're hearing, you've been misled. No matter what, investments have to return a higher % than your mortgage rate to make them a superior choice.

Making your mortgage tax-deductible simply "levels the field" between the choices. If your marginal tax rate is 50%, then your investment must yield twice as much profit for you to break even.

Eg., you have $10,000 and 2 choices in how to invest it: pay down your 5% rate mortgage, or purchase an investment. Paying the mortgage will save (or 'earn') $500 that year. If you instead invest that money, the investment must yield at least 10% (i.e., $1,000) so you can pay $500 ($1,000 x 50% marginal rate) in income tax and still earn that $500.

If your mortgage is tax deductible, however, the value of paying down your mortgage is reduced, because the interest payments you'd otherwise acrue retain value. Looking at it another way, your investments don't need to yield as much to be a superior option. If you put $10,000 towards your mortgage, you will still 'earn' $500. However, if you invest that $10,000, you need only a 5% yield to break even. That's because the $500 extra you paid in mortgage interest makes the $500 you earned from your investment tax-free.

If your mortgage interest rate is 5%, then it would be foolish to choose an investment yielding less than 5% vs. the GUARANTEED 5% earning of paying down that debt, no matter what the tax situation.