Comments on: Case Study: High Income and Consumer Debt Free http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm Building Wealth through Saving and Investing Fri, 12 Mar 2010 18:54:45 -0500 http://wordpress.org/?v=abc hourly 1 By: Judy http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-106740 Judy Fri, 30 Oct 2009 19:00:24 +0000 http://www.milliondollarjourney.com/?p=956#comment-106740 Sean My brother didn't lose HIS qualification for the credit, his employer did. The company failed to meet/maintain its standing as an Offshore Employer, (or employer offering offshore emp't, can't remember exactly what they "failed" on) which is why they paid out extra dollars towards penalties, interest. That credit had been offered as a perk of employment. Like I said, just a cautionary note. J Sean
My brother didn’t lose HIS qualification for the credit, his employer did. The company failed to meet/maintain its standing as an Offshore Employer, (or employer offering offshore emp’t, can’t remember exactly what they “failed” on) which is why they paid out extra dollars towards penalties, interest. That credit had been offered as a perk of employment. Like I said, just a cautionary note.
J

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-106708 Sean Fri, 30 Oct 2009 00:12:12 +0000 http://www.milliondollarjourney.com/?p=956#comment-106708 Judy, Thanks for that, but I definitely qualify for the tax credit. The exact definition of eligibility is that you are a Canadian citizen, working for a Canadian company, outside of the country for greater than 6 months, engaged in the exploration/exploitation of oil & gas. S. Judy,
Thanks for that, but I definitely qualify for the tax credit.
The exact definition of eligibility is that you are a Canadian citizen, working for a Canadian company, outside of the country for greater than 6 months, engaged in the exploration/exploitation of oil & gas.
S.

]]> By: Judy http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-106703 Judy Thu, 29 Oct 2009 22:42:52 +0000 http://www.milliondollarjourney.com/?p=956#comment-106703 Sean Just found this blog recently, and felt I should comment on part of your scenario: Just a word of caution on the Offshore Employment Tax Credit. My brother worked overseas for many years, and had this "Credit". Lived a good life, until CRA audited his employer, disallowed their rating/standing (not sure of exact terminology), came back to him for the 3 previous years' taxes. Taxes plus penalty plus interest meant he had to re-mortgage nearly-paid-for condo. His employer paid some dollars towards penalties and interest, but, of course, THAT counted as income! NOT a happy employee. And left company soon after as the regular tax regime not enough to balance out the negatives of working overseas. With hindsight, he said he should have saved, separately, the equivalent of the taxes, "just in case"!! Sean
Just found this blog recently, and felt I should comment on part of your scenario: Just a word of caution on the Offshore Employment Tax Credit. My brother worked overseas for many years, and had this “Credit”. Lived a good life, until CRA audited his employer, disallowed their rating/standing (not sure of exact terminology), came back to him for the 3 previous years’ taxes. Taxes plus penalty plus interest meant he had to re-mortgage nearly-paid-for condo. His employer paid some dollars towards penalties and interest, but, of course, THAT counted as income! NOT a happy employee. And left company soon after as the regular tax regime not enough to balance out the negatives of working overseas. With hindsight, he said he should have saved, separately, the equivalent of the taxes, “just in case”!!

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-100800 Sean Fri, 21 Aug 2009 13:29:36 +0000 http://www.milliondollarjourney.com/?p=956#comment-100800 And here I thought it was a revolving door... Well Ive still got $5k to work with in the wifes! Does it sound reasonable to keep mine in an ING account making 3%, so that its easy to get to, then invest hers in something a little more long term, such as index funds or the like? S. And here I thought it was a revolving door…
Well Ive still got $5k to work with in the wifes! Does it sound reasonable to keep mine in an ING account making 3%, so that its easy to get to, then invest hers in something a little more long term, such as index funds or the like?
S.

]]> By: FrugalTrader http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-100790 FrugalTrader Fri, 21 Aug 2009 11:20:37 +0000 http://www.milliondollarjourney.com/?p=956#comment-100790 Sean, if you withdrew $1k this year, then you can contribute that withdrawed amount NEXT year. To clarify, you can deposit $6k come Jan 2010 instead of $5k. Sean, if you withdrew $1k this year, then you can contribute that withdrawed amount NEXT year. To clarify, you can deposit $6k come Jan 2010 instead of $5k.

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-100788 Sean Fri, 21 Aug 2009 11:17:44 +0000 http://www.milliondollarjourney.com/?p=956#comment-100788 Update: I just received a windfall from work in the form of some owed back pay! Was going to top up both mine & my wifes TFSA with it. But when I went to add the last $1k to mine Im not allowed to do it! Ive put in $5k already this year, but I withdrew $1k a few months back. I thought I was allowed to do that & still be able to have that contribution room? S. Update:
I just received a windfall from work in the form of some owed back pay!
Was going to top up both mine & my wifes TFSA with it.
But when I went to add the last $1k to mine Im not allowed to do it! Ive put in $5k already this year, but I withdrew $1k a few months back.
I thought I was allowed to do that & still be able to have that contribution room?
S.

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-99193 Sean Fri, 14 Aug 2009 04:02:52 +0000 http://www.milliondollarjourney.com/?p=956#comment-99193 I appreciate all the input. I don't want to be holding a huge amount of cash. If I can get the TFSA's maxed I'll be happy. Interesting that jonbon mentioned variable rates, as Ive been thinking about that. If I could get a rate that low for the next year I would probably hammer everything I could on to the mortgage. I know having a cash reserve is important, but I don't feel like I own my house at all yet. Ideally I'd like to get my mortgage down to $200k, then start the SM. Thats a number I could live with. S. I appreciate all the input.
I don’t want to be holding a huge amount of cash. If I can get the TFSA’s maxed I’ll be happy.
Interesting that jonbon mentioned variable rates, as Ive been thinking about that. If I could get a rate that low for the next year I would probably hammer everything I could on to the mortgage.
I know having a cash reserve is important, but I don’t feel like I own my house at all yet. Ideally I’d like to get my mortgage down to $200k, then start the SM. Thats a number I could live with.
S.

]]> By: Mark in Nepean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-99185 Mark in Nepean Fri, 14 Aug 2009 01:59:36 +0000 http://www.milliondollarjourney.com/?p=956#comment-99185 Sean, my suggestions.... 1) build your cash reserve/emergency fund first (say $10,000)...with baby on the way, you'll need it even with your high income! 2) finish maxing out your TFSA, then do one for your wife as well, as your second priority. Even if you have # 1 done ($10 K), with the TFSAs, you'll have an even bigger emergency fund or savings for the future. 3) start contributing to RRSPs as your third priority, to a) reduce your taxable income and b) build your retirement fund. Even $100-$200/month is a great start. 4) pay down the mortage. Add a $100/mortgage payment. It will make a big difference. That would be my plan. It would avoid you from returning to consumer debt, something you shouldn't be in given your income. Have fun! Sean, my suggestions….

1) build your cash reserve/emergency fund first (say $10,000)…with baby on the way, you’ll need it even with your high income!
2) finish maxing out your TFSA, then do one for your wife as well, as your second priority. Even if you have # 1 done ($10 K), with the TFSAs, you’ll have an even bigger emergency fund or savings for the future.
3) start contributing to RRSPs as your third priority, to a) reduce your taxable income and b) build your retirement fund. Even $100-$200/month is a great start.
4) pay down the mortage. Add a $100/mortgage payment. It will make a big difference.

That would be my plan. It would avoid you from returning to consumer debt, something you shouldn’t be in given your income.

Have fun!

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-99092 Sean Thu, 13 Aug 2009 20:02:48 +0000 http://www.milliondollarjourney.com/?p=956#comment-99092 Good points Jonbon! Ill look in to the spousal RRSP. I like going with the shorter term as I feel I have a more active role in the mortgage, being able to take a fresh look every year. S. Good points Jonbon! Ill look in to the spousal RRSP.
I like going with the shorter term as I feel I have a more active role in the mortgage, being able to take a fresh look every year.
S.

]]> By: jonbon http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-99075 jonbon Thu, 13 Aug 2009 18:56:37 +0000 http://www.milliondollarjourney.com/?p=956#comment-99075 Sean, Thanks for sharing, you and I are similar in finances and current life changes. I would only add two things to the good article which we have done. If your wife chooses not to work until the youngest one is say 4 years old, there is a period where she makes no income. If you have been contributing to a spousal RRSP (ie in her name, but you take the tax deduction), she can start withdrawing it after 3 years if it is left untouched. After 3 years you can withdraw it as income. If you stay under the personal tax exception (I think ~$10k/yr) you can withdraw it without paying tax. The money taken out can then be applied to your mortgage, or invested, etc. I imagine some people will challenge this. My situation is that we currently have $40k in spousal RRSPs (which we recieved about $12k back in tax deductions), and plan on slowly taking it out. After removed, it will be reinvested in RRSPs, getting yet another tax deduction. In the end, $40k could turn into $40k*(1.3)*(1.3)=$67k The second note is when you renew your mortgage you might want to consider a variable rate. In most cases (8 times out of 10) variable rate saves money over fixed, as long as you can handle the risk. Right now we are paying 1.45% for a mortgage! Sean,
Thanks for sharing, you and I are similar in finances and current life changes. I would only add two things to the good article which we have done. If your wife chooses not to work until the youngest one is say 4 years old, there is a period where she makes no income. If you have been contributing to a spousal RRSP (ie in her name, but you take the tax deduction), she can start withdrawing it after 3 years if it is left untouched. After 3 years you can withdraw it as income. If you stay under the personal tax exception (I think ~$10k/yr) you can withdraw it without paying tax. The money taken out can then be applied to your mortgage, or invested, etc. I imagine some people will challenge this. My situation is that we currently have $40k in spousal RRSPs (which we recieved about $12k back in tax deductions), and plan on slowly taking it out. After removed, it will be reinvested in RRSPs, getting yet another tax deduction. In the end, $40k could turn into $40k*(1.3)*(1.3)=$67k

The second note is when you renew your mortgage you might want to consider a variable rate. In most cases (8 times out of 10) variable rate saves money over fixed, as long as you can handle the risk. Right now we are paying 1.45% for a mortgage!

]]> By: Ann http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-99065 Ann Thu, 13 Aug 2009 18:26:59 +0000 http://www.milliondollarjourney.com/?p=956#comment-99065 Oh, I'd also check to see if lump sum payments can be made any time or just on the anniversary date. I know I saved a lot in interest with TD because I'm able to make lump sum payments any time I have the extra money. Oh, I’d also check to see if lump sum payments can be made any time or just on the anniversary date. I know I saved a lot in interest with TD because I’m able to make lump sum payments any time I have the extra money.

]]> By: Ann http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-99064 Ann Thu, 13 Aug 2009 18:24:25 +0000 http://www.milliondollarjourney.com/?p=956#comment-99064 TD's policy is 100/15, so you can double your payments and make lump sum payments up to 15% of the original principle. ING Canada's policy is 25/25. When I bought my first home, I signed up with TD for a 5-year term and a 13-year amortization because, unbelievable as it is, no other bank could beat their interest rate at the time (it took a week of negotiating). Once I felt secure in my job, I started doubling my semi-monthly payments and increased my lump sum payments to 12-15% per annum. The home will now be paid in less than 4 years, instead of the original 13. TD’s policy is 100/15, so you can double your payments and make lump sum payments up to 15% of the original principle.

ING Canada’s policy is 25/25.

When I bought my first home, I signed up with TD for a 5-year term and a 13-year amortization because, unbelievable as it is, no other bank could beat their interest rate at the time (it took a week of negotiating). Once I felt secure in my job, I started doubling my semi-monthly payments and increased my lump sum payments to 12-15% per annum. The home will now be paid in less than 4 years, instead of the original 13.

]]> By: JJ http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98948 JJ Thu, 13 Aug 2009 09:50:29 +0000 http://www.milliondollarjourney.com/?p=956#comment-98948 Hey Sean, Thanks for sharing your situation with everyone. It has been interesting reading the advice provided. Congratulations on your first baby! It sounds like you and your wife are living your dream :) Hey Sean,

Thanks for sharing your situation with everyone. It has been interesting reading the advice provided.

Congratulations on your first baby! It sounds like you and your wife are living your dream :)

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98920 Sean Thu, 13 Aug 2009 04:12:38 +0000 http://www.milliondollarjourney.com/?p=956#comment-98920 Vince, that is Very helpful! Mine is actually a 15/15 policy, but that is still $45k a year. As far as CMHC I was pretty sure that was basically a one time deal, so thanks for confirming. The 6 month renewal incentive is news to me though. I might just start keeping a closer eye on rates! When I went with the 1 year term I had to buy out of my 5 year term. Saved over $600/month on interest (which went straight back on to the mortgage of course). Interest saved paid for the buy out in 7 months - extra $3k on principle by the end of the year. So in a nutshell, hammer down on the mortgage until I have a solid stake, with the tradeoff of having no cash reserve. (which wouldn't be a huge amount in the period we are talking anyway.) If I can renew my mortgage again in September, then Ill have that 20% by next September. Then I can get a readvanceable mortgage & have the Option of doing the SM, if I feel thats right for us at the time. With regards to post 2, my wife is trained as a custom drapery seamstress & we have been building a workroom in the house. So that should be good for some right offs. S. Vince, that is Very helpful!
Mine is actually a 15/15 policy, but that is still $45k a year.
As far as CMHC I was pretty sure that was basically a one time deal, so thanks for confirming.
The 6 month renewal incentive is news to me though. I might just start keeping a closer eye on rates! When I went with the 1 year term I had to buy out of my 5 year term. Saved over $600/month on interest (which went straight back on to the mortgage of course). Interest saved paid for the buy out in 7 months – extra $3k on principle by the end of the year.
So in a nutshell, hammer down on the mortgage until I have a solid stake, with the tradeoff of having no cash reserve. (which wouldn’t be a huge amount in the period we are talking anyway.)
If I can renew my mortgage again in September, then Ill have that 20% by next September. Then I can get a readvanceable mortgage & have the Option of doing the SM, if I feel thats right for us at the time.

With regards to post 2, my wife is trained as a custom drapery seamstress & we have been building a workroom in the house. So that should be good for some right offs.
S.

]]> By: Vince http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98913 Vince Thu, 13 Aug 2009 03:32:14 +0000 http://www.milliondollarjourney.com/?p=956#comment-98913 Sean this is information for your mortgage that is coming up for renewal: - Scotia along with most of the big 5 have what is called a 20/20 policy which means that you can pay 20% down on your principal every year at any time and increase your payments by 20% per year. (if your goal is to pay your mortgage down as quick as possible), plus you can put down as much as you want at renewal of course. - As for the risk of the bank not financing you at renewal, again you are dealing with an A lender and you should not be worried about having your financing terms withdrawn if you have kept your payments up to date. - As for the CMHC premium, the premium you paid at time of purchase (likely tacked onto the principal) is good for a minimum of 25yrs so there is no premium to pay at renewal. - Finally, if Scotia did decide to reneg on their financing at time of renewal your CMCH or Genworth policy is completely transferable to all lenders... .so no need to pay another premium! This is something that many borrowers don't know and end up paying unecessary premiums. - And finally, Scotia offers an early renewal incentive. You can renew your mortgage within the last 6months before your renewal date without penalty. Since you said you were likely staying with them for a while, you may want to act on this option and not take a chance that rates are higher in February. I hope this helps and good luck! Sean this is information for your mortgage that is coming up for renewal:
– Scotia along with most of the big 5 have what is called a 20/20 policy which means that you can pay 20% down on your principal every year at any time and increase your payments by 20% per year. (if your goal is to pay your mortgage down as quick as possible), plus you can put down as much as you want at renewal of course.
– As for the risk of the bank not financing you at renewal, again you are dealing with an A lender and you should not be worried about having your financing terms withdrawn if you have kept your payments up to date.
– As for the CMHC premium, the premium you paid at time of purchase (likely tacked onto the principal) is good for a minimum of 25yrs so there is no premium to pay at renewal.
– Finally, if Scotia did decide to reneg on their financing at time of renewal your CMCH or Genworth policy is completely transferable to all lenders… .so no need to pay another premium! This is something that many borrowers don’t know and end up paying unecessary premiums.
– And finally, Scotia offers an early renewal incentive. You can renew your mortgage within the last 6months before your renewal date without penalty. Since you said you were likely staying with them for a while, you may want to act on this option and not take a chance that rates are higher in February.

I hope this helps and good luck!

]]> By: Sampson http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98827 Sampson Wed, 12 Aug 2009 20:51:33 +0000 http://www.milliondollarjourney.com/?p=956#comment-98827 My suggestion would be to put everything (TFSA included) against the mortgage. Ensure you have enough equity (20%) based on a conservative estimate of your house's value (check out similar properties on MLS). When the time comes to renew your mortgage, get the readvanceable mortgage from ScotiaBank. Then you'll have plenty of funds to use for investment, emergency, or anything else. Next year, start funding your RRSP, RESP and TFSA, where you cannot deduct the interest. There is obviously some risk involved, but if you know or are pretty certain your job is safe, then with your high income, you should easily be able to catch up those registered accounts in the near future, meanwhile, your SM mortgage is in place and can grow itself. My suggestion would be to put everything (TFSA included) against the mortgage. Ensure you have enough equity (20%) based on a conservative estimate of your house’s value (check out similar properties on MLS).

When the time comes to renew your mortgage, get the readvanceable mortgage from ScotiaBank. Then you’ll have plenty of funds to use for investment, emergency, or anything else.

Next year, start funding your RRSP, RESP and TFSA, where you cannot deduct the interest.

There is obviously some risk involved, but if you know or are pretty certain your job is safe, then with your high income, you should easily be able to catch up those registered accounts in the near future, meanwhile, your SM mortgage is in place and can grow itself.

]]> By: Denis http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98820 Denis Wed, 12 Aug 2009 20:28:06 +0000 http://www.milliondollarjourney.com/?p=956#comment-98820 I'm with 19. Subversive on this one. In this case, due to the very short term time lines, I'd go with the mortgage payment to make sure you have some wiggle room / equity at renewal to mitigate your downside risk. If you had more equity in the house and more time, calculating future (long term) returns in either RRSP or Real Estate to make your decision is a great way to decide where to put your money. Times have changed though... I'm sure you noticed with the $20k drop in equity in the house, which is not bad considering that's only 6.7%. Most RRSP accounts took harder hits than that this year. That aside ... Keeping the house is more important than watching the retirement portfolio online. You can always top up and catch up later. I’m with 19. Subversive on this one. In this case, due to the very short term time lines, I’d go with the mortgage payment to make sure you have some wiggle room / equity at renewal to mitigate your downside risk.

If you had more equity in the house and more time, calculating future (long term) returns in either RRSP or Real Estate to make your decision is a great way to decide where to put your money. Times have changed though… I’m sure you noticed with the $20k drop in equity in the house, which is not bad considering that’s only 6.7%. Most RRSP accounts took harder hits than that this year. That aside … Keeping the house is more important than watching the retirement portfolio online. You can always top up and catch up later.

]]> By: Subversive http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98814 Subversive Wed, 12 Aug 2009 20:01:41 +0000 http://www.milliondollarjourney.com/?p=956#comment-98814 @ Sean post 16. One thing to keep in mind is it is always better to make the lump sum payment before you actually get close to renewal. Some banks have stupid rules about this sort of thing. My personal opinion is you can always catch up on this year's TFSA contribution room next year, so I'd get that mortgage in a positive equity state ASAP. Given your income, you are unlikely to have any issues upon renewal, but I simply wouldn't take any chances with that. @ Sean post 16. One thing to keep in mind is it is always better to make the lump sum payment before you actually get close to renewal. Some banks have stupid rules about this sort of thing. My personal opinion is you can always catch up on this year’s TFSA contribution room next year, so I’d get that mortgage in a positive equity state ASAP. Given your income, you are unlikely to have any issues upon renewal, but I simply wouldn’t take any chances with that.

]]> By: tetsuo69 http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98811 tetsuo69 Wed, 12 Aug 2009 19:52:57 +0000 http://www.milliondollarjourney.com/?p=956#comment-98811 Paying off the mortgage or putting it in an RRSP comes down to 2 main factors: - Can you get a reliable higher return from your investment in RRSP than your mortgage interest rate? Keep in mind your return on your mortgage is after tax, while your RRSP return is before tax (future tax, but its still a tax liability). I'm not sure of the math to translate future tax liability to a current rate, but being conservative I'd probably go full on marginal tax rate. This would also give some wiggle room for the unreliabliaty of markets depending on what you invest in. Stocks, I'd add an even higher premium. -Can you sleep at night knowing you net worth is growing but your mortgage is massive, and all the risk associated with that. MTR = marginal tax rate Paying off the mortgage or putting it in an RRSP comes down to 2 main factors:

- Can you get a reliable higher return from your investment in RRSP than your mortgage interest rate? Keep in mind your return on your mortgage is after tax, while your RRSP return is before tax (future tax, but its still a tax liability). I’m not sure of the math to translate future tax liability to a current rate, but being conservative I’d probably go full on marginal tax rate. This would also give some wiggle room for the unreliabliaty of markets depending on what you invest in. Stocks, I’d add an even higher premium.

-Can you sleep at night knowing you net worth is growing but your mortgage is massive, and all the risk associated with that.

MTR = marginal tax rate

]]> By: Sean http://www.milliondollarjourney.com/case-study-high-income-and-consumer-debt-free.htm/comment-page-1#comment-98806 Sean Wed, 12 Aug 2009 19:29:41 +0000 http://www.milliondollarjourney.com/?p=956#comment-98806 Oh one more thing! Upgrading the house while keeping the current one is more of a 5 year goal, definitely not an immediate one. The goal for the more immediate future is a nice big safety net & security for my family. S. Oh one more thing!
Upgrading the house while keeping the current one is more of a 5 year goal, definitely not an immediate one. The goal for the more immediate future is a nice big safety net & security for my family.
S.

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