Over the months, I have noticed that there are some very smart readers on this blog. The comments that are posted on my articles are proof that my readers really know their stuff.
Last week, I received an email from Pastor Brad who currently resides in Calgary. He wrote me about his financial situation and how he could improve/optimize it. As I’m not a financial planner, I didn’t feel comfortable giving financial advice to him, but I told him what I would do if I were in his situation.
The reason why I’m posting this is because I’m hoping that YOU, the intelligent reader, could add any insights that would help Brad out.
Brad’s Situation (30 years old):
Here is my net worth and expenses:
RRSP’s – $10k – $250 a month goes into an account which can be changed Home – $340k – Mortgage @ $210k (home worth $430k b/c of Calgary market)
My taxable combined income is Approx. 35k Because of allowances I take home $4200 month.
My wife and I can usually save approx. $500 – $600 a month which has been used to pay off our debt (which is now 0 as of today – no car payments or CC)
I’m at a loss as to what to do now. We have been looking at manulife one mortgage because we can save money every month and pay down our mortgage with the flexibility of taking money out when needed, but we have a $4000 penalty if we do so, and @ 6% I’m not sure what’s best. We also don’t have a “rainy day fund” to use for vacation or emergency, but we do have a 10k line of credit for such as these.
I have to tell you – I am a NEWBIE in the world of investments. I don’t know what is WISE. You probably don’t have time for this, but if you could squeeze out some wisdom (knowing your NOT a financial advisor) I’d love to hear it. I do have another question – You talk about your passive income – do you have any wisdom on how someone could look at obtaining some (any)?
We spend approximately $400 – $500 to charitable donations, which we do get back a portion (30%) come tax time. I’m a firm believer that 10% of my wage should go back into God’s work. Some might agree or disagree, but this is a non-negotiable. Some people ask me if I “HAVE” to because I am a pastor … and the answer is “no”. It’s a personal decision.
Thanks man for just sending me your thoughts. And again, I know you’re not a financial advisor!
This was my response:
In Calgary, $35k in taxable income puts you in the lowest tax bracket. Do you expect your taxable income to increase over the years? Or will this be a standard wage for a pastor? Will your wage grow faster than the rate of inflation (2% / year)? The reason I ask is because being in the lowest tax bracket makes the RRSP less effective.
It perhaps would be a better strategy to focus on a non-registered portfolio. When you become more comfortable with investing, you should perhaps look into tapping into your home equity to invest, this is called the Smith Manoeuvre.
Brad, I wouldn’t use the Manulife One mortgage. I would stick with the existing mortgage and pay it down as fast as possible. The M1 mortgage rate is too high without any real benefit to those who can pay down their mortgage themselves. It’s really a big negative once you factor in the penalty you would have to pay to cancel your existing mortgage.
Your passive income strategy would depend on if you expect your income to increase over the years. In Calgary, you can make up to $37100 in employment AND dividend income without paying ANY tax on the dividends. Perhaps starting a non-registered portfolio would be a good idea based on Canadian dividend paying stocks. Since you make $35K, you can make up to $1,448/year in dividends (before gross up) without paying ANY tax on them.
Before jumping into the stock market though, you should do some substantial research. Go to your local library and pick up some books about Warren Buffet and perhaps the Stock Markets for Dummies for Canadians (no offense).
If you are going to look into real estate, there is one big rule, the rental must produce POSITIVE cash flow from day ONE after ALL expenses. This may be a challenging task in Calgary.
I must commend you and your family for giving so much of your income to charity! There should be more people like you.
If you have more questions, feel free to ask away.
Disclaimer: I’m not a financial advisor, this is my opinion only so act upon it at your own risk.
How did I do? Would you have suggested anything different? I look forward to your comments.If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).