High-income earners might want to consider putting some money toward their debt, while investing the rest, especially in cases in which they’re carrying multiple real estate properties with variable rate mortgages, one advisor recommends.megaflopp/iStockPhoto / Getty Images
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More Canadians are sitting on cash and weighing whether to pay down debt or invest their money in an environment of higher costs of living and higher interest rates.
According to Canadian Imperial Bank of Commerce’s recently published annual Financial Priorities poll, 61 per cent of Canadians are concerned about inflation while 28 per cent are concerned about rising interest rates. Forty-two per cent are also worried about their job security.
Thus, choosing between paying off debt and investing needs to be looked at on an individual basis and there’s no one-size-fits-all approach, says Ida Khajadourian,portfolio manager and investment advisor at Richardson Wealth Ltd. in Toronto.
She notes while some clients are worried about making ends meet and might want to stash away a few thousand dollars in an emergency fund, other clients may have had a good year – especially those holding U.S. equities, small caps or tech stocks.
“Certain positions outperformed incredibly well,” Ms. Khajadourian says. “As a result, many are now asking themselves, ‘Where do I deploy that cash?’”
Here are six strategies to consider:
1. Assess the financial situation
High-income earners might want to consider putting some money toward their debt, while investing the rest, especially in cases in which they’re carrying multiple real estate properties with variable rate mortgages, says Wes Ashton, co-founder and senior portfolio manager at Harbourfront Wealth Management Inc. in Vancouver.
For lower-income earners or those who may face layoffs, Ms. Khajadourian urges them to pay off as much debt as possible. “It makes sense to put money toward that debt,” she says.
2. Factor in personal preferences
“Many of us were brought up to fear debt,” says Patrick Caffrey, a financial advisor with LT Wealth Management Partners at Raymond James Ltd. in Vancouver.
Others are more comfortable owing money. Mr. Caffrey says if debt is keeping someone up at night, it needs to be addressed, even if the individual can afford to carry it.
“Personal feelings matter,” he says. “Mental stress impacts a lot of Canadians.”
3. Triage debt
If someone is carrying most of their debt on credit cards, that debt should be priority number one, Mr. Ashton says, as the interest rates on credit cards are radically higher than other loans. Or, for example, if a line of credit has a rate of eight per cent, it isn’t wise to invest those savings in a GIC that will pay four per cent interest.
However, if they have a mortgage with a rate of three to four per cent that’s not up for renewal, “it makes sense to invest that money,” rather than pay down the mortgage, he says.
In cases in which someone has significant balances on multiple credit cards, Mr. Ashton recommends they should “pay the small ones down first.” Paying off some debt in full will act as a catalyst to pay off more debt in the future.
4. Assess what you’re carrying
Ms. Khajadourian says some of her higher-net-worth clients utilized the low interest rates of the past several years to buy real estate, such as recreational properties or farmland. With rates now up significantly, they’re looking to make payments on those loans, often using the profits they’ve made on investments to make those payments.
“It’s prudent to reduce that debt now,” she says.
5. Weighing RRSP contributions
“RRSPs are most beneficial for high-income earners,” Mr. Caffrey says, noting that those contributions defer tax and help put those high-income earners in a lower tax bracket at retirement.
However, for those earning $50,000, for example, RRSPs are not especially beneficial, as their tax bracket at retirement will not be much different than the one they’re in now. For those individuals, investing in a tax-free savings account might be a good tax-free option, he says.
6. Using RRSP contributions strategically
With those individuals who have some money to invest, putting it in an RRSP can help lead to paying off debt as well, Mr. Ashton says. “Use your refund to either [reinvest] back into your RRSP [for a bigger tax break next year] or knock down that debt,” he says.
Ms. Khajadourian says it’s important to discuss the best approach with a financial advisor before embarking on any strategy. “They can try to balance these investments and [allocate them] where it makes sense.”
She adds paying off debt shouldn’t always be the focal point. “It’s just one aspect of the overall financial discussion. Be strategic.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
