How to manage debts, savings and mortgage

How to manage debts, savings and mortgage

balance finances Most of us struggle with finding a balance in our personal finances.

A reader recently asked me:

“I have a good question for you. How do you manage savings, a buffer for emergency, and basically daily funds when all you want to do is pay down that as quickly as possible? What’s a good amount to always have so that you can be comfortable and still contribute as much as possible to your mortgage?”

I wrote back “First, to manage for daily funds you need to know how much you spend in a typical month, and map that against how much you make (net) each month.

You can download the family income and expense statement (long way of saying budget) as a starting point for budgeting.

For a buffer for emergencies, there are different theories about that. Many financial planners advocate setting aside as much as 6 months net income for “ just in case” – but really there are only a few situations that would require six months emergency funds such as job loss or roof replacement or structural damage to your house.

Other emergencies are typically unforeseen car repairs or home maintenance and two or three thousand set aside can often do that trick.

Should I pay off my and save money at the same time or do I just focus on paying down my mortgage as quickly as possible?

This subject has been flogged to death over the years, and most financial experts have strong feelings on one approach or the other.

The simple “technically correct” answer might be just to focus on your mortgage – unless you are sure the after-tax benefit of your saving and investment strategy is superior to the return you get on paying down non tax-deductible debt. But as a practical matter, that is not always the best approach.

Most people like to measure their wealth not only by the increasing value of the equity in their home but also by the size of their ’s, savings accounts, investments, pension plans etc. If that’s you, a balanced approach to saving and pay-off might be the best approach. i.e. Do both.

Make sure you are getting the most out of any available tax deferral programs.

Use up your full allowance for Tax Free Savings Accounts first (as of June 2014, you could have contributed up to $30,000 into your TFSA – and this will increase by $5,000 each year)

I love ’s, but would like to see you defer significant contributions till your salary takes you into a higher average personal income tax rate. Check here for your personal tax rate (note the average rate is over 31.15% only on income earned over $41,544 per year)

But if your employer has some kind of matching contribution to a Group RRSP, you should avail yourself of that.

And your employer may also offer discounted purchases of stock in their company – if you feel the investment would be good, you can take a piece of that program too.

As for your component, you do any of the things the experts preach are good for you like:

  1. Select as short an amortization period as you can afford
  2. Some people will extoll the virtues of bi-weekly or weekly payments – yes these can help if you can manage the logistics, but it is simply one variation of shortening your amortization period
  3. Make a lump sum extra payment once per year (using some of your savings and perhaps your income if you get one)”

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