There’s a whole lot of noise out there when it comes to personal finance. Here, we deconstruct three prevailing financial myths to help you make the most of your hard-earned dough. Just remember to invite us over once you buy that private island.
Myth #1: To maximize tax savings, put every spare penny into your RRSP.
Reality: RRSPs are great if you’re already in a high tax bracket; if you’re not, the tax savings today will be nice, but you’ll pay the piper when you cash out your RRSP – likely at a higher marginal tax rate. On the other hand, a Tax-Free Savings Account means you pay tax on your principle now, but any gains are tax-free for life.
Myth #2: Renting is stupid; buying a condo is smart.
Reality: Renting is cheap; owning a condo is not. Never mind the huge down payment; every month, you’ll have to shell out for not only mortgage payments, but also property taxes and condo fees, which can equal a modest rent alone – plus a new stove, or whatever other appliance happens to break down. And, with condos sprouting like weeds in most Canadian cities, their rising value is no sure bet.
Myth #3: For smart, safe investing, nothing beats a mutual fund.
Reality: Mutual funds are great, but they also have high fees; your fund manager’s got to get paid. Exchange-traded funds (ETFs), which are computer-managed indexed funds, are much cheaper, and they often produce better returns over the long run. At least, with a computer doing the work and not someone with a taste for cigars and fine wine, your fees will be lower.
Image courtesy of deedoucette.
I don’t know where you live but where I live, rents aren’t cheap. mortgages are cheaper and you get deals on things like car insurance if your a home owner as opposed to a renter and you get better deals at your bank. Can make your mortgage a line of credit and bring the monthly cost down considerably to that of a rent. and you get equity on home ownership, Renters get a shoe box of rent receipts at the end of the year and that’s all
I think a more important consideration about a mortgage is the REAL cost. Getting a mortgage for 5% sounds like a good investment, however if you pay 5% every year for 25 years, you’re paying more in interest than the price of the purchase property. In most cases, you never really get that money back even if you sell your property at a tidy profit.
Paying rent puts you in a position of knowing exactly what you’ll pay in the next year. I bought a brand new concrete suite in Vancouver and had enormous additional expenses for building deficiencies, totally over $10,000. I had a few months to come up with it. Just about killed me.
Food for thought.
;0)
Renters pay homeowners’ mortgages 😉 I don’t know where you got your reasoning, but I live in toronto where you are not getting a decent place for under $1000, and many such places don’t even include parking. Renters also move a lot more than homeowners which can have enormous costs; financial, physical AND emotional. As a renter, you are pretty much at the mercy of your landlord. My mortgage, property taxes, insurance, hydro, and condo fees are around $1000/month give or take $50. A portion of that is what I am paying into my equity, a portion which increases every year. My 35 year mortgage will cost me about $70,000 by the end of it, plus $52,500 in property taxes, and $126,000 in condo fees. The grand total is $250,000, whereas 35 years of rent in toronto in an appartment that rents for $1000 (which is the lower end of the spectrum unless you want to spend 35 years in a shoebox bachelor or someone’s basement for 800 – 900/month) would cost around $420,000. Of course my property taxes and condo fees will go up over the years, but so will rental fees. Beyond the financial, there is the peace of mind, my neighbors were tenants, and the unit owner sold the condo and they had to move not too long after! No one can kick me out of my place unless I go bankrupt.
I like john’s comments. As a Realtor buying Real Estate is the best purchase anyone can make, period. Why? this Is know as forced leverage. when you sell your property you basically get almost every dollar back after 5years once the market price is rising. Therefore, you basically lived for free. Renting , you’re making your Landlord rich.
Mutual funds are ok. except you cant borrow against paper assets to buy Real Estate period.You can borrow against your principal resident to purchase your second property as an investment. The mortage interest is also tax deductable not bad for owing Real Estate. Plus other tax savings an incentives available when you own Real Estate. while interest gain in your mutual fund is taxable. cant live in a mutual fund. You get the pictuire. that’s right
You want to gain wealth ? invest in Real Estate and have the bank fund your investment O.P.M (others people money) do what the bank does and you too will be free
in 10 years. You want to be Rich ? do what the wealthy does.
After 35 years of mortgage, you’re stuck with a 35-year-old condo. Not to mention the fluidity you lose from being anchored down. Goodness forbid if you end up getting a crazy cat lady as a neighbour, or worse, addicts (that’ll easily dampen your property’s value) owning prevents you from just-up-and-go. Some see it as stability where you don’t have to worry about being kicked out, some view it as chain-and-ball. I’m by no means against marriage, even if it is just for tax benefits, but just how many marriages live happily ever after?
If may not be so hip or cool to think and live outside the box but in the long run buying a duplex or triplex is a much better investment than a condo.
You have real estate land under your building that appreciates. Location, location , location.
You have a number of people paying for you to live free in your building depending on how much you can invest as a downpayment and how much rent you can pay.
As self-employed person I set this up 25 years ago as my pension plan. You get to write off all the expenses you put into the building against the income you receive.
This only works if you know how to read people and pick good tenants and you find someone competent who can maintain the building at a fair price.
There are other things to consider which I have written about in my book.”The Seven Principles of a Successful Landlord” , but these two are the cornerstone of the principles.
Nevertheless , it worked for me and I have thousands of dollars in rental income – a great source of passive income.
If you are a bit adventuresome such as myself and do a bit of globe trotting and live like a king as it were in many countries ,especially during Canada’s east coast winters which as I write still is with us.
Disclosure- I returned recently from a 3 month stay in Chiang Mai, Thailand with a lovely tan. I have been staying in Asia for the past twenty winters thanks to a lovely passive income.