Our situation:

  • Both 28 years old
  • Both working full time with stable jobs
  • No debts (no student loans, cars are paid, etc.) except a 80$/month 0% interest 2 years loan for home furnitures.
  • Family income: about 130 000$/year + few government benefits (we have a 2 years old son)
  • Mortage (signed June 2018): about 236 000$ at 3.14% fixed for 4 years. That's 1 192$/month. We already increased that amount to 1 500$/month to pay it faster.
  • I have an emergency fund account of 25 000$. I will probably invest 15 000$ and keep 10 000$ as security. My GF has an emergency fund account of about 4000$.
  • We contribute to a RESP for our son (family plan, we manage it through our bank). 1 200$/year and government throws 20% of that amount for a total of 1 440$/year. We started contributing 2 years ago and will continue to do so for the next ± 16-18 years.

Before buying our house, I had an automatic transfer from my bank account to a RRSP account of 150$/week for a total of 7 800$/year. When doing my taxes, I get about 37% of that amount in taxes return - about 2 886$. The interest rate of that RRSP is about 3.93%/year (mutual fund, so it can vary). Right now, there's about 15 000$ in that account.

Now, my question is: should I put that 7 800$ toward my mortage knowing that 3.93% of 15 000$ is a lot lower than 3.14% of 236 000$? I generate less money from my savings than the interests from my mortage. I wouldn't stop contributing to my RRSP account totally as my employer has a DPSP program. With that program, I get about 6 000$ per year (3000$ directly taken from my pay and 3000$ from my employer). I also don't need the 2 886$ from taxes return as I usually used that money to buy luxuries (computer parts, etc.).

RESP

A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter).

Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.

RRSP

An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

DPSP

A DPSP is a plan that allows a portion of a company's profits to be shared with employees. Since the amounts contributed to the plan come from the company's profits, contribution amounts can differ from one year to the next.

  • 1
    Step 1: take ~2k and be done with the furniture loan. – Pete B. Sep 7 at 16:18
  • Is your mortgage rate variable, or fixed over those 4 years? – Chris W. Rea Sep 7 at 23:08
  • @Chris: it's fixed. – user76558 Sep 8 at 0:15
  • 2
    pay off any non-mortgage debt immediately, as suggested by @Pete B. That's a no-brainer. What you seem not to have considered is risk. The future involves uncertainty, and therefore risk. The sooner your mortgage is paid off, the shorter period of time you maintain that risk in your lives. What if your income is cut in half? What if property values fall below your outstanding mortgage. Having a paid for house provides freedom of action. – rocketman Sep 8 at 4:11
up vote 4 down vote accepted

should I put that 7 800$ toward my mortage knowing that 3.93% of 15,000$ is a lot lower than 3.14% of 236,000$?

The amounts aren't really relevant. What matters are the interest/return rates.

If you put $7,800 extra to the mortgage, you will decrease the interest paid in the next period by (3.14% / 12) of the $7,800, or about $20. If you invest in the RRSP, you expect to earn (3.93% / 12) off of the $7,800, or about $25. So the difference isn't huge. Put another way, you're going to pay interest on the remaining $230k either way.

That said, 3.93% seems like a very low return for long-term retirement savings. I don't know the Canadian market, but in the US, long-term (30-year) retirement returns should be 10% or higher.

If I were you I would pay off the 0% loan first. Yes it's zero percent, but most consumer 0% loans have kickers that retroactively charge interest on the original balance should you miss a payment or not pay it off in full by the due date. I would rather just knock it out so it's not a risk. It may also be a painful reminder of borrowing to buy furniture.

Then continue saving 10-15% of your income for retirement, and look at your investment options to see if there are some higher-return options (you can afford to take more risks at 28). Then put any remaining money towards the mortgage (or save up for the next home furnishings purchase). You might also consider setting up college savings for your son.

It sounds like you're in a great position overall. I think all you need is a medium-term (5 or 10-year) plan, and then you can prioritize your investments (mortgage, retirement, college savings) to meet that plan. anything you do beyond that is just tweaking.

  • We already have a college savings account for our son, will specify it in my question. – user76558 Sep 7 at 15:35
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    The first paragraph is the pivot point of this answer. It addresses the biggest misconception in the OP's question. – void_ptr Sep 7 at 15:49
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    LOL 10% return. If you could get that, Fidelity will pay you $10 million a year to manage a fund. – Five Bagger Sep 8 at 2:04
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    @FiveBagger The S&P has averaged 10% over the last 30 years. The worst 30-year period in the S&P's history is 8%. – D Stanley Sep 9 at 1:23
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    @FiveBagger Not everyone has thousands of dollars left over to save each year, or the discipline to not spend it for 30 years. If you save just $6,000 a year for 30 years, at 10% return (again, average for the S&P 500), you'll have just under $1 Million. There's a question on this site titled Why isn't everybody rich?. You might want to read that. – D Stanley Sep 9 at 1:54

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