Q: I am turning 30 this year and make around $60,000 a year and was wondering what the best thing to do with some extra money is? I have $10,000 saved in an emergency fund sitting in a high-interest bank account at my bank, so I am covered in case of emergency. Is this the best place for this?
On top of that I have around $5,000-$10,000 extra I am looking to use to start investing and was wondering where it should be put. I have no debt other than a mortgage for $90,000 with 10 years left at 3% which I am already paying an extra 10% per payment towards. I have an RRSP through my work, but I am only contributing 3% in order to max out their matching 3%. I am doing the minimum because it has a high MER of about 2.75%.
I was thinking of starting a Couch Potato Portfolio via a robo-advisor site or inside of a TFSA as I have never contributed to a TFSA. I have never done any investing other than RRSPs through my jobs so I could use some advice to ensure I am using my money wisely.
A: It sounds like you are a responsible saver, J. You are quickly paying down debt and have quite a bit of extra cash flow beyond your group plan to put to work.
I think there is a psychological benefit to having an emergency fund available and that money probably shouldn’t be in anything other than a high interest savings account. If it’s invested in something more volatile that can earn a higher return, you may give up some of the comfort that it’s meant to produce with the uncomfortable ups and downs of the market. In your case, the emergency fund is modest and I think a high-interest savings account is a good option.
If you really wanted to put it to work though, I’d ensure you had a low-interest, secured line of credit on your home as a back-up before investing it more aggressively, J.
I don’t blame you for not wanting to put your extra savings into your group plan at work. In most cases, my bias is towards contributing the minimum required to get the maximum employer match anyway, in fact. I’d rather have the flexibility to invest outside the group plan, but if someone doesn’t trust themselves to actually save, payroll deductions can be a magical forced savings tool.
Saving isn’t your problem, J. But the high management expense ratios (MERs) on your group plan mutual funds are a problem. I blame your employer for not doing their due diligence. 2.75% is unreasonable for any mutual fund, but a group plan should have leverage due to the size of the plan to try to negotiate lower fees than what a retail investor would normally pay. Your employer is getting ripped off.
A robo-advisor may be a good option for you. Online advisors offer simple, low-cost, passive portfolios of exchange-traded funds (ETFs) a la Canadian Couch Potato, but you hand over the management of the ETFs to them. Fees are generally in the 0.5% range – a fraction of your group plan.
There are a number of options in the robo-advisor space now. Take the time to understand the different models and offerings to make the best choice for you, J.
If you go that route, I would be inclined to open a TFSA. You’ve done a great job paying down debt, but with only a low interest rate mortgage and a short amortization, I think you can afford to focus on investing with your extra cash flow. The best part of a TFSA is that it’s flexible. When your mortgage comes up for renewal, you can consider a lump-sum payment at that time with your TFSA savings. You can also use your TFSA to make RRSP contributions–though at a robo-advisor instead of into your group plan at work.
The thing with investing your TFSA into stock ETFs is that it won’t always go up every year. But two-thirds of the time, it will and pick those up years to use it for extra debt repayment or RRSP contributions, J. A TFSA at a robo-advisor could really round out your financial strategy.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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