Balancing Act

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Striving for work life balance is one thing. But there was an even tougher balance this Mama was struggling to find.

Finding work life balance has been a topic of conversation (and a much coveted goal) of women everywhere for years. But a client recently posed another balance question that I thought I’d throw out for discussion this week. Save for tomorrow or pay off debt right now? That, as they say, is the question.

There’s only so much to go around.

At the heart of my client’s question – a working Mom of two school aged children – is the simple fact that we all have a finite amount of money to spend each day. Law of attraction and abundance theories aside, it is what it is. The basis of any budget is income minus fixed expenses. It’s the discretionary stuff - what we do with what’s left over - that often causes stress. It’s this part of the budget that often gets us in trouble, as well (a topic for another day). Assuming we don’t blow it all on take out and shoes, how should we direct those dollars?

Practically speaking, how you answer this question will likely be a very personal thing. As with all things in personal financial planning, the answer will always depend on your own unique set of circumstances and priorities. However, there are a few “rules of thumb“ worth consideration.

Think before you act.

I am always amazed that people will eagerly accelerate or double up a mortgage payment while carrying balances on a credit card.  Being quick to pay down debt that is costing you 3% does not make sense if it means ignoring debt that is costing you 19% or more. I think the problem is that we just don’t stop to think before we act. The marketing material we receive from our lender often encourages us to pay off our mortgages faster, convincing us it’s easy and convenient and will save us thousands. However, will that really be accomplished if you end up having to ultimately refinance your home to tackle higher interest debt down the road?

Don’t let advertising influence common sense. When I’ve done this side by side interest rate comparison with clients, they immediately have an “ah ha moment” (thanks, Oprah) and realize they may have acted in good faith but did not exercise good judgement.

This same interest rate comparison can be used to decide if saving or tackling debt is appropriate for you.

Let the rate be your guide.

Even if you carry no balance on a credit card, I would still argue that using disposable income to accelerate your mortgage repayment is not the wisest financial decision. If you can reasonably expect to earn more than you pay, whatever is left over after you have met your bi-weekly obligation should be directed to some sort of investment. Whether that means RRSP or TFSA or something else will really depend upon your circumstances.

The Financial Post released fifteen year historic mutual fund returns in February of this year. Despite the roller coaster of highs and lows that define mutual fund performance, those who invested in Canadian equities and stayed invested enjoyed a “modest yet respectable” average return of 7.2%. Let’s face it. The last 15 years have been pretty wild from an investment point of view. After 2008, most investors were just happy to protect their savings and viewed any growth at all as gravy! Obviously, there are few guarantees when talking returns, but if you have 10 or more years to invest and only have mortgage or low interest debt to worry about, allocating some dollars to a savings plan simply makes sense.

Keep timelines top of mind.

If retirement is within your grasp (i.e.; 5 year or less), everything I have just written may not apply. For example, if investing your disposable income is not likely to have much of an impact on your retirement income, then paying down debt may be a better priority. Furthermore, if investing increases your taxable income such that you lose out on things like the Guaranteed Income Supplement or prescription drug coverage, focusing on debt should definitely be the priority. In these situations, you are going to be living on a lower income when you stop working, so the less bills you have to pay the better. Seeking professional advice from a financial advisor will help you make that call.

As with finding any kind of balance, you first have to define where you are, decide what you want and act with purpose to achieve that goal.

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