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My household earns more money than we spend. What should we do with the excess cashflow?

Should we put the cash flow to our mortgage or our investments?

The above is a common question that we deal with. A big benefit of paying down your mortgage is the guaranteed return it brings with the interest savings. If you have a variable rate mortgage today you could be paying about 6 - 7% interest and this is a good return on the money.

The amount of registered contribution (TFSA, RRSP) room that you have is also important. If you have the space your investments can grow tax free (TFSA) or tax deferred for retirement (RRSP) in these investing accounts. This is the preferred way to do it although not always possible.

There is more of an argument to pay down the mortgage if you don't have any registered space left. This is because any yearly interest, dividends and future gains are all going to be taxable personally.

Say you are paying a 6% mortgage and you pay this down it's basically a guaranteed 6% return. However, if you earn 8% on your investments and have to pay 40% tax it reduces the effective investment return to 4.8%. This example assumes you are earning interest (GIC, HIETF, etc.) and if you have other forms of income the after tax rate would be lower and probably deferred to the future. However, it clearly shows that the after tax rate is what to focus on.

If your house is completely paid off then it needs a discussion about where to allocate your future cash flow. Investing is often the best way forward here although many people also like to invest in real estate.

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