With today’s high interest rates, you may be wondering whether you should pay off your mortgage, build your savings, or invest it for future growth. All three are responsible options worth considering. The best choice, however, depends on your personal goals and current financial situation. Today, I’ll outline some of the key benefits and drawbacks of each, so you can decide which is best for you! Paying off your mortgage quicker Tinnakorn jorruang/Shutterstock Paying off your mortgage quicker can reduce the overall interest you pay on your home, helping you save money in the long run. After the mortgage is paid off, it frees up your monthly cash flow, allowing you to divert funds that would otherwise be used on interest to other things like investments and retirement savings. Why you should do it The key benefits of paying off your mortgage quicker include: Freeing up monthly cash flow Saving money in long-term interest payments Reducing the risk of losing your home since you own it outright In today’s uncertain economy, paying off your house early can give you peace of mind and eliminates your monthly mortgage payment. If you’re currently stuck in a mortgage with a high interest rate, paying it off as quickly as possible could be very beneficial. Potential drawbacks There are a few drawbacks to paying off your home early, though. It ties your money up in your home equity, which is less liquid than other investments. Secondly, paying off your mortgage quicker may not be the smartest move if you already have a lower interest mortgage. For example, if your current mortgage rate is lower than your average rate of return from investments, you may be better off putting investing the extra money in your RRSP and TFSA accounts. Growing your savings Vergani Fotografia/Shutterstock Everybody should have an emergency savings fund. The Financial Consumer Agency of Canada recommends that consumers save between three and six months’ worth of spending and living expenses. This will protect you and your family during an unexpected job loss, illness, or worse. What if you already have an emergency savings fund, though? Should you continue to grow your savings, or is it better to pay off your mortgage? This depends on your personal and financial goals and your current situation. Why you should do it Today, many banks offer special high interest savings accounts (HISAs) that offer far more interest on your savings than traditional savings accounts. In some cases, a HISA could offer as much as a 4% yield per year or more. If you get a good savings rate that’s more beneficial than paying off your mortgage quicker, then it’s worth considering. You also have easy access to your funds, in case you ever need it. Potential drawbacks A drawback is that HISA accounts typically impose limits on how much you can keep in the account, which can limit its overall growth. Even with interest rates being quite high right now, the returns still might not keep up with inflation. An easy calculation to determine whether you should save or pay down your mortgage is to compare the savings interest rate to your mortgage interest rate. If the mortgage rate is higher, then it’s probably better to pay that down. For example, if your mortgage rate is 6% but you only receive 3% in a savings account, pay down your mortgage. Another option is putting it towards long-term investments if you think you can earn a higher return, but this depends on your experience and risk tolerance. You might also like: How to maximize your government benefits in Canada The best free and cheap tools to help you stay in control of your finances Investing for the future Yellow duck/Shutterstock Investing has made many people wealthy. However, it’s also a double-edged sword that can result in both short-term and long-term losses, as current economic conditions largely determine your portfolio’s value. Why you should do it Often, investing can yield higher returns than the interest earned with a savings account, especially when the market is good. For example, the iShares Core Equity ETF Portfolio (XEQT) has shown steady growth since its launch in 2019. If you invested $10,000 in August 2019, your investment would have grown to $14,210 by July 4, 2023, a 42.11% return. Potential drawbacks The market isn’t always kind, though. As we’ve all seen, penny stocks, cryptocurrency, and other high-risk investments can fall quickly, resulting in heavy losses for investors. Even good stocks and ETFs with excellent track records will have bad years, which can cause your portfolio to lose value and incur stress. You’ll need to remain patient and wait for the market to improve during these times, which requires knowledge about investing. Table Summary of Options Paying off your mortgage quicker Saving Investing Pros Save money on interest in the long run and free up cash flow. High interest savings accounts may offer a more reliable return on your investment than investing. The money is easily accessed whenever you need it. Investing may result in higher returns than saving over the long run. Cons You’ll tie up funds in your home that may be better used for other investments, especially if you have a lower interest mortgage. Traditional savings accounts typically offer low-interest rates. Might lose money in real terms if the savings interest rate is lower than the mortgage interest rate or rate of inflation. The market is often fickle and changes with the economy. You can lose money as easily as you make it. How changing interest rates affect the economy On June 7, 2023, the Bank of Canada increased its overnight interest rates by 25 points to 4.75%, marking the second rate increase of the year. The overnight interest rate is what banks have to pay back to the Bank of Canada whenever they borrow funds from it. When the central bank increases its interest rates, the banks increase interest rates for consumers and businesses. The downstream effect is that interest rates for most financial products increase, including: Mortgages Credit card APR Small business loans Personal loans The central bank changes interest rates to help guide the economy. When inflation rates increase, the central bank typically increases interest rates to decrease spending, encourage saving, and prevent the economy from “overheating.” Prior to the pandemic, the overnight interest rate was 1.75%. The central bank decreased interest rates to 0.25% to encourage more spending during the pandemic. When the economy fully reopened, it began to overheat, which resulted in the central bank steadily increasing interest rates since March 2022. What’s the best way to utilize your money with high interest rates? Ultimately, the most effective way to spend your money depends on your current goals and financial situation. I recommend putting your money toward wherever you stand to earn the most or save the most. If you have a lower mortgage rate, saving with a high interest savings account or investing your money may be better. Alternatively, if you have a high mortgage rate, you may be able to save far more in the long run by paying off your mortgage early. There’s also something to be said about being debt free, which can be a huge relief to many people. If you think you’ll get a huge psychological boost from paying off your mortgage quickly, then that might be the best option for you. Written for Daily Hive by Christopher Liew, a CFA Charterholder, former financial advisor, and the creator of Wealth Awesome. Source link Post Views: 249 Post navigation How To Trade Penny Stocks Best Investing Apps in Canada [2023]