Building Wealth Across the Decades: Financial Planning Priorities for Your Thirties

Personal financial planning is important at every stage of life, but it may be more critical in your 30s. At this stage, you might have a growing family, a house, a mortgage, and various other financial obligations and responsibilities. A big question I hear from people in their thirties is: “should I invest in my Tax-Free Savings Account (TFSA) or should I pay down my mortgage?”

Investing in your TFSA

By way of background, a TFSA is a tax-sheltered account that allows you to save and invest money without paying taxes on any investment gains. It is worth noting that unlike a Registered Retirement Savings Plan (RRSP), your TFSA contributions are not tax deductible. In 2023, the annual contribution limit for a TFSA is $6,500 (previously $6,000), and any unused contribution room can be carried forward to future years.

Investing in your TFSA should be a great way to grow your savings and earn tax-free investment income. Once you have contributed funds to your TFSA it is important to effectively invest these funds. By investing in a diversified portfolio of stocks, bonds, and other securities, you may earn a higher rate of return. This tax-free rate of return can be compared to the interest saved from paying down your mortgage. Historically the spread has been significant. This was especially true if you have a mid to long-term horizon for your investments. The benefit of this strategy must be looked at within the new interest rate environment.

Paying Down Your Mortgage

Paying down your mortgage is also a smart financial move in your 30s and beyond. By making extra payments towards your mortgage principal, you can reduce the amount of interest you’ll pay over the life of your mortgage and potentially pay off your mortgage sooner.

Consider this: if you have high-interest debt or other financial obligations, it may be wise to pay down your debt before investing in your TFSA. On the other hand, if you have a low-interest mortgage and a long-time horizon for your investments, investing in your TFSA may offer higher returns.

It’s important to consider your risk tolerance, investment objectives, and overall financial plan when making this decision. It is always beneficial to speak with a financial advisor who can provide personalized advice based on your unique situation. It should be pointed out that the same analysis can be undertaken when it comes to a decision between your mortgage and your RRSP.

In conclusion, both investing in your TFSA and paying down your mortgage can be smart financial moves for Canadians in their 30s. By weighing the pros and cons of each option and considering your personal financial situation, your risk tolerance level, the current rate of your mortgage, and the returns you can expect from your investments, you can make an informed decision that aligns with your financial goals.

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