Ask a wealthy Canadian when the best time to invest is and they’ll likely answer, “When you have the cash.” However, that is easier said than done for most. We want to be invested but considering the government takes around half our paycheque in taxes, the high cost of a mortgage, and the fact that income growth doesn’t seem to be keeping pace with the increasing expense of life, where are we supposed to find that investable cash?
Chances are, if you own your home, you have investable funds
If you’ve owned your home for any length of time, chances are that with rising real estate values and a reducing mortgage balance, you have some equity in your home that you could put to work. What is common in Canada (and elsewhere) is for people to tap into their home equity through a home equity line of credit (HELOC) which frees up sometimes significant cash with which they can do whatever they want – mostly purchase non-tax-deductible ‘consumption’ items like cars, vacations, renovations and dinners out.
What is less common (but becoming increasingly common) is people recognizing that rather than borrow to buy depreciating assets like cars, they should be investing this equity. This creates tax deductions (lovely). It also means that if they are implementing The Smith Manoeuvre, they can pay out that non-deductible mortgage very quickly (lovelier). Lastly, they are necessarily purchasing assets that will increase their net worth (loveliest).
Prime the Pump
In conjunction with The Smith Manoeuvre, if you have access to additional borrowing power, you can get a lump sum invested right away. ‘Right away’ means that you have the longest possible time for the growth of your investment. ‘Right away’ means that you are further increasing your tax refund. ‘Right away’ means that you will be able to eliminate your non-deductible mortgage even faster.
“My home is where I live, it’s not an investment”
This mantra of, ‘my house is where I live, it’s not an investment’, is a popular one. And it is more often than not spoken by people who have an aversion to all types of debt; people who will tell you that ‘all debt is bad’. But if you ask a wealthy person the wisdom of having hundreds of thousands of dollars of equity earning you less than zero percent due to inflation, what do you think they will say? They’ll likely cringe and look at you like you’ve got three lips. It goes against everything that the wealthy believe, and if we want to be wealthy, we need to start thinking and behaving like the wealthy.
Certainly, we need to assess the suitability of pulling some equity out of the house to invest in securities or investment real estate, but with the guidance of your Smith Manoeuvre Certified Professional, you’ll be able to determine if this path to wealth creation is for you.
