Pay off the mortgage, or top up the RRSP? THERESA EBDEN From Monday's Globe and Mail As a wedding photographer, Danielle Vuong sees many couples start their lives together. But when she zooms in on her own household's financial outlook, the picture is a little unclear. Happily married for more than a year, Danielle, 26, and her husband Vu, 29, now own a bungalow in Toronto, close to the subway and parks. And like many Canadian first-time homeowners, the Vuongs borrowed from their RRSPs for the down payment. In fact, they each borrowed the personal maximum of $20,000 allowed under the federal government's Home Buyers Plan, which means they have an interest-free loan for up to 17 years. On the not-so-bright side: the Vuongs have no registered retirement savings left. Now they're faced with a dilemma -- pay off the zero-interest RRSP loan as soon as they can, or use their spare cash to chip away at their $265,000 mortgage. "I don't like to have debt. A mortgage I can see as an investment, that doesn't bother me as much," Danielle said. "But is it better to put money into our mortgage first or our RRSPs?" The Vuongs are off to a great start, even if they do face some tough questions, said Bruce Armstrong, director of investment-savings programs at Scotiabank. "They're in pretty good shape for what they want to do. They certainly have their plans laid out," Mr. Armstrong said. The answer to their big question, he said, is to focus on several goals at once. "If they pay down the mortgage quickly to the exclusion of the RRSP savings, they have no feeling that they are getting anywhere. Paying down the debt is not psychologically as satisfying as seeing your RRSPs build," he said. "I would say as a rule of thumb, try to do a little bit of everything. That way you'll see progress on all fronts." Yet the couple's uneasy relationship with debt means they may be more comfortable tackling that first, pointed out Patricia Lovett-Reid, senior vice-president at TD Waterhouse Group Inc., and a certified financial planner. "A planner can coach, counsel, give the statistics, but they can't negate the emotional side of it," she said. "If having no debt is the driver for this couple, then that's what they should do." Even so, Ms. Lovett-Reid recommends the Vuongs reduce their amortization period to get the mortgage paid off faster, contribute to their RRSPs and take any extra money and put it on the mortgage. The Vuongs are ahead of many couples -- they have no consumer debt, and they're already paying their mortgage biweekly to get rid of it faster. But how do they work towards all their goals, when there is only a limited amount of funds to do it all? Once the $1,700 monthly mortgage bill and other costs are paid, Danielle figures they have about $700 left over, though she admits "We have never added things up." They spend their money on vacations, lindy hop dancing, and repairs and renovations on the house such as the chimney, a grounded electrical system, and air conditioning. They own their car outright, and earn a combined $120,000 annual salary, of which Danielle brings in one-quarter but has multiple tax write-offs for her business, Rabbat Photography. The Vuongs should consider developing a financial plan that factors in monthly payments of about $500, said Tom Zaks, an investment adviser at RBC Dominion Securities Inc. That money should build back their RRSPs, and build an emergency fund of about three months gross salary, he added. The Vuongs are on solid ground, "both with their savings and their dealing with debt: they don't have credit cards, they just have the mortgage," he said. "A lot of young couples get strung out on debt and can't dig themselves out," Mr. Zaks said. But you can always be safer, he said, with an emergency fund. "Say $150 a month goes to a separate account, which is kind of like an emergency fund -- if they need it, they use it. They can either take a trip with it or put it into the RRSP. But there's still life to be lived today," Mr. Zaks said. The couple should aim to save at least 10 per cent of their gross salary, Mr. Armstrong added. This goal may well be possible, because the pair don't have extravagant spending habits, he added. "I hate shopping, isn't he lucky?" Danielle laughs. "He married a woman who hates shopping. We don't spend money we don't have in general, except for the mortgage." Yet even with their fairly conservative financial profile, the Vuongs do have a quirky trait when it comes to money. "He paid for our honeymoon with on-line poker winnings," Danielle explains. "But he hasn't played in about a year. We thought it might be best if he played more, because he has a good track record." Mr. Zaks in particular has some strong words of advice on this front. "It's something they shouldn't rely on. What if he gets addicted to it? What if he starts to lose money, what if he takes money out from the mortgage to pay for it?" he said. "You can end up with a chip and a chair -- one chip left and the chair you're sitting on. That's not a good idea." The Vuongs say the gambling money was just a bit of fun, and they're keen to achieve financial freedom the old-fashioned way. But once they save their money, Danielle wonders, where should they invest? Before they bought their house, Vu's RRSP consisted mainly of domestic and international equity mutual funds, while Danielle's also held shares in Canadian blue chip stocks, which were given to her in the past. "We talk about it together and we decide together what to do," she said of their investments. Even so, they're both left wondering what direction to go next when it comes to investing their money again. While the couple is still young, both Mr. Armstrong and Mr. Zaks believe they should focus more on equity mutual funds for their RRSPs, and leave the fixed-income for later on. Once they have saved past $50,000, they should seek an investment professional's guidance on buying individual stocks for the potential of better returns and fees, Mr. Armstrong added. Ms. Lovett-Reid takes a different tack, recommending 65 per cent equities, 35 per cent fixed-income to hedge if the stock market goes down. Regardless of what asset allocation mix is chosen, Mr. Zaks said not all mutual funds are created equal, and the Vuongs should avoid front- or back-end fees, or any kind of penalty to sell. Because of the gap between their incomes, the Vuongs should consider a spousal RRSP for Danielle in the years to come, the planners advise. Down the road, the Vuongs want children, but they're not sure when. Danielle, who is self-employed, may find she's working fewer weddings while she's pregnant and later at home with the new baby, Mr. Armstrong said. "If they have children, if she's going to leave the work force, that's another reason to have a spousal RRSP," Mr. Armstrong said. "You're trying to ensure that when you get to retirement, you've shifted some of the income in retirement to a lower tax rate. You're splitting the income as best you can." Another plan the Vuongs are considering in order to resuscitate their RRSPs is to become landlords. They currently have the money to finish their basement, Danielle said. "Once we start renting it out we can use that money to build up our RRSPs," she said. "I think we could get at least $1,000 a month." Ms. Lovett-Reid said this plan can work, but only with the right approach. "They should understand the bylaws, and see if they can do it," she said. "It's not as simple as people think, and you really can't romanticize the concept. You have to go into it with a business mentality." Mr. Zaks likes the Vuongs' plan. However, he added, there are some things to consider that will warrant a consultation with a tax expert. "A portion of the house is going to become taxable as capital gains if they sell," he said. Also there is the problem of tenant selection, he added. "It's nice to have somebody come down and they're paying the mortgage off for you, but we've heard horrible stories about bad tenants. Tenants have a lot of rights. It's difficult to get rid of bad tenants, especially in wintertime. A lot of people treat this as a hobby when they should treat it as an extra income."