Financial planning and mental illness

Q: I am 43 with no children or spouse. I have a mental illness that is chronic and has prevented me from working and saving in my past up until the past two years.

I was able to buy a home which I converted into a duplex. I live in the walkout basement apartment while I rent the upstairs which pays the mortgage and utilities. I have $187,000 on my mortgage and I am able to work now and save $1,000 a month.

I don’t know what my future holds in terms of health and work. I am wondering if I should pay down my mortgage or invest in a TFSA mutual fund? My income is not high but I’m able to save because I’m frugal and the renters pay my mortgage.

Once my home is paid off, I can live for free and collect the rental income. What should I do with my extra $1,000 a month? My furnace is two years old and my roof is new on my home. All appliances were bought two years ago. My car is paid off and five years old.

—Elizabeth

A: Sometimes, people go about financial planning the wrong way. They plan and budget for the best-case scenario and it never comes to fruition. I think you’re best to plan for the worst and then hope for the best. In that regard, Elizabeth, I feel you’re doing things right.

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Finding an extra $1,000 per month to save is the hard part. What you do with it can be the easy part. I’ll try to help make it easy for you.

I think if someone has their debt in check, that’s when they can consider investing. You have only mortgage debt, though it’s not clear how much your mortgage is relative to your home value. I’ll assume you have a comfortable amount of home equity.

You may want to consider setting up a secured line of credit that is backed by your home equity. Secured lines of credit can get some people in trouble who feel tempted to borrow and spend, but it doesn’t sound like that’s going to be a problem for you, Elizabeth. I’ll assume your mental illness isn’t likely to lead to a risk of excessive spending? I’d consider the line of credit an emergency fund, which could come in handy if your health or career are uncertain.

One of the factors I would consider when trying to decide whether to invest instead of paying down debt is your tax bracket. If you have a high income and tax rate, RRSP contributions can be better than debt repayment or TFSA contributions. Given your low income, I might opt for TFSA contributions if investing is the choice over debt repayment.

Regardless of what your mortgage rate is now, in the long run, I would expect mortgage rates to be more like 4-5% as interest rates normalize. So, I would use that as your threshold for determining whether to invest. Can you earn 4-5% on your TFSA investments and be better off? That may be a tough question for you to answer if you haven’t done much investing, Elizabeth.

Historically, a global balanced portfolio has returned over 6% for the past 20 years. But that doesn’t factor in fees.

As a small investor considering mutual funds, it wouldn’t be unreasonable to expect 2% or more in fees. An expected return of 6% less 2% in fees could put you on par with your expected mortgage rate. And I’d expect a balanced portfolio to return less than 6% in the future.

So, I’d say in your case, Elizabeth, you would need to have a high risk tolerance and exposure to stocks to consider TFSA contributions instead of debt repayment. I’d also strive for low fee investment options to help increase your potential after-fee return. This could include low-cost active mutual funds, ultra-low-cost index funds, or even a robo-adviser.

If you were a conservative investor, Elizabeth, I don’t think it would be unreasonable to allocate your monthly savings towards mortgage repayment instead of investing. Paying down debt and investing in your TFSA both increase your net worth. It’s just a matter of figuring out which will build it quicker and with the most peace of mind for you.

More important than what to do with your money today is what to do with your money tomorrow. If your chronic mental illness is such that you may have difficulty managing your finances in the future, or even unexpectedly, I’d be even that much more inclined to have a plan in place.

All adult Canadians should have powers of attorney or personal directives to appoint someone to make health care decisions or manage their finances if they are unable to do so themselves. But you may also want to consider a system of checks and balances, whether with your named power of attorney or with some sort of professional.

In summary, Elizabeth, it sounds like you’re doing an awesome job of managing your modest income. And you’ve accomplished a lot in the past two years. TFSA contributions are likely better than RRSP contributions in your case, though only if you have a moderate to high risk tolerance. If not, consider extra payments against your mortgage with your extra monthly cash flow. And be sure your estate planning, including powers of attorney or personal directives, is up-to-date.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.