Dale Jackson

Personal Finance Columnist, Payback Time

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We’re swimming in cash.

A new report from CIBC says Canadian households are sitting on a record $90 billion. As economic activity fell during the pandemic, and government benefits started rolling out, savings increased. The report found the savings rate for households was likely about 13 per cent in the third quarter, compared to about 3.6 per cent before the pandemic.

CIBC concludes that we’re just not in the mood to spend right now. Accumulating cash could make sense if you might need it in the near future or for peace-of-mind, but cash generates little to no interest and even modest inflation will nibble away at it. Depending on your individual situation, that cash could be put to a much better use. Here are four ways to get it working for you:   

1. Pay down debt

Massive government spending to fight the economic effects of COVID-19 has brought borrowing rates to record lows, but that hasn’t lowered interest rates on credit card balances. Rates from the major credit card companies remain in the high teens and up to 29 per cent on cards sponsored by some major retail chains.

Paying down debt is just like getting a guaranteed, tax-free, return equal to the rate of interest. The best use of your cash could be paying off lines of credit or student loans, which could be near 10 per cent.

Even with mortgage rates in the two-per-cent range, increasing payments means more cash paying down a home’s principal and paying your house off early. 

2. Top up your investment portfolio

If you have a diversified portfolio, you should notice that some sectors have been hit harder than others during the pandemic. It could be a good time to rebalance it by adding to good investments that have fallen on hard times. 

If your portfolio is not diversified, it’s a good opportunity to get exposure to under-represented sectors and geographic regions.

If you are content with your investment mix, dark days like these are good for taking risks in stocks and funds with long-term growth potential. A qualified investment advisor can help you decide.   

3. Maximize tax savings

Many Canadians are experiencing a drastic reduction in income as a result of the pandemic, while others have maintained or even grown their income.

If your income will be the same or higher in 2020, you can lower your tax bill by contributing available cash to a registered retirement savings plan. Those RRSP contributions will not be taxed in the year they are claimed and can be invested, and grow tax-free, until the money is withdrawn in retirement; ideally when you are in a lower marginal tax rate.

You can keep your contribution in cash in an RRSP and still claim the deduction.  

If your income for 2020 is lower, and you still want to invest, contribute your available cash to a tax-free savings account. TFSA contributions cannot be withdrawn from taxable income, but the amount you invest, and gains that investment generates, will never be taxed. 

4. Build a U.S. dollar trading portfolio

Less than three per cent of global public equities are traded in Canadian dollars. That means if you want a diversified portfolio you have to invest outside of Canada, where the U.S. dollar is the standard currency. 

Canadian dollar currency hedges can be costly in mutual and exchange-traded funds. To see how costly they are, compare management expense ratios (MERs) on funds that come in both hedged and unhedged versions.

The U.S. and Canadian dollar exchange rate ebbs and flows but with the Canadian dollar creeping up to the high 70 cent range it could be a good time to trade some of those loonies for greenbacks, and bypass expensive currency hedges by trading directly in U.S. dollars.

U.S. dollar trading accounts are permitted in RRSPs and TFSAs. In addition to saving on hedging fees, it gives investors – especially those who want to travel or live in the U.S. when they retire – a readily available pool of U.S. dollars. 

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.