Here is an email from a young reader who has put himself in a very good financial situation. Mark has $5,000 sitting around and is wondering what to do with it.
I’m in a situation that I’m sure many would envy, but I’m stuck. Through a combination of income tax returns and unintentional savings, I have about $5,000 just sitting around, and I don’t know what to do with it.
Here is my situation:
- Mid 20’s, have been working for about 2 years.
- Currently renting – would like to buy property in the next 5 years.
- I am currently debt free (no mortgage, no CC debt, no car, nothing).
- My TFSA is maxed out for the year (5k in a HISA)
- With my current rate of regular paycheck contribution to RRSP through personal passive saving and a Group RRSP plan through work, I will only have about ~1-2k left in contribution room at the end of the year. (All RRSP money is invested in low MER index funds)
- There is nothing in particular that I want to spend the money on.
So I’m not sure what to do with the money. I suppose the best idea is to stash it to eventually use it for the down payment on property. But I don’t want it to just sit around in the meantime, and HISA’s are paying next to nothing at the moment.
I know you’re not an advisor, and I’m not asking for advice per say, just for some ideas on investments with a 5-year time frame.
Before we get into the details, I would like to congratulate Mark on being is a strong financial position at a young age. There are not many 25 year olds out there that can say that they are completely debt free with the problem of having too much cash.
Mark is looking for some ideas on what to do with the money. To start, lets look at his goal. In 5 years, he plans to purchase a property which means his $5,000 could go towards a portion of the down payment. With this in mind, he could either continue maxing out his RRSP (1-2k room) and put the remainder in a 5 year GIC. Even with today’s low interest rate environment, if you look hard enough, you can find rates in the mid 3% range. It’s not much after taxes, but better than current high interest rate savings accounts.
The reason why I suggest a RRSP contribution is because he can use the RRSP home buyers plan to go towards the down payment of his home. With Mark’s strong savings habits, I doubt it would take him long to repay the HBP.
Another solution would be to put the money in a 1 year GIC, then move the $5,000 (+ interest) into a GIC within a TFSA next year. That way, the GIC growth over 4 years can accumulate tax free.
I tend to steer away from investing in the market unless you can stay invested for at least 10+ years. One might predict that with today’s suppressed market prices that it’s a no brainer the markets will be higher in 5 years. However, the truth is that no one can say where the markets will be at that time. If you “need” the money in the near future, I think that it’s best to preserve capital with guaranteed instruments.
So that’s what I think, GIC’s all the way. What are your thoughts? What would you do in Mark’s situation?