What to do with Xmas Bonus?

by Mike Holman

I get a year end bonus which normally adds about 10% to my annual salary. It’s a bit early to be thinking about what to do with it but I’d thought I’d write a post since I can’t decide. Basically the choices are to put it into my rrsp or my mortgage or split it up and do both.

Up to now this money has always gone in to the mortgage and in some cases paid for vacation trips.

This year I’d like to only use it for mortgage and/or rrsp and nothing else. Since I feel my mortgage is excessive and I worry about it a lot more than the size of my rrsp, it seems like a no brainer to put the money into the mortgage. However at the same time if I put it into the mortgage then that means I’m paying a lot of tax (43.38% to be exact) on it, which I can defer if I put it into the rrsp.

One of the strategies I was thinking about was to see how the markets perform this year and perhaps decide based on that. For example if my rrsp (I’ll use my portfolio as the index) does better than say 5% then I’ll put all the money into the mortgage – I’m thinking that considering how well the markets have done, if they continue to do well then maybe they should be avoided. Bernstein says to buy when things are looking their worst – not at their best. On the other hand if the rrsp goes down at least 5% this year then I’ll put the whole bonus into the rrsp. If the return is between -5% and +5% then I’ll figure out some ratio and split the bonus between the mortgage and rrsp.

A couple of other things – even without the bonus we make quite a bit of extra mortgage payments. We also contribute a fair bit to the rrsp on a normal basis . Regardless of the my choice, neither the rrsp or mortgage will be ignored!

Any opinions?

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