Dale Jackson

Personal Finance Columnist, Payback Time

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The most common benchmark for measuring wealth is net worth; assets (investments, pension, home equity or anything else that stores value) minus liabilities (mortgages and any other debt).

When it comes to the total value of our investments there’s not much we can do when markets tank as they did in 2022, but there are three sure-fire ways to boost our net worth without taking on risk.

PAY DOWN DEBT

A new CIBC poll on financial priorities shows only 18 per cent of respondents said repaying debt was their number one goal for the new year, while 17 per cent said just keeping up with bills was their top priority.

The results come after a year that saw borrowing rates climb by around four per cent. 

What might seem like a curse, however, brings opportunity.

Every dollar invested toward paying down debt is a dollar that generates a risk-free, tax-free, return equal to the interest rate on that debt. In other words, paying down a mortgage at six per cent, student or consumer debt at 12 per cent, or credit card debt at 20 per cent, is equal to a guaranteed return of the interest rate being charged.  

Reducing liabilities can increase net worth significantly even if asset growth is stagnant.   

PORTFOLIO TAX STRATEGY

According to the same CIBC poll, 14 per cent of respondents said growing their investments was their main financial goal for the year.

How much your investments grow in dollars obviously depends on how much you have invested. Keeping your tax liabilities low leaves you with more to invest.

A good tax strategy can divert more hard-earned dollars from Ottawa to your investment portfolio, which can grow over time.

The purest example involves contributing to a registered retirement savings plan (RRSP) before the March 1 deadline, deducting it from your taxable income for 2022, and contributing the refund back into your RRSP when it comes in the spring. 

That second contribution and any other cash you can muster up can also be deducted from your 2023 taxable income next year, which will generate refunds in following years as the investments inside your RRSP compound over time.

It’s important to know RRSP contributions and the gains they generate are fully taxed when withdrawn; ideally at a low marginal rate in retirement.

In contrast, contributions to a tax-free savings account (TFSA) can not be deducted from taxable income, but contributions and gains are not taxed when withdrawn. Avoiding tax in a TFSA leaves more cash to be invested.

Tax savings can also be achieved outside registered accounts like RRSPs and TFSAs. Only half of capital gains are taxed when equity investments are sold in non-registered accounts and tax credits can be applied on eligible dividend income.

Developing a good investment tax strategy can be difficult, so it might be wise to speak with a qualified advisor.  

TRIM INVESTMENT FEES

While you’re speaking with an advisor, consider a conversation about fees. The investment fee structure in Canada is a twisted labyrinth despite feeble attempts by regulators to make them more transparent. 

The best way to get a fix on what you pay is to add up all the fees each year in dollars and break them down into a percentage of total assets invested.

Most Canadians invest for retirement through mutual funds, which could have annual fees as high as three per cent when you include the advisor’s cut.

A three per cent charge is a serious hindrance to portfolio growth. In most cases investors paid dearly to lose money in 2022.

The performance of some mutual funds far outpaces their fees but it could be worth your while to look into investing directly in the stock market or lower-fee exchange traded funds (ETFs), and let those savings compound in your portfolio.

As those assets grow, you should have more leveraged to negotiate lower fees.