Will you thrive in 2025, or be another year older and deeper in debt?
The new year brings an opportunity to decide and take action. After a banner 2024 for equities and fixed income, here are four potential resolutions for 2025 that will help clear a path to prosperity.
Keep chipping away at debt
Most Canadian investors saving for retirement also hold debt. According to the latest Statistics Canada tally, Canadian households owe $1.73 for every dollar they take in.
Debt levels have been dropping since the pandemic but have rocketed since the 1990s when debt-to-income was 90 cents to the dollar.
Despite several interest rate cuts by the Bank of Canada, the payback rate on most debt ranges from 4.5 per cent for a variable rate mortgage to nearly 30 per cent for some credit cards.
That debt is guaranteed to compound over time at its posted rate. No investment available on the public market can guarantee an equal return.
In short, every dollar compounding against you in debt is one less dollar compounding for you in investments.
The best investment for 2025 might be paying down debt, starting with the highest rates.
Mortgages and other secured debt have the lowest rates, which brings an opportunity for homeowners to consolidate their high-interest debt into one low-interest loan.
Secure your portfolio as you age
If your debt is under control, you can turn the tables on the bank and generate guaranteed returns by becoming a lender.
Annual yields on fixed income, such as guaranteed investment certificates (GICs), remain at about four per cent but growing a significant portion of your portfolio in fixed income regardless of yield also has the ability to stabilize returns as you age and need a reliable cash stream in retirement.
A good strategy to get the most from a fixed income portfolio is to stagger maturities over several time periods to get the best going rates.
How much fixed income you hold in your portfolio depends on your age, return goals and whether you can stomach the volatility of potentially lucrative equity markets.
Keep more tax dollars invested
Experts say a good investment tax strategy can boost returns by 25 per cent over the lifetime of an investor.
For most Canadians that requires utilizing their registered retirement savings plans (RRSPs), tax free savings accounts (TFSAs), and any other tax perks available.
On Jan. 1, Canadians will be permitted to contribute an additional $7,000 to their TFSAs. As it stands, the current limit for those who were 18 years or older when the TFSA was launched in 2009 is $102,000, but it can vary among individuals depending on withdrawals made over the years.
Gains on investments in a TFSA are never taxed when funds are withdrawn, which make them a compliment to RRSP savings, which are fully taxed.
Retirees can keep their tax bills low by withdrawing RRSP savings at the lowest marginal rate and tapping into their TFSA for any other cash they need.
Unlike a TFSA, RRSP contributions are income tax deductible. That means contributions made before the March 3 deadline can generate a hefty refund in the spring, which can be contributed to a TFSA.
Keep investment fees invested
In most cases a good tax strategy, wrapped in a good investment strategy, requires expert advice. Expert advice costs money. Like taxes, every dollar spent on investment fees is one less dollar compounding in investments.
Resolve to review all the investment fees you pay and determine if you are getting enough bang for your bucks.
Several credible studies show long-term investment returns are greater with professionally managed portfolios, even after fees. But fees vary widely and are generally lowest for those with plenty to invest.
Most Canadians invest for retirement through mutual funds, which can charge annual fees above 2.5 per cent.
That means the fund would need to generate a return above 7.5 per cent to give investors a five per cent return.
Many mutual funds outperform the broader market after fees, but most don’t. Consider less expensive alternatives such as basic market-weighted exchange traded funds (ETFs) with much smaller fees.
If your portfolio has been growing for a few years, consider trading companies directly on the stock market through an advisor or broker - and keep that fee invested.