WWYD?? Where should I park my $$$? finance question

[Self-employed-swami]

Hello all,

Here is my quandary:

House Value: ~$380,000
Mortgage $66,500 remaining at 2.99% (payments are maxed up to double payments a week, and there is just under 9 years remaining, if I don't make any lump sum payments).  I can make $17,800 a year (November 2012 to November 2013) in additional lump sum payments (haven't made any this year).

I have a mutual fund worth ~$67,000 earning shitty returns (3% average over the last 2 years) at the moment.  I borrowed $65,000 to buy that investment from my HELOC, and I'm paying 3.5% interest to furnish that debt.  However, this debt is tax deductible in it's entirety, and my marginal tax rate is 32%, average tax is 24%

I have an RRSP account with $33,000 in it, earning similar 3% returns on average, over the last 2 years. (I put ~$5500/year in historically).

Say I have $40,000 cash, where would you put it?  I only have about $15,000 room in my RRSP, and I can only make a max lump sum payment of $17,800 per year on the mortgage.

I am about to take 6 months off work next year to recover from hand surgery (boo) so I may need access to some of that, but I can take it out of my HELOC if required. The HELOC is tied to the mortgage, so as I pay down the mortgage, the amount I can borrow from the HELOC increases (I have $45,000 available credit in the HELOC, and I don't imagine I'll need anywhere near that for the 6 months off).

I own a small consulting business which grossed ~$170,000 last year. After taxes and business expenses, I personally netted about $120,000.  This next year is going to be half of that, but I will still easily make enough to cover my normal expenses and prepayments.

Where would you put it?  How would you split it up? 

I'm not ready to give up on the investments, and sell them to pay off what I borrowed.

Despite the fact that the interest rate is lower on the mortgage, I'm inclined to put my $$$ there, since I can re-borrow from the HELOC if needed.  If I pay down some of the borrowed $$$, and then need to take it back out again, it won't be tax deductible anymore either.

I'm inclined to pay the $17,800 on the mortgage, and then either hold onto the cash in a higher interest savings account, or pay a bit off on the HELOC.

What would you do?  Thanks for the time to read this, and give me opinions!

[Self-employed-swami]

I should also mention that I'm married (no kids) and my husband easily earns enough to cover our monthly expenses too.

[Jamesqf]

I would look at your particular mutual fund, and try to figure out why it is producing such low returns.  I keep my semi-emergency money in TRP's Spectrum Income fund, which is returning 11% this year, 7.7% for 3 years.  (This is actually the worst performer of any of my funds for the 1 & 3 year periods, but of course the others took bigger hits in the '08 crash.)

[Self-employed-swami]

I would look at your particular mutual fund, and try to figure out why it is producing such low returns.  I keep my semi-emergency money in TRP's Spectrum Income fund, which is returning 11% this year, 7.7% for 3 years.  (This is actually the worst performer of any of my funds for the 1 & 3 year periods, but of course the others took bigger hits in the '08 crash.)

I should have mentioned that this fund pays dividends as well (has to 'earn income' for me to be able to write off the interest as an expense towards earnings).  I wasn't including that in the returns, but I should have, I guess (I took the dividends out, and payed down mortgage principal with them).

I have an adviser handling my investments, as I am away from home, and reliable communications, for at least half the year.  And due to the fact that this is leveraged investing, we have selected more conservative funds (there are actually 2, whereas my RRSP is more properly diversified in higher and medium risk).

You didn't really answer my question about what you would do with my extra cash though...

[Jamesqf]

You didn't really answer my question about what you would do with my extra cash though...

Thought I did, by implication at least.  If it was money that I thought I might need in the medium term - anywhere from a few months to a few years - I'd put it in something like that TRP fund: "RPSIX - Spectrum Income The fund seeks a high level of current income with moderate share price fluctuation."  You don't seem to have any high-interest loans that need repaying.  Your mortgage seems to be low enough interest rate that with tax deductions (not sure how this works in Canada, though) it's basically free money: that is, just about any decent mutual fund would return more than the interest you're paying.  (Indeed, I wouldn't even be making the double payments, let alone dumping in additional lump sums.)  It also appears that making just minimum payments wouldn't leave you in a bind when your income takes a hit. 

[Self-employed-swami]

Ah.  Sometimes I need to hit over the head with something to get the point... ;)

In Canada, mortgage interest isn't tax deductible, but money borrowed for the purposes of earning an income is.  So, if you were to take out a mortgage/loan on a rental property, that would be deducible, as is interest on a loan used to purchase something that yields dividends.

I know that from a pure mathematical standpoint, paying down my mortgage isn't the best decision, but for whatever reason, I find that I am more motivated to save money, if I can see my mortgage or loan balance decreasing rapidly, since that is a guaranteed money saved, whereas investment returns aren't always a sure thing.

What the most idea thing to do, would be for me to pay down as much mortgage as possible, then re-borrow the money from the HELOC, and hopefully earn more interest than I am paying on the loan.  However, the $65,000 borrowed is as much as DH is comfortable having leveraged.

I'm due for a meeting with my investment advisor, so I'll be discussing this with him as well, but I was just wondering what others would do, in the same position.  I don't always make money decisions based on just the numbers, but from an emotional standpoint as well (hence the double up mortgage payments, instead of investing that extra savings).

Thank you for taking the time to answer :)