Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

Digital Banking: the smarter way of saving that’s here to stay

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By Dave Schurman

Special to the Financial Independence Hub

By nature, we’re creatures of habit, but this past year has taught us that necessity clears the way for change. In a relatively short time, we’ve adjusted how we shop, work and study. The same can be said for banking. We’re looking for new ways that check all our boxes: easy, convenient, safe and smart.

What is digital banking?

Easy. It’s like having a financial institution at your fingertips.

Digital banking is fully online: it gives you the same financial products and security you would find in a traditional financial institution without need for expensive bricks and mortar, achieving cost savings that are then passed on to customers in the form of better rates and lower fees. And, the really good news in digital banking is that the “doors are always open,” so you manage your money on your time, not bankers’ time, and you do it from anywhere you want!

Who should consider digital banking?

Pretty much anyone looking for something more. We all like to get more from the services we use. More convenience. A more intuitive experience. More value. Here are the top reasons digital banking has taken off:

  • Low or no monthly fees
  • Better rates
  • Access whenever you need it
  • Easy-to-use and secure online experience
  • Ongoing innovation and updates based on customer feedback

 How do you choose the right digital banking platform?

Shop around.

First, decide which banking products you are looking for. If it is investments, what are you saving for: Retirement, an upcoming purchase or just a rainy day? Are you willing to lock your money in for a period of time to get a higher rate or do you prefer to have quick access to your money? Once you’ve figured out what you are looking for, next look into rates. How does one digital bank compare to another? Searching online is a great place to start. Once you have a shortlist of possible digital banking options, consider the following questions:

  • Is this digital banking solution backed by an established financial institution?
  • Will you have easy access to a real person if you need help or have questions?
  • What do the reviews say?
  • Will you have to pay for fees and, if so, how much?
  • What is the deposit insurance limit?

What is a HISA?

Don’t worry; it’s better than it sounds.

HISA stands for high interest savings account, and here’s what people love about digital HISA accounts: The rates are generally higher than what you get at traditional financial institutions with branches. So, for example, let’s say you find yourself in the middle of a pandemic. You’re not spending as much, so you have more money to save. A good move would be to put your money in a HISA and watch it grow faster. Saven’s HISA offers a competitive 1.55%* rate with no monthly fees, no minimum deposit and free e-transfers and direct deposits! Plus, your money is not locked in, so you can access it at any time.

What about GICs?

A smart choice to give your savings even more of a boost. If you want to lock in, then a Guaranteed Investment Certificate is another great way to save. This option is best for long-term savings at a fixed term (usually anywhere from one to five years). Saven’s GICs offer up to 2.05%**. Our super competitive rates are locked in so you see consistent growth. Continue Reading…

Money, health, and family top worries in COVID-influenced RRSP season

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By Scarlett Swain

Special to the Financial Independence Hub

As Canadians turn their attention to their investments during this COVID-influenced RRSP season, an annual online study conducted for Questrade by Leger (www.leger360.com) last month unveiled some compelling findings regarding trends and changes Canadians are likely to make when investing.

As part of our ongoing commitment to improving the financial security of Canadians, we set out to learn about what issues are currently top of mind, how they might impact investing, and what we can do to help investors on their journey to financial security. To no surprise, most respondents chose money, health, and family as their top three worries. We also saw some interesting behavioural trends to note.

Despite the pandemic, our research showed that Canadians continue to be very committed to making contributions to their retirement savings, while evidence suggests investors are placing importance on ensuring their investments go farther.

Most will contribute as much or more this year

A majority (69%) of respondents with an existing RRSP plan to contribute the same amount as last year (or more) to their RRSP this year, showing an unwavering commitment to their retirement. The number is even higher amongst those with a TFSA, with 85% planning to contribute more or the same amount to their TFSA. Half (50%) said given the impact and uncertainty during this pandemic, they are more likely to invest for the long term or for retirement, while 44% are actively seeking lower fee options this year, and 39% are investing more this year to get better returns. Continue Reading…

Master your Mortgage for Financial Freedom

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By Michael J. Wiener

Special to the Financial Independence Hub

Many people have heard of the Smith Manoeuvre, which is a way to borrow against the equity in your home to invest and take a tax deduction for the interest on the borrowed money.

It was originally popularized by the late Fraser Smith, who passed away in September 2011.  Now his son, Robinson Smith, has written the book Master Your Mortgage for Financial Freedom, which covers the Smith Manoeuvre in detail for more modern times.  Smith Jr. explains the Manoeuvre and its subtleties well, but his characterization of its benefits is misleading in places.

The Smith Manoeuvre

In Canada, you can only deduct interest payments on your taxes if you invest the borrowed money in a way that has a reasonable expectation of earning income.  Buying a house does not have the expectation of earning income, so you can’t deduct the interest portion of your mortgage payments.

However, if you have enough equity in your home that a lender is willing to let you borrow more money, you could invest this borrowed money in a non-registered account and deduct the interest on this new loan on your income taxes (as long as you follow CRA’s rules carefully).  A common mistake would be to spend some of the invested money or spend some of the borrowed money.  If you do this, then some of the money you borrowed is no longer borrowed for the purpose of investing to earn income.  So, you would lose some of your tax deduction.

With each mortgage payment, you pay down some of the principal of your mortgage, and assuming the lender was happy with your original mortgage size, you can re-borrow the equity you just paid down for the purpose of investing and deducting any interest on this new loan.  Some lenders offer mortgage products with two parts: the first is a standard mortgage, and the second is a line of credit (LOC) whose limit automatically adjusts so that the amount you still owe on your standard mortgage plus the LOC limit stays constant.  So, after each standard mortgage payment, your LOC limit goes up by the amount of mortgage principal you just paid, and you can re-borrow this amount to invest and deduct LOC interest on your taxes.  This is the Smith Manoeuvre.

Smith describes a number of ways of paying off your mortgage principal faster (that he calls “accelerators”) so that you can borrow against the new principal sooner and boost your tax deductions.

Compared to a Standard Mortgage Plan

Ordinarily, mortgagors pay off their mortgages slowly over many years.  Their risk of losing their home because of financial problems is highest initially when they owe the most.  This risk declines as the mortgage balance declines, and inflation reduces the effective debt size even further.

With the Smith Manoeuvre, the total amount you owe remains constant (declining mortgage balance plus LOC balance) or may even increase as your house value increases and your lender is willing to lend you more money against your house.  So, your risk level as a function of how much you owe doesn’t decline in the same way as it does with the standard mortgage plan.  You could argue that your financial risk does decline somewhat because you’ve got your invested savings to fall back on in hard times, but your risk certainly doesn’t decline as fast as it does with the standard plan.

Leveraged Investing

Smith likes to say that the Smith Manoeuvre isn’t a leveraged investment plan.  He justifies this assertion by saying that you’ve already borrowed to buy your home, and you’re now slowly converting this mortgage that isn’t tax deductible to an LOC debt that is tax deductible. Continue Reading…

6 things you can do to stay out of Debt

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By Sia Hasan

Special to the Financial Independence Hub

No one wants to be in debt, but the good news is that you don’t have to be if you make smart financial decisions. Here are six ways you can change your habits and stay out of debt.

Create a monthly budget

Creating a monthly budget can help you visualize how much money you have coming in and how much typically goes toward expenses such as electricity, Internet and maintenance. There are plenty of apps that can help you get started, or you can go the old-fashioned route and use a pencil and paper. After about a month, you’ll be able to see how you can cut down on your expenses, such as canceling subscriptions that you don’t need or use.

Go Green

Not only can you go green on a budget, but it can actually save you money in the process. The next time you’re low on food, try going to the local farmers market instead of the grocery store. Contrary to popular belief, one study found that farmers markets are 10 to 20% less expensive than grocery stores. While you’re at it, bring your own reusable bag with you when shopping. Some stores will give you a refund, which can add up to $10 of savings a week. If you’re looking for another way to go green, installing solar panels in your home can be a great way to help the environment and save money at the same time. Although the initial investment may be large, you’ll actually end up cutting electrical costs in the long run. One study found that you can save up to $30,000 in the first 20 years after installing solar panels. If you’re interested in going solar, Loanpal can provide you with financing options.

Leave your credit cards at home

Unlike a credit card, you can’t overspend cash once it’s gone. Before you go on your next trip to the grocery store, bring only the amount of money that you think you’ll need. This way, you can stick to your list and you won’t be tempted to buy any extra treats or unnecessary items. Credit cards can make it difficult to know how much you’re actually spending, which can lead to costs rapidly accumulating. Continue Reading…

Retired Money: What can retirees do about GIC reinvestment sticker shock?

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My latest MoneySense Retired Money column looks at the vexing problem retirees and near-retirees face when their GICs have matured in recent months. Click on the highlighted text for the full column: Recovering from GIC sticker shock.

If before you were getting 2 to 3% on 2, 3, 4 or 5-year GICs, you may be shocked to discover you’ll be lucky to get 1% and only then by declining to take the first suggested GIC your brokerage has on offer. Going out 5 years may only gain you 0.5% or so, depending on provider.

Nor will matters improve any time soon. The Federal Reserve, Bank of Canada and other central banks have suggested interest rates will stay “lower for longer.” The Fed in particular has indicated rates are unlikely to rise for at least three years.

The piece passes on the views of financial advisors Adrian Mastracci and Matthew Ardrey on what to do about it. It amounts to grinning and bearing it and settling for lower guaranteed returns, or biting the bullet and taking a bit more risk with equities or alternative investments.

But what if you insist on what our family has done historically: leaving half your fixed-income allocation in GICs? Personally, I aim for roughly a 50/50 asset allocation and for the fixed-income portion historically have split it between laddered GICs and bond ETFs, or asset allocation ETFs with a healthy dose of bonds.

Odds are if you use the major discount brokerages of the big banks, you may need to leave them to find more generous GICs available from independent places like Oaken Financial, which has a 1-year registered GIC paying 1.4% and a 5-year GIC currently paying 2% through Home Trust and Home Equity Bank.

Personally, I have reinvested some GIC cash in 2- or 3-year maturities, on the hope rates start to rise three years from now. While 1% or so is pathetic at least it’s a positive number (ignoring inflation): with so many mentions of negative interest rates in Europe and sometimes floated by central bankers in North America, any positive return at is not to be sneezed at.

Conservative Asset Allocation ETFs are one possible alternative

Among the gambits I’ve tried is to raise risk slightly by moving some of this cash to ETFs like Vanguard’s Conservative Income ETF Portfolio [VCIP/TSX], which is 80% fixed income but provides a modest 20% equity kicker. Those who don’t wish to mess with their pre-existing asset allocation might consider the Vanguard Global Bond ETF [VGAB], roughly split between US and global bonds, all hedged back into the Canadian dollar. Continue Reading…