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.”
Every year around this time, people like me pound their fists on the proverbial table for ordinary Canadians to make an RRSP contribution. Spoiler alert: that’s what’s going to happen here, too.
What’s different in this post is that I’m going to go a little bit further than others in making my plea … but only a little bit. I’m not going to recommend a specific security or product. I am, however, going to recommend a specific asset class: income.
So many people tell me that the reason they don’t contribute is that they don’t know what to invest in. I gently point out to them that deciding about how to invest your little tax-deduction generator is not a pre-condition of contributing. Just put the money into your RRSP based on the room available on your most recent notice of Assessment before Monday March 2, already. Generate a refund …. or at least a reduction in the amount owing.
Many people make RRSP contributions in the second half of February and contribute nothing else throughout the remainder of the year. For them, this is an annual tradition where they make a one-time contribution into whatever catches their fancy and pay precious little attention for the next 52 weeks or so.
Most people should be investing in Bonds this year
If this sounds like you … and if you already have a somewhat balanced portfolio that has some combination of stocks and bonds in it, then I suspect that the stock portion of your portfolio did very well in 2019 and the bond portion did relatively less well. That simple reality is why most people should be investing in bonds this year.
Let’s say you’re a traditional balanced investor with a target of 60% in stocks and 40% in bonds. If you started out a year ago with that asset allocation and your stocks were up 20% while your bonds were up 3% over the past year, then you could re-balance using the contribution. Continue Reading…
For those trying to scrape together a down payment in Canada’s hottest housing markets, the Home Buyer’s Plan is known as an effective tool. Offered by the federal government, it allows first-time buyers to pull funds from the RRSPs completely tax-free to put toward their home down payment. If you’re lucky enough to have RRSP matching via your employer, or have been saving for retirement for some time, it can seem an especially attractive method to amass down payment funds.
However, there are a few restrictions buyers should be aware of:
Buyers must have a signed Agreement of Purchase and Sale to buy or build a property before applying to access the funds.
They can pull up to a limit of $35,000 from an individual’s RRSP, and up to a combined $70,000 from RRSPs held by two individuals buying together (assuming the funds are saved in the first place).
The funds must have been sheltered within the RRSP for a minimum of 90 days before they can be accessed.
Buyers are required to “pay themselves back”, contributing one fifteenth of the withdrawn amount on an annual basis over a 15-year timeline, or be taxed on that portion at their full rate.
Buyers must qualify as “first timers,” which the Government of Canada defines as not having owned a home, or occupied one that your spouse has owned, in the four consecutive years before this home purchase is made. (However, there are exceptions in the case of a marriage or common-law relationship breakdown where former partners can restore their first-time buyer status.)
Buyers must intend to dwell in the home as their permanent residence within one year of its purchase or completion.
How long would it take to actually save for the HBP?
Assuming a buyer satisfies all the criteria above, they also need to actually save the funds in the RRSP in order to use them for their home purchase: and that’s easier said than done in some urban centres than others.
To see how long it would take to actually set aside the maximum $35,000 in an RRSP, Zoocasa sourced individual income thresholds in 14 cities across the nation. The data was based on 2017 tax filings as reported by Statistics Canada, and assumed the income was earned income, eligible to create RRSP contribution room, and that individuals contributed the maximum to their RRSP annually (18% of earned income, to a maximum of $26,500). The study also compared how long it would take for those in the top 50%, 25%, and 10% income groups to save $35,000.
According to the findings, for a median-income household contributing the max amount to an RRSP, it would take between 4.3 – six years to pull together $35,000.
(See Infographic at the top of this blog).
How far would $35,000 go in your Housing market?
As well, the extent that the maximum HBP funds would actually aid in a home purchase varies across Canada; it’s no surprise that in the priciest markets, such as homes for sale in Toronto or Vancouver, that it’s hardly a drop in the bucket – just 4.3% and 3.5% of a benchmark home price, respectively. Continue Reading…
MoneySense.ca: Photo created by pressfoto – www.freepik.com
My latest MoneySense Retired Money column looks at a press release slated for release next week from discount brokerage Questrade Inc. You can find the full column by clicking on the highlighted headline: Canadians are still paying too much in investment fees.
According to the RRSP study commissioned by the independent discount brokerage (a copy of which was provided to me in advance) finds 87% of Canadians don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20+ years).
While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that almost half of mutual fund investors still don’t even know what they’re paying for mutual funds.
There are also disturbing generational differences. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. That’s in contrast to the operative principle behind the surge in indexing and ETFs that “Costs matter,” and the lower the costs the better. Yet Millennials seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (vs just 18% of the 55+ cohort).
Or as the teaser under the main headline at MoneySense puts it: Millennials and Gen Z missed the memo on how much management fees erode returns over the long term, according to a new Questrade survey.
Questrade estimates a 1% decrease in fees over a typical 30-year investing horizon could result in 27 to 29% more money in one’s retirement kitty, assuming a 7 to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference a 2% fee makes versus a 1% fee’s impact on the value of their portfolio over the long run. 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2 to 1% will have a big impact on returns over 30 years.
Questrade notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.
47% of mutual fund investors still don’t know what fees they’re paying
I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high. Continue Reading…
Our finances can be a source of stress and frustration at the best of times. For many of us, our budgets account for our expenses for the month, with perhaps a little left over for savings and disposable income. Which can make it particularly difficult when the unexpected occurs.
There are, of course, a variety of solutions to emergency situations. However, in the heat of the moment these can lead us to the financial band-aids that solve the problem in the short term, but perhaps put us at a long-term financial disadvantage. Credit card payments, loans, and financing may well be quick fixes to stressful issues, but you may find it difficult to cope as time progresses and your circumstances change.
We’ll take a look at a handful of the most common unexpected expenses that may arise. What are some useful, intelligent financial responses to these? Are there low-cost preparatory steps you can take to fend off larger-scale consequences?
1.) Medical Expenses
There’s certainly an element of injustice in the fact that people so often go into debt as a result of illness. However, the current US health system isn’t always well designed to provide adequate care without incurring huge bills. So, in the absence of complete systemic overhaul, what are your options for unexpected healthcare?
Of course, the simple preventative answer is to take out adequate health insurance. It can be tempting to just select the plan with the lowest monthly premium, but this could find you seriously out of pocket; particularly as lower premiums are usually leveraged by higher deductibles. That said, if you can mitigate this effect by investing a little from each paycheck into a Healthcare Flexible Spending Account (FSA). The funds paid into these accounts [in the United States] are deducted from your paycheck, but are not subject to tax. The amount accumulated can then be used to help pay for deductibles, co-pays, and indeed anything not covered by insurance in the event of an emergency.
If you have been involved in an accident that was the fault of a third party, it is certainly advisable to seek assistance from personal injury lawyers. While we all want to avoid unnecessary litigation, fair compensation may be obtained in order to cover your emergency and ongoing medical expenses. This may not be an adequate short term solution, so it can also be useful to find ways to minimize your initial outlay. Attend walk-in clinics in place of large hospital emergency rooms if appropriate, look into prescriptions of generic drugs rather than brand names.
2.) Funeral Expenses
None of us like to think about the passing of ourselves or those closest to us. However, we have to accept that death is one of the few guarantees we have in life. That said, for all its inevitability, death can take us by surprise; with the costs associated with it adding additional stress to our emotional pain.
Funerals are notoriously expensive affairs. When an unexpected death occurs, we can understandably tend to opt for solutions that place the responsibilities of organization on third parties such as funeral directors. It’s worth noting that these are usually the most expensive options, and don’t usually provide us with the opportunity to do our due diligence in investigating the necessity of services which drive prices even higher.
The fact is, there is no legal requirement in any U.S. state for a funeral director to take charge of planning and executing a funeral. It is perfectly possible for you to undertake a low-priced, meaningful ceremony. Cremation is usually one of the most cost-effective methods of handling the remains of a loved one, with the cost of cremation urns certainly tending to be lower than caskets. In fact, if you donate the body to scientific study, the remains are usually cremated and returned to you free of charge.
If you are set on burying a loved one, there are certainly options which can keep costs low. Direct burial — a process which forgoes a viewing in favor of almost immediate interment — can be around the same price as cremation, and does not require the additional expenses associated with preparation of the body. Also be wary of “extras,” such as gaskets on caskets; these are ostensibly to protect the remains after burial, and can raise the price of the casket by as much as $800.
3.) Vehicle Problems
Vehicles can represent one of our more substantial investments. Not simply in the material cost of the vehicle itself, but also its maintenance and ancillary charges such as insurance and road tax. It’s no shock, then, that when something goes wrong with our vehicles, it can be a costly affair. Continue Reading…
Credit cards are great, aren’t they? We can use them to pay bills, buy stuff online or in stores, and travel, even if money’s tight right now. Of course, the ability to buy now and pay later also means it’s easy to get carried away and spend more than we can actually afford!
Many of us have racked up huge credit card bills, and paying them off seems impossible sometimes. If you’re in the same boat, don’t despair. We’ve put together some great tips to help you pay off credit card debt faster.
Here’s what you should do:
1.) Avoid the Minimum Payment Trap: It’s tempting to pay just the minimum due every month, especially when it means paying only a few extra dollars in interest charges.
But have you ever thought about how much this adds up to? Total up the interest you pay in one year, and you’ll know why everyone advises paying in full every month. If full payment isn’t possible, pay as much as you can. It’ll significantly reduce the interest you pay in the long term.
2.) Consolidate High-Interest Debt: Debt consolidation is a good way to reduce the cost of high-interest credit cards, loans and other debt. If you tend to lose track of due dates for multiple cards, it also helps you avoid late payment fees and penalties.
Use a debt consolidation loan or personal loan with affordable interest rates to pay off expensive credit cards and loans, and then make repayments in one place.
3.) Prioritize One Debt at a Time: Speed up debt repayment by focusing on clearing one credit card in full (with minimum payments on the rest). There are two ways to handle this: Continue Reading…
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