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.”

FP: RRSPs still have at least 3 advantages over TFSAs

Posted By Jonathan Chevreau | February 6, 2019

My latest Financial Post column has just been published. It being the height of RRSP season, it looks at some well-known and some less well-known advantages RRSPs still have over the new kid on the block: TFSAs. Click on the highlighted text for the full story online: Three reasons why RRSPs still matter — and one of them you probably didn’t know. The article is also in Wednesday’s print edition on page FP6 under the headline RRSPs still matter despite rise of TFSAs.

The Tax-free Savings Account (TFSA), which was introduced just over ten years ago, is often described as the “mirror imaqe” of the RRSP. That is, the RRSP provides an upfront tax deduction by lowering your taxable income for the year you make the contribution. The TFSA does not, which can be a strike against it in some eyes; on the other hand, once you reach retirement, the TFSA comes into its own by NOT being taxable, and therefore not resulting in clawbacks of Old Age Security (OAS) benefits or (for very low-income seniors) the Guaranteed Income Supplement (GIS) to the OAS.

On the other hand, as many seniors are discovering to their chagrin, all those RRSP tax savings you enjoyed during your (hopefully) high-income earning years come back to haunt you: once the RRSP becomes a Registered Retirement Income Fund (RRIF) at the end of the year you turn 71 (the alternative is the unpalatable act of cashing it all out and being taxed then and there, or annuitizing), then you’ll be on the hook for forced annual — and taxable — RRIF withdrawals. Ottawa giveth and Ottawa taketh away.

But, as the FP piece argues, some decades can elapse between an RRSP contribution and the ultimate RRIF withdrawals, and when you add in the ongoing tax sheltering of an RRSP — on top of the upfront tax contribution — then the experts quoted in the piece believe the RRSP comes out, certainly if you’re at or near the top tax brackets.

Below is the arithmetic provided by Mathew Ardrey, wealth adviser at TriDelta Financial, which was too long to include in the FP version. He cites the example of someone who has $10,000 of income and can invest in either a TFSA or a RRSP:

Same tax rate

	RRSP	TFSA
Income before taxes to save	$10,000	$10,000
Tax at 50%	$0	($5,000)
After-tax available to contribute	$10,000	$5,000

FV with 5% return for 25 years	$33,864	$16,932
Tax at 50%	($16,932)	$0
After-tax withdrawal in retirement	$16,932	$16,932

Lower tax rate in retirement

	RRSP	TFSA
Income before taxes to save	$10,000	$10,000
Tax at 50%	$0	($5,000)
After-tax available to contribute	$10,000	$5,000

FV with 5% return for 25 years	$33,864	$16,932
Tax at 25%	($8,466)	$0
After-tax withdrawal in retirement	$25,398	$16,932

Higher tax rate in retirement

	RRSP	TFSA
Income before taxes to save	$10,000	$10,000
Tax at 25%	$0	($2,500)
After-tax available to contribute	$10,000	$7,500

FV with 5% return for 25 years	$33,864	$25,398
Tax at 50%	($16,932)	$0
After-tax withdrawal in retirement	$16,932	$25,398

“The part of the example I would focus on, is what is a reality for many Canadians, their income is higher while they are working than in retirement. Because of this, there is a clear advantage of receiving the deduction at a higher marginal tax rate and paying tax in retirement at a lower marginal tax rate,” Ardrey concludes.

Foreign income taxed less harshly in RRSPs than TFSAs

But that’s not all! As the FP column mentions, there are at least two other advantages RRSPs have over TFSAs. One is that foreign income is taxed more in TFSAs than in RRSPs: Continue Reading…

Value for Money: Do you always get what you pay for?

Posted By Robb Engen | February 4, 2019

“This $6 bottle of wine tastes awful.” “What did you expect – you get what you pay for.”

It’s true, in most circumstances, that the quality of products and services increases as the price increases. You get what you pay for. When you cheap out on something, be it a bottle of wine, pair of jeans, or a manicure, more often than not you’ll end up disappointed. You might even end up paying more in the long run, having to replace the item or fix the mess you made when you cheaped out the first time.

One of the most common examples is with clothing. In this age of fast-fashion it’s not unheard of to find a t-shirt, pants, and a pair of sneakers – all of it – for less than $20. Anyone who’s ever shopped at Old Navy or Walmart can attest to this. But then what happens? The thin material starts to unravel, it’s improperly stitched, and it quickly wears out. Or, just as likely, it just doesn’t fit properly in the first place and so you never wear it.

I hate the term ‘investment’ when it comes to something that doesn’t have the potential to earn you money, but ‘investing’ in more expensive clothes can pay off. A well-cut suit, a timeless pair of shoes, work-out gear that doesn’t fray or pill after a few washes. Most of us can agree that spending more on a high quality item that will last a long time is worth the money.

Do you always get what you pay for?

But higher price = better product/service doesn’t always hold true. Take investing, for example. It’s widely accepted now that cost is the only reliable predictor of future returns. The higher the cost, the lower the expected return. The reverse is also true.

Canadian investors pay some of the highest mutual fund fees in the world and so it stands to reason that our expected returns will also diminish. We’re not getting what we pay for: our advisors get paid and investors get short-changed.

Yet I’ve heard advisors use this argument – you get what you pay for – when trying to persuade their clients that low-cost indexing, or a robo-advisor, is an inferior solution to their actively managed model. Ridiculous!

Here are some other, hopefully, less controversial examples from my own personal experience where a higher price doesn’t always mean better quality. Continue Reading…

Pros and Cons of Vacation Timeshares

Posted By Financial Independence Hub | February 3, 2019

By Becky Williams

(Sponsored Content)

If you are like nearly everyone, the time that you spend on vacation represents some of the most pleasant and days of the year. You may spend a good deal of time trying to decide what will be the most amazing type of vacation you can take. One option you may want to focus on is obtaining a vacation timeshare. There are a number of significant benefits associated with a vacation timeshare.

A timeshare may not be for everyone and there are some factors that may make this type of vacation property not the perfect choice for you. However, by weighing and balancing the pros and cons of timeshare ownership, you will be able to make an informed, educated decision as to whether this type of vacation property makes the most sense for you. You will be able to find a vacation timeshare that is perfect for you today and into the future as well.

Guaranteed, reliable vacation

A primary benefit associated with a timeshare is that you have a guaranteed, reliable location to spend your precious vacation days. You do not have to spend an inordinate amount of time trying to find an ideal place to spend a vacation. You need only undertake that task one time when you select a vacation timeshare property the first time.

With a vacation timeshare, you know precisely what to expect. You will never again face a situation in which you are uncertain about what your vacation destination and lodgings really will be like. The reality is that this type of uncertainty, which is completely eliminated with a timeshare, has been a major reason why so many people have experienced vacation disasters.

An ideal location for you

Another key benefit of going the timeshare route when it comes to a vacation property is that you will have a destination and location that is ideally suited to you. There is a significant array of different vacation timeshare options in many, many locations across the United States and around the world.

On a related note, you can enjoy another benefit of getting a vacation timeshare. Many timeshare companies offer you the ability to swap your timeshare location for a particular year. In other words, you can trade your timeshare location with someone else at a different location. This provides you with both reliability and consistency as well as a degree of flexibility should you elect to try something different one year.

Entertaining family, friends, and colleagues

Although your main purpose in purchasing a timeshare is to be able to have a set vacation location for yourself and your immediate family, other people in your life can benefit from the timeshare experience as well.

For example, you may not have the need to use your timeshare for a particular period of time set aside to you. As a result, you can offer your timeshare to extended family members, to friends, and to work or other types of colleagues. Often, the owner of a timeshare will donate a stay to a charitable organization. The stay is auctioned off to raise money for the organization. In short, there really is a tremendous amount you can do with a timeshare, not only for yourself and your immediate family but for a broad spectrum of other people who may be important in your life as well. Continue Reading…

Retired Money: Is $1 million the magic number for Findependence?

Posted By Jonathan Chevreau | January 14, 2019

My latest MoneySense Retired Money column was just published, focused on Monday morning’s release of the 2019 RBC Financial Independence in Retirement poll.

Click on the highlighted headline to retrieve the full article: The Magic numbers for your Findependence nest egg revealed.

And yes, they did use my term Findependence in the headline, which is a neologism I coined and is of course merely a contraction for Financial Independence.

May as well save a few keystrokes and/or syllables!

As I note in the column, I like the fact that RBC uses the term Financial Independence instead of the more commonly used “Retirement.” The two are not the same thing: it’s possible to be financially independent but not retired (that’s the case for myself and possibly many who frequent this website). But as I also note, it’s pretty hard to be retired if you’re NOT also financially independent. If the distinction eludes you, read my book Findependence Day.

In its poll, RBC can’t resist throwing out the figure $1 million as the level many non-retired Canadians believe is necessary to amass: not for “Retirement” per se, mind, but for what they call “a comfortable financial future.”

Call it what you will but RBC identifies four “top motivators” to accumulating such a nest egg: being debt-free, having things to make life more comfortable, having money to take part in desired experiences, and having enough to travel wherever you want.

BC needs $1 million for Findependence, Quebec just $427,000

So how much does it take to get there? Apparently, those in British Columbia need a little more than the rest of us: $1.07 million, compared to a national average of $787,000. Continue Reading…

Home financing options for credit scores

Posted By Financial Independence Hub | December 19, 2018

By Michael Plambeck

(Sponsored Content)

It’s important to go over all your options in regard to home financing to ensure you know what your options are and what’s available to you. This is especially crucial if you are a first-time buyer. Though this can seem like an overwhelming process, knowing what your options are based on your credit score, what types of help are available, and how you can improve your credit score if it’s poor or bad, is the best way to figure out what to do.

How to check your credit score

There are many ways to check your credit score to figure out where you are currently at. You can use a number of institutions and resources to check what your credit score currently is, such as using FICO,or Equifax.

It’s never a bad idea to regularly check all of your credit reports in order to be completely sure that the information is both complete and as accurate as possible. This will help you to know where you need to make improvements, how you can do it, and what your situation is at that point in time.

Low credit scores and what your options are

Having a low credit score sends red flags to lenders and deems you a credit risk. In short, this will make it very difficult to get a proper credit loan.

Here is a quick list detailing the range of credit scores and what they mean:

300 – 499: Bad credit
500 – 579: Poor credit
580 – 619: Low credit
620 – 679: Average credit
680 – 699: Good credit
700 – 850: Excellent credit

Having a high credit score means you should have no problem getting a loan from your bank or your credit union. Having a middle credit score, which is a credit score from average to good, you have a wide variety of options available other than your bank or credit union if they deny your application, such as quick loans or by going online.

If you have bad to poor credit, getting credit is going to be very difficult. The fees and interest rates will more than likely be higher than what you can afford, but that’s only if you can get approved at all.

You can do your best to go through the Federal Housing Administration in order to get a mortgage loan, but they only grant loans through FHA-approved lenders, which may pose a problem. They have a list of requirements that must be met in order to get an FHA mortgage loan, which are listed below for you:

A FICO score between 500 to 579, which equals a 10% down payment
A FICO score of 580 at the very least, which equals a 3.5% down payment
Debt-to-income ratio of under 43%
Mortgage Insurance Premium (MIP)
The home in question being the primary residence of the borrower
Proof of employment and a steady stream of income

However, there are options you can go through in order to get the approval you need for a home loan if you’ve exhausted all your other options, which include going for an FHA mortgage loan. Homeloansforall.com, for example, will help you get approved even if you have bad credit and find the resources you need based on your city and state.

No matter what your credit score may be, the financing options you have in front of you, and what the future may bring, once you are approved for any type of loan, it’s important to keep up with your payments in order to keep the home.

To help keep up with your mortgage payments and be clear of the debt, check out how to pay off your mortgage in 10 years.

Michael Plambeck, founder and owner of Home Loans For All, bridges the gap between its content team and industry team by being an expert in both areas. Michael is a home loan expert who has worked closely with loan officers and realtors for over four years, and who is engaged in constant continuing education to make sure he’s up-to-date on all real estate laws and regulations.

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