General

6 unexpected expenses you need to prepare for

Posted By |

By Lidia Staron

Special to the Financial Independence Hub

“Life is like a box of chocolates. You never know what you’re gonna get.”

Truer words were never spoken. We all know how life can be full of surprises: some of them happy while others can be a huge pain in the backside.

We’re talking about unexpected expenses here. Even when you’ve already set your budget,  you’re sticking with it, and you’ve got some savings set aside, you can still get knocked off your financial track due to a cost you never anticipated paying for. While you were patting yourself on the back for your financial savviness, life was preparing to throw you a curveball. To help you expect the unexpected and plan your savings accordingly, we’ve listed six of the most overlooked costs that are just waiting for you around the corner.

1.) Home repairs or replacements

It’s a fact of life that everything breaks down eventually, especially if it experiences everyday wear and tear. Your home won’t last forever, especially since you and your family are living inside it everyday. Anything that breaks down will need to be taken care of right away. Plumbing, electricity, a leaking roof, a flooded kitchen, a broken oven, termites …  all  these are things you never think of saving for when you plan your budget.

2.)  Health-related bills (Dental and vision care)

We all know you need to save up for those emergency room visits and prescriptions you may need to fill. But have you ever considered that you may suddenly need to pay your dentist or eye doctor a visit? If you’ve ever had a really bad toothache that turned out to be a root canal in your future, then you know this is something that needs to be placed in your “health budget” right away. Continue Reading…

Borrowing to invest? Beware of rising interest rates.

Posted By |
Del Chatterson

By Del Chatterson

Special to the Financial Independence Hub

Your financial advisor is probably not recommending it and you may be naturally averse to more borrowing, but it is hard to ignore the basic principles of financial leverage from Finance 101. (The principles have not changed, since I first taught the course in 1972!)

As explained in a chapter on Capital Budgeting, companies and investors should continue to invest in projects until the marginal cost of capital equals the marginal rate of return: assuming you select projects in order from the highest return to the lowest return and that the cost of borrowing increases with the total amount of loans outstanding.

So in the example chart shown to the right, you would borrow and invest up to $1.0 million, which is the point where the expected rate of return declines to meet increasing cost of borrowing at about 5%.

You may have confirmed the theory from your own experience. Your current portfolio has a few investments that are achieving better than 10% or 12% returns, most congregate around the long-term average of 7% to 8% and a few continuing disappointments are returning below 5%, or worse.  Your lowest cost of borrowing is probably the mortgage you signed in 2015 at 2.5% or a car loan at 1.9%, but your subsequent borrowing for a personal line of credit is at 3.25%.

Continue Reading…

Half of us fear rising interest rates will be negative for our finances

Posted By |

Now that interest rates have finally appeared to bottom, consumers are starting to worry about the prospect of rising rates and their impact on their personal finances.

This is explored in my latest article, which is in Monday’s Financial Post (e-paper and online). You can access it by clicking on this self-explanatory highlighted headline: Only a quarter of Canadians have a  rainy day fund, but more than half worry about rising rates.

It describes a new Forum Research Inc. poll that shows more than half of Canadians (51%) fear rising rates will negatively impact their personal finances. The national poll of 1,350 voting-age adults was conducted after the Bank of Canada raised the prime interest rate from 0.75 to 1% on September 6th, which in turn followed an initial 0.25% hike in July.

After an amazing run of nine years of ultra-low interest rates, it’s clear consumers are starting to fret the party is over. Anyone with variable-rate mortgages might well be petrified that interest rates could again reach the high teens, as they did in the early 1980s. Little wonder that many homeowners are starting to “lock in” to fixed mortgages while rates are still relatively low.

Of course, as Credit Canada’s Laurie Campbell notes, for the longest time it’s paid to stay variable and flexible, whether with a variable-rate mortgage or a line of credit. It does cost a bit more to “lock in” to fixed mortgages, as Campbell notes, but the ability to sleep well at night in my opinion more than makes up for the difference.

While the poll asked specifically how consumers felt about the second hike, “they are worried more are coming,” Forum Research president Lorne Bozinoff told me. 12% say the negative effect will be extreme. However, 17% believe rate hikes will have some positive aspects:  you’d expect debt-free seniors to welcome higher returns on GICs and fixed-income investments. Another 38% don’t think it will have an effect either way.

Lorne Bozinoff

A quarter have no emergency savings at all

Bozinoff is more concerned that 26% of respondents have no emergency savings, and 40% have a cushion of a month or less: 9% have less than a month and 11% just a one-month cushion.

Financial planners generally recommend three to six months as a hedge against job loss or other setbacks. A minority do: 14% have two to three months, 9% four to five months, and 13% six months to a year. Only 15% have a year or more and predictably, 56% of the latter group are 55 or older. Continue Reading…

Liberal tax changes would spark exodus of Canadian entrepreneurs

Posted By |

By David J Rotfleisch, CA, CPA, JD

Special to the Financial Independence Hub

The proposed changes to the Income Tax Act that the Minister of Finance, the Honourable Bill Morneau, has released have real-world implications. The consultation period ends October 2, 2017, so now is the time to make your voice heard. Call or email your member of Parliament, or Minister Morneau directly.

I recently had a meeting with a high-tech entrepreneur in an internet-based business. He is very conservative and has not carried out any tax planning. His wife helps him but he does not do any income splitting with her. He has about $1 million in his corporate bank account for possible business use, but has not invested it and just earns minimal bank interest. The hype about the proposals has caused him to take notice of his tax affairs and meet with me.

I told him that under the new proposals income splitting with his wife, other than a fair salary for services performed, will be prohibited. His wife will probably not be able to participate in the lifetime capital gains exemption. If he decides to invest his retained earnings, there may be an additional tax on his income. He is now thinking about lifestyle and whether he wants to leave the country. I fully expect to prepare a memo for him about becoming non-resident.

Minister Morneau’s proposed tax changes will have the effect of causing an exodus of Canadian entrepreneurs for more business-friendly jurisdictions.

I had lunch with accountants a few days ago and they reported the same types of conversations with high-tech clients. They are considering leaving the country. Now, some won’t because of the education of their children, to be close to aging parents, adult children,or because they like their Canadian lifestyle. Others will decide it’s more important to maximize after-tax income and that it makes sense to move offshore.

70% of Canadians work for firms with 100 or fewer employees

Remember,  statistics show that the vast majority of Canadians — 70 per cent — who are the economic engine of this country, work for companies with between 1 and 100 employees: the very targets of these new measures, and who are able in many cases to pack up and leave.

This is not just the view of tax professionals. Ryan Holmes, the CEO of social media internet company Hootsuite, was reported as saying on Sept 14, 2017 that the proposals are causing a lot of concern to business owners and that “I think you need to be very favourable at the small end of the market.”

I was recently contacted by a Liberal MP who is very opposed to what his government is doing. He has an entrepreneurial background and he realizes the impact of these proposals.

Continue Reading…

Women have distinct financial planning needs

Posted By |
Marie Philips

By Marie Philips

Special to the Financial Independence Hub

The financial assets controlled by Canadian women as well the income earned by women is projected to grow significantly over the next decade.

This increase in wealth will result from a greater overall participation in the work force, higher level professions, an increase in female entrepreneurship and being the beneficiaries of a large share of the $1 trillion wealth transfer that is underway in Canada.

By 2026, women in Canada will control close to half of all accumulated financial wealth, roughly $900 billion in financial and real estate assets. That’s a significant increase compared to a decade earlier, when the share was closer to one third.

Yet according to a recent white paper published by IPC Private Wealth in collaboration with Strategic Insight, almost two  thirds of financial advisors (85% of whom are men) do not believe a female client should be viewed in any different light than a male client.

If we look at some of the concerns women have, we can see that there are distinct financial planning needs for women compared to men. Life expectancy at birth now means mortality in 2015 is 84 (80 for men).  Women live longer and are likely to have interrupted careers as a result of family responsibilities (children and caring for elderly parents) which all lead to potential lower available savings for retirement income.

Caregiver women more likely to end up in poverty

Research shows that women caregivers are likely to spend an average of 12 years out of the workforce raising children and caring for an older relative or friend.  Continue Reading…