Tag Archives: Financial Independence

Smart ways to divvy up your tax refund

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Situation: The income tax refund is a welcome sight for many taxpayers.

My View: Park it temporarily to reflect on its best use before allocating it.

Solution: Evaluate family needs and options that provide lasting benefits.

Income tax filing season is under way once again. Accordingly, I examine some smart ways to apply your tax refund. First, a little trivia:

For what year did Canadians last file a 1-page Federal income tax return?
It was the 1949 tax year.

I think of allocating the income tax refund loosely within these categories. For example, you can spend it, save it, invest it, reduce debt and help others.

Start by parking the refund into a saving account to resist impulse, say for 30 to 60 days. That provides you sufficient time to reflect and evaluate your needs and best options that apply.

Try your utmost to arrange lasting usefulness from this source of cash. Many of the allocations you will make are not reversible.

Everyone can reap benefits from these simple best practices. I summarize some sensible ideas in dealing with tax refunds:

Reduce debt

  • Repaying credit card balances are top notch, risk-free allocations.
  • Trimming a line of credit, mortgage or student loan is very desirable.

Invest it

  • Contributing to the RRSP boosts the retirement nest egg.
  • Adding to the TFSA generates tax-free investment income.

Help others

  • Donating to a charity of your choice is a noble cause.
  • Helping out someone less fortunate than you is generous.
  • Making RESP deposits helps pay the rising costs of education.
  • Funding the RDSP for a special needs family member is unselfish.
  • Lending it at the prescribed rate to the lower tax bracket spouse.
  • Assisting an adult child to purchase a vehicle or residence.

Save it

  • Leaving it in your saving account is a worthy choice.
  • Supplementing your family business capital is worthwhile.
  • Adding to your investment plan is productive strategy.
  • Improving your career or education fulfills goals and dreams.
  • Rebuilding the family emergency account is beneficial.
  • Setting funds aside for the next income tax instalment.

Spend it

  • Replacing an aging vehicle and appliance helps.

Maximizing your CPP benefits: 65 isn’t always the answer

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Special to the Financial Independence Hub

 

As I prepared to write this month’s blog post, I came across an interesting U.S. study exploring how the structure of a company’s self-directed retirement plan might impact its participants’ investment selections.  When investment choices were listed alphabetically, the study found employees were apparently favouring the first few funds on the list. 

Arbitrary?  You bet.  But before we laugh too hard, I’ve noticed similar behaviours closer to home, especially when it comes to making best use of the Canada Pension Plan (CPP).

Assuming you’ve contributed to the CPP during your career, when should you start drawing your benefits?

If you guessed age 65, that’s understandable.  Unless you decide to receive a reduced benefit at a younger age (as early as 60), it’s when Service Canada automatically mails you your CPP application form, as if it’s a given you should fill it out right away.  65 is also the age many younger folks talk about when they dream of the day they’ll stop working.  It’s a number that’s become almost synonymous with “retirement.”  

That said, it’s an entirely arbitrary number when it comes to your own best financial plans. I can cite any number of reasons 65 might or might not be the right number for you.

There’s the prospect of receiving more benefit by waiting until age 70 to get started: currently 42% more than if you start taking it at age 65.  On the flip side, it may make more sense to start drawing a smaller benefit sooner if you are single and in poor health. 

As Financial Post columnist Jason Heath suggests, it’s worth treating your CPP like an RRSP for planning purposes.  To put this in perspective, Heath calculated that a lifetime CPP benefit starting at age 65 and assuming an age 90 life expectancy would be the same as having a $277,000 RRSP, earning 4% per year.  As Heath explains, “Whether you withdraw from other sources, or start your CPP, you are reducing the future income that you can earn from that source.”

So, when is it best to take these significant benefits compared to others that may be available to you?  Instead of simply signing up at age 65 as a given, why not give it some thought (or hire a planner to help you)? Continue Reading…

Key technologies for smarter financial decisions

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By Sia Hasan

Special to the Financial Independence Hub

Have you ever considered going paperless? The switch might seem daunting at first, but you will find that electronic options can give you greater freedom and reduced expenses. Whether you’re in business or healthcare, the following technologies will transform your company into a more profitable and financially independent institution.

Cloud Technologies

Cloud computing uses remote servers on the internet for managing data, rather than storing files on a personal computer or external hard drive. When you store data in the cloud, you’ll enjoy higher speeds and greater security. Even if a computer or hard drive crashes, all of your files will still be safely stored in the cloud. In addition, cloud technologies can be a lot cheaper than more traditional options. With cloud computing, you don’t have to pay for unnecessary hardware or software, there will be fewer labor costs. You will also have increased productivity, saving you both time and money.

Strategic Analytics

Implementing analytics can help you better prepare for the future. These forecast technologies use past data to predict future events for your business. With analytics, you can use mathematical approaches to determine the most valuable resources to invest in. Define specific business goals and create strategies that will allow you to test changes on a smaller scale. Analyze costs, advertising, product management, and your ability to meet customer demands. Making small changes now will help you save money in the long-run.

Artificial Intelligence (AI)

Machines are revolutionizing the work industry by learning how to perform human-like tasks. From self-driving cars to bots, AI is making it easier and faster to maximize efficiency. Al offers many benefits, like faster performance, reduced error margins, and lower costs. AI can also achieve breakthroughs by recognizing blind spots and detecting trends. While the initial cost is high, using AI long-term will save you money and increase your efficiency. Instead of replacing workers, AI supplements the work that your employees are already doing. AI can perform smaller tasks, like updating the company website, managing finances, tracking inventory, and finishing payroll. By automating these time-consuming tasks, workers are free to focus on important duties, like human interaction.

Project Management Software

Project management software keeps teams on the same page, while helping managers to better organize tasks and data. Improve your efficiency by storing all of your information in one, easily-accessible location. Simplify team collaboration through crowd-sourced documents and shared to-do lists. Keep track of schedules, budgeting, and resource allocation. Easily communicate questions and concerns to other team members. Track time and expenses, paying attention to areas where you can improve efficiency and cut costs.

Healthcare Software

Going paperless in the healthcare industry has never been easier. With the variety of new software available, you can improve the way you schedule, treat, and communicate with patients. Continue Reading…

FP: Bank on Yourself — Why women need to focus on Financial Independence with or without a spouse

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My latest Financial Post column looks at an upcoming book, Bank on Yourself, which focuses on how Canadian women need to focus on Financial Independence, whether or not they are currently part of a couple. Click on the highlighted headline here for the full review: Why Women shouldn’t let a solo retirement catch them by surprise. The review also appears in the print edition of Tuesday’s Financial Post (page FP 3, April 2, 2019).

The book, which is being published this month (April) by Milner & Associates, is co-authored by a lifelong single woman, Ardelle Harrison, and a financial advisor, Leslie McCormick. McCormick is a Senior Wealth Advisor with Scotia Wealth Management but Ardelle is not a client.

The subtitle says it all: “Why every woman should plan financially to be single. Even if she’s not.”

The authors say 90% of women will end up managing their own finances at some point, whether because of divorce, widowhood or because they never married in the first place. And because women tend to live longer, expect five female centenarians for every male who reaches 100 years (according to the 2016 Canadian census).

Allegedly one of women’s biggest fears is ending up in old age as a “bag lady” destitute on the streets. In fact, 28.3% of unattached women live in poverty and single older women are 13 times more likely to be poor than seniors living in families, the authors say.

They cite Pew Research’s eye-opening finding that when today’s young adults reach their mid 40s and mid 50s, 25% of them are likely to never have been married, and that by then “the chances of marrying for the first time after that age are very small.” (Whether by choice or circumstance.)

But even those who do “couple” earlier in life may not always remain in that state. A 2013 Vanier Institute of the Family report says 41% of Canadian marriages end before their 30th wedding anniversary. 68% of divorced couples cited fighting over money as the top reason for the split. 2011 Canadian census data shows the average age at which women are widowed is 56.

Multiple Streams of Income

A key concept emphasized throughout the book is having Multiple Streams of Income, at least three in Retirement. Employment income is the springboard to other income streams,  including employer pensions.

A second is government benefits unlike CPP and OAS. Other streams are business, investment and real estate income, and annuities. Home owners have a potential backup in their home equity, although the authors rightly say “Debt is not something you want in retirement.”

I asked McCormick if these principles apply equally to single men. General financial planning principles apply across genders, she replied, but women have longer life expectancies, so when you add the gender wage cap, it’s harder for women to build wealth. Female baby boomers can expect to outlive their spouses by 10 to 15 years, “yet so few women plan for it.” While 31% of women view themselves as being financially knowledgeable, 80% of men do.  Her hope is the book will help bridge that gap. So might a planning tool at her Plan Single website (www.Plansingle.ca).

 

A beginner’s guide to Fixed Rate Mortgages

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By Rebecca Hills

Special to the Financial Independence Hub

Fixed rate mortgages are very popular in Canada. In fact, of the 6 million mortgages that have been taken out by Canadians, 60% are fixed rate mortgages. A fixed rate mortgage agreement stipulates that the borrower will be required to pay interest on their mortgage that will not fluctuate for a set period of time. Presently, the most popular mortgage in Canada is a three-year fixed rate mortgage.

In addition, interest rates for fixed mortgages will differ, depending on the province that you are living in, as well as the number of years on the term, and also the financial institution that you borrow from. Different mortgage brokers will also offer different rates, so doing your homework beforehand, while understanding your unique financial goals and situation, will help you avoid any headaches down the line. Here, our goal is to provide you with a beginner’s guide to the fixed rate mortgage scheme.

What is meant by Fixed Rate Mortgage?

As mentioned, roughly two thirds of Canadians opt for a fixed rate mortgage over a variable rate mortgage. A fixed rate mortgage is designed for people who are averse to risk, as having a set interest rate will eliminate the risk of interest rates suddenly skyrocketing in the future. Imagine a situation where interest rates increase exponentially and you are unable to afford the sudden spike in rates. Such a possibility would not be an issue when you lock in an interest rate for the entire term of your loan.

Also, please note that you don’t have to stick with a fixed rate mortgage forever. For instance, if you receive a job promotion or inherit some money then you may be more comfortable taking a risk and switching to a variable rate mortgage. Once your mortgage has reached the end of its term you can consult with your broker in order to determine if switching to a variable rate mortgage may be the better option when it comes time to refinance your home.

Evidently, in some cases a variable rate mortgage may be the better option, if interest rates happen to be low when you sign, and remain relatively low throughout the term of your mortgage. As can be seen, both fixed rate and variable rate mortgages have their pros and cons, so if you are not sure with which to go with speaking to a financial advisor or broker may help with your dilemma.

Should I choose a fixed or variable rate mortgage?

There are many advantages to fixed rate mortgages. For instance, you won’t have to worry about your payments increasing over the duration of the mortgage term. There are also many options to choose from, from 2- or 3-year terms, to 5- or 10-year terms. In some cases you may also have the option to sign a 6-month fixed rate mortgage or one as long as 25 years. There is also the matter of certainty, as you will know exactly what your mortgage will cost at all times. Knowing exactly how much you will be required to pay will also streamline your billing, and also help you create a budget that is safe and secure. Continue Reading…

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