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Saving for your First Home? What are your options?

By: Louai Bibi, Advisor Associate

So many Canadians are saving for their first home. Some of us might be on the brink of making that lifechanging purchase, others may still have some time ahead of them. Regardless of your timeline, we often ask ourselves questions like:

  • Should I invest this money?
  • What account suits my personal circumstance the best?
  • What are the pros & cons of each account?

I’ll preface by saying that if you are considering accessing your money within a 48-month window, we advise against investing in the market. While markets generally trend upwards most of the time (you might not feel like it if you started investing in 2022), we don’t have a crystal ball and we’d rather play it safe & ensure your hard-earned savings stay intact if markets happen to experience short-term volatility.

In terms of what accounts are available for first-time homebuyers, you have four great options:

  • A generic savings account
  • A tax-free savings account (TFSA)
  • A registered retirement savings account (RRSP)
  • A first home savings account (FHSA)

Your savings account is a great place to store your money when we’re on the brink of purchasing your home (think 48-month timeline, as we discussed above). The TFSA, RRSP, & FHSA all generally entail investing your money in the market. So how do you differentiate which account makes the most sense for you?

Well, let’s start with understanding what benefit each account offers a first-time home buyer:

The TFSA

The TFSA offers tax-free growth when you invest, so if your money grows from $50,000 to $100,000, you get to withdraw $100,000 tax-free, with no penalties and/or restrictions. This is pretty great in my eyes, as the last thing a first-time home buyer should be concerned with is taxes when they are going through an exciting life change. If you later decide purchasing a home no longer makes sense for you or that you need to push out your timeframe, you can keep trucking along & growing your wealth tax-free.

The RRSP

While primarily, used for retirement savings, first-time home buyer’s have an advantage when saving within this account. It’s widely known as the home buyer’s plan (HBP), which allows you to withdraw up to $35,000 from your RRSP to put towards the purchase of your first home. Generally, when you withdraw from a RRSP, that amount is taxed as income. When a RRSP withdrawal is for your first home, you can withdraw this money tax-free. The catch is that after a couple years, you need to begin paying back 1/15th of the amount you withdrew from your RRSP over the next 15 years. By participating in the HBP, you’ve essentially loaned yourself those funds from your retirement savings & they slowly need to go back to your RRSP to later fund retirement. This isn’t a ground-breaking implication, but you earlier heard me mention that we don’t have a crystal ball. We don’t know what the future holds & many homeowners are feeling the stress of higher interest rates impact their monthly payments. While a 1/15th of up to $35,000 per year may not feel suffocating to you while reading this, it certainly can add stress to the lives of others who are adjusting to the associated costs of home ownership.

The FHSA

This just launched in 2023 & the majority of financial institutions can’t even open these quite yet, as they are still building out the infrastructure required to be able to handle contributions, withdrawals & CRA reporting. This account shares a few characteristics that the TFSA & RRSP offer. You can contribute up to $8,000 per year (to a lifetime maximum of $40,000) and use these funds towards your home purchase tax-free. By the time 15 years has passed or you turn 71 years old (whichever comes first), you have the option of withdrawing these funds as cash, at which point it becomes taxable to you, or you can transfer the balance to your RRSP on a tax-deferred basis. While you are waiting for the FHSA accounts to be accessible at all financial institutions, you can save in a TFSA and/or RRSP & later transfer this account to the FHSA, with no tax implications.  Your contributions are tax-deductible just like your RRSP, which makes this unique from the TFSA.

Here are my favourite parts about this account:

  • Remember how I mentioned needing to repay 1/15th of your RRSP HBP withdrawal every year? This concept does not exist when you withdraw from the FHSA for your first home. There is no repayment schedule & I think that will put a lot of minds at ease, especially when we go through times where money is tight.
  • When our annual RRSP contribution room is calculated, its often based on a percentage of our earned income. The FHSA annual contribution limit is not linked to our earned income, but rather a set dollar amount prescribed by the government, which is currently $8,000/year. For those who may be newer to Canada and/or just starting their career & haven’t hit their salary potential quite yet, this may be a powerful tool to save!

When you should connect with us for help

You may want help establishing a savings target or building a roadmap to get from goal to reality. For others, our financial circumstances can be complex & may warrant a deeper conversation, like if you are a US citizen, or if you are just trying to understand where this piece of the puzzle fits in your overall wealth plan. Whether you are new a new or existing client, our door is always open to chat. Whether it is me, Mike, Shawn, or Corey, we’ll be happy to help you make an informed decision. Click HERE to book with us.

Conclusion

At this point, we have a baseline understanding of how each account works for first-time home buyers to make an informed decision. I’ve shared a table below that compares the features of the accounts that we have covered in this blog (click HERE for image source). Each of our scenarios are unique, so we do have to assess the merits of using each account on a case-by-case basis. My objective for this blog is to create general understanding of each account, as well as how they may or may not work in your favor. Buying your first home is a significant achievement & you deserve to have the right professionals by your side. Whether you need our advice, or the advice of a mortgage/tax/legal professional, we’ll put you in touch with the right person.


How does the FHSA compare to the RRSP Home Buyers’ Plan and a TFSA? 

FHSA RRSP HBP TFSA
Contributions are tax deductible Yes Yes No
Withdrawals for home purchase are non-taxable Yes Yes Yes
Annual contribution amount is tied to income level No Yes No
Account can hold savings or investments Yes Yes Yes
Unused annual contributions carry forward to the next year Yes Yes Yes
For first-time home buyers only Yes Yes No
Total contribution amount limit $40,000 $35,000 Cumulative
Can check contribution room remaining in CRA MyAccount TBD Yes Yes

 

Bring the Compass on your Hike. Why should you plan twice?

By: Shawn Todd, CFP

Just before the New Year of 2023 – I was fortunate enough to go for a short adventure trip with my wife Michele, where we planned to do some extraordinary hiking in Arizona.  The first thing I did when I packed for my trip on the days we hiked – was making sure that I had packed a GPS, a compass, enough water, and had a plan.  It sounds simple, but you’d be surprised on how many people venture out with just their shoes.  I saw many with no gear, or the wrong gear.

Some short stats:

  • 57.8 million hikers every year in the US.
  • There are 4 deaths per 100,000 hikers
  • 70% of hikers who die are male

Looking at these stats – right away it becomes a very good message to me that not only should I be careful, but I should always be packing a compass.  I’m male, I hike, I Iove my wife and family, and I’m planning a hiking trip.

When it comes to our personal lives, and our business lives, it’s very easy to overlook what you need to be packing in your ‘day to day’ backpack.  It’s very easy to be comfortable with life ‘as it is right now’. The home & your after-hours routine, and your work & your normal ‘day at the office’ routine all flow one day to the next without any issues.  Sometimes we neglect how each of these affects the other. How impactful our personal lives are with our work, and how significant a role our work plays in providing comfort in our personal lives.

 

 

The merging of our personal and business lives give way to four key themes on this Venn diagram above. These dual areas are:

Time – how much time can we spend with our loved ones, what kind of quality time is it?  How much flexibility does our business provide us, how hard have we worked to have it be this way?

Security – Our business without questions provides the security for us to make decisions that affect our spouse, our children and ourselves.  Where are the children going to post-secondary school?  Do we need to have two incomes or just one in the home? What will happen if one of our family is sick and needs care? Does our life feel safe and secure?

Income – We all start off with a life wanting to not be only concerned about money.  You may be more interested in your community, in charity, in just time with loved ones.  The income that comes in now, and the income that may or may not come in – if you weren’t working – will impact most of the decisions we make with the other three areas – time, security, and our goals.

Goals – This is where it’s always interesting.  Every single person has different goals, different needs, and different wants.  Spending a great deal of time here, really helps with a good foundation to mapping out where we want to go in life [and mapping out what trails we want to explore on that hike]

Many times, when we meet new clients – and we ask – “would you like us to spend time doing financial planning for you personally, and also for you corporately?” they may feel initially positive about it, but also feel slightly tentative about planning twice.  Why would I need to do this?

Some more short stats:

  • 96 percent of small business [with 1-100 employees] survive for one full year
  • 70 percent of small businesses [1-100 employees] survive for five full years
  • There are over 1.3 million businesses in Canada with employees
  • Small businesses provide over 70% of the total private labour market
  • A healthy growth rate for a small business should be between 15%
  • A business will double in 5 years at a 15% growth rate
  • 350 people out of 100,000 [ages 45-49] will be diagnosed with Cancer [87 times the chance of dying hiking]
  • 1,000 people out of 100,000 [ages 60 and older] will be diagnosed with Cancer [250 times the chance of dying hiking]

Spending time planning can’t take away all the risks of business failure, of financial stressors, or of getting a critical illness that impacts your business. It certainly can help make you aware of your blind spots.  Having an opportunity to see the risks, whether they are in your investment portfolio, in providing enough retirement income, or possibly in your business structure – really help make you more aware of your current situation, and your future situation combined.  You wouldn’t go on a hike without the proper gear, and I wouldn’t suggest you tackle life and business without the proper gear.

Take the time to review your own strategy and plan. If you’re unsure on areas, or need guidance, consider having a finanical plan completed, or updated.  Keeping both your personal and corporate worlds safe is key.  If you need to pack a compass to stay on track, I’d certainly recommend doing so.

Just my thoughts for the day,

Shawn Todd, CFP

Future Outlook

By: Corey Butler, Wealth Advisor

2022 is in our rear-view mirror and 2023 is now staring us in the face with a sea of uncertainty. Inflation, supply chain, Covid, China, Ukraine war, stagflation, interest rates… it never ends. This is where you come to the realization that you can only control your own day to day decisions and life. The world has, and will always have, issues. As far back as we can look, there is always civil unrest, famine, war, and natural disasters. So why do we react with such negative assumptions when we know history always repeats itself? Markets go up and markets go down. Buyers and sellers get to make their decision on what something is worth and whether there is upside or downside.

If we look at real estate which is under pressure as of late with massive interest rate increases by both the Bank of Canada and Federal Reserve. Market values have certainly retreated as of late, offering a lower entry point for buyers, but with interest rates at current levels, we essentially end up in the same place with monthly payments vs 2021 pricing. The exposed variable rate debt has gotten much more expensive but when compared to the 5-year fixed rate, the variable is still cheaper option. We need to accept that these rates are going to stay much higher than what we experienced throughout the pandemic. Historical Prime Rate Average has been 5-6%.  If you look out over the next 20-25 years at a modest 5% growth rate on real estate, you still have more than doubled the home value.  It is an incredible asset class.

There are so many conflicting outlooks across all sectors which result in complete paralysis in making decisions or taking a stance. A well-diversified investment portfolio is truly the key to your success during turbulent times. “The trend is your friend until it’s not, and trying to catch a falling knife hurts a lot.” These are wise words bestowed on me from mentors that I have had the pleasure to work beside.

An Investment Policy Statement “IPS” is one of the best ways to keep yourself on the straight and narrow to not get tactical during turbulent times. An IPS becomes your compass to help you find the North Star. It should be reviewed annually with your wealth advisor to ensure risk, goals, and behaviour are on track. If you currently have not created an IPS roadmap, please feel free to reach out and we can grab a coffee to discuss.

NEW YEAR! NEW APPROACH!

By: Michael Lutes CFP, CLU

Certified Financial Planner

It’s a brand spankin’ new year, (2023 baby!). The calendar has turned, the slate is wiped clean, you’re at mile zero! You have twelve whole months to kick some butt when it comes to managing your money and financial planning! (Wow, I’m getting energized just writing this!!)

Perhaps you’ve already begun brainstorming ways to improve your finances in 2023. Maybe you’re hunting for new tax-efficient planning strategies. Or you think your investment portfolio could use a revamp. Or, after spending time with loved ones over the holidays, you’re inspired to audit your insurance and estate plans.

Or, like so many of us, you truly don’t know where to start.

Here’s a tip…

Start with your values. Let those values motivate your goals, life objectives, dreams. Whatever you want to call them, start there.

So, what are your values? Seriously, yours, what are they? Take a moment, take a minute, take whatever time you need…

No, no, no, not THOSE values…. those are the values you think you should have. The ones your brother incepted inside of you when you were chatting over the holidays. Or maybe those values are the ones your Instagram feed is telling you to have – fancy cars, fancy food, fancy vacations, fancy clothes, fancy blah blah blah.

Not those.

I’m talking about YOUR values. The ones that truly reflect the deepest sense of what cultivates happiness in you. The ones that make you feel authentically happy to just be. The ones that when you’re living in alignment with them you are at your most satisfied, most at peace, most content, and most fulfilled.

THOSE are your values.

(Ummm, I thought this was a financial planning blog…no?)

How does this apply to financial planning?

While considering all the calculator stuff – tax, investment returns, insurance, etc. – the best financial planning is done in a space where decisions of how to use your money – or capital (more on capital later) – are in alignment with your values. This is where financial confidence builds. This is where the real financial planning magic happens.

In this space, you stop obsessing over moves in the stock market, you don’t really care what shows up in the daily financial news, you can genuinely listen to your neighbor’s stock tip from their cousin who “worked on wall street” and effortlessly separate opinion from truth and move on.

This is the space where you can be totally and completely confident and fulfilled in your financial decision making, because you know it aligns to your values and your life objectives.

So, when it comes to financial planning this year, start with your values – dig deep, be real, be honest, be reflective – and let your values motivate your goals that ultimately drive your decision making.

Do this, and you’ll be kicking butt in 2023!

And if you’re one of us who, like most, need help uncovering their values and articulating their goals, we recommend talking to a trusted advisor who can help you through the process. If you don’t have a trusted advisor, schedule some time with us – we love to help!

Renting vs. Buying a Home

Housing prices have been climbing quickly. This is especially true in major urban centres where most Canadians live. The rate of increase for the average sale price appears to be climbing faster than people are able to save.

Some Canadians see the dream of homeownership vanishing, others wonder if the choice to own is appropriate for them. No matter the situation, objective analysis should accompany the emotional aspects of buying a home.

What You Need to Know

Regardless of the ultimate choice, affordability is an important decision criterium. No one has ever enjoyed being “house poor”, where little money is left after making your rental or mortgage payment. Based on household income and available down payment a maximum purchase price can be determined.

Every Canadian financial institution has an online calculator to determine mortgage payments. Mortgage providers employ additional analysis tools to predict whether a borrower will repay the lender based on their income, total expenses and financial history. If lenders are reluctant or refusing to provide a mortgage, perhaps the timing is not appropriate, yet.

Mortgage rates have been at the extreme low end of their range for several years as central banks around the world have attempted to revive economies through inexpensive borrowing. When interest rates are low more people and businesses can afford to borrow more. When something is on-sale people buy more, but for borrowing, you cannot decide to delay a purchase when prices rise. Payments must still be made.

At some point rates will rise and some homeowners may not be able to afford their new, higher payments. Before buying their first home, borrowers should ask themselves, “if mortgage rates rose by 2%, would I be still able to afford my payments?”. For example, a $400,000 loan with an additional 2% interest adds $8,000 interest charges per year, or $667 more each month.

That increase would sit atop the existing mortgage payment. The same $400,000 mortgage with a 25-year amortization and 2.25% 5-year fixed rate requires a monthly payment of $1,750. Each additional $100,000 adds another $450 per month to the payment.

Lenders typically limit housing costs to 35% of gross income, acquiring a mortgage will ultimately decide if you purchase and the price. If you earn $100,000 then your maximum housing costs are $35,000 per year. Subtracting property taxes, condo fees and utilities will determine the amount available for mortgage payments. If these costs totaled $14,000, then a maximum of $21,000 would remain for mortgage payments. $21,000 divided by 12 equals $1,750 per month, yielding your maximum mortgage of $400,000.

A down payment is also required; the more the better. At least 10%, but 20% is preferred to keep payments lower. In the examples above with a $400,000 mortgage a first-time home buyer should plan on a down payment of at least $50,000 netting a purchase price of $450,000.

An experiment to determine if home ownership is appropriate is to act as a homeowner while renting. That is, make housing costs equal 35% of gross income. Set aside exactly 35% each month, pay your rent and utilities and the rest goes directly into a savings account, an RRSP or TFSA. Set up the deposit like a monthly bill that is paid automatically. If you are able to practice this disciplined spending/saving approach you are able to live at 35%, if not habits may need to be changed or a more modest home purchase should be contemplated.

Continuing the example of $100,000 income, then $35,000 per year or $2,920 should go toward rent, utilities and savings. If rent is $1,800 and utilities are $150 set up an auto-deposit for $970 each month. At the end of one year, you will have nearly $12,000 more set aside. At the very least this test should increase the amount of your down payment.

While you are accumulating your down payment the type of investments you purchase and sheltering it from taxes is also important. First time homebuyers can withdraw funds from their RRSPs, for example. Certain conditions apply, of course.

The Bottom Line

A dangerous emotion during a period of rapid rises in house prices is desperation. “If we don’t buy now, we’ll never be able to afford a home” has led many to overextend themselves financially. After that has occurred owning again can be almost impossible.

Couple the dreams of home ownership with objective analysis to determine the best course of action. Prudently investing your down payment in a tax advantaged way is another important aspect of the home buying and ownership experience. We are happy to help with calculations, scenarios, timing, negotiation advice with lenders and investment recommendations.

Book an appointment with us today! – CLICK HERE

How to Financially Prepare for Divorce

Divorce is an emotionally draining time for not only the couple but for their family as well. It can also be a financially devastating time. Putting your energy into your financial wellbeing is essential when going through this big life transition. You will be forced to make life changing decisions in a very short period, and it is important that you know what you are entitled to and where you stand in the marriage, from a financial perspective.

What You Need to Know

  1. Find and Compile Your Financial Records – Your first move to protect yourself financially is to make a file of all your financial records. Tax returns, loan documents, retirement accounts, bank accounts, and investment statements. You want to be sure that you are aware of all accounts and liabilities when you go into the divorce process.
  2. Assess Your Assets – Make an exhaustive list of all your assets that could come into question when it comes to division of property. Marital assets are any asset or liability that was acquired during the marriage. This includes houses, cottages, land, investments, pensions, personal property (jewelry, art etc.), vehicles, and other types of intangible property (such as intellectual properties). Debts can also be considered marital property depending on the nature of the liability. Typically, assets acquired before marriage remain in the possession of the person who brought them into the marriage. Inheritance and gifts can also be excluded from divorce if the assets have not been used to buy joint property.
  3. Open New Bank Accounts – Many married couples have combined finances and use joint bank accounts for convenience’s sake. If you have or if you plan to end your marriage, one of your first steps should be to open new bank accounts in your name that your spouse does not have access to. You should also make it a priority to have any direct deposits updates with your new accounts (your pay cheque, for example) and start paying your bills out of your new individual account.
  4. Change Your Will and Update Beneficiaries – Most couples name each other as beneficiaries in their will and on any investment or insurance accounts that beneficiaries are designated. This should be changed as soon as possible. This may not seem like a top priority, but the unexpected happens and no matter how amicable the divorce, it is impossible to know your wishes will be honors upon your death if you do not put it in writing. Investment accounts and life insurance policies can easily have their beneficiaries changed through your advisor. Your will and power of attorney designations needs to be updated by a lawyer.
  5. Change your Mailing Address (if applicable) – If you are changing your address due to the divorce, or even if you are splitting time in the family home until the divorce is settled, you should change your mailing address immediately. Whether this is to your new home or if you secure a PO Box, it is important that your mail stay private as you may receive correspondence from your lawyer or information about your finances that your former spouse should not be privy too.
  6. Get Credit Cards in Your Name – If you have joint credit card, pay them down and cancel them immediately so that you don’t find yourself responsible for debt that your spouse may accumulate when you leave the marriage.
  7. Refrain from Making Any Big Financial Decisions – Divorce can be a long road. Assets may become unavailable to you as you go through court proceedings, or conversely you could end up having to hand over more to your spouse then planned, and it is wise to hold off any making any big purchases or making any irreversible decisions until the divorce is finalized.

The Bottom Line

Divorce is complicated and can be a difficult time, both emotionally and financially. It is always best to work with legal and financial professionals when navigating a divorce to ensure your best interests are being looked out for and that you are being treated fairly as the divorce proceeds.

The Top 5 Mistakes You Should Avoid When Selecting a Financial Planner

A financial plan is a strategy you set in order to be able to attain your goals. With a financial plan, you can effectively manage your cash inflow and outflow and other recurring financial responsibilities with the aim of putting you in a better financial position to attain your set financial goals. A good financial plan should include provisions for your debts, income, insurance, savings, investments, and other things that make up your financial life.

Mistakes You Should Avoid When Selecting a Financial Planner

Hiring A Financial Planner Based on Referral Only

In this case, what is good for the goose may not be good for the gander, and in that case, you should base your hiring a financial planner solely on the fact that your friend has good things to say about him. For one, financial situations are peculiar situations, and a financial planner may not be well equipped to handle all kinds of financial situations. Make sure you do your vetting using your criteria and not what your friend tells you.

Hiring A Financial Planner on Sentiment

When you hire a financial planner because of an existing relationship with them, then you might be making a big mistake. You should hire a financial planner based on your current and future financial needs. Also, you must ensure that such a person is absolutely qualified to handle your financial needs.

Using Past Performances

When you only consider the past achievement of a financial planner as a criterion of hiring such a person, then you may be making a mistake. The past performance of a financial planner does not guarantee future success or a better plan going forward. Once you notice your financial planner is not adapting your finances to your current financial situations for a better long-term financial position, then it may be time to make a change.

Not Conducting a Thorough Research

When hiring a financial planner, there are a lot of things you must consider. Such a person must tick as many boxes as possible of what you want in a financial planner. You should vet the credentials of the financial planner, if possible, interview his clients to know how he handles different financial situations that may be similar to your financial situation. Also, try and interview multiple financial advisors to know the different personalities and investment styles to be able to pick the best.

Getting Carried Away by Promises

Yes, we want the best financial planner but that does not mean a financial planner that promises heaven and earth is the best. Most of the time, a sweet talker is not the best at what they do. The same goes for financial planners. You should ensure that your financial planner is not only concerned about choosing the most profitable investment and exploring the market. These are usually for their ego. Go for a financial planner that has your long-term financial position at heart. They usually make the best decisions at every turn.

Tips On Having an Effective Financial Plan

Set Your Goals

A financial plan is mostly about having something for a rainy day and how to manage your current financial situation to be able to achieve that. Therefore, it is good to outline what you are saving for. You should be exact on why you have a plan and why you are saving for it.

Have A Budget

This is for you to better manage your cash inflow. You should outline your bills, debts, and other necessary financial obligations. Yes, you can spoil yourself once in a while, but that should not get in the way of what you are setting aside for your goals.

Sort Your Taxes

Taxes are inevitable but there are better ways to go about it that will ensure you save as much as you can on your taxes and enjoy tax deductions. This will give you a better cushion for your financial plan.

Be Ready for Emergencies

Life has a way of throwing us a curveball. Of course, things won’t always go according to plan, which is why it is important to include an emergency fund in your financial plan to enable you to deal with unforeseen circumstances and expenses. This is where insurance also comes in handy. Have a good insurance plan to help you deal with emergencies.

Don’t Swim in Debt

Achieving your financial goals doesn’t mean you should go committing yourself to every financial aid that will drown you in debt. Debt is one of the banes to an effective financial plan. Ensure that you manage your debt effectively so you can achieve your goals.

Be Ready for Retirement Taxes

Most financial plans get you ready for when you are no longer active. So, your retirement goals and plans should take the forefront of your financial plan.

Multiple Investments

The only way to multiply your savings is to invest in different portfolios that will bring you both short-term and long-term profit.

Have An Estate Plan

Lastly, have an estate plan that will help you make important financial decisions when you can no longer make them yourself. Having an estate plan is not only for the rich.

Book and appointment with us today – Click Here

6 Tips for More Successful Investing

There is no one and done way to invest, but there are a few tried and true principles that have served investors well over the years.

What You Need to Know

  1. Have patience and a long-term outlook – Great investment results do not happen overnight.  Think of your moneys earning potentials in the context of years, not months.
  2. Never buy on a tip… do your research – We all know someone who has “discovered” the next big money maker. Be wary of taking tips from friends and family members. Do your own research and make decisions that you are confident in.
  3. Don’t sell on bad news – This may be particularly relevant right now.  Markets tend to overreact on the downside, so be sure that you know the actual implications of any bad news on your investments before making a rash decision.
  4. Don’t allow your emotions to take over – Emotion has no place in the investment world. Facts, facts, and more facts are what should be making your investment decisions for you.  Having a plan and sticking to it can greatly help reduce emotion driven decisions.
  5. Stay invested and take advantage of compounding – Compound interest is one of the most powerful tools that investors have.  Leave you money invested as long as you possibly can to take advantage of compounding.
  6. Make an investing philosophy and stick to it – Know your comfort level and tendencies before you ever start investing. This way you will be sure to have a portfolio that will work for you instead of stressing you out.

To discuss your investments – contact us! Click Here

Financial Planning Checklist

It is always a good day to review your financial plan! Knowing what you have and haven’t accomplished is vital to reaching both your long and short-term goals. Below is a list of financial planning priorities that should be reviewed regularly.

What You Need to Know

Insurance

  • Did you buy a new house?
  • Did you have a baby or add to your family?
  • Did you get married?
  • Did you take on new debt?
  • Did you get a new job or have a change in income?
  • Did you experience a marriage breakdown or divorce?

Liabilities (new or changed)

  • Mortgage
  • Business Loan
  • Student Loan
  • Line of Credit
  • Credit Card Debt
  • Car Loan
  • Any other liabilities?

Assets (new or changed)

  • Art
  • Jewelry
  • Cash
  • Real Estate
  • Land
  • Stocks
  • Bond
  • Life Insurance Policies

Short Term Goals (New or Changed)

  • Save for a House
  • Save for Vacation
  • Pay off High Interest Debt
  • Start Emergency Fund
  • Major House Repair or Renovation

Long Term Goals

  • Retirement Dates
  • Education Savings
  • Mortgage Elimination

Investments

  • Adjusting Risk Tolerance
  • Reviewing Asset Allocation
  • Savings Strategies
  • TFSA
  • RRSP
  • RESP
  • RDSP
  • Un-Registered Accounts

Accounting for Big Changes

  • Did You Move?
  • Did You Sell Major Assets?
  • Did You Change Jobs?
  • Did You Take on More Debt?
  • Did Your Family Grow?
  • Did You Lose a Loved One?
  • Is There a Critical Illness in the Family?
  • Did You Receive a Gift or Inheritance?
  • Was Someone in Your Family Diagnosed with a Disability?

The Bottom Line

Your advisor is here to help you and guide you through each step of the financial planning process. The above list should be used as a starting point to address basic financial planning needs.

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Credit Card Debt Is Your Financial Worst Enemy

Credit card debt is a recurring debt you are allowed to owe as long as you don’t exceed your credit limit. A credit card account is tempting as you can get whatever you want on credit as long as it is within your limit. It is always advised that you shouldn’t make purchases you cannot afford to cover at month-end. Another tricky feature of a credit card account is their interest rate charges on your debt until you fully pay. Payment is usually due at month-end and failure to pay as and when due would result in the accumulation of your debt as annual interest will be charged on the amount owed. There is also a minimum payment of 1% to 2% of your balance plus other charges that must be made to ensure you keep crediting your account. If you pay less than this minimum payment, interests will be charged, and it will keep on accumulating. Owning a credit card account can be a nightmare if not properly managed.

Tips On How To Overcome Credit Card Nightmare

The basic truth about overcoming a credit card nightmare is by taking charge of your spending. If you get this right, then you will enjoy the benefit of a credit card account. Here are some tips on how you can overcome your credit card nightmare:

  •  Know Your Credit Card – Get as much information as you can on your current credit cards or potential ones. Research the issuer’s payment schedule and other terms and conditions. Be sure to confirm the interest rate and other fees that will be charged if you delay your monthly payment. You can set up automatic payments and calendar alerts to avoid falling behind on your payment.
  • Be Disciplined – You should set spending rules on your credit card that you must follow. You can set a limit on your credit card expenses in a month. This will give you control of your spending and ensure that you live within your means. It is advisable to charge on your credit card what you can normally pay for with cash or debit card.
  • Keep Track – You should routinely keep track of the status of your account at least every week. Charges accumulate without notifying you, so it is advisable to check your account at least once a week to know the state your account is in. Adopting this principle will help you track your credit card debts, the types of credit you have, and your repayment history. These are what lenders will use to rate your credit score.
  • Avoid Cash Advances – Having a credit card account that can take care of things when you can’t afford it is quite tempting. You tend to want to take cash advances because you know you have a credit card account that can take care of things. Cash advances from your credit card account result in higher interest rates and transaction fees. There is no moratorium on your cash advance. Interest is charged immediately you take the cash advance. Avoiding a cash advance will put you in full control of your credit card account.

Tips On How To Prevent Accumulation Of Credit Card Debt

Credit card debt is easy to accumulate but difficult to do repay. The only way to avoid credit card debt is to prevent it from accumulating in the first place. Here are some tips on preventing credit card debt accumulation:

  • Negotiate Your Interest Rate – Negotiating your interest rate on your credit card debt will go a long way in reducing credit card debt accumulation. The interest rates on your credit card debt are what make it difficult to settle your debt. Negotiate your interest rates with your credit card issuer so you can get the best deal possible.
  • Forget You Own A Credit Card Account – Once you are in a credit card debt, a trick you can try to prevent accumulating debt is to put your credit card away for other purchases, at least until you meet up with your monthly repayment. That is why it is advisable to use your credit card for short-term financial needs such as utilities, groceries, and some other monthly bills. This will lighten the burden on your credit card account by keeping your balance within a reasonable limit. If you can avoid using your credit card for a while, it will go a long way in reducing your debt burden.
  • Pay Your Debt As and When Due – Simply put, what makes your credit card debt pile up are the charges and interest rates on delayed payments. The best way to get over this is to pay your credit card debt as and due. Missing a due payment can leave you playing catch up. Your next payment will be for two months.
  • Watch Your Spending – A credit card account can leave you spending lavishly but you need to caution yourself and stick to what you can afford. Going for everything you see for sale is part of what gives you credit card debt. It is advisable to always avoid unnecessary spending.

Feminist Investing

Gender inequality affects almost all aspects of women’s lives, but perhaps none as much as their financial life. Canadian women earn on average only 88 cents to the dollar that men earn, and that number is even less for minorities and trans women. While progress is being made, there is still much work to be done. Luckily, there are simple steps we can all take to support women’s financial success.

What You Need to Know

  1. Start Talking About Money: It is time to start talking to friends, family, and partners about money. We may find that we have a lot to learn from those around us. Money has been a taboo topic in our society for a long time and this taboo reinforces the wealth gap and money inequality. Talking about money can give you an idea of what is possible and where you stand financially. We tend to think we are falling behind others financially, or that no one else has ever had financial struggles. By starting meaningful conversations with those around you, you may find that they have similar experiences to you. This knowledge is empowering and can help you better navigate your own finances.
  2. Spend Money on Women: Simply put, one of the best ways to be a financial feminist is to put money in women’s hands.  There are more women-owned businesses than ever and thanks to the internet, it is easy to be a mindful shopper. Take the time to search out businesses owned by women and prioritize supporting them when you can.
  3. Raise Financially Savvy Girls: Financial inequality starts early. According to data analyzed by BusyKid, an allowance app for kids out of the US, parents pay boys twice as much for doing chores as the pay girls for the same chores. It also found that only 21% of parents talk to their kids about money, and only 10% talk to their kids about investing and debt. Talking to your kids about money, especially girls, will set them up for success later in life. Kids tend to think Mom and Dad have unlimited resources. Explain to them what your expenses are, including your investments and savings strategies. Get girls into the mindset of building wealth early.
  4. Investing with Intention: Every dollar you invest has an impact. Therefore, it is important to choose investments that not only will be profitable, but that align with your values. Look for successful companies with gender-equal boards, women leadership, and good track records of equality in the workplace. Put your money to work in more ways than one.

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Why You Should Only Have One Advisor

When it comes to financial advisors, less is more! There are many benefits to having only one advisor that you trust to work with to execute your financial plan and work toward your financial goals. Below are a few ways having one advisor can benefit you.

What You Need to Know

1.   Consolidation

Having multiple advisors means you have multiple accounts, possibly with multiple different companies. This can become confusing for you and eventually your beneficiaries. Consolidating will not only make your investments easier to keep track of, but it will ensure that your investments are working together instead of potentially working against one another.

For example: If you hold a clean energy fund with Advisor A and also hold a clean energy fund with Advisor B, then you may be over invested in an asset class. If the investments were all being managed by one advisor, they would be able to create an asset allocation for all your money that would manage risk appropriately.

2.   Taxes

Registered contributions, income planning, and estate planning are just a few of the decisions that you will make with an advisor that can significantly impact your income taxes. Having two or more advisors can pose a significant risk when it comes to tax planning.  One advisor can’t know what another is doing.

For example: If your RRSP contribution for a given year is $20,000, your advisor may advise you to contribute to your RRSP. However, if you have another advisor who is unaware that you have already used up that contribution room, they may advise you to contribute to your RRSP as well. This can result in stiff penalties for overcontribution. Having one trusted advisor can eliminate this problem. 

3.   Fees

Many advisors operate with a fee-based compensation structure that is dictated by account size. Having all your investments in one place may offer you the opportunity to save on fees.

For example: If you have three $100,000 accounts with three different advisors and are paying 1% on each account then you are paying $3,000 total in fees. However, if you consolidated your portfolio with one advisor who may be able to offer you a lower fee due to account size (let’s say .75%), you could be saving big time in annual fees!

The Bottom Line

Having one advisor that you trust is a smart financial move. Your portfolio will be simplified, better allocated, and benefit from someone having knowledge of your entire financial picture. If you do choose too have more than one advisor it prudent to ensure that the advisors are in contact to make sure that their decisions aligned and make sense for your financial plan.

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Should First Time Home Buyers Continue to Rent?

Housing prices have been climbing quickly. This is especially true in major urban centers where most Canadians live. The rate of increase for the average sale price appears to be climbing faster than people are able to save.

Some Canadians see the dream of homeownership vanishing, others wonder if the choice to own is appropriate for them. No matter the situation, objective analysis should accompany the emotional aspects of buying a home.

What You Need to Know

Regardless of the ultimate choice, affordability is an important decision criterium. No one has ever enjoyed being “house poor”, where little money is left after making your rental or mortgage payment. Based on household income and available down payment a maximum purchase price can be determined.

Every Canadian financial institution has an online calculator to determine mortgage payments. Mortgage providers employ additional analysis tools to predict whether a borrower will repay the lender based on their income, total expenses and financial history. If lenders are reluctant or refusing to provide a mortgage, perhaps the timing is not appropriate, yet.

Mortgage rates have been at the extreme low end of their range for several years as central banks around the world have attempted to revive economies through inexpensive borrowing. When interest rates are low more people and businesses can afford to borrow more. When something is on-sale people buy more, but for borrowing you cannot decide to delay a purchase when prices rise. Payments must still be made.

At some point rates will rise and some homeowners may not be able to afford their new, higher payments. Before buying their first home, borrowers should ask themselves, “if mortgage rates rose by 2%, would I be still able to afford my payments?”. For example, a $400,000 loan with an additional 2% interest adds $8,000 interest charges per year, or $667 more each month.

That increase would sit atop the existing mortgage payment. The same $400,000 mortgage with a 25-year amortization and 2.25% 5-year fixed rate requires a monthly payment of $1,750. Each additional $100,000 adds another $450 per month to the payment.

Lenders typically limit housing costs to 35% of gross income, acquiring a mortgage will ultimately decide if you purchase and the price. If you earn $100,000 then your maximum housing costs are $35,000 per year. Subtracting property taxes, condo fees and utilities will determine the amount available for mortgage payments. If these costs totaled $14,000, then a maximum of $21,000 would remain for mortgage payments. $21,000 divided by 12 equals $1,750 per month, yielding your maximum mortgage of $400,000.

A down payment is also required; the more the better. At least 10%, but 20% is preferred to keep payments lower. In the examples above with a $400,000 mortgage a first-time home buyer should plan on a down payment of at least $50,000 netting a purchase price of $450,000.

An experiment to determine if home ownership is appropriate is to act as a homeowner while renting. That is, make housing costs equal 35% of gross income. Set aside exactly 35% each month, pay your rent and utilities and the rest goes directly into a savings account, an RRSP or TFSA. Set up the deposit like a monthly bill that is paid automatically.  If you are able to practice this disciplined spending/saving approach you are able to live at 35%, if not habits may need to be changed or a more modest home purchase should be contemplated.

Continuing the example of $100,000 income, then $35,000 per year or $2,920 should go toward rent, utilities and savings. If rent is $1,800 and utilities are $150 set up an auto-deposit for $970 each month. At the end of one year you will have nearly $12,000 more set aside. At the very least this test should increase the amount of your down payment.

While you are accumulating your down payment the type of investments you purchase and sheltering it from taxes is also important. First time homebuyers can withdraw funds from their RRSPs, for example. Certain conditions apply, of course.

The Bottom Line

A dangerous emotion during a period of rapid rises in house prices is desperation. “If we don’t buy now, we’ll never be able to afford a home” has led many to overextend themselves financially. After that has occurred owning again can be almost impossible.

Couple the dreams of home ownership with objective analysis to determine the best course of action. Prudently investing your down payment in a tax advantaged way is another important aspect of the home buying and ownership experience. I am happy to help with calculations, scenarios, timing, negotiation advice with lenders and investment recommendations.

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Five Credit Mistakes You Should Never Make

In our everyday life, we spend so much on bills and other financial expenses we feel like a superhero when we wonder how we have managed to keep things together. One of the ways you can stay afloat and not drown in expenses is by having a credit card account. A credit account is a type of account that allows you to borrow money from your account to cover your monthly expenses.

You are however required to pay back money borrowed with interests and other additional charges. The line of credit you can borrow depends on the level of your debt. You have the option of paying your debt monthly or after each statement cycle. The nature of a credit card account makes it easy to accumulate debt which could be difficult to get out of. It offers a continued balance of debt option which makes it easy to accumulate debt. To avoid this kind of debt situation with a credit card account, here are some tips on the mistakes you should never make with a credit card. 

Mistakes You Should Never Make with A Credit Card

  1. Maxing Out Your Credit Card – When you max out your credit limit, apart from the huge debt profile, you also have other issues to be worried about. You may find it difficult to obtain another credit card account because of your credit score. You will also attract an Annual Percentage Rate (APR) which will be charged on every late payment. It is advisable to set a limit to your account to caution you and prevent you from maxing out your account.
  2. Paying Late – When you make late repayments on your credit card account, it damages your credit score and may put you in the bad books of your credit card issuer. A month’s late payment could reduce your credit card score by as much as 100 points. Imagine you are late for 3 months or more. You also stand the risk of accumulating APR on your late payments which increases your debt profile. The remedy to this is to ensure that you pay your credit card debt as and when due.
  3. Minimum Payment Habits – There are minimum debt payments you are required to meet every month on your credit card account. however, it is not advisable to only pay the minimum payment every month. You are still susceptible to APR charges which will increase your debt profile. To avoid this, try as much as possible to pay more than your required minimum payment.
  4. Not Reviewing Your Account Statement – One common and avoidable mistake you can make on your credit card account is to overlook checking your account statement on a regular basis. Reviewing your credit card account regularly allows you to know the status of your account and prevent reporting or charging errors and potential frauds from taking advantage of your account. if you cannot keep up with a weekly review, you should at least do a monthly account review to keep up with your bills and know the status of your account.
  5. Having Too Many Credit Card Accounts – In the short term, this might be a good idea because it gives you enough options to source for lines of credit to cover your expenses. However, in the long term, what this means is that you will not be able to keep up with the accumulated debt on different credit card accounts. These accounts will also charge APR which means more debts. Also, when you apply for a new credit card, the card issuer makes an inquiry on your credit card and too many inquiries may spook your existing lenders. You can take advantage of Pre-qualification forms which give you the opportunity to check if you qualify for a new credit card without damaging your credit score.

How Interest Rates Work

If there is ever a time to start understanding how interest rates work, now might be it! The Bank of Canada has been slashing interest rates consistently since the beginning of the Covid-19 pandemic. Below is a simple explainer of what it means to cut rates and how it could affect you and your money.

What You Need to Know

What Is an Interest Rate?

Simply put, an interest rate is the cost you pay to borrow money. For example, a bank may agree to lend you $10,000 but only if you agree to pay them 9% interest on that $10,000. This is how lenders get paid.

What Is the Federal Fund Rate? And Why Does it Change?

The federal fund rate, also known as the overnight rate, target rate, or nominal rate is one of the most important tools the federal government has.  A central banks ability to change the target rate is used to sway the economy in two major ways:

  1. The first is inflation. The government can raise interest rates when inflation is becoming too high as a way to stabilize it. The idea is that the raised rates lessen the flow of credit into the financial system. These raised rates tend to discourage people from borrowing and spending, which in turn can stop the rise of inflation.
  2. The second is to stimulate the economy. This is when growth is too low and unemployment is too high. By lowering the rates, the central banks hope to encourage borrowing and start a flow of money into the economy.

How Will Changes Affect You and Your Money?

Rate changes will affect anyone who has any debt. That means mortgages, lines of credit, credit cards…essentially anything you pay interest on! This is important for mortgages; especially when rates go down. If you have a fixed rate mortgage, rates going down may be a good reason to refinance and take advantage of lower interest rate.

What Do Interest Rates Have to Do with Investing?

Lowered rates are meant to encourage people to start investing in risky assets such as stocks and bonds.  This of course is part of the plan to stimulate the economy. By lowering interest rates, securities become more attractive than keeping your money in cash. The fact that the government takes steps such as this in an economic downturn is one of the reasons that securities typically will outperform cash in the long term.

The Bottom Line

The central banks have been using interest rate cuts to try to hedge against the economic impact of the covid-19 pandemic.  Lowered interest rates are designed to provide opportunity to businesses and investors. Be sure to talk to your advisor to find out how you could benefit.

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What Does Having a Pre-Existing Condition Mean for Your Life Insurance?

It’s a common misconception that having a pre-existing condition means that you automatically do not qualify for life insurance. The good news is this is not always the case and armed with a good life insurance agent, many individuals with pre-existing conditions get approved for insurance. The path to being insured just may look a little different for someone with a medical condition.

What You Need to Know

1.Work with a Broker

There are many life insurance carriers in Canada and each company has a different set of underwriting guidelines and level of flexibility. It is crucial to reach out to a number of companies when trying to get a pre-existing condition covered. Working with a broker is the most efficient way to research companies as most life insurance brokers have the ability to work with any company they choose. This also means they will have knowledge of which companies work best for hard-to-insure clients.

2. Understand Traditional Underwriting vs Non-Medical Underwriting

Many companies now offer non-medical underwriting. This usually means that applicants will be asked a number of medical questions and if the questions satisfy the insurance company then the insurance will be approved. If they don’t, the application will be rejected. This can work in the favor of someone with a pre-existing condition if the questions either:

a) do not ask about that particular condition

b) the question asked about that condition is forgiving (example: you are diabetic but the application only asked if you are an insulin dependent diabetic).

However, sometimes traditional underwriting can be the best option for someone with a pre-existing condition. Traditional underwriting can allow you the opportunity to make a case for a well-managed pre-existing condition through in person exams and doctors statements. If the applicant doesn’t qualify for non-medical insurance because of a condition there is usually no wiggle room with the insurer.

3. Manageable Condition vs Severe Condition

Not all pre-existing conditions are treated the same by insurers. Life insurance companies put each applicant through an underwriting process that uses in person medical exams, claim histories, and underwriting guides to determine whether or not they will insure someone. There is a big difference to an insurance company between someone with a manageable condition and someone with a severe condition.

For example, having high blood pressure is considered to be a pre-existing condition. However, it is a condition that can often be managed by medication and lifestyle choices. Therefore, an insurer may look at someone with high blood pressure and determine that their condition is well under control and be willing to make an offer to insure.

Conversely, someone who has been diagnosed with a terminal cancer would be considered to have a severe and unmanageable condition that would cause the insurer to reject the application.

4. Guaranteed Acceptance Products

Many companies offer guaranteed acceptance life insurance products and sometimes this is the only option for applicants with a pre-existing condition.  These products are typically offered with high premiums and small face amounts.  As well as higher premiums, they usually contain a deferred provision. This means that the insured is expected to pay premiums for two years before the insurer will pay out the death benefit. In the event the insured dies within the first two years, the premiums are most often paid back to the beneficiary. This can be a good option for those who are otherwise uninsurable but would like to have something to cover final expenses.

The Bottom Line

Knowledge is power when it comes to getting approved for life insurance and so is having a good advisor to guide you along the way. Be sure to bring a complete list of medical conditions and any medications you are on when meeting with a life advisor so that they can help you sort through companies and products to find the best fit for you.

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What to Expect When You Are Expecting

Building a home is not for the faint-hearted. A lot of sacrifices and planning are required, especially on the financial side. You do not want to bring your children into the world without proper financial plans. It is even advisable to start planning for kids long before they come. Before having children, you should try as much as possible to settle all debts, budget for child care and support, and apply for tax breaks and other benefits that may be available for children. A lot of questions pop up when trying to plan for your kids and with enough research, you can get adequate answers. We would try as much as possible to answer some of these questions for you.

How Much Insurance Should You Carry On Your Life Once You Have A Family?

When it comes to the type of insurance you should do once you have a family, experts advise that your coverage should be 7 to 10 times your annual income for adequate cover for your family. Surveys show that 74% of Canadians have a life insurance policy but 70% majority are worried that their life insurance is not adequate to take care of their family in the event of their death. Determining what will be considered as enough for life insurance is almost an impossible task because families differ but there is a general formula you can use. This formula is known as DIME – Debts, Income, Mortgage, and Education. DIME is the total sum of:

  • All your current and future debts;
  • The multiplication of the number of years your family will need your income with your current annual income;
  • What you owe on your mortgage and any expense on renovation or expansion; and
  • How much will cost to send your kids to school up until the level you wish.

What you want in your life insurance cover depends on what you want to leave behind for them. Life insurance is not for you but your family.

 Do You Need A Living Will?

A living Will, also known as Personal/Advance Directive is a document that contains your preference and wishes for your personal and medical needs for when you are unable to make such decisions. The document takes care of your end-of-life affairs whilst still alive. You need a living Will to take care of things for when you can’t make key decisions. It also spares your family from making difficult decisions in your absence. A living Will protects you and your family, just like insurance. Anything could happen at any time, it could be a ski accident, stroke, or bike crash that may incapacitate you, with a living Will in place, you are still in control of your life. A living Will must include who to make medical and financial decisions on your behalf, the level of their authority, your medical wishes, and the welfare of your family if you are incapacitated. Ensure you find out the laws that govern a living Will in your province.

How Early Do You Need To Begin Estate Planning To Ensure That Your Child Is Given Your Inheritance?

Estate planning is an important decision you need to make so as to adequately provide for your family. It is a detailed plan on how you want your assets to be distributed when you depart. It has its tax benefits, and it helps you structure and manages your finances both when you are alive and after you are gone. You can engage the services of a lawyer or use estate planning kits, apps, and websites with estate planning templates. If you choose the latter, it is advisable to give a lawyer to review for you. Estate planning involves documents like a Will, power of attorney, and a living Will. which is why you may need to consult, lawyers, tax experts, and financial planners when you want to come up with an estate plan.

There is no rule of thumb that states the exact time you should start your estate plan. Experts will say once you cross the threshold of being a minor, you can start your estate planning while some people choose to come up with an estate plan when they clock 40 or are diagnosed with a terminal disease. This means that you could start as early as when you clock 18 or when you are close to the great beyond of which you must still have the legal capacity to come up with an estate plan. it does not really matter when you begin your estate planning as long as you meet the legal requirements of making and your plans and wishes are clearly articulated. You should also make sure you update your estate plan every 3 to five years.

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RESPs 101

Not only has the cost of university risen sharply, but so has the importance of graduating with a marketable skill and knowledge set. In 2016, the cost of tuition, books, supplies, residence and travel for a student in an undergraduate program at a Canadian public university is approximately $20,000 per year.

For many new grandparents, Registered Education Savings Plans (RESPs) were not as commonly known as when their children passed through post-secondary education.

If you want to conscientiously pass wealth between generations and help minimize your grandkids’ debt load in the future, opening and contributing to an RESP on behalf of your grandchildren is an excellent option.

What you need to know

The opportunity to set aside a useful inheritance directly to your grandchildren for the expressed purpose of education is extremely appealing for many.

Although more in-depth analysis may be required to understand the eligibility for the Canadian Education Savings Grant (CESG), the quick RESP facts are:

  •  The CESG will match 20% of RESP contributions up to a maximum of $500/year per beneficiary and to a maximum of $7200 lifetime per beneficiary.
  • There are no minimum or maximum annual RESP contributions, but each beneficiary has a $50,000 lifetime contribution limit.
  • Contributions grow tax-free until they are withdrawn, like an RRSP.
  • Contributions are not taxed at withdrawal, only the grants and earnings withdrawn, called Education Assistance Payments (EAP) are taxed.
  • EAPs are taxed in the hands of the student, typically a lower income tax rate or no tax at all if their income is low enough

EAPs can be used for education-related expenses, including housing and transportation, when enrolled at any eligible domestic or foreign post-secondary institution or training program. You can contribute to an RESP up to its 31st year and it can stay open for 35 years.

Bottom Line

Canadian Education Savings Grants (CESG) provide an annual $500 and lifetime $7200 incentive to save for your grandchildren’s post-secondary education by contributing to an RESP. All the contribution and grant money will grow tax free to help fund any education-related expenses for your grandchild’s future education.

If you’re concerned about your children funding a post-secondary education for your grandchildren, give us a call. We can provide you with details and a plan that will allow your grandkids to go after their dreams!

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How To Create A Portfolio For The Long Run

The concept of investment is no longer alien and almost everyone now has one form of investment or the other tucked away somewhere. Even new babies now have investments. Just as there is no age limit to investing so is there no limit to the extent of time you can hold your investment. You can hold your investments for decades and reap multiple profits on them. It is not all about having a long-term investment portfolio; there is a science to it also. It is important to be strategic in your choice of investment portfolios. Everyone has a risk appetite, and it is important to choose an investment portfolio that conforms with your risk principles. Another key factor to having a healthy long-term investment portfolio is adapting your investment approach to the changing dynamics of the financial market.

Secrets To Creating a Long-term Investment Portfolio 

When it comes to having an investment portfolio, it is important that you make the right decisions. This is what will ensure a healthy investment portfolio. If you are looking to grow your wealth over a 20-to-25-year span, you should try the following tips:

  1. Select The Appropriate Asset Allocation: At this stage, you use your current financial situation to determine how you want to spread out your investment portfolio. To successfully do this, you must consider your age, the amount of capital you want to invest, and your risk appetite. Your risk appetite is important because when it comes to investment, you will make losses at one point or the other. So, depending on your risk appetite, you should choose an investment portfolio that is in line with your risk appetite. You should also consider your current expenses as you do not want to invest all your money and be left with nothing to settle your bills.
  2. Structuring Your Portfolio: After determining how you want to allocate your investment portfolios, the next thing to do is to determine how much goes into each portfolio. This is where you determine how much goes into bonds, stocks, and cryptocurrencies. You can also go further by further dividing your portfolio allocations. For example, if you have an equity portfolio, you may decide to spread it across different industries to minimize your risks. You can also spread your bond portfolio into short-term bonds and long-term bonds.
  3. Monitoring and Reviewing: After successfully structuring your investment portfolios, you need to keep an eye on them to make necessary adjustments where necessary. The fact that they are long-term investments does not mean you can abandon them and check them when you are ready to cash out. You analyze your positions from time to time and rebalance them where necessary. This is made necessary because of the constant price movements in the financial market which will make your initial trading positions change. Your current financial needs may also require you to change your position. If you have extra cash to invest, you may want to pump in more money and if you need cash, you may want to deduct from profits already accrued.
  4. Strategic Rebalancing: After reviewing your portfolio and there is a need to rebalance your positions to make your portfolios healthy, you need to go about it in a strategic way.  In other words, while you identify a performing portfolio, you should also determine the portfolio you can use the proceeds of the performing security to buy. These are strategic decisions that must be taken carefully to ensure an all-round healthy investment portfolio over a long period.

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When not to use a RRSP

This is a timely conversation.  After a recent discussion with several young clients in the past couple of weeks, the topic of when not to use a Registered Retirement Savings Plan (RRSP) has been re-occurring.

At one recent example – a good client of ours brought her daughter in to sit with us, and produced a list of items she wished for us to talk about with her college aged daughter.  One of the items she wanted discussed was “investing in an RRSP”.  You can only imagine the surprised look on my client’s face when we reviewed that investing in an RRSP may not be the best idea at this time.

“You don’t want my daughter to save in an RRSP?” my client offered to me, “I always thought the best advice would be to start the RRSP right away?” she said.

This is such a very common conversation, and I can see why.  The belief that the RRSP is the best and only way to save is so ingrained in our belief structure, it almost feels wrong not to listen to it.

There are some times and situations when we should be looking at other alternatives to the RRSP.  This doesn’t mean that we shouldn’t be saving, it just means there may be a better place to save (often a Tax Free Savings Account (TFSA)) depending on the person’s situation in life.

Here are some situations that we should potentially not save in an RRSP:

  • Low salary, and / or beginning a career: One of the easiest conditions to catch, is the person with a low salary, and / or beginning a career. If they are currently being paid a below average salary and in one of the lowest tax brackets, it may not be the best choice for them to be placing deposits into their RRSP.  Often the immediate disadvantage here will be the loss of the potential tax credit for that year (if depositing elsewhere).  The best move may be a deposit to a TFSA in that year, and then ultimately a transfer of the TFSA to an RRSP at a later time (and presumably in a year that they are earning more).  A transfer of the TFSA to an RRSP at age 30 (at an average salary) instead of age 20 (at a below average salary), may result in thousands of dollars more in the hands of the saver.  The RRSP works the best when the money is deposited at a higher income tax bracket, and removed in a lower income tax bracket.  If this isn’t going to be the case – you may wish to consider your strategy.
  • Above average pension, and RRSP already starting to grow sizably: Again with the perception that the RRSP is the only way to save we often come across many people who in addition to their above average sized pension, continue to contribute to RRSPs with as much zeal as possible. RRSP savings may work well for these clients in earlier years – when they are just growing their accounts, but as the account sizes begin to take on six figures – they should start doing some planning on how and when they will get that registered money out.  The RRSP income will come out taxable, and care should be taken on how this will look in addition to their pension amounts.
  • Next year you will be paid significantly more. If this is the case – then you may wish delaying your RRSP deposit until next year. By doing so, you will be entitled to a much larger tax break.
  • You are a brand new business owner. New business owners may often experience some early successes, and start bringing in some sizeable savings deposits wanting to invest it in their RRSP. Some issues that they may not be predicting on their short to mid-term time horizon may be; the purchase of new equipment, hiring of new staff, low earning business years, and the need for immediate liquidity.  As RRSP income is taxable, it can be a discouraging experience to deposit $20,000 one year, to only receive $12,000 of it back in your hands when you need it the most.  It may be best for the budding owner to defer their RRSP deposit, and deposit their savings in a TFSA. TFSA income would be non-taxable.
  • You are carrying high interest debt. In the event that one is carrying high interest debt on credit cards, or other high interest debt – they may wish to consider paying down these debts before investing. Often someone is particularly eager to save any new money in an RRSP when they opportunity presents itself, but the reality may be that the money may be best spent paying down the debt they hold.  If you are paying 18% high interest debt rates – it makes more sense to pay that back, than earn 6% in the RRSP.

These are all common situations, and I find that simply talking about these with clients, often helps unravel some of the questions that we have when utilizing RRSPs.  Through good discussion comes clarity.  RRSP investing is a terrific solution for many people.  The design, features and implementing of an RRSP is usually an attractive solution which allows many to receive a timely cheque in the mail in the spring.  Not understanding when you shouldn’t be investing in an RRSP sometimes isn’t as clear, and really needs to be discussed more often.