Tag Archives: RRSP contributions

How to Gift Money To Your Adult Kids

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Hi George: I sure do enjoy listening to you and Phil. I have 2 sons in their 20s, they have TFSA’s but my husband & I would like to put some money away for them. If we set them up with $10,000 each, what would you suggest we do? Thanks, B

Thanks for listening, B! Good question. But I only ever answer what I would do, so here’s some feedback that may or may not apply:

Most people in their 20s have a constant need for more money – for a car, bike, holiday, running a little short each month, etc. If you gift it to them for a TFSA they can take it out with 10 minutes notice and no penalties. It may be the equivalent of just giving it to them to put into their bank account. If you’re fine with them spending it on ‘whatever’ go ahead. Just keep in mind it’s a max of $5,500 a year – so you’d have to spread it out over 2 years.

If your intent is to have them save it and put it away to grow for retirement – it should be into an RRSP. Assuming they won’t have a defined pension (that they don’t work in healthcare, civil service, etc.) an RRSP is better anyway due to the tax refund it triggers with the contribution. And it’ll cause a tax penalty if they take it out in a few years and that may make them think twice before doing it.

Have them read the Money Tools chapter of Making your teenager a millionaire. No, they’re not teens but the logic is the same. Make sure they understand that money doubles every seven years. That they understand you are not gifting them $10,000 but $20k seven years out, $40k 14 years out, $80k 21 years out, $160k 28 years out, $320k 35 years out. So your $10k today is $320,000 when they’re barely 60!!!!

I’d also do it on a matching basis so they feel they’re earning it. IE: You (kid) save into your TFSA and show us  your receipts for 2020 and before December 31st this  year we will give you the same amount (to a max of $5500) into your RRSP. You will then have DOUBLE the money AND April 2021 a tax refund of around $1,500 because of it. We will do the SAME in 2021 for part 2.

Hope that gives you some feedback and ideas to make it a win-win and not a give-spend plan.

Getting Financially Fit for 2013

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Happy New Year!

New Year’s resolutions don’t work most of the time because we tend to make them too big, too overwhelming and not specific enough. But when our resolutions don’t come true, it’s decision time: We can get back at it and try again, or just go back to that “what’s the use” mindset and deal with it again next year. If nothing changes – nothing changes.

I recently heard some feedback from a couple of people who were pretty disciplined in paying for Christmas shopping with cash – hurray! Unfortunately, they fell off the “cash only” wagon on Boxing day. Well, nothing happens in a straight line. One day of brain damage, or credit card damage, isn’t a reason to give up.

The good news: It’s a new year! It’s a chance to start over, to resolve to do better, to do more, or in the case of your payments and all that interest – to do a lot less.

The bad news? You’re already broke! How’d that happen? Well, we spend more than 160% of our disposable income. That means every dollar you’re going to earn this year is already spent and spoken for. If that isn’t sick enough, half of us have no savings, and almost 70% of us don’t even make RRSP contributions. Why? Because every dollar we earn goes to make a long list of lenders really really rich and there’s simply nothing left at the end of the month.

And for 2013, I wish you:

Three months of emergency savings
A debit card in your wallet and a credit card at home for emergencies
A zero balance line of credit
And being overdraft free

Save or Pay Off Debts?

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Two weeks ago I had an e mail from a listener asking if her and her husband should pay off their $30,000 line of credit, will still contributing $400 to their RRSP each month, or to stop contributing, and focus on the debt? Unfortunately, there’s no black or white answer, and the note didn’t have any information about their income, tax bracket, etc.

Paying off debts is way more of a psychological and emotional issue than it is about math. If it were about math, who on earth would be dumb enough to run up debt on a 19% credit card? Who would finance a vehicle that depreciates so quickly AND adds thousands of dollars of interest on top of something that’s worth less each day?

That’s why I generally advocate stopping your investments while you clean up your debts. It’ll make it go that much quicker, and you get the huge self-confidence that you’re making progress each month.

There’s also no better return than getting out of debt. With a 19% credit card, you’re paying after-tax money. The chart to walk you through what your rates really mean is in the It’s Your Money book. So, that 19% card is really costing you 27%. And there isn’t a reasonable investment on the planet that’ll make you 27%.

The issue is a little different when it comes to a line of credit that’s likely in the 4 to 5% range. It’s also different for someone who has a substantial income and can pay off their debts within a year or 18 months.

If this couple is in a high tax bracket, the RRSP savings will net them a great tax return that should then go on the PLOC immediately. So essentially, half the investing is still going onto debt.

If they stop the RRSPs, it’s only for a year or so. It’ll give them way more traction, save a bunch of interest, and get it done two years faster. But that depends on whether they are really committed to paying off the balance in the first place.

Lots of people kid themselves that a line of credit is no big deal, because the interest is so low (forgetting it’s after tax money, that rates have already gone up ¾ of a percent, and often that size line of credit is secured by their home, and they keep using the line of credit…)

Anyone who is making some pretty steep payments on their debt anyway, and is seriously committed to getting debt free should absolutely stop investing for one year, and get their debts paid off and closed. If it’s going to take two or three years, it’s your decision: Get debt free fist, or just reduce your RRSP contributions for a while.

Whatever you do, this week, you need to do a written budget of where your money is going, and I bet you can find $100 to $200 in your budget that’s leaking out right now, and can go to the PLOC without you even noticing much of a lifestyle change at all.

When we focus on saving and paying debts and this and that, we know none of these will get done with much intensity. When we have a single-minded focus to pay off one or two balances, you’d be amazed how quickly it happens. If we want to…

Going Further Into Debt: Up, Up and Away

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The recent headline in the newspaper was pretty direct: “Canadians’ overspending is escalating.” As though we haven’t talked about that for a long time now.

This was a study by Mackenzie Investments that reinforced what you’ve have heard me say for some time: Try saving a little and stop impulse spending with money we don’t have. In this case, it’s pretty much a generational divide, breaking down the over and under 50 age group. In the over 50 age group, only five percent are chronic over-spenders, while those under age 34 are the biggest debtors at 29%.

The key findings are a lot of common sense. It’s just that common sense is so uncommon these days. Factors to overspending include an almost non-existent social stigma to being in debt and vast amounts of available credit. Just sign here, quick approvals, and introductory rates designed to make you feel like you’re saving today, just to get the rug pulled out from under you later.

The online survey actually had 53% of people under age 50 admitting they use their credit cards to buy stuff when they don’t have enough money. THAT is impulse purchases and not having a clear understanding between needs and wants.
What was even more eye opening was the admission by almost half the respondents that they have purchased something without any consideration of the long term implications of the debt, and costs to their personal finances.

And things will get worse – way worse. Remember that I’ve been saying for two years what happens in the U.S. will happen here in Canada. 90% of Canadians now have more debt than they did just five years ago, and last year we barely reached seven percent of our RRSP contribution room.

Singles are twice as likely to be over-spenders than married people, which stands to reason. But what was an interesting insight is that women are also twice as likely to be over-spenders, than men!

The best line of this article from Canwest News had to be the sub-title: “We don’t deny ourselves much – except for a dose of reality.”