Tag Archives: TFSA

Pre-Pay Mortgage Or Park the Money?

Hello George: We are at the renewal of our mortgage and are debating what would be the best move: prepay the mortgage or invest in our TFSA the amount of $12,000.00. We want to keep our monthly payment the same rather than taking the $130 lower payment.

We are both at or near retirement age and may want to sell our house in a couple of years to possibly be able to buy a family members’ house.

Part of my reply: You might get to buy that house and you might sell yours…that’s two BIG “if” questions without a today answer!

That means the $12k goes into the TFSA, or any savings account, to park it for the time being with easy access to it. There’s a saying that you can’t eat your home. In other words, when you need the money – for whatever reason – remortgaging takes time and is expensive. Even a home equity line of credit now has way more restrictions imposed by federal regulators.

If you put the money on the mortgage, you won’t have the down payment to buy the other one and will be forced to see yours super quickly (no matter what the price or market is at the time) to have the money for the 2nd purchase.

That’s assuming you don’t have the full amount in the TFSA to just write a cheque for the other home purchase and don’t have the massive income it’d take to get a mortgage on the 2nd one AND still have yours for a number of months until it sells. Likely zero chance of that with the Trudeau stress test restrictions! Besides, the $12k would “only” be a $50 principal reduction. $12,000/240 months plus a tiny bit of interest savings at such a low rate…Best have it ready and available!

Secondly, if you may be able to buy it and may or have to sell yours to make that work, you will have massive mortgage prepayment penalties to get out of your mortgage in year two or three out of five! It’d be over $10,000!

So I’d take a 3 year mortgage today to get to the point where the potential home purchase issue is resolved. Sure, I may cost you a little more on the renewal in three years, but it’d be way less than the massive penalties!

Thirdly, if you do get to buy it, do not NOY start at your bank. You’ll be turned down due to the Trudeau stress test. Immediately go to a good independent mortgage broker! You can find one by asking two of the top realtors in town who they use. They all do because their income depends on one that’s super sharp!

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 31^st 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.

Happy New Year…But…

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Sadly, as of last week, over 25 percent of resolutions have already gone by the wayside. But I have an idea and a way out of that: Think of January as a free trial month. You get that with some subscriptions, perhaps with a fitness club trial and other offers. So learn the lesson and start again on February 1^st with your financial goals!

Make sure that your financial to-do and to-resolve list starts with something really simple, really short, but also really critical. It’s an entire chapter in the Money Tools book called: Do you have a half hour?

Yes, you do have it – but do you want to invest that half hour into getting some of your financial stuff in order for at least the coming year?

First thing is to have a coffee date with your partner if you are in a relationship. If you’re not on the same wave length – nothing else really matters. Talk about your financial goals and hurdles for at least this year.

Do you want a $10,000 vacation? If you don’t have it set aside, what’s the plan to save $800 a month if it’s next winter, or save $1,500 a month if it’s this summer.

Want to just charge it on a credit card? That’s your choice if you and your partner agree…but at a 20% rate it’ll be $20,000 in total price in four years. I think that’s a horrible idea, but it’s your choice IF you agree and IF you know what you’re getting into.

Is there one specific debt want to pay off? Do you agree it’s worth it and which one? How important is it to you two? What will you do or give up to achieve it?

If you’re a home owner, and your mortgage is coming up for renewal, are you planning to stay in town, in the home, in your job? What’s the longer term life plan…..because you don’t want to sign another five-year mortgage if you haven’t talked it through, or your penalties will be upwards of $20,000 if you change your mind!

Open a TFSA or RRSP: If you don’t have one – it takes less than half an hour with an online brokerage or your financial institution – that’s it. If your tax refund or other money comes in you have a way to invest it. If you don’t – that money is most likely going to leak out elsewhere.

Open an emergency savings account: You want a basic one week net pay to start. Not hooked to an ATM. But you first need the 15 minute to just open it and put 10 bucks in it. That’s a start – and the longest journey always starts with that first step!

It lets you get traction…because without it you’re not going anywhere…

2015 Financial Resolutions You Can Actually Keep

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Happy middle of January! By last week, 25% of all new year’s resolutions went out the window. I’ve checked with a lawyer, and it’s still the new year – so resolutions still count! And by now, we’re over the sugar high, over-eating, over-spending, and most of the guilt phase that just doesn’t make it conducive to making good decisions for more than a day or so.

So now it’s OK to talk about some financial goals that take less than half an hour. Remember that good intentions are not goals that are likely to ever happen. But something that takes a half hour or less has a chance of getting some traction.

Here are some suggestions, all of which will make a huge impact on your financial situation, and all of which are pretty easy to implement and keep:

-No RRSP loan this year. If you keep getting RRSP loans for the past year, you’re doomed to permanent payments for the prior year. Most of your investment returns are also wiped out in the first year or two, as you’re paying interest on the loan. Instead, have your bank take that same amount of money out of your bank account each month towards a 2015 RRSP. Yes, you’ll miss the tax deduction right now, but it’s a one-time thing to turn a loan for the past into an actual investment with real, and not borrowed, money.

-Sit down and do a written budget. You’ll be amazed where all of your money leaks out each month. Yes, it has to be in writing so you can actually see it in black and white.

-Take a felt marker, or lipstick, and write on your en-suite mirror: I can’t afford it – or the words: debt free. At least two or three times a day you’ll be reminded that you can set limits on what you buy, and have the ultimate goal of no payments right in front of you.

Why? Because the one person who is standing in the way of being financially successful is in the mirror.

-Open a Tax Free Savings Account and put $50 in it. That’s it. Five minutes to get it opened and a start of savings that will all grow tax free, and are also withdrawn tax free.

Canada Savings Bonds Are a Crappy Way to Save, But You Should Use Them

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Breaking news alert!! Canada Savings Bonds are available again for payroll deduction purchases. Their sale is a fall-only option and available until November 1^st.

They’re a really crappy rate and shouldn’t be used for investing but you don’t need to worry about your return until you get started in the first place. They’re great for getting started, for having them come off your cheque and for parking your money for a while.

If you work for an employer, go see your payroll department for five minutes today. Ask whether you can get them, or if your employer can do payroll deduction for RRSPs. If so, make it happen TODAY – if you don’t already. The only way most people save is by paying themselves first. If you wait until the end of the month to see if there’s any money left over, I can tell you right now: There won’t be. But you can’t spend what you don’t have, and that’s paying yourself first.

If that’s all new to you, it’s really easy to start. Just have 1% taken off your pay. You will never miss $20 or $30 a pay. It’s a tiny amount that won’t impact your life or your finances one bit. Then, every six months, increase it by another percent. You’ve lived just fine on a net cheque $20 less. Another $20 won’t make a difference…again, you’ll never miss it. In another six months, add another one percent and so on until you are saving 10% of your pay.

It’s such a tiny change twice a year, you’d be amazed at how quickly your savings grow without any impact on your lifestyle or finances. Since it comes right off the top, there’s nothing for you to do. It’s on auto pilot and happening in good months or bad – in months where you’re behaving with your money, or spending it like you were a politician.

A few months ago, a relative received a letter from an ex employer he had been with for three years. They were asking where to send over $16,000 in RRSP money. When was the last time someone wanted to surprise you with an extra $16,000? You see, he had $70 or so deducted off every pay into RRSPs. After three years, with matching and growth, he had no idea what it all added up to and was sure surprised. It’s not like he missed the $70 a pay since he had it done on the first paycheque. But it sure added up…as can yours.

If you don’t have any savings options at work – shame on your employer – but you can also do it yourself. Go to your financial institution and ask to have a fixed amount transferred from your chequing to savings, a Tax Free Savings Account, or an RRSP every two weeks or every month.

Banks are for parking money. They are not places where you should be doing your investing. But it’s a start in order to get some traction. And the hardest thing with many financial lessons is to get started. It’s the first step that’s the most challenging. After that – you’ll never do without it again, as it’ll be part of your routine.

I had another minor savings plan a few years ago. I decided to live without coins. Every time I got any change, it went into a bucket. So, essentially I used $5 bills a lot because coins were always re-directed into this bucket from nickels to toonies. In one year, that ended up being over $1,000! Other than the pain of rolling them, it was a totally painless savings plan.

Savings, Parking Money and Investing How-To’s

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Two weeks ago, the National Post/BMO survey came out showing where we put our money once we’ve invested in an RRSP or a Tax Free Savings Account, and 57% of all the money is in cash and 23% is in GICs. Ok, that won’t work as you’ll get no return at all, and you need this money to grow for your retirement.

Not all savings are the same. The first thing you have to know is that there are different savings or investments:

Your one-week emergency savings and (once you’re debt free), your three months of expenses emergency account money needs to stay in a simple savings account because you may need to get to it. So, this money isn’t invested.

Saving for something bigger: If you’re saving for a newer vehicle, your annual bills, or, in my case, replacing my roof, that’s still money you’ll need in less than five years. Unfortunately, it needs to stay in a savings account because you need to protect the principal since the money is for a specific purchase or expense.

Retirement savings: This is money you won’t need or touch for a very long time and needs to be invested in order to grow. Anything longer than five years is investing – anything less is savings. You’ll need the five years window in order to ride out any up and down cycles in your investments. Less than five years makes that too risky and too short.

So, if investing is five years or longer, you can’t have this average of 80% of your money sitting in cash or GICs – it won’t grow enough to help you in retirement. There’s something called the rule of 72. Take your interest rate and divide it by 72. That’ll give you how long it takes to double your money. A 1% return takes 72 years to double your investments. A conservative 7% return doubles it every 10 years, and doubles again in 10 more years.

You do need to invest the money, but you need to not hyperventilate or panic when the market moves on one day or another. Who care what the stock market does on a given day when you don’t need the money for decades? Monday, because of the Ukraine, the Dow dropped 150 points. But on Tuesday it was up 220 points. Who cares! You’re invested for the long term and not for two days! A simple S&P 500 index funds has next to no commissions and gives you a basket of all the 500 largest companies in the world. A 10-year old can buy that in five minutes, and it’s returned 25% over the last year, 15% over the last three years, and is still over 7% in the last decade!

If you’re wishing to buy mutual funds, start at Morningstar.ca. It’s a rating company that’ll let you find good growth mutual funds with a long term track record and low expense ratios.

And whatever you do, go to yourmoneybook.com and look back on a story on dollar cost averaging. Do not dump your money in all at once. You want to contribute monthly into whatever investments you choose. It’ll put you light years ahead of anyone contributing only once a year.

Lastly, banks are for parking your savings and not for investing! I manage the money for a relative that had nothing but GICs with a bank – to the tune of high six figures! The return over the last decade was 1.4%! I moved it to a conservative managed portfolio that’s averaged 7.7% over the past two years. The different in the return has been over $105,000. That’s free money and still conservative.

Remember the difference between savings and investing. And keep asking yourself what you want to say to yourself when you retire: Wish I had…or glad I did?

Do You Have (Another) Half Hour?

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Last week we started a long list of some really easy half-hour steps that will absolutely set you on the path to financial success. Here are some more, just as valuable, whether you do one of them or a bunch:

-See your payroll department: Fill out the payroll form to have some money deducted right off your cheque. After all, you can’t spend what you don’t see. Paying yourself first, instead of hoping there’s something left at the end of the month, is the easiest way to save.

Have 1 or 2% of your pay taken out and put into an RRSP if you want to save for retirement, or have it put into Canada Savings bonds if you want it out once a year to pay off debts. It’s a crappy interest rate but next year you can take out the money and put it on one of your bills. You can also have your bank take the money right out of your chequing account and moved into savings. Same thing – but only if you trust yourself that you’ll keep it going.

Then move that percentage taken off your pay, or moved to your savings account, up every six months. You’re used to 1 or 2% coming off – change it to 3% and move it up every six months or once a year.

-Apply for a non credit credit card: A charge card is one that lets you charge but forces you to pay the balance in full. That is a real American Express cards. They also have the cards that entice you to make minimum payments. But if you get online and get the REAL card you’ll never ever carry a credit card balance again. I’m not the biggest Amex fan, but that’s the only card I’ll use because it takes away all temptation to pay less than the full amount you spent last month – period.

-Set up a TFSA (Tax Free Savings Account) Get to your financial institution or discount broker and open this alternative retirement account with $10. It’s the same logic as opening your savings account . $10 isn’t much but at least it’s open and ready for more.

-Get your kids or grandkids on track: Starting at age 4 (the sooner the better and more effective) whatever money they get from anywhere or anyone, one-third goes to saving, one-third to giving, and one -third for spending. No exceptions, no whining, no let’s make a deal. If they want YOUR money, it’s YOUR rules. Have them use three envelopes, or whatever you set up. That one little thing will change their financial lives forever if you stick with it. It’s not really about the money but the life lessons. When they get to be about age 10 you can change it to 10% giving and the other two parts spending and saving – your call – your choice. From three dimes, to three $10 bills, just make sure the money you give them is the exact change so they can’t delay what goes where for a while.

The Seven Steps to Get From Broke to Wealthy

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Over the last month we’ve talked about the first two steps to getting to be financially independent, and to have a chance to live like nobody else can afford to do. But, in order to get there, you have to do some things others won’t do.

Denial IS a financial strategy. It’s just not one that works. And the sooner you have that “ah ha” moment, or the “that’s it!” I’ve had it moment, the sooner you can get started to building wealth, instead of sending most of your pay out the door the day after you’ve earned it.

Step one: Save one week of net pay. That’s your emergency savings. It’s not much, but 70% of people don’t have that. If your fridge dies, or the car needs $500 repairs, you now have some money. Plan B for most of the world is to just borrow the money. And that hasn’t worked so far, has it?

Step two: List your debts smallest to largest and pay off the smallest one with every extra dollar you have. It’s the one that’ll be paid off the fastest and take just a month or two. While doing that, make minimum payments on all the others. Then, roll that money into the 2nd smallest and pay it off. Then attack the 3rd smallest, and so on. On average it’ll take a year or two, and you will be totally debt free except your mortgage.

Step three: Now you need a real emergency fund of three months of your net income. On average, most people are paying debts of $1,000 or more. The car payment, credit cards, etc. That huge amount of money isn’t going to pay bills now. It’s all yours! THAT alone puts you into some pretty elite company. So, saving three months of household income won’t take that long.

Step four: Start, or re-start, your retirement savings. Whether it’s an RRSP or the Tax Free Savings Account depends on your tax bracket. But you now need to save between 10 and 15% of your income for retirement. The amount depends on your age. If you’re in your 30s, 10% will do. If you’re over 40, it has to 15% to catch up.

Step five: Start a savings plan for university, if you have kids. Yes, this is AFTER you start your retirement savings. There is only ONE way to save for retirement, and that’s YOU saving YOUR money. But there are a number of ways to pay for university. It may be a part time job, scholarships, grants, savings, cash-flowing it every year, etc. It has to be in this order.

Step six: Pay off your home. You’re debt free, your retirement savings are happening, and you’re saving for your son or daughter’s education. The last step is to pay off your house. With no debts, on average, that takes people seven years. Every dollar extra goes towards the principal balance.

Step seven: You are totally debt free and don’t owe anyone in the world. Now you can live the live that others can only dream about. You can live the live that you USED to live with borrowed money and a phony house of cards. This time, it’s real. And it’ll put you into a group of maybe 20% of Canadians that are truly wealthy.

Is it worth it? You bet. Will you do it? I don’t know. But I do know that debt is not your friend and you can’t borrow your way to wealth.

New Years’ Goals Part II

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Last week we started talking about some financial goals for 2011. All of them are meant to be specific, measurable, and easy to implement – if you choose to. We talked about breaking the RRSP loan cycle, setting up a Tax Free Savings Account with just $50 and doing a written budget.

Here are a few more suggestions, all of which will have a big impact on your finances for this year, and years to come.

Do a seven day no-spending week. We talked about that over a year ago, and I did it for two weeks – twice. I’ll link the story from back then, all of which are always on the yourmoneybook.com site. Essentially, gas up, fill up the fridge, and then spend no money at all for seven days. Pay your normal bills, but nothing else. I learned a ton about where my money leaks out. It’s well worth it, and not hard to do for just a week.
http://moneybookcdn.myblogspace.ca/?p=35

Try an envelope system for any 30-day period. Take the amount of money that you will need for groceries, and for money you spend on yourself for stuff like haircuts, coffee, lunch out, and the likes. Take two envelopes and put that amount of cash into the envelopes. For that one month, you’re only spending on groceries and “me” stuff out of those envelopes, in cash. You’ll learn a lot about yourself and your spending habits. And when the envelope is empty – you’re done spending – and you’ll spend way less than you have been.

Put all your credit cards away for 30 days. No, I’m not asking you to stop breathing. I’m just asking you to see if you can break your stupid spending habits and addiction to credit cards – just for a month. Take your cards, put them in a plastic Ziploc bag, add some water, and put them in the freezer. Or put them in a sealed envelope and give them to a friend or relative that you trust. Yes, I can see you panicking now. You’ll be amazed that you’ll spend a lot less money in that month, however. Plus, your credit card balance will love you for it.

Write down a list of all your debts from the smallest balance to the largest amount, in order. Pay minimum payments on everything but the smallest bill and attack that one with every dollar you can spare. Because it’s the smallest debt, it’ll take only a few months to pay that off in full. Then you’ve freed up all that money to attack the next smallest. It’s a debt snowball that gets traction really quickly. It really is that simple, and it’s a chapter in the It’s Your Money book.

Most New Years’ resolutions tend to be what to do, but there’s also one of what not to do:

If there’s something big to buy this year, it’s probably going to get financed. So, for 2011, don’t. It might be a vehicle, or maybe some major renovations for the house. A great way to not spend money or go into debt is to not do it, buy it, or finance it this year.

Open a savings account that’s not hooked up to your ATM. I’d like you to do it at the Credit Union, for tons of reason, not the least of which is that you’ll get dividends back the end of the year, and you’re a member and not a customer.

Then take one-twelfth of your annual bills and start setting it aside each month. For most of us, that’ll include money for home insurance, car insurance, maybe property tax, and for sure our vacation money. Having that money in an account when the bill comes due creates an incredible feeling and it won’t end up on your credit card or line of credit.

If you’re a student that’s graduating this year: I know, it’s time to have a life, and to spend after all these years in school. Don’t – for one more year. If you can live like a broke student for one more year, you’d be amazed how much money you can save or dump on your student loan. You won’t do it, guaranteed – but think of me in five or ten years when you’re buried in debt, because you started living the financed lifestyle the year you got out of school. Honest.

New Year’s Resolutions: Easy to Do and So Worth It

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Last week, just before New Year’s eve, I refused to talk about New Years’ resolutions. It’s not a secret that the vast majority of them never survive the first two weeks of January. So the pressure is off to make all of your resolutions come true, and now you can calmly think through some that may be important, and that you actually want to implement for the long-term.

Now that we’re into the first week in January, it makes a little more sense to think about some financial resolutions that won’t be the plan of the week, but have a chance to become habits for a lifetime.

I’ve checked with a lawyer, and it’s still the new year – so resolutions still count! And by now, we’re over the sugar high, over-eating, over-spending, and most of the guilt phase that just doesn’t make it conducive to making good decisions for more than a day or so.

Here are some suggestions, all of which will make a huge impact on your financial situation, and all of which are pretty easy to implement and keep:

-No RRSP loan this year. If you keep getting RRSP loans for the past year, you’re doomed to permanent payments. Most of your investment returns are also wiped out in the first year or two, as you’re paying interest on the loan. Instead, have your bank take that same amount of money out of your bank account each month towards a 2012 RRSP. Yes, you’ll miss the tax deduction right now, but it’s a one-time thing to turn a loan into an actual investment with real, and not borrowed, money.

-Sit down and do a written budget. You’ll be amazed where all of your money leaks out each month. Yes, it has to be in writing so you can actually see it in black and white.

-Open a Tax Free Savings Account and put $50 in it. That’s it. Five minutes to get it opened and a start of savings that will all grow tax free, and are also withdrawn tax free.

We’ll have more next week. Remember that none of these are complex, and none will take more than half an hour to implement. Because the secret is to do small things that will have a big impact down the road.

Your Money Book

Tools, tips & tricks to borrow smarter

Tag Archives: TFSA

Pre-Pay Mortgage Or Park the Money?

How to Gift Money To Your Adult Kids

Happy New Year…But…

2015 Financial Resolutions You Can Actually Keep

Canada Savings Bonds Are a Crappy Way to Save, But You Should Use Them

Savings, Parking Money and Investing How-To’s

Do You Have (Another) Half Hour?

The Seven Steps to Get From Broke to Wealthy

New Years’ Goals Part II

New Year’s Resolutions: Easy to Do and So Worth It