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

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.

Happy New Year…But…

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 1st 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…

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

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

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.