Focus on career and family.
Education Planning, RSP, TFSA, Leveraging, and Insurance.
Assets acquired at this stage of your life are often acquired through borrowing, and whether you have student loans or a mortgage, there can be a heavy debt load to manage. Your retirement is far away, and you know that the earlier you begin to save, the greater the potential for meeting your retirement goals. But how do you fit it in when it seems like everyone wants a piece of your paycheque? How do you manage your debts? What about education for the kids? What happens to your family if something happens to you?
There, we said it! That nasty word that no one wants to hear. Believe it or not, learning to budget in your early years can be a habit that will carry you through a less stressful life into a very comfortable retirement. The “buy now and worry later” strategy doesn’t work! Now’s a perfect time to turn things around. Managing your debt and expenses as well as incorporating savings can be accomplished through sound budgeting. Even short term goals like buying a new car or going on vacation need planning. So even if you don’t have significant savings right now, we can help you reach your goals.
Remember, it’s not all about numbers, it’s about dreams.
Registered Retirement Savings Plan (RRSP)
Whether you’re saving for your first home, future education, or your retirement, an RRSP is the best place to start. And who doesn’t like to try for a tax refund in April? Contributing to your RRSP gives you a deduction based on the amount you contributed, and this may very well get you some more money in your pocket. But looking beyond tax time, first time home buyers can withdraw up to $35,000 from their RRSP, tax-free, using the Home Buyers Plan. You will have to re-contribute the money over 15 years following the home purchase, but your great budgeting skills can come in handy there. If you decide to go back to school, the Lifelong Learning Plan allows you to draw up to $20,000 to use for education. You must repay the withdrawal back to your RRSP, but this time over a 10 year period. Think of both strategies as an interest-free loan to yourself. There are a lot of rules about these types of strategies, so make sure you consult your planner on the best ways to take advantage of them. Any other type of withdrawal from your RRSP will be fully taxed, so don’t look at your RRSP as an emergency fund. It will cost you!
Tax Free Savings Accounts (TFSA)
It’s not often we get anything for free, but here’s one way to earn money without paying tax on your earnings. As of 2020, you can contribute up to a maximum of $6,000 to the TFSA each year. There is no deduction on your tax return this time, but there’s absolutely no tax when you take it out — regardless of how much you’ve earned. The name is very confusing, though. It sounds like just a regular savings account which earns interest (which is at a historical low right now), so what’s the big deal? Well, the fact is that you can have any type of investment in your TFSA, and even if you want to keep it low risk there are more options than you might think. So what if you don’t have $6,000 to contribute? Start with what you can. You can even start saving monthly in a TFSA, and you can take it out whenever you need it. Here’s a great place to stash your savings towards the new car or next vacation and earn some tax-free money while you are at it.
Education Planning (RESP)
Getting a good education is expensive, there’s no doubt about it. Anyone who has had to pay off a student loan can tell you that. A Registered Education Savings Plan (RESP) is a great way to save for your children’s education, giving tax-deferred growth and an immediate 20% increase in your savings through the addition of the Canada Education Savings Grant. And there’s extra money available for people with a low income. Whether you are a conservative investor looking to protect capital or if you are a long term growth investor, you can find the investment that suits you, and all withdrawals of grant and growth are taxed in the hands of the beneficiary. There are a lot of options for this type of account, even if your child decides not to go on to post-secondary education, but it’s been proven that if a child knows that there’s an RESP, they are much more likely to go on to college or university.
We can help you start the road map early to make time and compounding work for you, and get your child on track to a great (and worry-free) education.
Leverage (including mortgage & investments)
Leverage isn’t a term most people will hear in a day but it simply means borrowing to invest. Unless you have been very lucky, most people buy their homes using a mortgage. This is leveraging. Your home is likely the biggest investment you will make, so it deserves a lot more planning than simply picking the right location and choosing a mortgage provider. Paying down the mortgage versus making an RRSP contribution is a topic that we often discuss, and we can help you sort out what’s best for your situation. It’s more than just math.
Borrowing money to invest is also leveraging (see Disclaimer). When you borrow money to invest, the loan interest becomes tax-deductible, please speak with your accounting professional. There can be huge risks to this type of leveraging but it definitely fits some situations, and, if well planned, can be a great part of your investment plan. Is it a good strategy for you, though? Lots of discussion with us can determine the answer to this question.
Are you planning on travelling outside of Canada? Are there people who financially depend on you? Will you leave debts behind if you meet with a tragedy? If you’ve answered yes to any of these questions, you need to find out about insurance — and there are many types.
Insuring a mortgage is a great idea, but simply tacking it on at the bank isn’t. Paying a fixed amount to the bank for steadily decreasing insurance just isn’t a good investment. What’s worse is that if you died your heirs would not have any choice about what the insurance money was used for. The bank would apply it to the mortgage, even if your spouse needed the money for final expenses or debt settlement. Wouldn’t it be a better idea to have a fixed payment for a fixed insurance amount that could be spent at the discretion of the beneficiary? And remember that life insurance proceeds are tax-free.