Confessions of a CFP: Homeownership is not for everyone

One of the biggest purchases that people will make in their lives is the purchase of a home.  From the time we are young we are taught to save money and purchase a home because it’s a good investment.  As a financial planner I have to admit that this is not always true.

Buying a home creates an expensive debt.  Hopefully it also creates a more valuable asset, but once again this is not always true.  The decision to buy a home is a personal choice and the reasons to do so – or not do so – depend on your personal goals, your budget and your personal financial situation.

Some people think that paying rent is a waste of money but I tend to disagree. There are several benefits that come with renting an apartment versus buying a home:

 

The advantages of renting an apartment

Carefree living. When you rent an apartment you don’t have to worry about, well anything.  One of the main advantages of renting an apartment is that you have no responsibility to maintain the premises.  If your drain gets clogged all you have to do is call your superintendant and they will send a plumber.  Renting an apartment is hassle free.

It’s easy to budget.  Paying rent is just one bill a month that you have to budget into your expenses.  I absolutely love this about renting –it’s simple and easy and that’s just the way I like to set a budget.  Whether it’s for myself or for my clients, an easy budget is one with the fewest expenses.  When you have too many expenses each month it’s easier to forget about the due dates and you can miss payments  – this doesn’t happen when you rent an apartment.

No long term commitment.  If you don’t like to plan for the future then renting an apartment is the best choice for you.  I love that fact that I can pack up my things and move away any time I want.  Committing to a five year mortgage term is not for me.  I love the flexibility and freedom that comes with renting an apartment.

 

The disadvantages of owning a home

The cost of maintenance.  Owning a home is a lot of work, both inside and outside the house.  I don’t know about you but dusting, vacuuming, shovelling snow and cutting grass is just not my thing, in my opinion this is a major disadvantage of owning a home.

All of the other expenses.  The down payment for your mortgage is only the first expense that comes with owning a home.  Afterwards there are several additional ongoing costs involved in homeownership such as taxes, utilities and the cost of furnishing a home.

What do you love about renting or owning? Tell us on Twitter @ TahnyaKristina

 

Photo by images of money

Together or Apart

 

Together or Apart?

 

Do you keep your money to yourself, the old what’s mine is MINE or do you share your finances and the responsibility with your partner?  This is a great conversation starter, which often evokes a highly emotional response.

 

Over the years I have met with couples and in the process of discussing values and personal /financial goals, there has come that awkward, frightening moment when I present the completed twelve month budget.  The responses have been memorable in the situations where each partner is keeping their finances separate.  I have shared in the sorrow, disbelief, and sheer panic as the full financial picture is revealed.  Honesty and openness is a must when dealing with finances as a couple.   I have come to the opinion that the most successful way to manage your finances as a couple is to utilize each other’s strengths and to make a plan where each person is held accountable.

 

Some people truly are not the least bit interested in finances and will live in a world of denial where they honestly do not know how, when or even IF the bills are paid!  You can ask them their mortgage interest rate or how they paid for their last vacation and they will just shrug because they have no idea.

 

So what is a success strategy that has been proven to work over and over again?  Both partners in the relationship have to take responsibility.

 

If you are not the one responsible for the finances (you know who you are) then here are your strategies for success which will reduce the questions and the arguments:

 

  1. Show your appreciation towards the one who is managing the finances;
  2. You MUST make yourself aware of the financial Goals.
  3. Know what the budgeted weekly amounts are for groceries, etc., and what account you access that money from.

 

For those of you managing the finances here are your success strategies:

 

  1. Have a system in place so your partner can easily access all the information without causing you stress.
  2. Have one account just for groceries, and spending money. Transfer in the weekly or bi-weekly amount into an account that each person can access with their debit cards. There is definitely NO overdraft protection attached to this account!  This is the easiest and most successful method I’ve seen.

 

My recommendation to all couples: discuss and plan who is going to be responsible for which bills, and to have a system in place that makes this a simple task.  Secrecy will not produce financial results; and living in ignorance will only result in frustration for one or both of you.

 

The solution? Teamwork and using each other’s talents.  I have client’s using this method for success.  The husband transfers money into both a savings accounts and a spending account (groceries and other expenses).He ensures that the bills are paid on time.  It doesn’t matter if 95% of these transactions are automatic debit: it still counts because he has taken ownership!!! The wife does the grocery shopping and takes out the spending money for the week for both of them.  They have agreed on set goals and each of them is motivated and feeling involved and appreciated.

 

The moral of this story?  Couples that work together planning and managing their financial future are the most successful, financially, and in their relationship as well.  Together or apart: you decide.

 

Laurie Lee

Goodcents Co.

 

How do you eat an elephant? Book Review

how to eat an elephant
Book Review: how to eat an elephant

 MONEY.CA Book Review

HOW TO EAT AN ELEPHANT: THE MONEY BOOK REVIEW

Written by Ian R. Whiting, Senior Editor

Not exactly what you had in mind when you think elephants but this analogy turned idiom is a great way to describe and explain the complexities of personal finance in an easy and manageable way.

Frank Wiginton has developed a reputation as an easy-to-understand financial educator and has written an interesting book entitled “HOW TO EAT AN ELEPHANT – ACHIEVING FINANCIAL SUCCESS ONE BITE AT A TIME” that includes access to a self-help website (http://www.howtoeatanelephant.ca) that takes people through his entire process. His chosen title is very appropriate as developing a sound financial plan is perceived as a daunting exercise for most people.

Frank uses a variety of stories and scenarios to share his thoughts and perspectives on each part of your plan. Frank takes people through a logical process beginning with setting goals followed by that most feared word – budget! To his credit, his process helps relieve people of the much of the stress that often accompanies this challenging exercise.

Frank takes his readers on a journey through all of the important parts of a sound plan including debt and cash-flow management, life and disability insurance along with critical illness and long term care needs. He discusses pensions and other retirement resources including OAS and CPP/QPP, your RRSPs and TFSAs. He provides sound guidance on savings for education requirements and the legal niceties required to ensure our wishes are carried out in the event we are unable to act for ourselves and after we pass away.

After reading the book, I came to a series of conclusions about his process and style:

a) he emphasises that achieving your own definition of financial success is a journey, not a destination;

b) each person is accountable for their own successes and failures;

c) working with a professional team of advisors will reduce your overall level of risk of failure and enhance your probability of success, but you can’t abdicate your own responsibility to your team;

d) common-sense is your greatest ally;

e) you need to have patience – starting with the patience to devote time each month to your own financial affairs; and

f) you need to monitor your progress regularly against your goals and make needed adjustments as soon as the need becomes apparent.

Like every effective author, Frank has strong personal beliefs and has done a very good job at sharing them with his readers. Even if you choose not to agree with his perspective or views, the process he uses to explain each part of the plan ensures that you go through a logical evaluation of the various options before making a decision rather than shooting from the hip.

Throughout the book, there are “One Frank Thought” boxes in which his personality shines through while sharing some unique perspectives on the topic in question – they add greatly to both the material and the concepts he presents.

A very worthwhile investment of $21.95 plus taxes is available at fine retail establishments including Chapters and Indigo through Wiley and Sons Limited http://ca.wiley.com/WileyCDA/ the publisher or www.howtoeatanelephant.ca.

To view the photo associated with this press release, please visit the following link: http://www.marketwire.com/library/20130425-How_To_Eat_An_Elephant_ORIG.jpg

To view the video associated with this press release, please visit the following link: http://www.youtube.com/watch?v=VySIxLCtQsk

Should You Contribute to Your RRSP?

There are two advantages to RRSP investing. The first is tax deferred growth, which allows the effects of compounding to grow your assets far in excess of non-sheltered assets. The second is the assumed reduction in your personal tax rate at older ages when the assets will be withdrawn. Both of these benefits may not be as advantageous as they used to be.

RRSP funds should be invested in income generating assets, such as bonds and GICs, which would attract the most tax outside of an RRSP. Assets which return capital gains are best kept outside of the RRSP due to the more favourable tax treatment of those gains. With interest rates at multi-decade lows, and projections that these rates will continue for the foreseeable future, compounded growth will be severely hindered.

With growing government debt loads and lower projected growth rates, we also face the real potential for higher taxes. This may be especially true with respect to retirement assets, which will draw the attention of future politicians struggling to pay for the debt load which, as far as many voters will be concerned, was created by a wealthy retired class.

In analyzing a retirement strategy, it would therefore be prudent to consider the possibility of low investment returns, and higher tax rates. For instance, a 50 year old, earning only 3%/year, with a marginal tax rate increasing from 46% to 60%, by age 71 would have been slightly better off without an RRSP. Assuming investments are based on capital gains the RRSP effectiveness drops significantly.

Most scenarios for the future do still show RRSP investing to be beneficial, especially if it is likely that you will find yourself in a lower tax bracket at retirement. Nonetheless, based on age, investment return, and future tax rates, there will be a percentage of Canadians who would have been better off without registered assets. Those fortunate enough to expect to remain in the top tax bracket should consider whether deregistering all of their assets now would reduce their total tax bill, if tax rates do increase in the future.

Take Ownership

Take Ownership

OWNERSHIP.  Use this as your “mantra” for 2013 and you can experience a new way of living.

I am not talking about purchasing a new vehicle or a new home; I am talking about taking ownership of your personal finances.

What are your limiting beliefs or roadblocks preventing you from honestly embracing your finances?

Why are you highly successful in your work, but are unable to move forward to becoming debt free?

If you managed your business in the same manner that you manage your personal finances, would you be bankrupt?

Our values around money are well established by the time we are teenagers.  Our parents views and experiences around money shape our beliefs and attitudes towards money as well. Our values around money play an important role in how we currently deal with our finances.

So what are the roadblocks and patterns that are entrenched as adults causing us financial stress?

Fear:  When I sit down with clients for the first time there is always a hesitation and curiosity as we begin the process of reviewing all their financial information.  We discuss the details of paystubs, Credit Card interest rates, even money owed to the Cash Store.  When was the last time you took a clear look at your entire financial picture? To review everything you owe and to see exactly what you have saved for the future is a very powerful and enlightening first step.  Let’s call it a balance sheet for your personal finances.   Fear is stopping many people from taking this first step.  Fear that once you are aware you will need to hold yourself accountable and will need to make changes and sacrifices.  It is much easier to live in the land of Avoidance.

Avoidance: How are you avoiding dealing with your finances?  Are you writing post-dated cheques, taking a passive role in your finances, avoiding the government, overspending repeatedly at Christmas, buying “big ticket” items you can’t afford?  Review your last five years of spending and you will see the patterns emerge.  Are you setting yourself up for failure, by repeating patterns that you truly know are not helpful?

Money is one of those great relationship tests: it can be stressful talking about it and people may feel defensive.  Are you delaying discussing your finances with your spouse out of fear or because you think it is easier to avoid?

Take Ownership!  Develop a healthy financial plan with your spouse that is respectful of each person’s values around money.  Make it realistic both of you are right, now find a compromise.  Have a budget/plan in place that allows both of you to take responsibility and both of you to win.

Let 2013 be a new and successful financial year for you!  It’s Simple: Take Ownership

Laurie Lee

Goodcents Co.

 

 

 

 

 

The Future of Life Expectancy and Government Benefits

The average life expectancy in Canada has been increasing steadily for over a century. This is due largely to improvements in living conditions and the remarkable advancements in medicine during that time. According to Statistics Canada, the average life span at birth in 1920 was approximately 60 years, and it has now risen to over 80. With a baby boom cohort and a typical retirement age of 65, the pressure on pension programs is starting to mount.  However, the situation may not be as dire as it seems.

The United States has frequently been cited as having $87 trillion dollars in unfunded liabilities with respect to various entitlement programs. This is a dubious figure, as it based on the projected shortfall over a 75 year period. Over such a long time period it is virtually impossible to predict any of the variables associated with such a calculation, including life expectancy. Baring extreme technological breakthroughs, it is unlikely that increases in life expectancy will continue to increase at a significant rate, and may in fact begin to decrease.

The problem with most projections of life expectancy is that they are extrapolations of past increases, which happen to form a nearly straight line, with that line being assumed to continue. A better method is to focus on the current health status of various groups of people, and the impact that has on survival. The obesity epidemic has led researchers to conclude that life expectancy will soon begin to decrease due to cardiovascular disease.

Further research is also showing the emergence of two distinct groups with respect to life expectancy: those with higher education and those without. Higher education is associated with higher income, better access to health care and healthier lifestyles, all of which improve life expectancy. With higher income this group will also have better access to new medical technology.

Projections of shortfalls in retirement programs may therefore be overstated. Means tested benefits such as Old Age Security would be doubly impacted. Improvements in life expectancy will be concentrated amongst people who will receive little or no benefits. Those who do receive the benefits will on average have lower life expectancy, reducing the projected payouts.

The recent increase to the OAS eligibility age reflects known increases to life expectancy and was necessary to keep the program affordable. This will undoubtedly not be the last cost cutting measure; if cost projections are based on an overestimate of life expectancy, the additional cuts will be excessive. The impact of reduced life expectancy on government expenditures will not be noticed until long after the reductions have occurred.

Of course the future is unknown, as the best projections, data, and expert opinions, cannot account for politicians.

Ryan Wall

Financial Planning Doesn’t End at Retirement

They say that you can’t take your money with you when you go, but that doesn’t mean you don’t need your money after you pass on. Many people save their entire working lives in order to have a financial stable retirement, but what about afterwards? Unfortunately, not many people plan for their final estate expenses and this is a big financial mistake.

Why it’s important to plan your estate

As a financial planner I always advise clients to consider their final estate expenses when planning their retirement because the financial planning process doesn’t end at retirement. After we pass on our family is left behind to pick up the financial pieces.  Many people don’t plan for their estate because they are not concerned with what happens after they are gone, but before you spend all of your savings – think about your family.

The average Canadian funeral costs approximately $10,000; does your family have that money available to spend?

How you can avoid the financial burden

Estate planning is not complicated; it is just like saving for any other personal goal.  There are several ways that you can personally cover the costs of your final estate expenses: you can purchase an insurance policy to cover the costs of your final expenses, you can start saving at a younger age and save a little bit of money over time or you can prepay your funeral expenses to alleviate the financial burden from being passed on to your family.

Before you start saving for your final estate expenses you have to calculate approximately how much they will be.  Your final expenses include the cost of your funeral, but they also include your final personal tax filing, your estate tax filing and the cost to repay any of your outstanding debts upon death.

You can also take some of the financial burden away from your family by always having life insurance on your credit products.  This ensures that your debts will be paid upon your passing.

When family members don’t have to worry about getting into debt over your final expenses and paying your final estate taxes they can take the necessary time they need to mourn their loss.

Talk to your financial planner today and start planning your estate.

If you like this article then follow me on Twitter.

Photo by SuzieT

Make, save and preserve more of your money

Me and My Money
Me and My Money – Nobody cares about me and my money like I should.

Money; how do you make, save and preserve more of your money? And that is the question of a lifetime. If everyone knew how to make, save and preserve more money and wealth they would have done it.  There are millions of millionaire’s and thousands of billionaire’s in the world so in fact what seems to be an unattainable plateau has been reached several times over.

Everyone has their own circumstances and you have heard every rags to riches story there is including the boring but true philosophy of dynastic wealth that is transferred down to family members that have little or no idea how to make, keep and not lose those hard earned dollars and assets.

If we all started from the same place the world would be even more different than the disparity we have today. Some even have greater penalties like language and skill and greater hardships are faced with business owners having to face bankruptcies and closure.

The difference between success and failure is simple “knowledge is power” if you  know and have timely information and act upon it. Often the difference between the haves and the have nots is understanding the power. the power of you. People, humans, shoppers and tax payers have evolved and most of them can read and do math and with this combined basic to advance financial literacy they try to make, save and preserve more of their hard earned wealth or inherited money.

When you don’t know you don’t know and therefore the best advice is you get what you pay for and top dollar paid for advice is one of the best things you can ever do. You may not even take the advice, it may be  a second opinion but to make or save larger amounts of money one realizes you do get what you pay for.

 

 

Income Splitting Strategies

Mark Twain once said that the only difference between a taxman and a taxidermist is that the taxidermist leaves the skin.

For many Canadians the pursuit of tax avoidance strategies has become an obsession and over the years, I have seen some people do some crazy things to avoid paying income tax. In the end, the government has the upper hand and often we are limited to a few programs designed only to delay the inevitable.

However, for the truly savvy wealth planner, there are some strategies that are available to can help you reduce your tax bill through income splitting.

What is Income Splitting?

Income taxes are assessed on each individual at graduated rates. This means that as you earn more income, the tax rate gets progressively higher on each additional dollar earned.

Income splitting simply means that you transfer some of your income to a family member to have part of your income taxed in their hands.

Assume you have $150,000 of taxable income. If you live in Ontario, the basic income tax is $48,752. If you could split that 50/50 with your spouse, the combined tax bill would be reduced by more than $15,000!

In reality, it is not as simple as it sounds because there are a number of rules that limit or prevent a simple transfer of income. However, this does not mean that it is impossible.

Lend Your Spouse Money

This well-known strategy involves the higher income spouse lending the lower income spouse a substantial amount of money. The loan is documented and carries an annual rate of interest at the CRA’s prescribed rate (currently 1%).

The lower income spouse then invests the loan proceeds, and provided they make interest payments on the loan from their own funds (i.e. from the investments), the investment income is then taxable in the lower income spouse’s hands.

At the same time, the higher income spouse reports the interest received on the loan as income.

The Family Trust

A trust is a legal arrangement where one person (the settlor) transfers their property to another person (the trustee) who manages the assets for another person (the beneficiaries).

This structure has a number of characteristics that make them flexible tax planning vehicles.

One such feature is that the trust can allocate income to the beneficiaries and have it taxed in their hands. Of course, this is not always as simple as it sounds because of the various attribution rules in the Income Tax Act.

To help avoid attribution, you can extend a loan at the prescribed rate to the trust. The terms are similar to the spousal loan above, and since the loan is callable at any time, the settlor holds the right to recall the loan from the trust for any reason.

By structuring the trust with the loan the attribution of income to your spouse and children do not apply and you have the maximum income splitting potential without losing control of the assets.

The Corporation

The corporation is an often-overlooked tool to help reduce taxable income.

In this strategy, you establish a corporation and it sells its shares to you and your family members (be cautious if issuing shares to a minor child). To retain control, you should consider issuing non-voting shares to your family.

Next, you lend the funds to the corporation in exchange for a note payable at the prescribed interest rate following the same basic principle as we would for a trust or spousal loan.

Now the corporate tax rate on investment income is close to the top personal tax rate. However, when that income is paid out of the corporation in the form of dividends, there is a refund paid back to the corporation. When the income is paid to family members with low or no income, there can be a substantial tax benefit.

With the corporate structure, caution must be exercised when shares are issued to minor children since the dividends paid to minor children will be subject to an income splitting tax. With his tax in mind, the corporate structure is generally effective with your spouse and adult children.

Final Words

These strategies can produce dramatic savings in larger family groups with a substantial amount of wealth but implementing them does come with additional costs. Legal fees will be required to set up trusts and corporations and each would require additional tax returns and annual filings. It is important to consider these costs to make sure there is a net benefit of the arrangement.

Another important consideration is the so ensure that the structure is set up correctly to avoid application of the income attribution rules and in the case of minor children, the so-called “kiddie tax.” The application of this tax can eliminate any benefit of income splitting and you should discuss your situation carefully with your accountant.

 

Avoidance

Avoidance…..

As young children we learn to avoid, it is human nature.  My two daughters try every day it seems to avoid certain chores, or tasks.  Take homework for example: children need to learn how to use a day planner and how to break down the large assignments into small achievable daily tasks.  Avoiding the project or task until the final hours before it is due, increases stress levels and the final copy is of poor quality.  Yes we all know this FACT by the time we are adults!

However, avoidance is the first behaviour that I focus on when dealing with families and their budgets.  The first question I will ask is where is your mail?  You would be amazed at the “unique” filling systems or lack of that I have seen!  There are some people who bring down boxes (covered in dust), or some cute small file organizers, but most cannot bring me their mail or bills. Why, because the mail is filed throughout the house.  One of my customers used behind there fridge as a filing system.  Talk about avoidance.   Once the mail has been tracked down it is very easy to see who has the mastered the skill of Avoidance.  I have seen over an entire year’s worth of mail in one box and not one single envelope had been opened. Yes there was mail from the “tax man” and all the regular monthly bills X twelve.  What if there was a winning lotto tickets in there?

Now going beyond opening your mail, my second question is, “How many bank accounts to you have?”  For my customers who are reading this, I know you are smirking.  This is my favorite question.  Some people have one or two accounts, but many however have five, six, or more.  Some people opt in favour of having bank accounts with overdraft protection attached with limits of up to $5000.  In addition there are Line of Credits accounts, Savings and Chequings.  Now the game of avoidance in this example is how to avoid knowing what living within your means is.  This is accomplished by making your financial life so complicated transferring money from one overdraft account into the line of credit then back into the main account in a never ending cycle.  This is what I refer to as pretend money!  You have worked hard all week, and it is finally payday!  Your cheque is automatically deposited into your account.  But wait your balance is still in the negative.   Hmmm, to avoid costly overdraft fees you transfer money from your line of credit because this payment is only 3% of the entire balance, and then your proceed to live off the credit card for all your daily expenses because there is a delay of two to four weeks depending on when your due dates are.  Now times this behaviour by two, as both the husband and wife are transferring money from account to account and now you are immersed in a cycle of debt.

  • If this is you, please stop the avoidance it is time to simplify!
  • Stop the Overdraft protection or at least limit the amount to $500.
  • Have one main account and one or two Savings accounts no more.
  • Do NOT use your Credit Card or Line of Credit unless you have already earned the money you are charging to it.
  • Do not count on a paycheque that has yet to be earned.
  • Please open your mail!

 

Take ownership of your finances and your life.

Laurie Lee

Goodcents Co.