The Three Most Common Financial Mistakes Made by Young People

NerdWallet’s CEO and Founder, Tim Chen, recently told reporters that his personal finance website sees several serious financial mistakes that young people are consistently making today. He says that if these problems are recognized and corrected early in a young person’s life they will can find peace of mind while building a secure financial future for themselves and those they may be taking care of.

Chen is quick to add that most young people are not well-grounded in financial planning, that it is rarely  spoken about at home when they are growing up or offered as a class at many institutions of higher learning. But in these uncertain times, when inflation threatens and financial institutions are being freed from many previous restrictions and guidelines that are meant to protect consumers, becoming something of a financial planner is going to become a necessary skill set for survival. Yet very few young people in the United States take the time or trouble to think deeply about their personal finances or consult with financial planning experts, especially since many of them unfortunately are just coming out of a drug detox as well. Chen suggests that young adults concentrate on these three areas of their financial lives:

How to handle a 401(k) account

Retirement funds from a job are most commonly packaged as 401(k) accounts. These accounts are an excellent way to begin saving up for retirement, and most major and middling companies now offer their employees a 401(k) account as one of the main benefits of employment. Yet because young people so often change companies in America’s so-called gig economy, they can easily neglect, or completely forget, to rollover their accounts from their old job to their new job. Chen says that doing this is not rocket science, but just common sense. New federal regulations make it relatively easy for account owners to initiate the rollover within sixty days of starting a new job. Chen notes that usually after sixty days the companies that manage a 401(k) account will begin charging up to two percent for managing fees if the account is no longer active. This can add up to a significant loss if the account is neglected for years on end. Keeping the account active at a new place of employment prevents that from happening.

Refinancing loans to reduce interest payments

Many young people are under the impression their student loans, car loans, and first mortgages are locked in at a particular interest rate that can never be changed. But this is not the case. Most young people don’t take the time to check to see if they can get a better finance rate on a loan as their credit score improves over the years, or as interest rates themselves fluctuate. Chen suggests that young people reassess their loan payments every six months to see if they can find a better rate.

Too much month at the end of the money

Many young people, says Chen, make the mistake of letting their spending control them, instead of controlling their money with a simple budget plan. It all boils down to spending less than is earned. One example is to budget for eating out — once the limit is reached each month, the discipline of a budget kicks in and no more drive through meals or takeout happens. It’s an easy skill to learn. Keep credit cards for emergencies only.


3 Tips for Balancing Your Savings and Paying Down Debt

Choosing whether to save or pay off debts can be a difficult decision. Saving money for a rainy day or retirement seems like a top priority, but will your debts linger on for years to come? 

Managing debt and maintaining savings is tailored to each individual, and different strategies can be implemented in helping to achieve your goals. Here are three tips on how to maintain a balance between paying down debt and saving.

Learn to Budget

The first step to managing your finances better is learning how to budget. Knowing your expenditure can seem like a scary thought at first, but creating a budget helps to prioritize financial obligations.

Start with your monthly income after tax, and then list your expenses. According to Certified Financial Planner, Jeff Rose, it’s best to separate your expenses into three categories.

  • Fixed: rent and debt repayments (these expenses are necessities).
  • Variable: groceries, travel expenses and utility bills (expenses that can be adjusted).
  • Optional: expenses that aren’t necessary, such as going to the movies, out to restaurants or on vacation (expenses that you can live without).

Breaking down expenses into categories helps identify optional expenses. By reducing them, you’re saving money.

Refinancing Debt

Gather information and find out the total amount owed, the interest charges, and the terms of the loans like how long you have to pay. 

Student loan refinancing can be one of the most effective ways to lower your monthly outgoings and help make your finances more manageable. Refinancing is essentially applying for a private loan at a much lower interest rate, and that could potentially save you thousands of dollars. Refinancing companies tend to be strict in terms of eligibility. Most lenders will want to see a steady stream of income, ability to manage finances, and good credit history.

Paying Down Debt First

Now that you have an idea of where you can free up some cash, it’s time to prioritize paying down larger debts first and paying the minimum towards debts with lower interest rates.

Donald Hammond, MBA, CFP, and executive vice president at Maritime Financial Group suggests:

“List your debt from the highest interest rate to the lowest. Pay off the highest-interest cards and loans first, paying more than the minimum each month. Continue to at least make minimum payments on the rest. Work your way down until everything is paid off.”

With this method, Hammond suggests to get more aggressive on larger debts with higher interest rates. For example, paying $400 towards a credit card with an interest rate of 17 percent is going to be more effective than paying down a credit card with an interest rate of 7 percent. 

You Can Do It

Saving for the future and paying down debt doesn’t have to be mutually exclusive. Establish a budget, and you’ll get a clear picture of which outgoings can be tweaked to save money. The methods listed above are a strategy to chip away at your debts, maintain savings, and bring you one step closer to becoming debt-free. 

Brushing Up on Knowledge of the Stock Market

It takes some knowledge and some practice, but if you work your way through the ups and downs of the stock market, you can make enough money to be reasonably secure about your future finances. And that’s a big deal these days, when people are scared about future solvency. So if you have enough money to put in, then learn about using the stock market as a way to help out your retirement possibilities.

If you do things like look into trading trends, install mobile apps, understand the difference between small and big trading goals, and read the daily stock market news, you should be well on your way to being able to make the decisions about where your money goes and when.

Trading Trends

Effectively making money in the stock market means paying attention to trading trends. Without knowledge of these trends, and without comprehension of what they mean to you as a buyer and seller, you’re going to the putting your money and blind to a gamble that you don’t understand. To avoid potentially catastrophic losses, you can use visualized trends to make educated guesses about the direction of various stocks.

Mobile Apps

You can install stock market apps on your mobile devices to help your cause as well. Some of these are just for seeing what the stock market is doing. Others of them give you control about what you’re doing with your stocks. And further others have even automated processes built in where under certain circumstances your applications can buy and sell shares for you to make the most money possible. This sort of automated trading can be perfect for people who know in advance what kind of trends they want to follow.

Small Vs. Big Trading Goals

When you put money in the stock market, there are two essential goals that you can follow. One is to make significant gains quickly. The other is to make sustainable goals in the long-term. You always want to balance these two concepts out when you’re putting money in taking money out. The worst thing that can happen is that you take money out too soon and lose out financially because you weren’t patient.

Reading the Daily News

When you read the daily stock market news, that adds to your knowledge base about the topic as well. There are so many things going on all around the world that affect the value of stocks, the more situational awareness you have, the better you can move your money around. It does take some time to learn the lingo, but once you have those basics down, you can talk to anyone in the industry and get some advice from them face-to-face as well.

Why More Canadians Are Retiring With Debt and What It Means

As Canadians, we live in a country where certain rights and freedoms are expected, hoped for and, some might say, taken for granted. The freedom to retire early is one many of us begin grappling with as we approach middle age. Ironically, many Canadians won’t be ready to retire until they are significantly older.

The reason? Debt.

Unfortunately, too many retired people – 34% — over 55 years old still carry consumer debt, according to Statistics Canada. In fact, a recent Equifax Canada report found that the debt load of seniors is outpacing that of their younger counterparts.

It’s not as though Canadians have always carried a heavy debt burden. In 2012, 42.5% of people over 65 still had debt, a jump of 55% when compared to seniors in 1999.

A number of economic, social and cultural factors are to blame, say experts. They point to divorce, illness and large mortgages as some of the culprits. Experts also explain that children, grandchildren and other family members may also be at fault, as they often look to their parents and grandparents to lend them hand. In fact, a 2015 survey showed that 18% of first-time home buyers are gifted their down payments thanks to relatives, typically parents.

But, children can’t shoulder all of the blame.

Low interest rates have made debt much more attractive. Further, cottages, pricey vacations, fancy cars and other expensive toys may be out of reach for the average pensioner. Paring down and cutting back in your sixties may not seem fair. After all, you’ve worked decades, aren’t you entitled to a little luxury? Your fixed retirement income simply may not support your lifestyle any more. Perhaps it’s time to downsize and sell your 3,000 square-foot home?

If selling isn’t an option, many house-rich, cash-poor seniors can look to their houses for equity. Often by the time a person retires, he or she has either paid off their mortgage or is only owing a small amount. Because house values have increased in recent years, in some markets quite significantly, tapping into a home’s equity may be something to consider.

Still, as a borrower, you need to be aware of how you are intending to pay back the loan. Is it possible to make monthly payments or would you prefer to have your estate pay off the loan after you die?

No matter how the money is borrowed, the process should be well planned out. Know what you need it for. Have a repayment plan in place. Don’t borrow more than you need – that often leads to trouble.

Dwayne Rettinger

Executive Financial Consultant

Investors Group Financial Services Inc.

Rettinger & Associates Private Wealth Management

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.

TFSA or RRSP? Cutting through the Confusion

When it comes to choosing between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), there are plenty of details to keep you up at night. It’s important to look at the pros and cons of each plan, so you can develop a financial plan that’s right for you.

Your personal Financial Plan should include the income per year you will need after you retire to have the retirement lifestyle you want. Your Plan should also calculate the amount you will need to contribute to TFSA or RRSP per year to achieve this.

This will help you determine the difference between your current tax bracket and the tax bracket you will experience after you retire. It’s easy to assume your income will be less, so your tax bracket will be less, but that is not necessarily accurate. Many government income programs allow clawback provisions that put many seniors in shockingly high tax brackets!

Clawbacks are just like a tax and they can be an unexpected cost. If you look at the breakdown of the three most common clawbacks, you can see the difference between having a TFSA or an RRSP. Here’s how the three clawbacks break down:

1.      Low income (less than $20,000) – 50% clawback on GIS

2.      Middle income ($35,000-$85,000) – 15% clawback on the age credit

3.      High income ($75,000-$120,000) – 15% clawback on OAS

You can own the same investments in your TFSA as your RRSP. The main difference is that RRSP contributions and withdrawals have tax consequences, while TFSA contributions and withdrawals don’t.

Therefore, the answer to TFSA vs. RRSP is primarily based on your marginal tax bracket today compared to when you withdraw after you retire.

Rule of Thumb

RRSP is better if:

  • You will be in a lower marginal tax bracket during retirement. Example: Today you’re making $100,000 and you will receive $35,000 during retirement, you can get a tax refund of 43% on your current deposits and pay only 20% tax on your retirement withdrawals, giving you a gain on the actual value of your RRSP of 23%.

TFSA is better if:

  • You will be in a higher marginal tax bracket during retirement. Example: Today you’re making $40,000 and you will receive $20,000 during retirement, you can get a tax refund of 20% on your current deposits and pay out 70% when you make retirement withdrawals. This figure includes lost GIS from the clawback. This saves you a 50% loss on your entire RRSP.

You can choose either an RRSP or a TFSA if:

  • You will be in the same marginal tax bracket during retirement.

Other Details to Consider

If you are still unsure if an RRSP or a TFSA is right for you, answer these two important questions:

1.      How will I use my tax refund?

  • TFSA is best if you plan on spending your RRSP tax refunds. Example: if you deposit $10,000 to either a TFSA or an RRSP and then spend the refund, the TFSA will give you a higher retirement income. You need to reinvest your tax refund for RRSPs to provide you the same after-tax retirement income as TFSAs.

2.      Is the withdrawal flexibility from my TFSA a pro or a con?

  • Flexibility is good, but if you are tempted to withdraw before retirement, RRSP might be a better choice.

Sound Financial Planning

It is advisable to plan on retiring with a taxable income in the low-to-mid level tax brackets. Since the cash that you live on can vary from your taxable income, it’s important to remember that TFSA withdrawals that are non-taxable. They can give you cash income that is not taxable income. Other tax deductions must be factored in to figure out the tax bracket you will be in.

Example: Basic government pensions are $20,000. OAS is $7,000 maximum, based on your number of years residing in Canada. CPP can range from $0 to $13,000, depending on how much you’ve deposited in the past. From here, calculate your income from your RRSP and TFSA and any other investments. You can generally withdraw 3-4% (depending on how you invest) of your RRSP or TFSA each year and have it last as long as you live.

This should help you determine which plan is right for you. You can plan to be in the right tax bracket. If you currently earn $80,000 and will retire with $50,000, you may be tempted to think TFSA is best since you will get a refund of 31% today but will pay 34% at withdrawal. However, with only $5,000 per year from non-taxed TFSA, your taxable amount is down to $45,000 which puts you in the 23% category, so RRSP is actually better. In this example, you need enough TFSA for the $5,000 per year but the rest should go into RRSP.

Important Note

Don’t forget to adjust for inflation! All of your retirement calculations need to factor in inflation. It will roughly double your cost of living in 20 or 25 years.

Forgetting to include inflation is the most common error many people and advisors make in estimating retirement income and how large of a nest egg you will need.

What about non-registered investments?

In some cases, non-registered investments may actually be better. Just maximizing TFSA and RRSP is not always the best answer. If your taxable income in retirement will be in a higher tax bracket than now, non-registered investments might be a smarter choice. If using your TFSA to the maximum will still leave you in higher tax brackets, non-registered investments will give you more cash at lower tax brackets than RRSP.

Example: Currently you make $80,000 and you plan to retire with $80,000, you get a 31% refund now but will have to pay as much as 44% when you withdraw because of the OAS clawback. Upon retirement, you can only get $45,000 at lower tax bracket rates than your current tax bracket.

If you plan on getting $20,000 from government pension, then you need to plan now for enough RRSP to give you $25,000 income. The rest should be in TFSAs. However, that won’t be enough. You will still need $35,000 more. That’s when non-registered investments might pan out better for you than RRSPs.

But don’t forget the taxes. Non-registered investments are not always tax free, depending on how they are invested, and the interest is always taxable. Capital gains, however, are only half taxable. Dividends are given preferred tax rates but they also get higher clawbacks because the income for determining clawbacks is the “grossed-up dividend”, which is 38% more than the dividend.

Let’s look at a worst-case scenario for non-registered investments: a senior making $20,000 gets a dividend of $1,000 which has a clawback of $690 (50% of $1,380). In this case, there is no income tax, but you still lose $690 out of the $1,000 in reduced GIS income.

If you sell a bit of your non-registered investments each month, you can get a nice, low tax rate on the cash. My term for this is “self-made dividends.” Since your cash income is made up of your capital gains and your original investment, the tax is very low, often only 10% of your withdrawal.

Bottom Line

1.      RRSP –

  • medium working income $50-80,000 and modest retirement savings
  • high working income over $90,000

2.      TFSA –

  • low working income under $45,000
  • medium to high working income with no retirement savings
  • medium to high working income with large retirement portfolio

How much should I save?

Generally speaking, a modest savings would be $500,000-$700,000 when you retire. Factoring in inflation, this would amount to approximately $1 million to $1.4 million if you plan to retire in two decades.

Plan in Place

Now is the time to prepare a Financial Plan that will help you sift through the options while understanding all the details such as tax brackets, clawbacks and inflation. In my experience, when my retired clients have a portfolio consisting of a good RRSP or pension, a strong TFSA and some non-registered investments, we can come up with a good plan for how much they can withdraw annually while minimizing the amount of taxes that are required.

With a mix of fully-taxed, low taxed and non-taxed sources of income, we can plan effectively for you to receive the cash for the retirement you want, while remaining in lower tax brackets.

A sound financial plan that cuts through the confusion of TFSAs and RRSPs set you up for a comfortable and worry-free retirement. It will have the optimal strategies that are right for you.

3 Golden Rules Of Money Management

In order to have a good head on your shoulders about money, it’s important to know the basics first.  Being smart with your money knows where to set limits for yourself, and what moves to take in order to prepare yourself for the future.

Money is something that should be seen in the long-term vision, rather than just in the moment.  When you are able to take control of your money and confidently say that you know what it takes in order to plan for your future while taking care of what needs to be done today, it’s a great feeling.  Ready to get started with the basics?  Here are the golden rules of money management to get you started.

Always Have Savings Account

It’s important to always have a backup plan if something goes wrong.  When you have a medical emergency or need to take care of your home by making unexpected repairs, it’s a huge relief to know that you put some money to the side in order to be able to fund it.

A general rule of thumb when it comes to saving money is to put away at least 10% of every paycheck.  This way you won’t see a huge chunk come out each time, but rather a small trickle that eventually starts to grow and grow.  You won’t only just have a great sense of satisfaction when you look at the final result of your savings efforts, but you’ll be relieved to find that you have extra security in the event of any emergencies.

Set Up Auto Payments

One of the easiest ways to waste money is to forget to pay a bill.  When you forget to pay then you are hit with a late payment fee, or an insufficient funds fee.  You may as well be burning your money and throwing it out the window.

The best way to eliminate the risk of forgetting to make payments is to sign up for auto-pay.  This way everything is done for you without needing to worry about accumulating fees.  

Don’t Live Beyond Your Means

Many people don’t have the best self-control.  When you aren’t able to recognize when something is too expensive for your lifestyle then you may have a problem with self-control.  In order to ensure that you make the best decisions for your financial future, you should be constantly making an assessment of how well you are doing at your spending patterns.

People who take out credit in order to pay for something that they want but don’t need are setting themselves up for a mountain of debt.

Remember to never take out more than 30% of your total available credit.

4 Biggest Mistakes That People Make With Their Money

When it comes to people and how they spend their money, there are usually a considerable amount of areas that they could make improvements.  Unfortunately, money management isn’t taught in schools, so most people have to learn their money management skills on their own.

When it comes to some of the biggest mistakes that people make when it comes down to money, here are some of the most common.

Letting Their Debt Pile Up

When you accumulate debt by taking out loans or charging things on your credit cards, you are setting yourself up to have to pay these things back eventually.  Some people see loans and credit as a magical source of free money.

However, this money comes at a price.  For every amount that you charge or borrow, you will be expected to pay it back as well as interest.  This means that the longer that you take to pay it back, the more debt you will owe from the interest.

Therefore, paying off your debts rather than letting them pile and pile is the best route.

Paying Minimum Due

Many people make the mistake of paying only the minimum amount due on their loans and credits.  What happens as a result is that they pay a significant amount of interest over the years rather than the small amount they would have paid had they paid as much as they could each payment cycle.

Although it may seem appealing to keep as much money in your pocket as possible, rather than to spend it on bills, it’s in your best interest long term to pay as much as you can each time to get rid of the debt sooner.

Not Budgeting

When you fail to set a budget for yourself which has guidelines and limits in order to be able to pay for all of your bills and basic necessities each month, you are setting yourself up for the potential to overspend.

People who fail to budget tend to frequently find themselves at the end of the month overdrawn and stressed out due to lack of preparation.

Creating a budget, however, isn’t something that has to be complicated.  It’s easy to create within an app or a simple spreadsheet created in a program like Excel.  Once you get into the habit you won’t be bothered to do it every time that you make a charge.

No Savings

The single biggest mistake that you can do is fail to have savings set aside.  Without a savings account, you aren’t prepared for emergencies like medical problems, auto incidents, or having to replace a big expense like a computer.

Try to set aside a bit of savings each month so that you always know you have a backup plan.

Understanding the Differences Between Financial Advisors and Brokers

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Advisors Channel

As a fee-only financial advisor, I am surely biased to this type of advisor. I do think everyday investors are much better off if they have someone in their corner who is recommending a particular investment product because it actually is the best product for them, given their circumstances and life stage. Not because there’s a commission on the sale at the end of the day.

That doesn’t mean, though, that you shouldn’t be mindful of possible issues – and that’s for any financial advisor, whether fee-based or full-service brokers. For that matter, you also should be mindful of potential drawbacks to other options that may seem (superficially, at least) appealing.

Let’s look at the options.

Fee-only financial advisors are considered advantageous because there’s no inherent conflict of interest as there can be with full-service or commission-based brokers. Brokers often recommend investments owned by their company, which is an inherent conflict.  You simply have to consider whether the products recommended are going to be best for your personal financial goals.

What you pay for is financial guidance, planning and assistance. This may be a flat fee. Some advisors charge a percentage of your account’s assets. You may be able to negotiate the amount. But, the fees you pay do not fluctuate according to the type of investments that are being recommended. What you get with this approach is objectivity and investment advice that’s unbiased. Your interests and your advisor’s are aligned.

The commission-based approach to financial advisory services is less the norm today than in the past. You open an account or buy a stock or bond and your advisor gets a percentage. Recurrent trading may also be encouraged – which may not be good for investors with a longer-term perspective. This all can pose a conflict with your best interests and goals.

And on the do-it-yourself front? Well, as attractive as this might sound on the surface, consider the relevance of the saying about the attorney who represents himself. For investment purposes, you might find good information online, but it’s just as likely you’ll find speculative information, if not real fake news. Investing is a risky business; if you don’t have the time or the expertise to do an adequate job of qualifying research, get a professional to help. Your future – financial and otherwise – depends on it.

Speaking of your financial future, it’s never too early to start planning for it. That means Millennials – and even the oldest Generation Zs who are just entering the workforce – should be putting money aside as they think about their long-term financial goals. It’s a challenge, of course, especially for those who are still trying to pay off college. Retirement is maybe too much to think about, right?

With that said, I’ve developed a service package to make it less painless. My new Robo-Advisor Professional service package is specifically targeted to the needs of Millennials and utilizes an in-depth financial data collection sheet, as well as a plan discussion with myself, to collect essential information about your financial background and goals.  This provides a strong base of understanding for clients to invest in ETFs through WealthSimple with a superior portfolio manager with a track record of beating the index.

ETFs are ideal for those with more limited resources, as a “wrapper” around a group of securities. They have a cost advantage over individual stocks and can be traded commission free. They’re similar to mutual funds, but with more flexibility as they can be traded throughout the day, not just once.

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