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We scrimp and save to fund our RRSP and TFSA contributions and meet the goals of our retirement plan, so why is it that so few of us really understand the fees we are paying on our investments? Despite increased transparency and fee disclosure, many investors remain in the dark about fees and how much of a bite they take out of long-term returns.
“It’s only 2%, that’s just a couple of bucks out of a hundred!”
When it comes to investment fees, you are about to see these are very costly words!
Assume you are 25 years old and maximize your 2021 annual TFSA contribution limit of $6000. You are busy and don’t know much about investing, so you stop by your local bank and they recommend one of their “top-performing” mutual funds.
The bank gives you a glossy brochure highlighting the fund managers vast experience and dutifully informs you of the “management expense ratio” (MER) built into the fund. This 2.35% annual fee seems reasonable to you. Everybody has to get paid and you tip a restaurant server 15%, so this is a relative bargain! No one does any math; the whole matter is soon forgotten and becomes routine. In fact, you barely notice this built-in fee on your annual statement.
Fast forward 35 years and you are now 60 years old and ready for retirement. Your $6000 in that “top- performing” mutual fund has returned 5% annually (before fees) and grown into the tidy sum of $14,987.
Unfortunately, your lack of financial knowledge meant that you had no idea of an alternative investment; something called an index ETF. Buying an index ETF is dead easy and you could have done it yourself with an online brokerage account. Your annual fee would have been much lower at around 0.35%.
If we re-do the math with the same parameters ($6K for 35 years at 5%) and use a 0.35% annual fee, you can see that your investment in an index ETF would have grown into the much tidier sum of $29,446!
Doing some much simpler math ($29,446 minus $14,987) reveals that your retirement fund is $14,459 lower than what it could have been – half of your total gain has disappeared with that little 2.35% fee!
But wait…. How can a mostly set-and-forget index fund return the same as a highly managed “top performing” mutual fund? The answer is that index funds often match or outperform “managed funds” with much higher fees regardless of whether the market is stable or volatile. In our example, the mutual fund would have had to beat the index fund by at least 2% every year in order to return the same amount.
You can always find exceptions and some managed funds may have success over a couple of years. However, very few are consistently able to beat the returns of the index over the long term. When you factor in their low cost and ease of maintenance, the decision to rely heavily on index ETFs is a no-brainer for most investors.
Canadian DIY investment guru Larry Bates has created this online calculator to instantly show how fees can cut into your investment returns.
Our passion at Enriched Academy is to inspire everyone to improve their financial literacy and take control of managing their money. In this example, a little financial education would have done wonders for your retirement planning. The same can be said for many aspects of personal finance – saving, budgeting, passive income generation – so make sure to get the financial knowledge you need to make the right choices for today as well as build your plan for a secure financial future.
People. Let me get real with you for a second. Tax season is upon us, and there is this magical unicorn of an account in Canada called an RRSP (Registered Retirement Savings Plan). It will help you reduce the amount of tax that you owe the government, and/or increase your tax return. Interested? I thought you'd be! I just maxed out my RRSP before the March 1, 2018, deadline. So get on it, open your account, and start contributing!
"BUT ALANNA, I DON'T KNOW WHAT AN RRSP IS?"
Funny you should say that out loud! I had an infographic created last year about the RRSP. Note that the date on the infographic is for 2017 and this years' deadline is March 1, 2018!) And if you're like, "Alanna, I don't want to look at this cool and helpful infographic you had made for your readers", then read on Donkey Kong.
What is an RRSP and why should I have one?
A registered retirement savings plan is an account that will help you save for a happy and financially stress-free retirement. Want to live on a boat in the middle of the ocean, scuba diving all day, surrounded by Great White Sharks? Yes. Please. Mountain climb in the middle of Vancouver Island feeding freshly caught salmon to Grizzly bears every day? Fuck, yes - who wouldn't? The RRSP will help you achieve your dream retirement, but you need to start right NOW. There are two main reasons why:
1. The money that you contribute to your RRSP is deductible from your taxable income.
Example time! Say you made $40,000 in 2017, and contribute $3000 to your RRSP. When it comes time to file your taxes, you can claim that $3,000 contribution as a deduction and can calculate your income as if you’ve made $37,000. This will likely put you in a lower tax bracket, saving you money and/or increasing your tax return. Cool, huh?
Yes. Yes, it is cool.
2. The savings in your RRSP are able to grow tax-free. Within your RRSP you can invest in stocks, mutual funds, ETF's, bonds, and other investments. If you make profits from these investments, they are not taxable until you withdraw the funds, which ideally occurs when you retire. And when you retire and have very little income, you will be in a lower tax bracket than you are now (hopefully), and will have to pay less tax on your withdrawals. Kapeesh?
sweet BOULDER HOLDERS. how do I start?
You can set up a managed RRSP through a Robo-Advisor like Wealthsimple (which helps to reduce your MER fees, rebalance your portfolio, and is just all around awesome), or you can open one up through your bank, credit union, trust, or insurance company. You can also have your RRSP self-directed, and manage it all on your own (that's what I do!) However, if you'd like to go that route, I'd suggest contacting me for more information on how to do this.
I'm sold! But I need some more facts.
• If you work and file an income tax return, are under 71 years old, and have a social insurance number, you should definitely consider opening up an RRSP. • Your RRSP contribution room changes every year, and is calculated based on the following: ◦ 18% of your earned income from the previous year, with a maximum of $26,230 for the 2017 tax year;
◦ Whatever remaining amount is available after any company contributes to your RRSP. If your company contributes 10% of your earned income from the previous year, you can only contribute the remaining 8%.
• You can withdraw up to $25,000 for a down payment on your first home, and not pay any tax under the Home Buyer’s Plan. However, you have up to 15 years to repay the full amount back into your RRSP. • Wanna go back and hit the books? You can withdraw up to $10,000/year, or up to $20,000 in total to help pay for your education using the Lifelong Learning Plan. All you have to do is repay at least 10%/year for up to ten years.
• It isn’t mandatory that you deduct your RRSP contribution on your tax return in the same year that you made the contribution. You can hold off and deduct it in a future year if you think you will be making more money down the road. So, if you have room in your RRSP and just want it generating some kind of income through an investment, you can just leave it in your RRSP and let that shit grow. Yay compound interest!
• You can set up a spousal/common-law RRSP, which you can contribute to, but your common-law partner/spouse owns. This reduces their taxable income with your help.
RRSP vs TFSA - CONCLUSION
The RRSP and TFSA are great accounts for all Canadians and you should definitely consider opening up one or both of them, and start contributing ASAP. Depending on your financial situation and short/long-term goals, one account may be more beneficial than the other. If you are only making $25,000/year and are in a low tax bracket, you'd probably be better off with a TFSA. But let’s say you get a raise and go from making $25,000/year to $60,000/year, it would probably be worth contributing to your RRSP to put yourself into a lower tax bracket, saving you some money at the end of the year.
So there you have it! Everything you needed to know about the RRSP. If you're still hella confused and need some more guidance, please contact me! I've helped over 100 millennials and Gen-Y'ers figure out what's best for them and how to get started - and I can help you too!
You don’t need a money coach or financial advisor to learn the basics of how to start saving money, Financial Literacy Month is all about educating yourself. This 3-minute DIY workout will help build your financial fitness and steer you around eight of the most common pitfalls we see every day.
If these tips sound familiar, your financial literacy may be better than you think, or maybe you have been attending our free webinars? We offer great webinars on all sorts of topics and there isn’t a better way to improve your financial literacy with so little time. We do the research, present the facts, answer your questions, and get you motivated to act – all in 60 minutes!
Why not subscribe to our Financial Friday newsletter— you get all the details on our upcoming webinars, and it’s also crammed with practical, need-to-know personal finance facts, tips and advice.
If you are trying to get your financial life in shipshape, one of the first tasks you should be focusing on is how to improve your credit score. Your credit score is a measure of your demonstrated ability to pay your loan commitments and other bills in a timely manner. It is derived from a credit report issued by either TransUnion or Equifax and ranges between 300 and 900. The Canadian average is 650.
Credit scores of 700+ are considered "good" and offer a higher chance of loan approval, greater borrowing limits, and lower interest rates and insurance premiums. If you want to get one of those super-low advertised mortgage rates you are going to need a top-notch credit score. Potential interest savings are huge on big-ticket items; qualifying for a preferential rate on your mortgage could easily save you tens of thousands of dollars. Vehicle loans are another area where a good credit score can let you keep a lot more money in your jeans every month.
However, credit scores are used for a lot more these days than just whether you qualify for a loan. Insurance companies, potential employers, and landlords are just a few of the people that will often request your credit score and use it for decision making. Understanding how to improve your credit score and ensuring you have the highest score possible is going to open doors to many opportunities and save you money. For a great overview of your credit score “must know” information, take 3 minutes of your time and watch ”How Does Your Credit Score Work” on our YouTube channel.
Five factors that affect your credit score:
Length of credit history (15%) It takes time to build your credit score, so get a credit card when you turn 18, use it, and pay it off in full each month. A car loan or student loan will also help greatly — but only if you stay current with the payments!
Credit utilization (30%) If all your credit cards are maxed out, your credit utilization rate is 100% and it indicates to potential creditors that you are overextended. Try to keep your balance under 30% of your credit limit at all times.
Credit mix (10%) Using a mix of different types of credit will increase your score. When you are young the only credit available may be a credit card, but as you grow older adding a car loan, student loan, or line of credit to the mix will help improve your score.
Credit application frequency (10%) Applying for a lot of new credit in a short timeframe will negatively affect your score. Potential lenders do what is called a “hard pull” on your credit history when you apply. You want to avoid having a number of hard credit pulls in succession as it may look like you are desperately seeking more credit. Please be mindful of this if you want to get more credit cards or are rate shopping for a mortgage.
Payment history (35%) This is the largest determinant of your score and the most critical factor to manage. You need to always make the minimum payments and avoid anything ever getting to the “collections” stage – this includes parking tickets, mobile phone or other utility bills, student loans, and credit cards.
Credit scores are continuously evaluated and adjusted. If you have "errored" in the past, rest assured that the damage is not permanent! Your score can be raised/rebuilt over time by using credit responsibly, but it is much easier to avoid mistakes that lower your score in the first place.
Errors and omissions are not uncommon in credit reports and it is a good idea to confirm the details of your report. Both TransUnion and Equifax have a process to report mistakes and getting them corrected.
Monitoring your credit score regularly is a great financial habit that will allow you to track improvements, detect errors, and prevent identifying fraud. Please note that checking your own credit score is a "soft" inquiry and will not affect your score.
If you want to learn all the details about managing your credit score, make sure to check out How to Increase your Credit Score on the Enriched Academy YouTube Channel. Alanna Abramsky, our head of financial coaching and resident credit score expert, has packed everything you need to know into an easy-to-understand, informative session.
The worst financial mistake you can make is believing that Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are something to look into when you are a little older and more able to set some money aside. The fact is, you don't use these accounts for saving at all, you use them for investing. Your retirement fund could grow to seven figures, even if you only contribute a fraction of the allowable yearly maximums. They also come with huge tax-saving benefits.
Rising inflation combined with a strengthening post-pandemic economy gives both reason and opportunity for the Bank of Canada (BOC) to raise interest rates aggressively in 2022. The 0.25% increase to its benchmark overnight rate in early March likely went unnoticed by most of us. However, it could be that interest rates are 1% or even 2% higher by this time next year, and that would definitely not go unnoticed! Don’t forget that the BOC dropped rates by a whopping 1% in just a few weeks at the height of the pandemic in March of 2020.
One common point of misunderstanding about variable rate loans is their basis on the prime rate. The prime rate is currently 2.2% higher than the BOC overnight rate and is determined by the major banks. Although the rates are much different, the key takeaway is the prime rate moves in lockstep with any changes to the BOC rate, usually within a few days.
Now that we have the background knowledge out of the way, just how will future BOC rate hikes affect your debt?
1. Variable rate mortgages
The percentage of Canadians holding a variable rate mortgage surged in 2021 and now stands at about 50%. Any rise in the BOC rate is met by an equal rise in variable rate mortgages, so the impact is almost immediate. If rates rise 1% over the next year, a $500K mortgage payment will increase by over $200 month.
2. Home Equity Line of Credit (HELOC)
HELOCs usually have a variable interest rate that will rise in conjunction with any BOC rate hikes. A $100,000 balance carried on your HELOC will cost you about $20 more each month for every 0.25% increase by the BOC, so you could easily be looking at an extra $100 monthly a year from now.
3. Credit card debt
Credit cards have fixed interest rates, and you would have to dig into your card-holder agreement to see the details of how the rate can be changed. However, credit card rates are already so astronomically high that it is unlikely you would even notice a 1% increase! Our advice is to attack any outstanding credit card balance ASAP. Paying the minimum each month is futile and only keeps your creditors at bay. It requires over 10 years of minimum payments to eliminate a $1000 balance (at 20%) and will cost you another $1000 in interest charges!
4. Personal lines of credit
There are fixed and variable rate options out there. If you selected the lower variable rate when you signed the agreement, expect to pay more going forward on any outstanding balance.
5. Car loans
Car loans can be either fixed, variable, or sometimes have a combination where they change to a variable rate after a few years. You will need to check your loan agreement for any variable interest portion to see if your payment is going up…. in addition to those skyrocketing gas prices!
6. Student loans
The default choice for Government of Canada student loans is variable interest "at prime" with a fixed rate option at "prime + 2%". The point is mute right now as interest charges are currently suspended, but variable rate student loan holders will see a significantly higher payment when interest charges resume in April of 2023.
The bad news is that you will likely be paying more interest as we move through 2022, but the silver lining is that you will become more aware of just how much your debt is costing you. Not all debt is bad, but the cost of your debt can vary greatly, so make sure you understand your interest expense and adjust your repayment priorities accordingly.
It’s difficult to find timeless advice in the ever-changing world of personal finance but these five are about as close as you can get.
1. Start small and start early with investing
Starting small could be as little as $100 month and starting early means now! Invest what you can and don’t think a $100 monthly will never amount to anything. Only around 5% of Canadians under 25 have a TFSA, which means 95% have already missed out on 7 years of compounded returns! Investing that "measly" $100 month at 5% for 47 years (18-65) will give you $68,754 more than someone who did the same for 40 years starting from age 25. Time really is money when it comes to compounded returns, so get started as soon as possible.
2. Make more or spend less?
Our advice would be to do both, but there are limits on how much income you can generate and cutting back on expenses has a larger impact on your bottom line. You may even be able to cut back without a huge pain factor by first auditing your expenses and keeping track for a couple of months. You may find some expenses you could do without, like that "lightly used" gym membership or seldom watched 300-channel cable package. A part-time job or side hustle isn’t a bad idea, but it comes with its own pain factors. You will spend more time working and less time enjoying life, and any extra income is fully taxable — you might need to earn around $10 in order to get the same result as a $7 spending cut.
3. Re-evaluate your wants and needs
A 1200 square foot, 3-bedroom bungalow used to be the standard for many young Canadian families back in the early 1970’s. A lot of us grew up in a house like that with our parents, brothers, sisters, even the family cat managed to squeeze in! Houses are much bigger now (over 2000 square feet on average) and often come with a lot of high-end finishes. They call this trend lifestyle creep, and it is not limited to housing, it has inundated every part of our life. From what we drive to how often we eat out to where we go for vacation, we are constantly presented with a new norm as our wants slowly transition to needs. Being able to satisfy your wants later in life will only come from making smart spending decisions on your “needs” earlier in life and freeing up the cash to start saving and investing.
4. Understand credit and debt
131 months — that’s how long it takes to pay off a $1000 credit balance paying only the minimum amount — and it will cost you another $1000 in interest charges! Many people carry a credit card balance and are blissfully unaware of just how much it is costing them each month. Car loans are another area where the financing costs are often a lot more than most people realize. It is also important to realize that not all debt is bad, and mortgages are a great example. Even with recent increases in interest rates, 5-year variable mortgages are still a bargain at under 3%.
The key is to be knowledgeable about your debt. Track what you owe and what it is costing you as well as any alternatives that may lower that cost. For example, refinancing your mortgage or drawing on home equity to pay off higher interest loans or credit cards. If you struggle with debt, then it's time to bear down on expenses and draw up a strict repayment plan.
5. Get financially literate
Managing your money has become more difficult as we have a lot more spending, saving, and investing options, but we also have access to a lot more information and tools to help us. Some things like a Registered Education Savings Plan (guaranteed 20% annual return for your child’s education) are a no brainer and can easily be understood with an hour or two spent online. Understanding the fees on your investments and how much they will cost you over the life of those investments is another need-to-know piece of information that can be easily confirmed.
Managing your retirement savings is more complicated because there are a lot of variables (lifespan, health, income, taxes, lifestyle) as well as options (TFSA, RRSP, investment properties, pensions) to consider. You may want some professional advice at some point but arming yourself with as much financial knowledge as you have the time and motivation to learn will help you better evaluate any advice you do get.
Enriched Academy offers complimentary, informative webinars every week on a wide variety of personal finance issues to help you become more financially literate. We don't sell or recommend financial products and we do our best to provide reliable advice and information that is easy to understand, practical and unbiased. Check out our events page to see the webinars coming your way over the next few weeks.
Household budgets are under siege across Canada as inflation spikes prices on gas, food, and almost everything else we need to record levels. In addition, rising interest rates have added hundreds of dollars to the mortgage if you have a variable rate or are looking at renewing a fixed mortgage. Many Canadians have been forced to cut back on their monthly spend to try and make ends meet but don’t have the financial education they need to get started.
Budgets have a reputation for being difficult to sustain and it isn’t unjust, almost everyone has tried and failed at budgeting at least once. There are a lot of reasons for this, your budget may have been too strict and not realistic or maybe it was simply because it took too much of your time.
A lot of people start the budgeting process with trying to figure out how much they think they spend or might need and then try to live within those amounts. The fact is, most people don’t really know (or vastly underestimate) how much they spend. So, the first step to creating a realistic, sustainable-over-the-long-term budget is to track your current spending. You can do this in a number of ways; a mobile app or a piece of paper both work fine. It doesn’t matter which method you choose, just make sure it is easy and convenient to do so you don't forget.
Once you start tracking expenses you will soon see some that a whole pile of them are quite stable and don’t vary much (if at all) from month-to-month. This list includes the mortgage or rent, car or student loan payments, most utilities (some like gas or electric do vary seasonally), car or life insurance, and childcare. A second class of expenses are necessary items that fluctuate a little from month-to-month, like food, gasoline, and (essential) clothing.
The final class of expenses fluctuate wildly and are items that are discretionary or nice-to-haves.... but you could survive without. These include eating out, vacations, concerts or sports events, recreation, and non-essential clothing.
You can determine a basic monthly spend by adding up all the items in the first two expense categories. Put that amount of money into a chequing account every month and pay all those bills from that account. You don’t have to bucket each purchase to a category if you don't want to, but if you are running short from month-to-month and you are not cheating and using that money for non-essentials, you may have to up the amount. If you use a credit card instead of cash, make sure to pay those charges by the payment deadline with money from this account — no cheating!
Any money leftover after filling your basic expense bucket is not what you can spend, because you haven't saved anything yet! You need to fill two more buckets — your savings bucket and your discretionary or fun-money bucket. This is where it all goes sideways for most people. Taking from one bucket obviously robs from the other, so you need to find a balance between short-term gratification and long-term financial security. You also need to stick to the plan and lock away these amounts every month to succeed.
It isn't reasonable to follow some guideline that says put away "xx" percentage of your discretionary income because saving 30% of $500 is a lot harder than saving 30% of $5000. You are going to have to come to a conclusion yourself on what is livable when choosing between what you save and what you spend and aligning that to other financial goals like funding your retirement. Our only advice is that even if what you can save at the moment seems negligible, make that commitment! Did you know that just $100 month invested at 5% for a period of 30 years will give you an extra $100K for your retirement?
If your expense tracking shows that you are running out of money just trying to cover the basics, you need to go back and dig into your spending on necessities. There are some low hanging fruits here…. cable packages and cell phone plans are much easier to eliminate or lower than the water bill, and food is a huge expense that offers a ton of savings opportunities.
Food prices fluctuate wildly from week-to-week and from store-to-store. There are also cheaper substitutes on everything from what you BBQ (rib steak vs. pork steak... or marinade a cheap cut!) to your morning coffee (a large tub of Folgers vs those pricey Starbucks beans). Make sure you know your food prices so you can recognize a bargain when you see one (big-ticket items like laundry soap can be up to $8 cheaper from week-to-week) and constantly assess alternatives – there are lots of options at the grocery store.
What you consider essential clothing is also a grey area, your kids grow out of winter boots and need new ones — mom and dad can likely get another season out of their still functional but not so stylish boots.
If you are seriously in the red each month before even getting to your discretionary spend, then you need to dig into your fixed expenses. Number one on the hit list and a primary source of overspending is the car. Ideally, you want to keep the car payment and the related expenses (gas, insurance, oil changes, tires parking, etc.) to around 15% of your take home. Most people can afford much less car than they currently drive and turn to the never-ending lease or monthly payment to make it happen.
The other option for some families is to go from two cars to one. Before you say impossible; at least look at how you might make it work and how much money you could save. Car prices are extremely high at the moment and there has never been a better time to unload a used car.
Finding a cheaper place to live is an option and you can easily look around at what’s available if you are renting. If you own a home, there may not be many alternatives unless you really went overboard on your current home and there are viable options that make sense given the costs and effort involved. An easier option than selling would be to try and rent some portion of your home (a basement suite?) or maybe offer a spare room through Airbnb or as a homestay to an international student.
If you are already struggling with the mortgage payment, keep in mind that it could get much worse depending on your current rate, whether it is fixed or variable, and when you have to renew. The Bank of Canada interest rate hike on July 13 is expected to add about $55 a month for every $100,000 held on a variable rate mortgage and more interest rates increases are expected.
Credit card debt is another expense that is often overlooked because most people don’t fully realize how much of their money goes out the window each month on potentially unnecessary interest payments. If you are tapped out and need to use your card just to get by then you need to dig into your fixed expenses. However, if a review of your credit card statement reveals a number of discretionary purchases over the past few months (or years!) that you are financing at 19.99% then you need to do two things.
The first is to get a budget in place and a system to keep your card purchases under control. Whether you give up on the card and switch to a monthly cash envelope is up to you, but you need to know exactly how much fun money you have at any given time and a system to keep that spending in check.
The second step is to reduce that card balance as soon as possible. Cutting spending is the first place to look for generating funds, but you may also be able to draw on the equity in your home or have some investments that you could liquidate. For reference, paying the minimum on a $1000 credit card bill will require more than 10 years and another $1000 in interest before you finally get it paid off.
Lines of credit are another area where discretionary spending may also go unchecked. Many LOCs are backed by home equity and have carried a very low variable interest rate over the past two years (especially compared to credit cards). The problem is that as interest rates spike higher, the interest on these loans will also start to bite more and more. At best, these loans will add years to your mortgage free date and at worst, you could lose your home entirely. A decline in home prices like we are seeing now may also cause lenders to look a lot more closely at equity-backed loans in the future.
If you are having trouble making ends meet and up until now have been getting by with fairly lose monitoring of your spending, it is time to dig in and put some controls in place. Tracking your monthly expenses and getting a handle on your monthly spend is a good idea even if you don’t have financial issues.
You don’t need to bucket every purchase into a complicated spreadsheet (unless that works for you!) but you do need to get a good idea of the total amount you absolutely have to spend each month. After that, you can figure out how to start saving money and how much you have left over to enjoy.