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(Enriched Academy Financial Coach / AFCC)
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.
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!
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.
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.
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.
It’s a fact; retirement planning is an overwhelming task that is all too easy to kick down the road! There are so many “ifs” in the planning process it’s hard to know where to start, and just getting by for the near term may be taking up all of your time… and most of your money! However, the result of procrastination when it comes to retirement planning is also a fact —getting started too late will severely restrict your retirement lifestyle and is the number one regret for retirees.
To that end, we have assembled a list of quick tips and busted a few myths to help get you going on the essentials and highlight some additional factors you should be considering.
There is no magic amount for a savings target or a simple rule of thumb to base your retirement plan. There is no shortage of variables to consider when trying to figure out how you are going to fund your retirement dreams: How long will I live? Will my health or my spouse’s health fail? How much will my current assets and investments grow in value? How will inflation impact the next 5,10 or 20 years? There is also no magic number — often quoted numbers like $1,000,000 or formulas like six times your annual salary at age 50 have no basis in fact, especially not your facts.
The truth is there is only YOUR number, which results from making a plan based on the kind of retirement life you envision, carefully calculating how much it might cost, and creating a saving and investing roadmap to fund it. If you must have some kind of number for reference, 2019 Federal Government data showed the average annual spend for a household over 65 (including taxes) was $64,461.
CPP, OAS and other government programs will get me through. The maximum amount of CPP you can currently receive is $1254, but the average CPP payment at age 65 is only around $750. OAS will add another $685. You need to pay the maximum yearly CPP contribution for 39 years in order to max out your benefit! Both CPP and OAS are indexed for inflation but that is a pretty tight budget by any standard and you will definitely need to supplement these benefits with some retirement savings of your own. You can get an estimate of your CPP and OAS payments HERE.
If you don’t yet have a TFSA and/or a RRSP, waiting is costing you a lot more than you think! Maxing out your TFSA every year from age 25 to 65 with an index fund returning 5% (TSX 15-year average) would yield $725,000. Starting at age 40 would leave you with only $287,000. You could try and compensate by taking on riskier investments with higher returns, but your downside risk would also be higher.
Saving as much as possible is the only retirement plan I need. This might work if you are super disciplined, but it does leave a lot to fatalism! Having a written plan will help you track progress and let you know when it’s time to make adjustments. Putting the savings away is only half the battle, you also need a plan to invest and track the growth of your nest egg as well as one for how much money you will need post-retirement.
A financial advisor is the golden ticket. A financial advisor can offer information and advice, but they don’t do miracles. They may also play a limited role (e.g. investing) and their market returns may not be any better than what you could get with a lower cost DIY solution like a robo-advisor or all-in-one ETF. A financial coach or financial planner offers more comprehensive planning and are good choice if you don’t have time or motivation to dig into retirement planning on your own.
The value in my home is going to make up for my lack of saving. It might if house prices remain elevated, but how will you get cash for day-to-day out of your home? You could sell it and rent or downsize, rent a part of it (or do short-term rentals like Airbnb), or get a reverse mortgage. There are options but each one has limitations, so do your homework before you retire and see which one might work for you. For example, there may be no market for Airbnb in your area. A reverse mortgage may make financial sense if you absolutely need to stay in your home, but they are currently running over 8% interest and you can only borrow to 55% of value.
I will spend a lot less after I retire. Another maybe! Some of your big-ticket expenses should be gone (mortgage, kid’s college) but your day-to-day will depend a lot on where you live and how you plan on keeping yourself busy. Your home may be paid for, but it could need major repairs down the road and property taxes go up continuously.
As for entertainment, are you content with the length of the Canadian golf season in your area, or do you hope to spend a couple of the winter months polishing your game down in Arizona? If you have retirement dreams, the first step is to sit down and make a best guess budget at how much they are going to cost and where that money is going to come from every month.
If you are planning to rely on a side hustle, spouse and/or inheritance for some extra cash to get you through retirement, just be aware that those options can be easily derailed. If your spouse dies, your survivor’s pension could be considerably lower. Side hustles are great, but your health may fail or maybe you can’t find something – only 10 to 20% of retirees report doing some sort of work. As for inheritance, your parents may live to be a 100, they may make some bad investments, or they may even get remarried.
I will be free as a bird and can move somewhere cheap. If you currently live in Vancouver or Toronto, you have options. If you currently live in rural Saskatchewan, your choices are definitely more limited! Moving from one place to another within Canada may yield savings, but it may also put you far away from familiar people and places that will keep you happy and content during retirement.
Moving to a “cheaper” country overseas sounds exotic, but it’s a huge commitment if you are thinking permanently, and you have to consider health and safety issues, cultural differences, and the fact you may simply get tired of it! You may need to (medical reasons?) or want to (homesick?) come back at some point. Despite the cold, we think Canada is a great place to be!
High interest rates will let me live safe and secure on the interest and keep my capital intact… I’m set! If you are nearing retirement age and looking for safe and secure investments, being able to buy a GIC at over 5% is a nice option that we haven’t had for a long time. However, there is no guarantee that we are entering a long-term high interest rate period. A quick look at this graph shows the BOC overnight rates was under 2% for 13 years from 2009 until earlier this year! With the average retirement now stretching 20 to 25 years, economic conditions are likely to change, and you need to plan accordingly.
The factors affecting your retirement planning are constantly changing — savings rate, inflation, investment performance, interest rates, real estate values, retirement age, job loss or illness, etc. Some degree of uncertainty will always be there but knowing your options and laying down a roadmap to get you started and stay on track will help alleviate a lot of that uncertainty.
I was very fortunate that my career eventually evolved into a role that provides a sense of personal satisfaction while allowing me to help others in a very direct way. First, as a financial planner of 21 years with Investors Group and now as a financial coach with Enriched Academy.
I would like to offer my insights on financial advice based on my various career and life experiences over the past seven decades. By the end of this post, I hope you will be better educated and motivated to take the necessary steps to create your own lasting wealth.
If you want help to grow your wealth in Canada, you have a few options when it comes to getting financial advice.
Large Wealth Management Firms
The large wealth management firms and banks dominate the financial advice industry in Canada. They mostly deal in mutual funds but also have capability to help you invest in individual stocks and other types of funds as well. As a CFP with a large investment firm for over twenty years, I became quite familiar with the various services and products these types of wealth advisors can provide.
At the firm I worked at, the expectations were that every client should have a financial plan and retirement plan and that they should be updated on an annual basis. Financial consultants are required to pass the Mutual Fund License Course in order to join the company and are expected to study to become a Certified Financial Planner within three years.
The following list is what you can expect to receive in terms of service from the financial professionals at large wealth management firms:
What are the drawbacks of a financial advisor?
The main drawback of large wealth management firms is their advisors usually get paid on the sale of financial products under their management. This limits the investment advisor’s income options and lowers their motivation to work with lower net worth individuals, particularly those new to investing with smaller portfolios or those who may be struggling with debt. Don’t be surprised if one of their first questions is, how much money do you have to invest? This type of advisor is more suited for higher net worth clients who want a hands-off approach and do not mind paying higher financial advisor fees.
For individuals who want to become financially literate and get more involved with decision making or pursue alternative investing strategies (real estate, private lending etc.) they will find very little emphasis on education and training with the large wealth management firms. In fact, promoting alternate investing is not usually allowed.
Should you get a personal financial advisor?
The main advantage of a personal financial advisor is they provide comprehensive service with very little work required on your behalf. Although they often rely heavily on mutual funds and you need to be wary of MER and other fees, they are financial experts with whom you can build a long-term, trusting relationship. Clients get a comfortable feeling that they are dealing with a professional and reliable advisor.
How about the financial advisors at my Bank?
The big Canadian Banks can offer a range of wealth management services that is similar to those offered by the large investment firms. They have the added advantage of offering a comprehensive range of banking products and services and conveniently integrating them with their investing services.
What are the drawbacks? Banks are in the business of taking in money and lending it back out for a profit, hence the same issue arises as with wealth management firms. If you don’t have a lot of money, you may not get a lot of attention and nothing in the way of personalized service. Their financial advisor services are mostly provided for high-net-worth clients and their insurance offerings focus on critical insurance products that are primarily intended to pay off mortgages.
What is a fee-only financial advisor?
Fee-only financial advisors are just as their name implies, they charge a fee for handling the services you request, rather than trying to generate commissions by selling you financial products. Their list of services can be comprehensive — they may act as an investment planner or retirement advisor, or they may provide financial planning, debt consolidation, insurance analysis or many of the other services you can get from a full-service wealth management firm.
How much do fee-only financial advisors charge?
Paying only for the services and financial guidance you need and ask for sounds attractive. You will not have any ongoing management fee or bias toward a specific financial product. However, the quality and price of their financial planning advice may vary greatly. If you google “fee-for-service advisor”, you will see hourly rates from as low as $10/hour to over $200/hour. A typical service will advertise a generic review and recommendation for around $800 and a customized plan for around $1800.
The other issue is how to choose a good financial advisor? If you choose an advisor who isn’t very competent or doesn’t take the time to properly understand your situation or explain things, you may not fully understand the risk or lack confidence in their plan. In addition, every time you have a question or need a follow up, it may end up costing you more.
Financial advisor vs financial Coach
There are several key reasons that I am passionate about the Enriched Academy financial coaching program. The first is that I am able to offer the same level of professional service to every individual who signs up, regardless of their financial situation. The program costs the same and offers the same high-quality financial advice for high net-worth individuals as it does for those who are in debt or living paycheque to paycheque.
The fees for our one-on-one coaching program are relatively low compared to the annual management fees of a wealth management firm or fee-only financial advisor. The Enriched Academy program also provides lifetime access to a continuously updated training portal with all sorts of analytical tools at no additional cost.
Financial coaching also covers the entire spectrum of your financial situation: cash flow and expense management, budgeting, saving strategies, all types of investing (RRSP, TFSA, income properties, other passive income investments), debt management, building credit, wills, insurance, and retirement planning. If we see a particular need, we can go into more detail on any particular area.
While cost and the scope of services are important differentiators, the biggest benefit of a having a financial coach is that you become financially literate. You will learn to understand and analyze your financial situation and the available options, so you can make highly informed decisions regarding your financial future. This knowledge is very valuable for your confidence and peace of mind, even if you do come to rely on a professional for at least some of your financial advice. Issues like estate planning can be very complex and seeking quality professional advice is never a bad idea.
A financial coach is both educator and advisor. A coach teaches you the facts and provides a structured plan, an impartial opinion, and plenty of motivation and inspiration – but the decisions are ultimately up to you. The focus is on equipping you with the confidence and knowledge to make solid financial decisions. If you want to be 100% hands-off money management and leave the decision making up to someone else, coaching is not a good fit for you.
Aside from the education and financial guidance, there are also intangible benefits to a money coach. Many people have trouble shifting from the learning phase (like reading this blog) to the action phase (purchasing an index fund online for example). A coach provides the motivation, structure and accountability to boost confidence and helps turn complacency into actions that build a robust financial plan.
Becoming successful financially starts with the knowledge that to earn more, you must learn more. The journey to financial freedom is not a get-rich-quick scheme. As evidence, a high percentage of people who win the lottery end up having less money three years later than what they had before they hit the jackpot. Professional athletes make millions of dollars but are disproportionately likely to end up bankrupt compared to your average citizen.
The missing factor in both cases is poor knowledge and a lack of learned financial responsibility that would have equipped them to protect and grow their wealth. It is precisely this financial knowledge and literacy that Enriched Academy is focused on providing to their clients.
Financial wellness is fast becoming the latest buzzword as soaring inflation and interest rates pile the financial pressure on Canadians. There is also a strong connection between mental health and finances and financial stress is taking a heavy toll.... so, what exactly does it mean to be “financially well”?
Financial wellness is described as a state of well-being where an individual or a household has achieved financial stability and is able to meet their current and future financial obligations without undue stress.
Financial wellness is not about being rich, having a certain amount of net worth, or achieving a specific financial goal. Rather, it is about having a sense of security and confidence in your financial capability and being able to manage financial issues, challenges and opportunities as they arise over time.
Financial wellbeing is a function of many different factors. Income is obviously a critical element, but it also depends heavily on how well we are able to manage our money. These tasks include budgeting, managing debt, and investing and planning our retirement. The degree to which we are able to handle these tasks successfully depends on our level of personal financial literacy and our ability to make informed decisions, solve financial problems, and manage financial risk.
What is making Canadians so financially unwell?
Lack of financial literacy: Many Canadians lack the financial knowledge and skills to manage expenses and cashflow, save money, and invest and grow their savings for a secure financial future. This makes it difficult to effectively manage their financial life and can lead to financial instability and plenty of financial stress.
Better financial understanding by itself will not solve your money issues, but the importance of financial literacy cannot be overstated. We have seen over and over again at Enriched Academy how just a little pre-emptive knowledge can make a huge difference. For example, understanding the benefits of a TFSA and starting from a younger age.... or investing in an index fund instead of letting cash pile up for years in an RRSP.
High levels of debt: Canadians struggle with credit literacy and have some of the highest levels of household debt in the world. This debt is primarily driven by mortgage debt, but Canadians also carry significant amounts of credit card debt, car loans, lines of credit (often secured by home equity) and student loan debt. The average non-mortgage debt in 2020 was around $23,000. Rising interest rates have seriously exacerbated this problem and there is spiking demand for credit counseling and debt consolidation services.
Income inequality: Income inequality is a significant issue in Canada, with a widening gap between the richest and poorest Canadians. This can make it more difficult for lower-income Canadians to achieve financial stability and security.
Housing affordability: Housing affordability is a major concern in many Canadian cities, with rising housing costs making it difficult for many Canadians to purchase homes or afford rental housing.
What are the costs of poor financial wellness?
Poor financial wellness can have significant costs, both for individuals and for society as a whole.
Overall, poor financial wellness can have far-reaching consequences for individuals and society, underscoring the importance of promoting education and financial literacy to support individuals in achieving financial stability and well-being.
Workplace financial stress in Canada
Financial stress in the workplace is a significant issue in Canada and according to one survey, Canadians worrying about their finances while on the job could have cost as much as $40 Billion dollars in 2022! Employee productivity, employee performance, and employee mental health are all being negatively impacted by financial stress at home and are common reasons for poor performance at work.
Some employers are starting to recognize the effects of poor financial health in the workplace and are implementing programs to support employee financial wellness. Financial wellness benefits may include free financial literacy courses, counseling, employee benefits such as retirement savings plans, and flexible work arrangements to help employees balance work and personal financial responsibilities.
Overall, workplace financial stress is a growing concern in Canada, and employers and policymakers are increasingly looking for financial stress help to support employees in achieving financial wellness.
How do you measure financial wellness?
Financial wellness can be measured in a number of ways, but it is often a feeling rather than some sort of tangible number. While we can easily take some steps to improve our credit score, improving financial wellness is much more complex.
A financial health assessment is a comprehensive evaluation of an individual's or household's financial situation. It typically involves reviewing income, expenses, debt, savings, investments, insurance coverage, and other financial assets and liabilities. A financial health assessment can help identify areas of strength and weakness and provide insights into how to improve overall financial well-being. Enriched Academy offers a complimentary financial assessment call for anyone looking for advice on how to better their financial situation.
A financial stress tests involve evaluating an individual's or household's ability to withstand financial shocks or unexpected events, such as a job loss or medical emergency. Financial stress tests can help identify potential vulnerabilities in one's financial situation and provide insights into how to build financial resilience.
Financial behavior analysis involves examining an individual's or household's financial behavior and decision-making processes. It can help identify patterns of behavior that may be contributing to financial stress or instability, such as overspending or not saving enough.
Surveys and self-assessments can be used to measure an individual's or household's financial wellness. These tools often include questions about financial knowledge, attitudes, and behaviors, and can provide insights into areas where individuals may need additional education or support.
Overall, measuring financial wellness is a complex process that requires taking into account multiple factors and indicators. Different methods may be appropriate for different individuals or households, depending on their specific financial circumstances and goals.
How can I improve my financial wellness?
There are plenty of options for improving your financial wellness and most of them revolve around bettering your financial literacy skills.
Budgeting: Creating a household or personal budget is an important first step towards achieving financial wellness. A budget can help individuals track their income and expenses, prioritize their spending, and identify areas where they can cut back. Most of us are already have the financial knowledge and skills to create a simple budget — the real issue is having the commitment and making the hard choices that are often required to stick to a budget.
Debt management: Developing a plan to manage debt, such as creating a debt repayment plan or debt consolidation and interest rate reduction can help individuals reduce their debt load and improve their financial stability.
Savings: Building an emergency fund and setting savings goals can help individuals prepare for unexpected expenses and achieve long-term financial goals, such as saving for retirement or a down payment on a home.
Financial literacy education: Improving financial literacy can help individuals make informed financial decisions and better understand the impact of their financial choices. Enriched Academy offers free financial literacy in our weekly webinar series, and we also provide learning resources to support financial literacy for young adults to educational institutions across the country.
Seeking professional help: Working with a financial coach, financial planner or financial advisor can provide individuals with personalized guidance and support in achieving their financial goals.
In addition to individual action, there are also broader solutions that can support financial wellness at the societal level. These may include policies that promote income equality, affordable housing, and access to financial services, as well as employee financial wellness programs and education initiatives.
2023 is shaping up to be another tough year financially for Canadians and financial wellness will continue to be elusive, especially if your financial literacy is lacking. The good news is there are a lot of resources available and many of them are free or low-cost. The largest hurdle for most of us is willpower and maintaining our motivation — achieving financial wellness is not a sprint. It can be a time-consuming, slow process and you may not see the results from your efforts until many months or many years down the road!
Saving up the down payment for your first home in Canada can be a daunting task. At the very minimum, you are going to need 5% and even in a comparatively inexpensive city like Edmonton with an average price of $400K, you are looking at $20,000. There are lots of tips and tricks on how to save for your first house, but this article isn’t about personal budgeting, it’s about where to park your savings along the way to purchasing your new home.
The good news is there are several home buyer incentives and a few savings options when saving for your first house! You could put your money under the mattress, in a savings account at your local bank, or take advantage of one of the government’s “registered” savings accounts. These include the Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA), and the new kid on the block, the First Home Savings Account (FHSA). The main advantage of these three accounts is the option to invest and grow your savings while cashing in on some serious tax advantages, allowing you to reach your home ownership goal even faster. It is also possible to use a combination of these accounts, but that may require a lot more income than you have at your disposal.
My retirement plan has a home buying option?
RRSPs are quite well known for punishing early withdrawals — ideally you would keep your money in your RRSP account until you retire and can then draw out the money you need at a nice, low tax rate during your retirement years. However, the Home Buyers’ Plan (HBP) is an exception to the rule. Under this plan, you can withdraw up to $35,000 from your RRSP to buy a home. Although you won’t be taxed on that withdrawal and have avoided one caveat, the catch is that you have to begin paying that money back to your RRSP starting a couple of years down the road. If you don’t pay it back on schedule over the next 15 years, the tax man will come calling as that withdrawal becomes fully taxable! It’s a good benefit, but you need to follow the rules and make sure the repayment schedule fits your budget.
To be eligible for the HBP, you must be a first-time home buyer, which means you or your spouse/common-law partner cannot have owned a home in the four years before the withdrawal. You must also have a written agreement to buy or build a qualifying home. If you're buying a home with your spouse or common-law partner, you can both withdraw up to $35,000 for a total of $70,000.
The home you purchase, or build must be a qualifying home, which includes most types of housing, including single-family homes, semi-detached homes, townhouses, condos, and mobile homes. It must also be located in Canada and must be used as your principal place of residence within one year of buying or building it.
In many cases, using your RRSP for a down payment under the Home Buyers' Plan is a good option. However, it's important to understand the rules and requirements of the program before making a withdrawal from your RRSP.
How can I use a TFSA to buy a home?
In case you missed the memo, Canadians 18 and over can deposit up to $6500 annually into a TFSA. You contribution limit also caries over from year-to-year, so you already have a sizeable contribution limit if you are in you are in your mid-twenties and have never had a TFSA before! The advantage here is that you could invest your down payment savings and would not be taxed on those returns. As the name says, after growing your portfolio for a few years, you could take those tax-free savings and head right down to the bank and put it down on a new home. The only real consideration is that you will have to wait until next year if you want to put that money back into your TFSA account. However, if you just bought a house, you are likely to be tapped for a couple of years anyways, so it may be a non-issue. A TFSA can also be used by anyone who fails to meet the criteria for a first-time homebuyer as required by the HBP and the FHSA.
Although this all sounds straightforward so far, the issue gets complicated when you start to think about using both an RRSP and TFSA. The most you could take out of your RRSP to buy a home is $35K, so once you hit that mark should you start putting your money into a TFSA? If you are looking to get into a home sooner rather than later, the immediate tax savings from an RRSP will help you reach your down payment goal faster than a TFSA providing they were invested the same way (and you reinvest those RRSP tax savings instead of spending a week in Cancun!). Beyond that, you might want to consult a financial coach for some expert advice and do an in-depth analysis of your TFSA/RRSP contribution strategy.
FHSA: The new kid on the block!
As of April 1, 2023, there is a new contender for your down payment savings dollars — the tax-free First Home Savings Account (FHSA or sometimes TFHSA). This is yet another tax-advantaged account from the federal government that takes a stab at combining the best of both the TFSA and RRSP. Although it is not 100% confirmed and the rules could still be tweaked, it basically allows you to do this:
Just like the HBP, the home must be your principal residence within one year of purchase and be located in Canada.
If you have been piling up your money in an RRSP or TFSA and think the FHSA suits you better, it looks like you will also be able to transfer RRSP and TFSA funds into an FHSA. In the case of a TFSA, you would also get a tax deduction on the amount transferred (subject to the rule of course!). Moreover, at this time it is also possible to take advantage of both the FHSA and the HBP allowing a couple to withdraw up to $150,000 of combined RRSP/FHSA funds for a down payment. There are still a few other details to be worked out, but at this point, the FHSA looks like a great down payment option for first-time home buyers.
Which down payment savings account is right for me?
At Enriched Academy we are all about financial education and helping you make the best decision. We equip you with the knowledge and facts you need, but at the end of the day you are in charge of your financial life. Our goal is to always encourage our clients to make an informed decision. There is no clear winner in the RRSP vs TFSA vs FHSA debate as it depends on a myriad of other factors which only you are privy to.
One thing we do know is that when it comes to investing, procrastination is your biggest enemy and saving for a home is no exception. Buying your first home is increasingly difficult right across Canada as prices and interest rates are at record levels and there appears to be no relief in sight. There are programs in place to make it easier to save for a home, and the sooner you start taking advantage of one, two or all three of these plans the better!
The other factor that comes into play is risk and investment planning. Some people see their down payment savings as untouchable and may limit their holdings to low-risk investments or fixed income securities. On the other hand, some folks may have a shorter buying timeline or be naturally less risk-averse and try to fast track saving for a down payment with a more aggressive investment strategy.
Homebuying in Canada has become increasingly difficult in many regions. Sound financial planning and a good credit score will help you save money and obtain financing, but don’t neglect the tax advantages and investing options of the RRSP, TFSA and FHSA.
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