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Alanna Abramsky
(Enriched Academy Financial Coach / AFCC)
Have you ever gone through your bank to take a look at your credit score and haven't been super happy with the results? Or have you ever looked into getting a mortgage or needing to borrow money, and nobody will give you a loan? It's likely because you don't have a credit score that's in tip-top shape. This article will explain what a credit score is, and how to increase it.
What is a Credit Score?
You credit score is a number (typically between 300-900) that is based on your credit report. Your credit score your financial report card, and it’s used by lenders to predict the likelihood that you will repay any future debt. Your credit score is based off of your credit report, which is a summary of how you pay your financial obligations. Lenders use your credit report to verify information about you and how you have been paid off your financial obligations in the past.
Why is This Important?
Your credit score will determine if you are a risk to lenders and it will affect the interest rates you pay on any loans you applying for. If you have a “poor” or “fair” credit score, and are looking at securing a mortgage, you may not qualify through a bank or credit union. You may have to go with a B-grade lender or even a private lender, where you’re looking at interest rates 3-6% higher than a traditional A-lender.Your Credit Score is one of the metrics that we track in our Coaching program, and if you can believe it, we’ve helped our average coaching client increase their credit score by 21 points over a 6-month period.
How Can I Increase My Credit Score?
There are 5 ways to increase your Credit Score. All of these ways need to be monitored and effectively managed in order to work.
You should check your credit report and score once per year. One small error can have a significant long-term impact on your credit score. Your credit score is like your financial report card and having a bad score can have a negative affect on your long-term financial plan. We’ve helped 1000’s of clients increase their score. If you feel like you need a little one-on-one help, make sure to sign up for our free Financial Assessment Call.
Do you feel like you need to be part money coach, banker, accountant and economist just to manage your money?
Should it really be so hard to cover the household bills, make the payments on the car and mortgage, put away a little for the kid’s education, and make some solid investments that will hopefully leave you with enough left over for a reasonably comfortable retirement?
Money management might have seemed a lot easier a couple of years ago – before inflation and interest rates went into overdrive and the stock markets and real estate values nosedived 15%. Most of us were just trying to get by financially in 2022 and being buried by an avalanche of ideas and alternatives on how to survive the financial tsunami got very overwhelming and made it hard to decide on anything!
Why is financial planning so hard?
If you are retirement planning and looking for options on where to invest those hard-earned RRSP contributions, there are around 5000 mutual funds and 1000 ETFs in Canada to choose from! But that's only if you are already up to speed on the differences between mutual funds and ETFs, all-in-one ETFs, MERs and other investment fees, asset allocation, portfolio diversification, how RRSPs (and TFSAs) actually work and their many rules and regs, DIY online investment platforms, robo advisors... and the list goes on!
Unfortunately, personal finance management is likely to get more difficult and more complicated in the future. If you are lucky, some employers are now offering financial wellness programs as part of their benefits. Enriched Academy is also working with schools, colleges and universities in several provinces to ensure that students learn the basics of personal finance before they start their career path. This is great news for your kids and their financial future, but it isn’t going to help you…. unless you want to put your kids in charge of the household budget?
The key to a good financial plan
The biggest issue we see over and over at Enriched Academy is focusing way too much time and effort on making money. What really moves the needle is spending more time looking at where your money goes, and how to manage it better and make it work for you. Earning more money won't solve your financial problems if you continue to spend too much, make poor spending decisions, fail to invest, and have no goals to help guide you and measure your financial progress.
The reality is that most of us are on our own when it comes managing our money. The good news is that mastering the basics is a lot simpler than most of us realize. You can still use a pencil and paper to track your expenses and one of our free weekly webinars can teach you a lot in 60 minutes – from how to improve your credit score to how to pay off student loans. There are plenty of excellent learning resources, tools and apps out there that can save you a ton of time.
8 Easy ideas to start your financial plan
If you are ready to dive into your finances and looking for some basic fixes that don’t require a ton of research or knowhow to get rolling, we have eight suggestions for you.
1. TFSAs & RSSPs.
If you don’t have a TFSA or RRSP, take it off your wish list and get one (or both). There is no excuse for not having these accounts; they are free, can easily be opened online, and there is no minimum deposit amount required with many institutions. RRSPs allow you to defer paying tax until you withdraw the funds — ideally when you are retired, and your tax rate is low. The deadline to contribute to your RRSP and take the deduction on your 2022 income taxes is March 1, 2023.
A TFSA contribution doesn’t offer any immediate tax reduction, but you don't pay any tax when you withdraw that money. Furthermore, any income generated by investing your contributions can be withdrawn without any tax. You can open a TFSA and add money to it at any time throughout the year. The maximum you can contribute does not depend on your income like an RRSP, everyone over the age of 18 can contribute up to $6500 to their TFSA in 2023. If you have never had an RRSP or TFSA, you may find that you have a lot of unused contribution space because the annual limits carry over from year to year.
2. Reduce your expenses.
As proven by a never-ending stream of bankrupt celebrities and athletes who “lost it all”, regardless of how much money you have coming in, not tracking where and how much is going out the door is a recipe for disaster.
Countless articles are churned out every day on how to spend less, and they may yield some good tips that are practical for your situation. Look for easy hacks to supercharge your personal budgeting, like taking advantage of grocery store bargains, re-evaluating your mobile phone or cable services, collecting points or discounts on a credit card (but paying the balance in full every month!), or even clipping coupons!
There is no end to money-saving ideas and hacks, but the first step of your financial plan is to know your costs. You can’t kill what you can’t see, and household expenses are no exception. You need to track all your expenses for at least a month and analyze where your money is going. Don’t forget interest charges, memberships, and any other miscellaneous expenses — you need to include everything!
3. Automate your savings.
Making it invisible is the fastest and easiest way ever when it comes to how to start saving money. Setting up automatic transfers every payday to a savings account (and then investing it!) will remove the guesswork and excuses from how best to stash your cash. It probably doesn’t need to be said, but money left in your daily chequing account has a way of disappearing!
4. Learn to manage debt.
If you are carrying a balance on your credit card, it's time to map out a realistic payment plan for an all-out attack on credit card debt. The average credit card balance in Canada as of September 2022 was $2121. Paying the minimum on that amount will require 187 months to eliminate the balance and cost you almost $2400 in interest. Paying the minimum plus $50/month will cut it down to 27 months and $518 in interest charges! If you have options to borrow more cheaply through a home equity loan and pay off your card, what are you waiting for? Balance transfer cards are another option as long as you investigate your obligations, create a strict repayment plan, and are disciplined.
5. Do I need a financial advisor?
A "high-interest" savings account is a huge misnomer, even with the recent increase in interest rates. You might get over 3% in a new account for a limited period, but chances are you are currently earning under 2%. The same goes for any cash sitting in your RRSP, TFSA, or your child's RESP. Financial markets were way down in 2022 and have been volatile, but stock have always recovered over the long term.
You may not need a financial advisor if you have the time and motivation to handle your own financial education. Self-directed investing in financial markets is very do-able and will help keep fees to a minimum. Make sure you understand the risk and how it is mitigated, regardless of who is making your investment decisions and financial plan.
6. Understand your mortgage.
Investigate you mortgage options and how recent interest rates hikes will affect your payment when you renew. The average for a 5-year fixed mortgage in 2018 was around 4.5%, so you are likely looking at 1% to 2% more if you are renewing in 2023. That will add between $200 to $400 monthly to a $400K mortgage.
If you have a variable rate mortgage you are already feeling the pain unless you have a fixed-payment variable rate mortgage? If you do, you could be in for a shock, so make sure to confirm the situation and allow for the higher payment in your financial plan. Some of these mortgages have already reached their trigger rate while others have payments that are barely covering the interest and not making any dent in the principal.
7. How much should I spend on a car?
Cars can easily be bought and sold and there is almost always a cheaper option. Attachment to a car is usually much more emotional than rational, so it's less about giving up a real need and more about feeling good behind the wheel. If you are comparing car alternatives, make sure you factor in gas, insurance, parking, snow tires, oil changes, and any repairs not under warranty in addition to the monthly payment. You should be aiming for around 15% of your take home pay for all your car expenses combined.
8. What is a RESP?
You don’t need a financial advisor to understand that a Registered Education Savings Plan (RESP) is hands down the easiest money you will ever make on an investment. Deposits up to the $2500 annual limit receive a 20% grant from the federal government. If you miss a year, you are allowed to overcontribute to some extent in future years but playing catch-up is hard — just dump in whatever you can every year.
If you are short of cash, try taking a $100/month from your child’s CCB payment. Just like your RRSP and TFSA, you should be looking to invest the funds in your RESP rather than let it sit in cash. You can get a CDIC-guaranteed GIC at around 5% these days if you need a risk-free alternative until you get up to speed and feel comfortable investing in the financial markets.
Choosing a financial planning solution
Although it may seem daunting at times, learning how to manage your money and save and invest for the future will pay huge dividends over the course of your lifetime. Even if you come to rely on a professional for advice (some financial issues are very complex and consulting an expert is a wise move), a little financial education will help you evaluate their recommendations and make sound decisions, as well as provide an extra layer of reassurance and confidence.
2022 has been a financial disaster for many Canadians with high inflation, high interest rates, falling home prices in many markets, and stagnant wages. There is no easy financial fix for 2023 and it could be another tough year, especially if your financial knowhow is lacking.
We hope taking some concrete actions to improve your financial literacy and putting that knowledge to practical use to develop a sound financial plan is top of your resolution’s list. The choice of how you improve your financial literacy is up to you. Our advice is simple — make it a priority in 2023 and just dive-in!
Almost everyone in Canada has heard of the Tax-Free Savings Account (TFSA), but if you already have a savings account or maybe you are younger and don’t have a lot of money, is there any reason to get one?
The short answer is yes — and the sooner the better!
You may believe a TFSA is something to start when you get older or mistakenly think that it is something for locking away long-term retirement savings. The fact is that TFSAs are actually quite flexible when it comes to deposits and withdrawals, they can save you a lot on your taxes, and you can use one to save for a house or a car, or yes, even your retirement.
What is a TFSA and how does it work?
A TFSA isn’t anything like your regular bank account. The main differences are that it is registered with the government and the money in the account doesn’t have to be held in cash. Registered accounts like the TFSA (and the RRSP) track the funds going in and out for tax purposes and although you can hold cash in them, you can also hold investments like stocks, mutual funds, ETFs and many others.
Although a TFSA is unlike your regular account and isn’t for daily banking, you can open a TFSA at most banks and credit unions as well as online brokerages. You have to be at least 18 years old to get one, but there is no fee and no minimum amount required to get started.
What are the benefits of a TFSA?
The main reason to get a TFSA as the name implies, is to save on your taxes. The catch is that if you don’t invest the money in your TFSA, you won’t be saving much. Simply putting money in your TFSA and then letting it sit there in cash won’t do anything for you. This is very different from an RRSP which delivers an immediate reduction in your income tax. However, down the road when you take money out of your RRSP you have to pay the tax, but you can take all the money you want out of your TFSA at anytime and pay absolutely no tax.
So, the secret is to make as much money as possible by investing with your TFSA because all that money will be tax free. If you buy a share of Google for $100 and sell it 5 years down the road for $500, you have $400 tax free profit in your jeans. If you bought those Google shares outside of your TFSA in a cash trading account, you would be on the hook for a pretty big chunk of tax — 50% of that $400 gain would be fully taxable!
How much should I contribute to my TFSA?
The best part of a TFSA is that everyone gets to put in the same amount regardless of how much money you earn and unlike an RRSP, you don’t need to be working and making an income to contribute. In 2023, you can put up to $6500 into your RRSP. But if you missed a couple of years and now suddenly find yourself flush with cash, you can use the carried over amounts from each year since you turned 18. In fact, if you are now 25 and have never had a TFSA, you can drop in over $45,000 since you have 7 years of contributions carried over.
What is the minimum I can put in my TFSA?
Chances are you won’t be able to max out your TFSA contributions, especially when you are young. Only 10% of Canadians of all ages actually max out their TFSA. However, this doesn’t mean that a TFSA is just for rich people. If you could only come up with $100 monthly for your TFSA from the time you were 18 until you retired at 65 and received historical average stock market returns of 7%, you would have $438,643. If you upped the monthly amount to $225 you would retire a millionaire!
Of course, 47 years is a long time and things will cost a lot more, but don’t underestimate the power of compounded investment returns. There are a number of self-directed investing options (like broad-based index funds or all-in-one ETFs) you can use to invest your TFSAs that don’t require a lot of time or investing knowledge to use. Of course, some funds will do better than others, but the real secret is to get started early! Unfortunately, only around 5% of TFSA are held by Canadians under 25.
How do I withdraw money from my TFSA?
If you don’t want to wait until your 65 to start spending those TFSA investment gains, you don’t have to. In fact, you can take as much money as you want out of your TFSA anytime you want. You won’t have to pay any tax and the only downside is that you may have to wait until the following year if you want to put that money back into your TFSA — you cannot re-contribute the amount of the withdrawal until the following calendar year, unless you have available contribution room. If you do overcontribute to your TFSA you need to correct the mistake as soon as possible as you are subject to a penalty tax of 1% per month on the excess amount until it is withdrawn. It's important to keep track of your contribution room to avoid over-contributing.
What are the disadvantages of a TFSA?
You may be thinking a TFSA is the greatest thing since sliced bread and for most Canadians, it is! However, there are situations where another registered account may be a more optimal choice. For example, if your income is high and you are in a high tax bracket, contributing to an RRSP may be a better choice if you don’t have the money to max out both. Another case may be if you are saving for a home, the new First Home Savings Account (FHSA) offers the advantages of a tax reduction like the RRSP and the tax-free investment growth of a TFSA and is a great choice if you are saving up for your first home.
One additional caveat to be aware of with a TFSA is that there are limits on how actively you can trade the investments held in the account. For example, day trading is not allowed, and it could cause the CRA to determine that the income in your TFSA is from carrying on a business and is taxable. Rules and tax interpretations for day trading with regard to TFSAs are different than for RRSPs and the CRA uses a number of factors to make a determination.
Conclusion?
If you've already opened a TFSA and have investments sitting within your account, you're on the right track. Make sure the money is invested and confirm your annual return (net of fees) to ensure your investments are performing up to expectations.
If you haven't yet opened a TFSA, get out there and open one today! A few years from now you will be happy you did. If you're still somewhat confused, scared, excited, nervous, and looking for some support, we have a one-on-one coaching program that clients say is a financial game-changer. You can schedule a free financial assessment call HERE to get some feedback on how to improve your finances and the programs we have available, including one-on-one coaching.
