Category: Money

Post is related to financial decisions or philosophies impacted by the acquisition or use of money.

Your Finances Are What You Tolerate

Are you settling?

The biggest cost that anyone ever pays financially comes from settling. Learning to tolerate small things will ultimately rob you of great returns throughout your life.

While the areas in which we often find ourselves tolerating less than ideal circumstances are numerous, there are a few that stand out as clear robbery of your financial health.

Bank Fees

Big Banks have long held the top spot for where we are told to store our money. Unfortunately for us consumers, those marketing messages aren’t cheap. And, neither are sports arenas.

To pay for all the extras that big banks are involved in, a common strategy is to leverage account fees on just about every product sold.

While the fees themselves seem small, there are two things to consider.

Just like the recipe for success is the right small things, stacked over time. The recipe for disaster is the opposite. The wrong things (even small in size), stacked over time will lead to financial ruin.

The second consideration is the precedent set when accepting a small fee because it’s “not that much”. That is only the first step, and the question then becomes where to draw the line?

It is far better to not take that first step, and avoid bank fees altogether. There are a few ways to do this, all of which I have done myself.

Open an Account with a Credit Union

Credit Unions operate much the same as banks, largely the same offerings, but without the overhead. While this means you won’t see your favorite sports team being sponsored by a credit union, you also won’t encounter the account fees needed to pay for such extravagance.

Open an E-Account

Another option is to look at e-banking options. These institutions have surged into popularity due to their low-cost offerings. That includes no pesky account fees.

Ask for the Fees to be Removed

Another option, and one especially important for those who won’t take on the hassle of changing financial institutions is simply to ask for the fees to be removed. I currently have accounts with a couple of the big banks, for various financial reasons. At both those banks, I simply asked for my fees to be waived, and they were! Now it’s your turn - take a look at your bank. Are you paying fees? Try asking for those fees to be waived. If not, maybe it is time to look at other alternatives.

Investment Fees

While bank fees cost you a few thousand dollars, they lie at the top of a slippery slope. The next area where many people simply tolerate what is offered lies in investment fees. The difference between low fees and standard fees might not sound like much.
After-all, the difference between 0.5% and 2% is a paltry 1.5%.

But that 1.5% makes all the difference in the world.

Take a $50,000 investment in the general market, returning 7% annually, for 30 years. After those 30 years, the account charging 0.5% in fees has: $330,700.

But what about the account with 2% fees?

That account only has $216,100.

That paltry 1.5% difference in fees just cost over 100 thousand dollars. And that’s simply considering the sum of $50,000. If you consider this impact on your life’s retirement savings, that number could be many times multiplied.

How much are you paying in investment fees? Are you tolerating the levels of fees that will result in financial hardship later in life?

Lowered Earnings

The third, and most costly area that we end up tolerating our lot in life lies in our careers. Far too many people don’t take the time to consider what economic value they are bringing to the world.

Failing to understand the valuable contributions that you make will ultimately lead you to undervalue your work. This is perhaps the most prevalent example of “settling”, as people tolerate the job they have without asking the hard questions.

In a 2018 Gallup survey on worker engagement, the all-time high record was set. 34% of American workers are engaged at work.

That means 66% of workers are not fully engaged. For that majority, the question, “are you paid what you’re worth?” is even more important. If engagement isn’t there, people aren’t working to fulfill an inner drive. For those 66% of people, it is more important than ever to understand their economic value.

To understand what it is that you do to create economic value, you need to think about the value-add tasks of your role. How much revenue does that bring in? Or how many costs are you saving?

As an employee, some of the earnings or savings are a direct result of your actions. That should give you an indication of whether you are paid enough. Other considerations are; how much would it cost to replace you?

Being paid for what your worth could mean the difference of hundreds of thousands, or even millions of dollars over your career. In the pursuit of financial freedom, every choice, good or bad, plays a role.

In all areas of our lives, we are asked to tolerate situations because “that’s the way things are done.” That could mean accepting fees that aren’t justified, or even accepting pay that’s too low. The decision to settle in any of these situations is costly though. From thousands to hundreds of thousands, the cost of tolerance is a high price to pay.

Where are you going to say, “enough!”? What areas of your life have you merely tolerated for too long? It is time to take a stand, your future just might depend on it.

How can you be better at your job?

   This week, several members on my team approached me with the question, “How can I be better at my job?”

   It’s an important question. One we all have asked at one point in our lives. And the answer is one that can have a profound impact on your entire life.

   The answer, perhaps overly simple,  has only 3 parts.

The To-Do List

   Opening up the notebooks of my team members, the first thing that practically fell out was a seemingly endless list of “To-Do’s”. Each of them, independently, had written down all the balls they were juggling right now. 

   And there were a LOT of items on those lists. No doubt, you can relate. How many things are on your lists? 

   How many times have you thought, “There simply isn’t enough time in the day to get all this done?”

   Trying to help take inventory of what their tasks were, we started putting those To-Do’s into buckets. Grouping tasks by the nature of the work gives a better understanding of what my team was spending their time on.

   Ultimately, we were able to separate these task lists into a few separate groupings, or buckets.

   Batching tasks helps give some clarity over where you are actually spending your time. Take out your to-do list, and group those tasks into buckets of similar items.

Make it Rain

   Putting those To-Do list buckets to the side for a moment, we then looked at what jobs they were each trying to do. Boiling down the job into the most basic metric: what makes it rain?

   Think about your work. What is it that you do in your work that makes it rain? What work do you do that makes money? 

   If you are a software developer, it’s producing working software. If you’re an artist, it’s making and selling art. If you are an event planner, it’s running smooth events.

   In every role, there are a handful of actions that really make it rain. Understanding what those few critical levers are will help you become more valuable. 

   Now think back to that endless list of To-Do’s that you have. Which of the buckets are the same on both lists? The To-Do list tasks that fall into one of your make it rain bucket, those are your money-makers. Do more of those, and do them well, and you’ll become way more valuable.

What The F*?

Focus. 

What the focus.

   Asked separately, both Bill Gates and Warren Buffet gave the same answer. The keys to success lie in your ability to focus on the important things.

   As my team members looked into their To-Do list, they were really revealing their focus. Anything on that endless list was something that was weighing on their mind, and sapping their time and energy.

   By putting more focus on the activities in the make it rain buckets, my team members will ultimately be more valuable to the company. Put another way, by focusing on the real value-add activities, my team members will be better at their jobs.

   You want to be better. Better in your career. Better financially. Better in all aspects of your life. I know you do, because that’s why you show up here each week.

   Understanding what it is that you do to make it rain, and then allocating more of your time to focus on those key activities makes you better. And that difference in performance between you and everyone else? That will, in time, be rewarded.

   Think about these elements this week: What can only you do to make it rain? Are you spending enough time on those activities? Can you increase your focus, time and energy on those money-makers to become even more valuable?

3 TFSA Mistakes That Could Cost You Big Time

   Are you making one of the three most common TFSA mistakes?

   For Canadians, the TFSA is one of the best investment style accounts you can hold. But that only applies when you follow some rules. Breaking any one of these rules, and you could be in for a nasty surprise come tax time!

   The Tax Free Savings Account (TFSA) is actually a style of account that allows tax free investment growth. Tax savings? Check. But, there is a specified limit of lifetime contributions that increases every year. The only way to increase the amount of funds covered tax free in this tax advantaged investment account is to let the markets work their magic over time.

   Of course, in times of great opportunity, sometimes impatience starts to rear its head, and people start looking for ways to get ahead of the game. Unfortunately, those activities could actually hurt you more than you’re expecting.

Trading too Often (Day Trading)

   With the increased market volatility during 2020, especially the crash in March, investing into the stock market can produce some wild swings in valuation. For those more involved in short-term trading (defined: gambling), there has presented the opportunity to score some quick returns. Investing for the short term steps a little too close to the vast grey-area that the Canada Revenue Agency refers to as, “investing for business activities”. 

   “Business Activities” as it applies to your TFSA means that you have found yourself in a grey-area of TFSA tax law. Somewhere in that grey area surrounds the frequency of buying and selling transactions. If the CRA determines that the buying and selling of investments is too frequent, those transactions may be disqualified, and therefore not tax-advantaged. You would then be required to pay taxes on those investments.

A note on frequency of trading: 

   Any long term buy and hold strategy will be fine, even if you have weekly or monthly contributions made automatically. This is where the grey-area begins. 

   For example: I might have weekly contributions to my TFSA - resulting in 52 purchase transactions a year. On the other hand, someone else might have bought and sold only a half dozen times throughout the year, playing on the market swings of particularly volatile stocks. While my 52 transactions would be fine, the person with only those half-dozen transactions might still be classified as “business activities”. 

   We saw this a couple of years ago during the weed-stock bubble. Playing the volatility in those stocks resulted in some people walking away with huge gains in their TFSA, ultimately increasing their tax-advantaged investment limits. But, the tax-man always takes his cut. And many people who had tried to “beat” the CRA were ultimately re-assessed and forced to pay tax and penalties, as well as losing that contribution room in their TFSA for the year. 

   As a general rule of thumb; if you think you’re out-smarting the tax office, watch out. They will find a way to get you.  

Buying Certain Foreign Investments

   Another mistake many people make is in which investments they buy for their TFSA. While the list is fairly straight-forward, there are a few areas that still trip people up.

What can you invest in?

  • Cash
  • GIC’s (Guaranteed Investment Certificates)
  • Bonds
  • Mutual Funds
  • Securities listed on a designated stock exchange

   In general, if the investment is traded on a major market like the TSX, NASDAQ, or S&P, your investment qualifies in your TFSA. But, that isn’t the end of the story.

   With the diversity of investments available, you can invest in virtually anything under the sun. There are a few types of investments that don’t qualify for the same levels of tax protection as say your RRSP. The most notable of these investments comes in the form of a REIT. 

   REITs, or Real Estate Investment Trusts, often pay their shareholders an above average dividend yield, which makes them extremely popular. With the international nature of many of these big REITs, the currency of distribution can trip some people up. Some REITs pay their dividend distributions in USD. While that alone is not a problem in a TFSA, the US tax office steps in to ensure they get their piece of the action too. Unfortunately, a TFSA does not provide the same protection from US Withholding taxes as an RRSP would.

   Be sure to know what investments you are holding in your TFSA. If the investment is in a foreign country, the same withholding tax protections might not be available compared to holding those investments in a RRSP.

Over-Contributing to Your TFSA

   The final mistake is far easier to identify and fix. Contributing too much into your TFSA will result in penalties, including additional taxes and charges for each day the TFSA sits in an over-contributed state. 

   Each resident has a contribution limit that increases each year they reside in Canada full-time (more than 183 days/year), and are over the age of 18. The confusion arises when moving money into and out of your TFSA. Withdrawals from your TFSA suffer a timing delay before they can be re-contributed. 

   For example: Assume you have fully maxed out your prior years contributions. Then, in August 2020 you remove $30,000 from your TFSA. Even if by October you have that $30,000 to re-invest, your contribution room doesn’t reset until January 1, 2021. That means, if you put the money back into your TFSA in October, you would be in a state of over-contribution until January 1, 2021. That period from October to January would result in penalties and additional taxes, despite your lifetime contribution limit not changing.

   To see what your contribution limit is for any given year, sign into your myCRA account.

   Remember, your contribution limit for the year is total contributions, and doesn’t add-back in any withdrawals until the following year.

   By adopting a long term buy and hold strategy, and only buying qualifying investments, you will be well positioned to avoid the costly TFSA mistakes mentioned here. Financial freedom is only a few right moves away - avoid these mistakes and you will be well on your way.

A Guide to Purchasing Brand Names

   When should you spend top dollar to buy brand name goods?

   Personal finance writers everywhere espouse a frugality mindset, often supporting the notion that brand names are a waste of money when you can buy similar No Name goods for a fraction of the cost. And the examples used so often leave little doubt. 

   Who needs a $4,000 purse, when a $80 purse is just as functional? Or a $10,000 watch when a $40 Timex does the same thing?

   While the argument in favor of the cheaper option is compelling, there is far more at work than the simple dollars and cents.

When should you buy Brand Name?

   Buying quality goods isn’t just a luxury, there are some very good reasons why someone would choose to spend the extra money.

The Product is Part of Your Identity

   How much is your identity worth?

   The answer to that is there is no price you wouldn’t pay. It is simply who you are.

   We can see examples of this every day, just by taking a look in your front pocket. Do you have an iPhone? Do you know someone who does?

   From a technology standpoint, iPhone’s are an inferior product. Hands down, different android phones perform better than the iPhone across any single metric. Battery life, camera quality, durability, ease of use. An android phone is certainly superior in whichever criteria you choose.

   Why then do so many people have an iPhone? Because it says something about who they are. Their identity is synonymous with the ideals and values that the product embodies. People love their iPhone’s because it is a reflection of who they are, and the phone is simply a tangible way of showing that identity to the world.

   The same case can be made by Harley Davidson Motorcycles. People will pay a premium for a Harley because they feel that the product symbolizes their own values of freedom and independence.

   When the product is a way of showing the world who you are, the question becomes more than simply what the price tag is for a set of features.

Higher Quality is Valuable

   Another reason to buy a premium product is the long term cost of ownership. 

   During a camping trip this summer, some friends made the comment that the coolers we used are quite expensive. Anyone familiar with Yeti products would agree. The coolers that we have for camping and outdoor adventures weren’t cheap. 

   But, as a testament to the quality of the cooler, we haven’t yet had food spoil because it wasn’t kept cool enough. For our outdoor adventures, having a product that works well isn’t just a nice to have, it’s essential.

   But aside from peace of mind, the difference in quality can actually lower the long-term cost of ownership. A quality product can be with you for years, even decades after a cheaper alternative has needed to be replaced.

   One such example is in footwear. A good pair of leather boots, properly maintained, can last a decade or more. With semi-regular treatment of the leather, and the occasional re-sole, those favourite pair of boots will outlast a dozen pairs of the cheaper options. Ultimately, due to the longer lifespan of a quality product, the total cost of ownership is less.

When to Buy Brand Name - A Practical Approach

   Thinking about higher quality, or even the personal identity makes the decision to buy top of the line goods easier. But it is too easy to fall into the mindset that you should always buy top quality. Sometimes the no name option is the better choice than another Gucci wallet.

   In true Business Minded fashion, as we strive to unlock the secrets of success, we needed a more formulaic way of making these choices. These decisions can’t simply be at the whim of “Does it match my identity today?” or, “Do I need top quality?” 

   The solution to this problem of No Name vs Brand Name comes from a piece of wisdom I heard a few years ago. 

When you are buying anything for the first time, buy the cheapest product you can. If that product wears out or breaks while you’re using it, replace it with the best quality option that you can reasonably afford.

Why this works?

   This guide to purchasing helps take the guesswork out of the game. When you’re buying a product for the first time, you don’t know what to look for, or even if you’re going to continue using the products.

   When I first moved into our condo with my girlfriend, I bought a mixed pack of 32 cooking utensils. By no means were these top quality, but I had enough different tools to cook with. In short order, one of the spatulas that I used every morning broke. By this point, I knew exactly what I liked about the spatula, and what was valuable to me. Now, when I went to make the replacement purchase, I knew exactly what to look for, and am overjoyed with our high-quality replacement.

   What about the rest of that mixed pack of cooking utensils? Well some of them I use regularly, and know what to look for if they ever need to be replaced. And the rest? I haven’t ever picked them up. Buying top quality from Day 1 would have been a complete waste on those items that have never seen the kitchen lights.

   Deciding what to buy shouldn’t feel like a chore. This simple formula of buying cheap, and replacing with quality ensures that you only spend your hard earned dollars on things that you’re actually going to use.

How To Choose The Right Credit Card For You

   Credit cards offer a variety of benefits, but with so many choices out there, how do you know if your card is the right one?

   While many of us have at least one credit card, these have really stuck out as the way of the future recently. Reeling from the coronavirus, the payment processing industry has fully embraced credit cards, with many stores simply refusing to accept cash or other contact-laden payment options. With increased usage of credit cards, it is more important now than ever to ensure that you have the right card for you.

Why Credit Cards?

   Credit cards offer the convenience and flexibility of payment virtually anywhere. Newer cards also have a “tap” function that allows you to pay under a certain amount without using the keypad. That technological capability made credit cards a clear winner as fear of germs and viruses escalated.

Factors to Consider When Choosing A Credit Card

   Credit cards come with a whole list of different costs and benefits, which can make the choice unnecessarily complicated. Three of the elements found on all cards are:

Interest Rate

   The interest rate is displayed as the annual percentage rate (APR). This is the interest that you will be responsible for if the credit card is not fully paid on time. That interest rates can fluctuate quite significantly, reaching 20% or more! While this is an important number to know, if you use your credit cards responsibly and pay them off in full every month, you won’t incur any of those high interest charges.

   Consider your own financial habits. Do you pay off your statement in full every month? If so, the APR isn’t really influential in your purchasing decision. If, on the other hand, you sometimes miss a payment, or only pay the minimum balance, the APR interest rate can have significant financial implications.

Fees

   The list of fees associated with each credit card can be both extensive and confusing. Some of the more common fees that you should be aware of are listed here:

The annual fee. Some cards come with an annual fee, often designed to give you access to more or better perks. While this sounds good on the surface, in reality many of those cards the additional perks don’t warrant the additional fees.

Cash advance fees. Cash advance fees are paid if you need to withdraw cash from your credit card account. While most companies don’t accept cash right now during Covid-19, there are always a few exceptions. In those rare situations, it’s always good to know what the fees are. These are either a flat amount, or a percentage.

Foreign currency charges. Credit cards often have a modifier on foreign exchange rates. For example, one of my credit cards charges me 2.5% more than the current market rate on all non-Canadian dollar transactions. If you do a moderate to significant amount of shopping in another currency, it might be worthwhile getting a credit card in that currency to minimize those extra fees. 

Statement fees. Statement fees have certainly become more frequent over the past few years. These fees are levied on print or re-print of account statements, as a type of environmental fee to encourage people to go paperless. These types of fees also can encompass transaction investigation fees, when you ask your credit card company to investigate suspicious or unknown transactions on your account.

Insurance premiums. This final type of fee is for balance insurance. These fees are especially prevalent on cards issued to individuals with no or low credit scores.

Perks

   The main reason credit cards are preferred by consumers over cash or debit transactions is the ability to earn different types of perks. 

   The size of the benefit is often contingent upon at least one of two factors. Your salary, or the annual fee. Bluntly put, the more money you earn, the better the rewards you’re entitled to. There are three types of perks that are typically offered.

Reward Points 

   Reward points are as varied as the companies offering the credit card. This is probably the biggest deciding factor between credit cards that you’re interested in. Do you like to travel? A card that rewards with airline tickets or Air Miles would fit your lifestyle. Like free groceries? That’s a different card. What about a shopping aficionado? There are likely reward points for your favorite boutique as well.

   Matching your reward points with your interests and values is the best way to get the most out of your credit card. For example, I have two different cards, one that rewards groceries and gasoline purchases. The other card has a more general reward point system, with rewards used for travel booking. Both of these cards work well for me, rewarding me where I spend my money, with rewards that I value because they fit my lifestyle. 

Cash Back 

   Cash Back rewards cards are another extremely popular option. Instead of receiving reward points, these cards return a certain percent of your purchases. Effectively, these cards give you a small discount on all qualifying purchases. 

   If these cards are of interest to you, be sure you do a quick calculation to see your required monthly spending to either qualify or break-even on those annual fees. 

Insurance, Hotel Upgrades, and/or Car Rental Upgrades 

   Another perk that is often offered is various kinds of insurance. For example, both my credit cards offer different types of insurance. One gives me trip cancellation insurance for any travel booked on that card, while the other insures rental vehicles. These are often the less-advertised perks of the cards, but are actually extremely valuable if used effectively.

How to Choose the Right Credit Card for You?

   Knowing what the interest rates are, the fees, and the rewards will help you shape your decision. To help you make that decision, think about the following questions:

Do you always pay your credit cards on time?

   If not, start doing so now. As you build up that financial discipline, you should get a card with the lowest interest rate possible. No amount of rewards will make up for extra interest charges.

Do the rewards from your necessary spending justify the fees?

   You shouldn’t feel pressured to spend simply to make the card worth it. If you have the right card, the purchases you’re already making should bring you out ahead after considering the fees associated with the card.

Are the rewards aligned with your lifestyle?

   Being rewarded is nice. But this is your decision, so make sure that the reward points won’t just sit around like that giftcard to the store you’ll never go to. The perks should mesh well with your lifestyle, so that you use them, and actually see the benefits. 

The Bottom Line

   Credit cards have a place in everyone’s financial fortress. Used effectively, the rewards and benefits can help you immensely. But, that comes at a cost. Financial discipline is necessary to avoid insanely high interest charges. Paying 20% APR interest even once hurts, and makes it that much harder to stay on top of your finances. 

   If you have the discipline to know your budget, and stick with it, credit cards will reward you handsomely.

Lending Money To Family and Friends

   Over the course of several long, hard summers working construction, I had painstakingly built up a prized collection of professional tools. Those tools, and the skills that I developed through those countless hours in the scorching sun made me the go-to guy for fixing small problems at my friends houses. For the price of a hot meal and a cold can, there was little that I couldn’t fix. 

   Then one day, a good friend of mine came and asked to borrow some of those tools. My skills weren’t needed, the job wasn’t that big, but he needed the tools that I had.

“No problem.” I said, “Just pick them up on Friday and drop them off at the beginning of next week.”

   Friday rolled around and I handed over a few of those recently cleaned and organized toolboxes. I wanted to help, and I wasn’t using those tools right now anyways. Better a friend gets some value out of what would otherwise be collecting dust on my shelf.

   But then Monday morning rolled around, and instead of a knock at the door bringing those tools back, I received a phone call, “Hey Brian, any chance I could keep these for a few more days? Something came up and I still need those tools a little longer.”

“Of course. How about you drop them off next weekend?”

“Sounds good, appreciate it buddy.”

   Next weekend came and went. Then the weekend after that. Finally, a few weeks later my friend showed up with my toolboxes. He sheepishly grinned as he returned them, with a chuckle and a bit of an apology. Other than a little impatience on my part, no big deal right?

   A little while later, when I finally went to use one of the sets that I had loaned out, and a long list of small things were either damaged or outright missing. To say I was furious was an understatement, especially since the one thing I actually needed? Of course that size wrench was one of the missing items.

Money is a tool.

   I recently recounted this story, when asked about lending some money to a family member. The friend who came asking for advice was slightly perplexed, “What does this have to do with my situation? My brother isn’t asking for a wrench, he needs some cash to get him through his current situation.”

   That’s when I needed to explain. Money is a tool. Nothing more, nothing less. Just as you would use a hammer to build or destroy, money does the same. It has the power to create, or take away. To build comfort, or remove discomfort. And while I may appreciate my tools, I certainly don’t want more wrenches for the sake of having more wrenches. 

   The philosophy you have about money will play an enormous role in how lending money to family and friends impacts you, and your relationships. 

Things to Consider When Lending to Family and Friends

Don’t Lend What You Aren’t Prepared to Lose

   Just as I learned from lending my tools, sometimes what returns isn’t in the same condition as what was lent out.

   There are stories abound of family or friends never fully repaying the loan (or never repaying any of the loan). This ultimately damages the relationships that you have. While borrowing from the bank may have a higher interest rate, what is the cost of your relationship with that other person? 

   Bringing a wallet into a relationship often has a nasty habit of increasing the friction between the two parties.

   While the advice can never be as cut and dry as, never loan to family or friends, a good general guideline is to never lend more than you’re prepared to lose. That way, if the worst comes to pass, you aren’t left in a tough situation yourself. This might even give the relationship a better chance of staying intact.

Count on Life Interrupting the Payment Plan

   As the weekend stretched into weeks on end, my patience was fraying. Where were my tools? We had an agreement!

   That irritation at the constantly changing terms of our arrangement certainly tested my patience, a test which, when trapped in my own mind, I certainly failed.

   Lending money to loved ones is no different. While the bank might shrug and say tough luck, it's a whole lot harder to do that when you care about the person. And while at first it seems like you’re just being generous, if you’re anything like me, that nagging voice of doubt will eventually start muttering. And those quiet whispers aren’t pleasant.

   Whenever possible, don’t send over money “just to cover this week”, because that one week could very well stretch into one month. If you have a need for yourself in the foreseeable future, it might be best to hold off getting financially involved. 

Ask Questions

   There are times when you might want to help out with a monetary loan. In those instances, you should try to get as informed as possible first. Ask questions, so you can set your own expectations, and to understand the needs. It’s never easy to ask for help, especially the way North American culture has conditioned us to provide for ourselves and our own. If a friend or family member is asking for help, it can be a sign of deep respect, and quite likely will help you feel good about helping out.

   Setting your expectations right from the outset will help you control some of those nagging thoughts that pick away at the strands of your relationships. Ask the borrower questions like:

Why do you need the money?

Who else is lending you money?

How do you plan on repaying me?

When do you plan on repaying?

   These questions will help you understand both the need, and also the plan in place to resolve the debt. And the plan to repay helps the borrower too. Good intentions only go so far, and beyond that, you need a rock-solid plan.

A Gift to You (of sorts)

   While this advice on lending money to family and friends may save many relationships over time, there is another solution. Don’t lend at all. Instead, can you make a gift of the money (some, or all of the requested amount). The gift towards a worthy cause for a loved one will help strengthen your relationship, and avoid the potentially high cost of borrowing in the future. And that high cost of borrowing isn’t interest or fees. It’s friendship. 

   When lending money to friends and family, your philosophy will play a large role in how that sits with you. But even if you aren’t unduly attached to the all-mighty dollar, it is always wise to have a few rules of thumb. 

Don’t lend what you aren’t prepared to lose. And most definitely count on life interrupting the best laid plans.

If you are dead-set on giving your loved ones some assistance, other than loaning money there is always another option through gifting.

Best High Interest Savings Accounts

   What is the best high interest savings account in Canada right now?

   This question is important for determining the right accounts for your personal financial systems. Understanding the best place to store different buckets of money is essential for optimizing your financial systems. Savings accounts often rank close to the top when people consider their own financial needs. There are even a dedicated number of people who will switch banks multiple times a year, all looking for the best savings account.

   Unfortunately, this often misses the mark. While having a good savings account is preferable, the benefits are often too small to be really noticeable, in the grand scheme of life.

   With that, let us look into why your savings account is important, but also why this is a decision that should be classified more in the  “set it and forget it” category.

Why is your savings account important?

   Your savings account is perhaps the very foundation of your financial fortress, and the starting point for future financial endeavors. Your emergency fund, the first real “investment” that you should be making, should be stored in cash. This safety net will see you through the ups and downs of life. With any luck, your emergency fund will sit there untouched for long periods of time. As a result, having that cash stored in a safe, accessible place is ideal. 

   Recall that your emergency fund should be stocked with 3-6 months of living expenses, and even upward to 12 months of living expenses. This is a sizable amount of cash, and to make the most of it, should be stored in a high-interest e-savings account. This will reduce the impact of inflation on that emergency fund, if only by a small margin.

   Since these cash savings are stored in a cash savings account, it makes sense to secure the best high-interest account that you can.

Why your savings account choice shouldn’t change often.

   Too many people focus solely on the interest rate provided by their savings account, even going as far as to switch banks to get the latest and greatest promotional offers and rates. While this may net you an extra half percent or so on your cash savings, the actual dollar value simply isn’t worth your time to swap banks.

   Let’s assume you have an emergency fund of $ 30,000. You receive $ 300 per year in interest per percent of interest paid by your bank. Differences between top high-interest accounts, and the general high-interest offerings are probably less than 1-2% annually. What that means, is that the interest difference between various high-interest accounts is $ 600 or less, on a 30,000 dollar balance. Given the number of hours it takes to change banks, the hassle is often not worth it. These changes only make the illusion of progress towards your financial goals, when in reality your time is better spent elsewhere, such as improving your vital career skills, or refining your goals. 

A better approach to savings accounts.

   Rather than chasing the highest interest rates on savings deposits, it is far better to examine all the offerings at your chosen institution. This includes account fees, accessibility of your money, any extra service charges (like EFT fees), as well as investment options. Simplifying the services you use will save you both money on fees, and more importantly, save your time.

What High-Interest Savings Accounts are “best”?

   Ensure you are taking into consideration all your financial needs and goals, and then pick the account that fits right with your plans. To help you get started, here are some of the available high interest accounts from some of the more popular financial institutions. Remember, these savings accounts are an essential piece, but still only one piece, of your financial puzzle. (Note: I am not affiliated with any of the institutions mentioned below.)

Financial Service Provider Account Requirements Interest Rates (Annual)
RBC No account minimum 0.5% (after promotional period ends)
CIBC No account minimum 0.2% (after promotional period ends)
TD Canada Trust $ 5,000.00 0.05%
Scotiabank No account minimum 0.15% - 1.35%, depending on length of time without withdrawing any money
BMO No account minimum, $200 contributions monthly to unlock the best interest rates 0.05% - 0.7%. Comes with 0.65% interest rate boost if minimums are met.
Tangerine No account minimum 0.25% (after promotional period ends)
Wealthsimple No account minimum 0.9%
EQ Bank No account minimum 2.00%
Alterna Bank No account minimum 1.9%

   Each of these accounts offers their own respective benefits and draw-backs. Remember, when making the decision about where to store your emergency fund, it is best to consider your other financial needs. 

   For example, I use other RBC and Wealthsimple products, such as investment accounts and credit cards. Keeping my savings accounts at these two institutions makes the most sense for me, providing visibility and access, despite not carrying the highest interest rates on the list.

   Making the right choices starts with selecting the right accounts. Eliminating  fees, and maximizing interest, in that order. Fees will shrink your financial resources far faster than interest can replace. Once that crucial first step is taken, sit back, relax, and move onto more important (and profitable) areas of your life, both financial and elsewhere. 

   The right knowledge, paired with decisive action will lead you to the financial success you strive for.

 

Interest rates and account details available as of June 1st, 2020.

Working from Home? Getting Your Taxes Right

   There is no doubt that COVID-19 has changed the way many of us operate in the world. While social distancing measures are slowly being lifted across the world, there is no doubt that the way of life for many of us will never quite return to pre-pandemic levels. 

   Already there have been several large businesses who have made the decision to have employees work remotely on a permanent basis. Even the company that I work with has started the process of terminating office leases for several of our divisions, transitioning to a full-time remote environment to save on office costs. These moves will likely impact you, or someone you know, pushing people to create home office environments to accommodate these changes. What would a push towards WFH (work from home) actually mean for you?

Tax Implications of WFH

   In Canada there are federal tax implications for home work spaces, allowing you to deduct home office expenses from your income. This helps you reduce the income taxes that you pay, which ultimately leaves more money for other areas of your life. To qualify, one of two conditions must be met: 

  1. The space must be where you work more than 50% of the time.
  2. The space is used only for the purpose of generating your employment income.

   What these conditions mean is that you either; work from more than 2.5 days a week, or that you have a dedicated home office. This is an important distinction, because as the past few months has shown us, we might work from home a substantial amount of the time, while not having a home office set up.

   This certainly applies in my case, where my living accommodations aren’t large enough to provide room for a separate office space. All space in my condo is for both living and working. Therefore, I would not qualify by having a space reserved solely for generating employment income.

You have a “Work-space in the Home”, now what?

   Even if you do work from home more than 50% of the time, or have a home office. If you are an employee, there are a few other criteria for claiming work expenses. As explained in the bulletin for the Income Tax Act IT352R2, employees must be required by contract to provide the office space. Also, expenses incurred cannot be reimbursed by the employer. 

   What this means is, in general, if you have a desk provided to you by your employer, you likely do not qualify. Likewise, if your expenses are reimbursed, you cannot also claim this as a tax deduction (sorry, your employer has already claimed those expenses).

   As employers make the switch to different office space arrangements though, those lines become more blurred. Some offices offer “hotelling” of their desks, meaning the employer isn’t providing you your own work space. In increasingly grey areas caused by these working arrangements, it is best to have your employment contract stipulate that you are expected to maintain your own work-space at home.

   Along with the employment contract, your employer will also have to fill out Form T2200 that confirms the requirement of a home work-space, as well as how much of your expenses are reimbursed.

What expenses can be claimed?

   We often think of the more obvious expenses, like printer paper or cell phones, but there are quite a number of “overhead” expenses that can also qualify. These expenses are based on a reasonable cost allocation. For example, if your home is 1,000 sq ft and your home office is 200 sq ft, you would be able to claim 200/1,000 = 20% of certain expenses. Some eligible overhead expenses are:

  • Hydro (Electricity)
  • Internet and Phones
  • Maintenance fees
  • Rent
  • Property taxes
  • Homeowner’s Insurance

   Making the best financial decisions means being informed. As the way we work transforms to fit our “new normal”, this extends to how our work-from-home spaces can be used to reduce your taxes. Knowing where to look to find savings on taxes is just one way you’ll be positioned to thrive in the year ahead.

It’s an Emergency: Spending your Savings

   The numbers are out, and they aren’t good. April unemployment numbers were released by Stats Canada this week. 

Some of the key points mentioned:

  • Unemployment rose to 13%, a number that doesn’t fully include recent job losses. Taking into consideration other elements, like self-employed persons who worked 0 hours, that number climbs higher than 17%.
  • “21.1% of Canadians lived in a household reporting difficulty meeting immediate financial obligations.”

   While these numbers don’t paint a rosy picture, the question becomes: 

What can you do to prepare yourself during the COVID pandemic?

   The answer to that question falls into two categories; those who aren’t seriously affected (yet), and those who are.

   If you haven’t been dramatically adversely affected, your focus should be on strengthening your financial fortress, and exploring ways to increase your value. Check out the 5 Steps to Recession Proof Your Life.

   If on the other hand the COVID situation has hit you hard, the questions you face are far more concerning. While the focus is still on cash, growing your reserves might not be an option. At this stage, you need to be eliminating debts and freeing up cash flow (i.e. cutting the cord on some of those subscriptions). Then it’s time to look at where to draw money from.

I’ve lost my job. What do I do now?

   With unemployment numbers jumping to unprecedented highs, and far more rapidly than ever before, this financial downturn has struck hard and fast. Next steps for you should involve reversing your “good times” financial allocation.

It’s an Emergency. Use your Emergency Fund

   If you have been following the financial advice of Business Minded, or any personal finance professional, you likely have some funds tucked away in an emergency fund. Now is the exact time that you’ve been waiting for. Start drawing down on your emergency savings to pay your bills.

   These days come rolling in full of uncertainty, will you go back to work next week? Next month? Many people are seeing their situations as a temporary inconvenience, and this is leading to some risky financial behavior. Expecting to return to work, and therefore floating your expenses on credit cards or other forms of borrowings is exceptionally risky, and likely to place you in a worse financial position.

   While it may be hard to see that wonderful looking emergency fund start to deflate, it is far better than skating on thin ice that comes with borrowed monies.

   Once the emergency fund is used up, you should then start looking at liquidating your investments, starting with non-tax leveraged accounts. By the time you get to this stage, you should be seeking out professional guidance, as your unique situation needs to be more closely evaluated. 

   As the economic environment worsens, it’s time to use your emergency fund for what it was designed for, emergencies. Drawing down on those hard-earned savings will help you weather this economic storm, and allow you to come out on the other side with your financial fortress intact.

Investing Advice from The Berkshire Hathaway 2020 Annual Meeting

   This past week saw the release of Berkshire Hathaway’s 2020 annual meeting. Along with the financial results of the company famously headed by Warren Buffett and Charlie Munger came some commentary from the widely recognized Warren Buffett.

   While the annual meeting was over 5 hours, there were a few snippets that come as timely words of wisdom from one of the world’s wealthiest people. 

Never bet against America.

   Throughout the years, America has proved its resiliency and ability to overcome tough times. This commentary can be more broadly applied with the simple yet powerful statement, bet on humanity.

   While we might be currently facing one of the most challenging periods of our lives, one thing is true. We will survive. 

   While I would caution the mentality of investing as any form of gambling, there is one hand that I would undoubtedly go all-in on. That hand is that we will not just go through this, we will grow through it. We will become better, faster, stronger from the challenges that we as a species are facing right now.

Buy America, And Forget About It.

   As with the first piece of sage advice, Buffett also makes some commentary on the ability of the average investor. Most people are better off taking that bet on human progress and investing in a total market ETF. 

   When saying this, Buffett recognizes that some people like him have careers in investing, and as such devote an above average level of time and attention into investing. These dedicated investors are the ones making individual stock picks based on years of research and experience. For most of us who are not combing through annual reports on a daily basis, taking a broad stance is better suited to our needs and our experience levels. 

   These total market ETFs allow us to place a bet that some of the best companies will survive and thrive. And that bet on human progress hasn’t been wrong, in the long run, ever.

   What can one of the world’s most successful investors teach us? Bet on humanity. Together we will not just survive, but we will thrive.

5 Steps to Recession-Proof Your Life

   Recessions are a normal part of the ebbs and flows of life. With that truth, recessions present their own challenges and opportunities. If you have a recession-proof plan, you could be well positioned for the next recession, whenever that finally comes. The economic slow down spurred on by the COVID-19 pandemic could very well trigger a recession event later in 2020. With that possibility looming on the horizon, it is not too late to build your recession-proof plan.

   There are 5 areas that need to be in any recession-proof plan, primarily dealing with cash. It’s been said that cash is king, and that is especially true during a recession. With employment markets and financial markets depressed, as is usually the case during a recession, having cash available provides a protective barrier around your life.

Emergency Fund

   Much of that cash should be held in an Emergency Fund. You have no doubt heard the advice before, 3-6 months of living expenses saved in cash. This will provide a barrier in case of the unexpected, like a job loss that sometimes comes with the shrinkage of the economy. If you don’t have that money saved in cash, make that a priority. This barrier provides you some protection, and gives you more time to make tough decisions, if needed. 

   Even if you have an emergency fund, now is a good time to increase that further. Three to six months of living expenses might be recommended, but extra cash never hurt anyone during a recession. While I have my own Emergency Fund, I am continuing to grow it each month. This will keep me safe in the event that my paycheck stops coming. If I follow the rest of my Recession-Proof Life plan, that extra cash cushion would be great to reinvest in the financial markets as the economy starts to recover. 

   Where should you store that cash? While interest rates have been slashed repeatedly in the past few weeks, a high interest e-savings account is still your best bet. In North America you can still find accounts at close to 1%, which while not much, is better than the 0% many large bank chequing accounts are offering.

Reduce Debts

   Cash is king, and debt is an obligation to pay some of that cash to someone. To protect your cash while you build an emergency fund, you also need to reduce any debts that you have. This means paying down all your consumer debt, starting with the highest interest rate loans first, usually credit cards. With investment returns being unpredictable at the best of times, and even more so now, taking that guaranteed win of savings on interest is important. 

   Once you are clear of any high interest debt, focus on paying down some of the other loans that you have. These might be your Student Loans or Personal Line of Credit. While there are different methods suggested for getting out of debt, in an effort to save you cash, I am only suggesting the financially most beneficial method. Paying off the highest interest rate debt first.

Trim the Fat - Reduce Unnecessary Expenditures

   Over time we sign up for a variety of services. When we’re looking at preserving our cash, it might be time to evaluate the value of these services. Depending on the severity of your situation, you might want to completely cancel these subscriptions, or it might be worth a call to discuss lowering your rates. Many companies would rather retain you as a customer than lose you completely, and often this preference makes them more open to negotiating your rates with you.

   Take a careful look at where you spend your money. Subscriptions are an easy area that savings can be found, but we often pick up other financial habits during times of prosperity. These habits aren’t always healthy. Evaluate where you are spending your money, and make changes if necessary. 

Diversify Your Income Streams

   Recession-proofing your life also means you need to look at where your money is coming from. For many of us, our salary is the primary source of income. But that doesn’t mean that it needs to be our only source of income. There are plenty of ways to generate income outside of your 9-5 hours, and now is an excellent time to explore those opportunities. The side-hustle has received a substantial amount of attention over the years, and for good reason. Finding something that you enjoy, that you can earn money doing, if only part time? To many of us, that extra freedom of getting paid for a passion project is exhilarating. And, with the internet, getting started couldn’t be easier. 

   Of course, the side-hustle route isn’t for everyone. Maybe you would rather go all-in on your career, reaching up the rungs of that corporate ladder. You can also take control over your income, by diversifying your investments into something that pays dividends / interest on a regular basis. This way you can bring in a little more positive cash flow each month. While those investments might not replace your full time income, every little bit helps, especially when recession-proofing your life.

Grow Your Skills

   One final way to recession-proof your life is to remember your professional development. What skills do you need to develop to help take you to the next level of your career?

   Recessions are usually accompanied by a rise in unemployment, and current events in 2020 are no different. With a reduction in the Canadian labor force of over 1 million people in March 2020, jobs are becoming even more competitive. That prompts the question, how do you stand out among hundreds of candidates? The answer: by becoming more valuable. And that answer doesn’t just apply to those who are out of work. By continually developing your skills and increasing your economic value, you will stand out among your peers, and be more likely to retain your job in the event of layoffs. 

   Education has become more accessible than ever with online learning, and with world-wide social distancing measures in place, many people are finding they have more time on their hands. Directing that time at developing or enhancing your skill sets will ensure that you are ready for whatever the future holds.

   Recession-Proofing your life starts with the right plans. What are your plans to manage your finances? By building an emergency fund, you are able to withstand any financial storm. This is aided by paying off debts, and cutting back on unnecessary spending. Once you’ve taken care of the cash outflow, you should look at the sources of that cash. How can you diversify so that you have income coming from multiple streams? The final element of your recession-proof plan is in making you more valuable. What are you doing to develop your skills?

   Recessions are a normal part of life, having the right recession-proof plan will make sure you are positioned not just to survive, but to thrive.

Risky Business: Understanding Your Risk Tolerance

What is Risk Tolerance?

   Risk tolerance is simply your ability to withstand fluctuations in the markets, which does mean the occasional loss.

   The more risk tolerance you have, the less concerned you are with short term fluctuations. The converse is also true, the less risk tolerant you are, meaning you are risk averse, the less you are willing to lose money even in the short term.

Why is this important?

   Depending on where you are in your investment life cycle, you may want to adjust your risk tolerance. For example, if you are young and just getting started investing, you likely will be more willing to take losses for the chance at higher gains. Young people typically don’t have as much to lose, and have time on their side to weather out any financial storms.

   As you get older, and that nest egg grows in size, many people become less risk tolerant. This is especially true when you are getting closer to the age of retirement, when large swings in the stock market can drastically impact your financial fortress, when you need that money most. For more information on the impact of stock returns on your retirement, check out our article on sequence risk.

How do you play within your Risk Tolerance?

   Your risk tolerance is a temperature gauge. There is no “right” temperature, but you’ll know it if you’re finding it too hot or too cold.

   The good news is, if you find yourself in either of those situations, you can adjust through asset allocation.

   In general, the heavier you are weighted in stocks, the riskier your portfolio is. Meaning the higher the upside, but also the higher the risk of incurring losses. If you would like to lower the temperature a bit, simply start adding in some fixed income investments, like bonds and cash. While the returns are lower, you’ll be better able to weather some turbulent financial markets.

   The inverse is also true. If you’re disillusioned with your portfolio growth, start turning up the dial. Add in more equities into your portfolio. This will increase the risk, but also increase the potential for higher growth.

Pro tip: you can add in equities without pushing all your chips in. Adding in equities through a total market ETF will give you exposure to an entire index, while keeping the diversification of those separate companies. This will hedge off some of the risk of simply betting on a single (or select few) stocks.

How hot do you like it?

   From 2010 to 2020, the stock market had been on one of the longest upward runs in history, especially in the United States. This likely influenced people’s self-evaluation of their risk tolerance. Seeing gains day after day for 10 years increased the FOMO (fear of missing out) of those prosperous times. It is quite easy to say you are “open” to the normal fluctuations when all you see is those double digit returns in the black. 

   The early part of 2020 was a reality check for many people. Years of positive returns were wiped out in an instant, with losses of well over 20% of total portfolio value.

   This alerted people to the realities of investing in the short term; sometimes you win, sometimes you lose. And sometimes those wins and losses are big. 

   This is something you need to evaluate for yourself, taking into consideration your unique situation. Does the possibility of losses like that impact your ability to enjoy life? Do they cause an undue amount of stress? Or perhaps you were right in your assessment of your risk tolerance, and you aren’t fazed. Maybe you even recognize the tremendous opportunities that lie in crashing financial markets.

What to do if you’ve misjudged your Risk Tolerance?

   Irrespective of the investing choices you may have made in the past, it is important that level heads prevail. If you think you were previously too risky, do not sell at a loss if you have any other options available. While nobody can tell how long the markets will be depressed, or even how low they will go, one thing is certain. We will survive. And, just as importantly, we will thrive again. What you can do going forward is change the asset mix that you invest in on a regular basis. By making an adjustment on your future contributions, you will over time change the asset allocation mix of your overall portfolio. This way you can learn from recent events, and avoid locking in any temporary losses.

   Investing provides a way to make your money work for you. But it isn’t a guarantee that you will always like the outcome, especially in the short term. Understanding your risk tolerance will help you invest wisely, and sleep better at night.

A helpful guide to risk tolerance

   While no one person is the same, a rule of thumb is often helpful to set some expectations for yourself. A formula to determine risk tolerance is:

115 - Age = Risk %

This estimates the amount of equities that you should have in your portfolio, based on your age. Understandably not every 30, 50, or even 70 year old is in the same situation. But the formula does help set your expectations. If you’re young and holding a conservative portfolio, you might be taking a lot off the table for the future you.

   Think about your life, and your comfort level. Do your investments keep you up at night? Maybe a conservative play is better for your overall well-being. Or maybe the inverse is true. Only you can decide. 

   What is important here is that you decide. Make the choices today that are right for you now, and for you in the future. After all, it’s your future. The choices you make today will shape that future for you and your family.

Investing in Stock Markets: 101

   The stock market is one of the most common areas to invest in. But what exactly is the stock market?

What is the Stock Market?

   The stock market refers to all markets and exchanges where you can buy and sell shares in public companies. In aggregate, the stock market refers to all publicly traded companies in the world. Ownership of these companies is represented by shares of ownership, or shares. Most countries have their own exchanges, though with the global nature of business, consumers can buy and sell shares across exchanges around the world.

What is a Stock Exchange?

   A stock exchange is a collection of companies deemed to be traded on that exchange. For example, the New York Stock Exchange (NYSE) and/or the NASDAQ is where many of America’s public companies can be bought and sold. Toronto has their own Exchange, through the TSX (Toronto Stock Exchange), and London has their own Exchange (LSE). Basically, a stock exchange is just a large store where you can buy and sell a variety of financial instruments, from shares to bonds, and even options. The shares on offer at each “store” may be different. For example, Enbridge is a Canadian energy company, and can only be bought or sold on the TSX.

The Stock Market and Stock Exchanges are Different. Why is that important?

   The stock market refers to the all-encompassing marketplace for buying and selling financial instruments, including shares. Each exchange operates on their own currency, for example the TSX buys and sells in Canadian dollars, the NYSE and NASDAQ operate in USD, and the London Stock Exchange operates in the British Pound. This means that buying and selling across international exchanges opens you up to foreign currency fluctuations. Also, since the exchanges are based in a specific country, that country's tax laws will also impact your investments.

Investing in Exchanges: ETFs and Index Funds

   As an extremely popular method of investing, Index funds seek to track the overall performance of stocks fitting a certain set of criteria. Some of the most popular indexes that are reported on are the S&P 500, or the 500 largest companies traded in the USA. Another index is the Dow Jones Industrial Average (DJIA), which is comprised of 30 of the largest companies in the US. By investing in ETFs, investors are able to diversify within an exchange at a relatively low cost of ownership. Rather than purchasing one share of each company in the market, an ETF allows you to purchase the general movement of the exchange as a whole.

Market Fluctuations in Today’s Economic Climate

   Understanding the difference between stock exchanges and the stock market in general is even more important during these difficult times in 2020. As the coronavirus is a global event, every country is impacted. But the impacts are not felt equally across the entire world. This means that the business disruption will be more severe in some countries than in others. As a share is simply a purchase of ownership in a company, certain companies and exchanges will be affected more severely than others.

   To illustrate this, we can look at the returns for the TSX Composite Index and the S&P 500 for the week of March 23 to March 27, 2020.

Opening and Closing Level of the TSX and S&P 500 for the week of 3/23/2020.

   In that time, the TSX saw an increase in value by 7.5%, while the S&P 500 grew 10.93%. How each government responds to the health crisis will influence how exchanges perform in the overall market. To diversify your investments, it is wise to consider investing beyond your local exchange. But, the calculations aren’t always as straight forward, depending on the accounts you are using, tax laws can impact your returns quite substantially, especially when foreign markets come into play.

US Withholding Taxes on Stocks (For Canadians)

   At the risk of diving too deep into the rabbit hole, it is worth a quick look at US withholding taxes. The two largest stock exchanges in the world (based on market cap) are located in the US, the NYSE and NASDAQ. Given the size of these exchanges, it is extremely likely that you will invest some of your financial resources on these exchanges. Canada and the US have tax treaties which allow for preferential treatment, but most investment proceeds in the form of dividends and interest are subject to withholding taxes. These additional taxes can be avoided however, if you are making these investments in a qualified account.

   The accounts that qualify for this favourable tax treatment are in general your retirement accounts, such as an RRSP. This is an important distinction to make, because the TFSA, which is another popular Canadian tax advantaged account does not receive the same special treatment for US holdings.

   If you are using an account that isn’t your RRSP to invest in the US, you will need to file a tax form with the Internal Revenue Service (IRS) to take advantage of the Canada-US tax treaties that reduces (but not eliminates) foreign withholding tax. This form is the W-8BEN.

Summary

   Investing is an important element in everyone’s financial plan. The stock market is one place where many of us will invest some of our money. Even in the stock market, there are different subsets, groups of companies in different regions, traded on different exchanges. These exchanges operate as stores, selling slightly different merchandise. Some of these stores will do better than others, as global events impact different regions at a different scale.

   Aside from investing in companies around the world, the savvy investor also needs to know how currency fluctuations and tax laws will impact their returns. With the right mix of investment accounts, you can capitalize on the benefits of diversifying into different exchanges. RRSPs receive preferential tax treatment in the form of eliminating withholding taxes on interest and dividends from US sources. When considering investing in the US, it is more beneficial from a withholding tax standpoint to use the RRSP over the TFSA, as long as your objectives for both accounts are the same, investing for retirement. For all other investments on US stock exchanges, it is important that you file a W-8BEN to take advantage of the existing tax treaties between Canada and the US. This will ensure you aren’t leaving money on the table. After all, less taxes paid means higher returns for you!

   Knowing how to use the tools available to you will help you build the right financial plan for you. Financial freedom isn’t a lofty ideal, with the right knowledge it is a realizable goal.

How to Invest during Market Volatility

Wall St Sign Credit: Adobe Spark
Wall St Sign Credit: Adobe Spark

   Are you able to see good deals on stocks and ETFs in today’s markets? If you had asked yourself this question a month ago, likely you would have been able to provide a number where you would absolutely love to buy at. 

   Take VGRO for example. The Vanguard Growth ETF portfolio is one of the most popular ETFs to hold. It is a balanced fund, representing all sectors across major North American stock markets. 

Note: The following example is for illustrative purposes only. I am not affiliated with the Vanguard ETF’s, nor should this constitute an investment recommendation. As always, investment decisions should be made based on professional advice and proper due-diligence. 

   On February 15th, 2020, VGRO was trading for $ 27.71 CAD. Without a doubt, most investors interested in this fund would have loved to get their hands on a share for $25.00 CAD.

   Fast forward to March 13th, 2020. VGRO closed the markets at $ 23.29 CAD. Is VGRO a good buy at this price?

   If you had done the research and determined that $ 25.00 CAD was a good price based on the underlying assets, making the purchase decision at $ 23.29 CAD should be a no-brainer.

   Assuming that is the case, why are people so fearful of buying into the market during current volatility?

   The answer lies in how close people are to the decision. While $ 25.00 might be an excellent price to buy VGRO at, the concerns about where the current bear market will bottom out at has people who were rational for years now acting irrationally. The cure for this is in placing Limit Orders. 

   A limit order allows investors to set a price that they are willing to buy or sell at. In the above example, if buying VGRO was a good deal at $ 25.00, a limit could be set to make that purchase once the price reached the $25.00 mark. In a long-term buy and hold strategy, this allows the investor to make smart, forward thinking investment decisions regardless of market conditions. 

   In this way, making the choice to pay $25.00 is actually easier than the decision to pay $23.29 right now. By eliminating the short-term emotions, investors can make sound investments at good prices.

   The other benefit of this type of strategy is to reverse the emotions that you feel. Rather than being fearful as the markets are dropping, you get excited that you are closer to the bargain prices that you identified. This means you aren’t waiting and anticipating the bottom of the market, which is good because timing the market is impossible. Instead, you are doing your research ahead of time, and waiting for your chosen investments to go on sale.

   Of course, the best way to invest for almost everyone is to skip all of this. Automating your investments will let you invest on autopilot, capturing any discounts currently found in the market. But if you are looking to invest a little more play money to take advantage of deep discounts currently available, try looking into limit orders. This will help you make rational, informed investment decisions without succumbing to the emotional roller coaster of the daily market swings.

The 80% Rule to Retire

   How much income do you need each year to retire comfortably?

   We’ve looked at different ways of figuring out your retirement nest egg size, like the 4% Rule. But even that assumption is predicated on another assumption, that you know how much you need each year. Do you know the answer to that question for you? 

How much income do you need each year to retire?

   Estimating how much you will need each year is hard. The amount of money each person needs will relate directly to their unique situation, further complicated by their own list of goals and aspirations. Will you own or rent your living arrangements? Do you have dependents to support? Are family members helping support you? What about your lifestyle, what do you want to do? Do you want to travel? Where do you want to travel to? These are but a few questions that each person needs to answer for themselves, as the answers will greatly impact your financial plans in the future.

   Another issue with retirement planning is the time the question becomes important. Deciding and planning for your eventual retirement should start in your early 20’s, when you first start earning money for yourself. At this stage, it is easy to look at your current lifestyle and think, “I can live off KD and ramen noodles. After-all, I’ve been doing it all through college and I turned out fine.”

   Unfortunately, that is certainly not the case when you are older. As you grow and develop throughout your career, your lifestyle creeps upwards too. Suddenly ramen noodles and beer aren’t the only things in your diet. And you certainly wouldn’t want to go back to living like you did in your college days, cheap food and cheap student housing included.

   If your current living arrangements aren’t how you will live when you retire, and you aren’t sure where life will take you as the decades roll by, what can you do now to prepare as best you can?

Career Planning: Income for Retirement

   While we may not have answers to the difficult questions posed earlier, many of us can look ahead in our careers. We are able to see where our careers are taking us, and plan for the roles that make up the general direction we’re facing. Whether that is a paralegal with visions of becoming a partner, or an apprentice electrician looking to become a grand master in her craft. These future roles we are aiming at, and may one-day hold ourselves have an abundance of information about them. This information includes the expected average annual salary. For bench-marking how much you will need in retirement, financial planners will often estimate 80% of your income at your highest earning level. 

   Planning for income during retirement at 80% of your peak earning potential will allow for lifestyle creep as you become more successful. If you plan on making $ 80,000 / year at your career peak, you should expect to need 80,000 * 80% = $ 64,000 each year during retirement.

   This 80% of peak earning potential estimate will help you set a target for your retirement nest-egg to work towards. As with all things of importance, your odds of success greatly increase if you have a clear target and a plan to get there. Think about your career, where you’ll be, and how much that means you should plan for in your retirement. With the right plan, financial freedom is available to everyone.

Estimated annual retirement income needed

Investing Strategies for the Coronavirus

February 23rd, 2020 - the stock markets around the world started slipping amid fears of the coronavirus (COVID-19).

   This week has been one to separate the successful investors from the unsuccessful. But the question is, amid all the panic and markets crashing, how do you become one of the successful?

   Turning on any TV channel, or scrolling through any number of online forums devoted to finance will tell you which stocks to buy, which to sell. There are countless predictions of where the “bottom” is, each saying a different thing. With all this noise, who is winning?

   To answer that question, we need to look at investor discipline.

   What was your investing strategy before the noise of the news started preaching panic? Have you changed your investing strategies as a result of the information screamed at you?

   Many of you have been reading long enough to know, the best investing strategy is to make regular contributions. This will result in the dollar-cost average of your portfolio being lowered during market downturns like this week has been. When the market recovers, you will be further ahead because you have been purchasing investments as they have been decreasing in value.

   Unfortunately, it is too easy to be caught in the sway of news media, and start abandoning your proven investment strategy by trying to time the bottom of the market. People caught in the latest Wall Street hysteria hold back regular investment contributions, thinking that they alone can perfectly predict the bottom of the market. This type of wishful dreaming gets in the way of the investing truths that we all know. None of us are smart enough to perfectly time the market.

   Your best bet? To continue investing as you always have, on whatever regular schedule you use. For me, that is the start and the middle of the month, aligned with my pay cycles. Since the crash happened after my mid-month contributions, I effectively paid full price for my investments at that time. My next regular investment (made probably around the time you are reading this), based on my own schedule will therefore be a purchase of ETF’s, stocks, and bonds that are “on sale”. This purchase of “on sale” investments will lower the average cost I have paid for all market investments in my portfolio.

The key take-away here:

Keep investing per your schedule. Don’t get caught up in the hype and try to time the market, or you might just miss out on a day of rapid recovery and all those associated gains.

   Of course, for those looking for a little extra credit, or for those who simply love a good bargain. The stock market investments are on clearance right now. Perhaps it’s worth a little extra belt-tightening over the next few weeks or months, and throwing a little extra in with your regular contributions. The extra purchases made when stocks are “on sale” will only serve to increase your financial wealth as the global economy steadies out over the coming months.

   If you can keep your calm during panic, and recognize a good financial opportunity when it presents itself, you’ll be well on your way to financial freedom! Happy, healthy, and prosperous investing to you!

How much do you need to retire?

   How much do you need to retire? This question has caused countless sleepless nights for all ages. With studies released every year all yielding the same alarming result, the vast majority of people are ill-prepared for retirement. Studies by any number of financial institutions, finance blogs, or news media agencies, conducted independently yet all displaying the same results. People are unprepared. What these studies don’t usually dive into, is the question; how much do you need?

How much do you need to retire?

The 4% Rule

   First created by William Bengen, the 4% Rule tells you how much you can safely withdraw from your retirement accounts to ensure you don’t run out of money. Used by many financial planners as a rule of thumb, you can also benefit from this calculation. 

The 4% Rule Example

   Meet Sally. Sally is 65 right now, and looking forward to three decades of retirement, living to the age of 95. 

   Sally has determined, based on her lifestyle and spending goals (travel and entertainment), that she needs $ 60,000 per year to retire comfortably. Based on the 4% rule, Sally would need a retirement nest egg of $ 1,500,000 to achieve her retirement goals.

   While that number alone provides some insights, there are some key assumptions driving the 4% rule.

Assumptions of the 4% Rule:

The 4% Rule makes a few critical assumptions:

  • Retirement will only last 30 years
  • Asset Allocation is between 50/50 and 75/25 stock to bond mix
  • Withdrawals are consistent, and comprised of interest, dividends, and capital gains

   What this means is that, if you plan to retire early, or have a long life-expectancy, 4% might be too aggressive to fund your lengthened retirement. Also, a 50/50 to 75/25 asset allocation mix might be riskier than you would like. Taking on too much risk could, in negative economic times, result in your portfolio depleting too much to be able to recover in the allotted time frame. And the final key assumption made is that the withdrawals are first funded by interest and dividends, and only small amounts of your portfolio are sold to cover the difference.

   This final assumption has caused some companies like Morningstar to discount the 4% rule as “too simple”. Their assertion is that the historical data that the 4% rule was created on doesn’t take into consideration the lower bond yields. By reducing the income from interest, a retiree would need a more aggressive portfolio to make up for the weak bond yields. Put simply, 4% is too much to withdraw. As a result, other numbers have been used as a benchmark, ranging from 3% to 3.5%.

   In Sally’s example, she might need a nest egg of $ 2,000,000 to safely retire at a 3% withdrawal rate. Or alternatively, she would need to learn to get by on only $ 45,000 / year.

How much do you need to retire?

   As you can see, there is no consensus on the amount. Lifestyle choices, alternative income sources such as pensions and old age security, and even life expectancy can greatly alter the calculations on a case by case basis. 

   Considering all these aspects, you still need a financial goal to aim for. For your planning purposes, I would suggest using a middle-of-the-road benchmark. If Sally could rewind until she was 30 again, her goal would be to save $1,750,000 before retirement. This allows her a 3.5% withdrawal rate, taking $ 60,000 per year.

   As you get closer to retirement, you will have a much larger investment portfolio than you do now. At that time, more options will be available to you, and a visit to a financial planner would be advisable.

Action Items
  1. Consider what you plan to do in your retirement.
  2. How much does that lifestyle cost each year?
    • Consider: Do you own your own home? Do you rent? Are you receiving Old Age Security or Pension benefits?
  3. Take your estimated annual spend and divide by 3.5%. 

 

Your answer has given you a financial goal to aim for. Don’t be discouraged by where you stand in relation to your goal, take pride in knowing you have a clear direction.

How to Plan for the End

“In this world nothing can be said to be certain, except death and taxes.” - Benjamin Franklin

   While not particularly motivating, Benjamin Franklin is indeed correct. And to that end, we should be prepared for that unavoidable permanence. But how?

How do you plan for the end of life?

  • A Will
  • A list of bank accounts, URLs, usernames, passwords.
  • Instructions for financial management of accounts

A Will

   A will is a legal document outlining what you want to happen with your estate upon your passing. Your will is used to outline your wishes, and leave assets to various individuals and groups (think spouse and children, and charities). Why you need a Will now further outlines the importance, and gives you steps to take to produce a will. 

  • Take action today: protect your family from estate taxes, and do your part to make a difficult time easier for your loved ones.

Accounts, Subscriptions, and Services

   Subscriptions are everywhere in today’s society. As we become further plugged in, and even reliant on technology, these subscriptions provide access to a wide range of services. Even services that once thrived on paper correspondence, like banks and government tax agencies, are creating online profiles and portals to conduct business. With all these online accounts in our name, navigating the list of services we’re using can become quite a chore. Indeed, I have spreadsheets with 30+ different accounts for business and personal use. With such a complex ecosystem of electronic connections, providing our loved ones a list of all accounts and login details is important.

   Providing a single, unified list of all accounts and details will help you stay organized, and make things much easier in the event that control needs to be passed on to a loved one. To help manage this, there are a few options.

   Spreadsheets are a convenient way to store account details. For my work-related logins, I store all my details on a single, password-protected file. This allows others with the password to access the files, and obtain access through my usernames and passwords to any service that I use for work. Certainly the ability to easily share the spreadsheet, especially if using a cloud based service like Google Docs, provides a measure of convenience that is hard to duplicate. One disadvantage is, while easy to use, spreadsheets do not provide high-level cyber security, and may not be best for storing sensitive information.

   On the other end of the spectrum for cyber security are password management services. Companies such as LastPass or BitWarden (I have no affiliation with either company) provide secure logins to store all passwords. These services also help you create and store high-strength passwords, to greatly reduce the chances of your accounts being compromised. Both these solutions offer both paid and free services for individuals, and provide high-strength, convenient password and account management services.

   No matter the route you take to organize your account logins, having a way to pass on the detailed list of login URL’s and account details will make life much easier for your loved ones.

Instructions for Financial Management 

   Another area of concern, especially among couples, is how to manage finances. While I would advocate that in matters of money, both parties share the knowledge and decisions, I understand that in some relationships this simply isn’t the case. If you are the one who primarily handles financial aspects, you need a way to pass on that knowledge and a “what to do next” plan to your partner and/or children. This is information that goes beyond simply what assets and liabilities exist, as those are covered in your will. Instructions for financial management should explain, at least at a high level, your investing strategies and asset allocation. Also included should be a short list of trusted financial advisers, or knowledgeable friends that would be willing to help understand the finances.

What to include:
  • Where investment accounts are held
  • Basic investing strategy, and financial goals
  • Trusted financial adviser / friends
  • List of resources to help educate your remaining loved ones
    • Books, Blogs, Courses, etc.

   Death is simply a part of life. Accepting this fact might not make the loss of a loved one, or your own mortality easier to bear, but it will certainly help you plan for the inevitable. Those plans should include a will, to outline your wishes for the distribution of your estate. This step will help you minimize estate taxes, and dispel potential conflicts between remaining family and loved ones. 

   Another helpful step is to compile a list of accounts for services that you use. Included in this list should be: service, company, a login URL (if applicable) account numbers, user names, and passwords. This will help keep things organized, and prevent service disruptions that further increase the difficulty of an already trying time. Finally, providing financial management best practices and strategies, along with education resources and trusted advisers will help ease the burden of financial management from your surviving loved ones. 

   The right plans implemented early will let you and your family / loved ones sleep peacefully at night, knowing that you have done all you can to set them up for success.

What Is An RRSP?

   Registered Retirement Savings Plan (RRSP) accounts were designed to provide an incentive for individuals to set aside money for retirement. These accounts provide a central foundation for long-term saving goals. 

What is an RRSP?

   A Registered Retirement Savings Plan (RRSP) is a tax-deferred account. This works by deferring taxes until the money is withdrawn in the future. The purpose is to incentivize people to save for their retirement, which the government does by simply saying, save now, and don’t pay taxes on that money until you need it. 

   The way this tax-deferral works is by reducing your taxable income for the year by the amount of your contributions. For example, if you make $80,000 per year and you invest $10,000 into your RRSP, the government will only take tax as if you earned 80,000 - 10,000 = $70,000. You are therefore receiving $10,000 tax-deferred. That $10,000 will be taxed in the future when you withdraw your money.

   Your RRSP may be opened at any time, although some institutions will require you to be the age of majority. Any RRSP account that you own must be withdrawn or converted into an RRIF or annuity when you turn 71.

   RRSP’s are offered by a wide range of financial institutions, from banks to credit unions, mutual fund and investment companies, and even life insurance companies. Through these institutions, you may open an RRSP investment account. Once you have an account, you then have further options of where to invest. The below is a list of eligible investments in an RRSP.

Eligible investments for RRSP
  • Cash
  • GIC’s
  • Savings Bonds
  • Treasury Bills
  • Bonds
  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Equities
  • Mortgage-backed Securities
  • Income Trusts
  • Gold & Silver Bars

What are the Benefits of an RRSP?

   The obvious answer here is that your contributions to an RRSP are tax-deferred, meaning you save money on taxes now, with the promise to pay that tax in the future. This works by allowing you to contribute more money to an investment account. For example, assuming your combined tax rate is 30%, and you plan on investing $10,000 pre-tax this year. If you were to invest after-tax, that $10,000 * (1-30%) = $7,000. Instead, by investing in your RRSP, the taxes are paid in the future. This means that you can invest the full $10,000 now, an extra investment of $10,000 - 7,000 = $3,000. That is $3,000 more invested now that can grow over time. 

   Using the tax-deferral of an RRSP account is especially important when you use your RRSP as an essential part of your financial strategy, allowing you to save taxes overall. For a more in depth look at how you can use different investment options to save taxes, check out our comparison between RRSP vs TFSA.

How Much Can You Contribute to Your RRSP?

   Unlike the fixed amount you can contribute to your TFSA annually, the RRSP has an individual contribution limit set as a factor of your income, up to an annual maximum. Your RRSP contribution limit is set by the lower of 18% of your annual income, or an annual maximum set by the government. In 2020, the annual maximum is $27,230.

   Any unused lifetime contribution room is carried forward each year. To see how much you can contribute, check out your account with the CRA. Most individuals who have filed in the past couple years will have been prompted to create an online account already, and since you’re reading this online, you probably are tech-savvy enough to have an online account. 

   Alternatively, your lifetime contribution limit will have been mailed to you (if you still have mailing selected as an option), and you can find this on your RRSP Deduction Limit Statement.

What If You Over-contribute To Your RRSP?

   There is a $2,000 safety buffer, allowing you to over-contribute by $2,000 before you will be required to start paying tax. The tax levied on excess contributions is 1% of the excess balance per month.

What if you need to Withdraw?

   Contrary to popular belief, there are no explicit penalties to withdrawing from your RRSP. If you withdraw from your RRSP, that money is taxed as income in the year that you withdraw. However, unlike the TFSA, when you withdraw from your RRSP, that contribution room is lost forever. For example, if your lifetime contribution room was $100,000 and you withdrew $15,000 for your wedding. You will pay tax on that $15,000 in the year you withdraw, plus, your lifetime contribution room will drop to 100,000 - 15,000 = $85,000. This lifetime contribution room is lost forever.

   There are 2 special cases where that is not the case, the First-time Home Buyers Plan, and Continuing Education. In those special cases, any withdrawals you make must be repaid over a set term. Essentially, you are borrowing from yourself. In these cases, the contribution room is not lost, but future contributions will be applied to the loan and hence not tax-deductible.

Advanced: Deferring Your Tax-Deferral

   You don’t need to claim your tax credit in the year that you make a contribution. In this case, you will essentially be putting after-tax dollars into your RRSP, similar to how you would a TFSA. Those “Unused RRSP Contributions previously reported and available to deduct” will show up on your RRSP Deduction Limit Statement.

   You may choose to do this if you expect to be in a higher income bracket in the future. This will mean you can still invest in your RRSP accounts now, and take advantage of investment growth, while saving the tax break for when you are earning more in a higher tax bracket.

What this all means for you

   The RRSP is an essential investment account for every Canadian. The tax-deferral properties give this type of account a big leg-up over traditional investment accounts. By saving on taxes now, you are able to contribute more, and let those investments grow over time. The taxes are then paid when you start withdrawing money. 

   If financial freedom is in your life’s plans (it should be), the RRSP is an essential tool to help you on your journey.

What is a Good Credit Score?

   Credit scores are extremely important in your financial life. Understanding what they are, and how they are calculated is important. But even then, what qualifies for a good credit score? And what about the other end of the spectrum, what is a bad credit score?

The FICO 8 as a Credit Score Benchmark

   While there are a few different credit scoring formulas, one of the most common is the FICO 8 score. Your FICO 8 score will provide a very close estimate to where you stand among all credit scoring methods. This is important to note, since when you retrieve your credit score from one of the different credit reporting companies, the number they provide should be close, but will not be exactly the same. This is partly because they are likely using a slightly different formula than the FICO 8. For that reason, using the FICO 8 as a benchmark will provide a very close approximation of your credit worthiness.

What is a Good Credit Score?

   The FICO 8 score, and all credit scores, are broken roughly into the following bands: Poor, Fair, Good, Very Good, and Excellent. A good FICO 8 score is in the 670 - 739 range. Individuals with scores in this area are generally not turned down for loans, and shouldn’t experience too many financial roadblocks. Unfortunately, the reverse is true. Individuals scoring below 670 may experience difficulty finding a credit card, and will pay higher interest rates on their loans. This is in addition to the other non-financial aspects, such as experiencing more barriers to job markets. The chart below shows the ranges of the FICO 8 score.

Chart showing credit score ratings

Better than Good

   A Very Good and Excellent credit score is even better than good (obviously). Individuals who achieve this range of credit score generally receive more favourable interest rates on loans, and have greater access to debt. Entering this level, over 740, will result in better financial options, and hence make your journey to financial freedom even easier. If you have an interest in achieving financial freedom in your life, there’s a good tangible target to shoot for: a credit score over 800.

What is a Credit Score?

   Credit scores can make our lives easier, or vastly more complicated, depending on our rating. But what are these credit scores? How are they calculated? How are they used? And, where can you see yours? 

What is a Credit Score?

   Credit scores are a measure of your financial trustworthiness. Based on a sliding scale between 300 and 900, the higher your credit score number, the better. Put simply, a high credit score indicates to lenders that you are less-risky, and that you have a good track record of paying your debts. Different reporting agencies have different calculations, and even different scoring ranges, but in general a high score at one agency will match a similar score from another agency. As a result, finding your credit score from a single agency will give you a good indication as to where you stand.

How are Credit Scores calculated?

   Different agencies calculate credit scores differently, and even the calculations are proprietary and not known for certain. That said, the most common scoring calculation used is the FICO score. In general the FICO score can be broken down into 5 core areas, generally weighted as follows.

  • 35% Payment History
  • 30% Amount of Debt
  • 15% Length of Credit History
  • 10% New Credit
  • 10% Credit Mix

   While this isn’t an exact formula, it’s a good estimate as to the most important criteria. Each category influences your credit score. Let’s look at how it all stacks together.

Payment History

   How well you have paid your bills in the past is the biggest influence on your credit score. Are you paying everything on time, every month? By routinely making your payments for all your bills, you indicate to lenders that you are reliable, which drives your credit score higher.

Amount of Debt

   The amount of debt you have, and the amount you use also plays a role. In general, you want to be below 20% of your total allowable consumer debt. For consumer debt, credit card limits and lines of credit are the most important types. It is important to make the distinction between types of debt here, since mortgages and auto loans can be rather large, you won’t be adversely penalized for using them, despite throwing off your total debt usage ratio.

Length of Credit History

   How long you have had an established credit history impacts your credit score. The longer you have had credit available to you, the better your score will be. This of course impacts young people and immigrants the most, as they haven’t had the time to establish their credit history yet. 

   Another consideration in this area comes with cancelling sources of credit. For example, it might be beneficial to hold onto your oldest credit card or line of credit even if you don’t use it anymore because it proves you have a longer credit history.

New Credit

   Applying for new credit can drive your credit score down. This is seen as risky behavior, as you obtain new sources of credit in a short period of time. As you prove that you can manage the level of credit that you are eligible for, your credit score improves. Again, this doesn’t mean that you shouldn’t find new sources of credit, indeed there are good reasons to change credit cards, etc. But, making a lot of changes at once might make you appear more of a credit risk, and your credit score will adjust to reflect that.

Credit Mix

   The final element is credit mix, or the types of credit available to you. Having a diverse array of credit options improves your score. This can be a combination of auto loans, credit cards, lines of credit, mortgage, etc. Being able to effectively manage multiple sources of credit indicates to lenders that you are financially responsible, and your score is higher as a result.

How are Credit Scores used?

   Arguably credit scores are the most important number in your financial life. They impact everything from housing rent and job applications, to the interest rates you pay on loans. Your credit score can even impact your relationships, with studies showing that your credit score can even impact your dating. 

   Credit scores are used as a measure of your financial risk. A lower number indicates that you are more risky, and therefore lenders demand a higher interest rate to account for the increased risk. This means that being financially responsible isn’t just good practice, it’s also saves you money! The difference of a fraction of a percent on large items like auto loans or mortgages can mean thousands, or tens of thousands of dollars in savings over your life.

Where do you find your Credit Score?

   You are entitled to a free copy of your credit report each year from each of the credit scoring bureaus. For our US readers, you may request your credit report here:

https://www.annualcreditreport.com/index.action

For my fellow Canadians, you may request your credit report from Borrowell here:

https://borrowell.com/

   Knowing how credit scores are calculated, what your score is, and how to find it is important. This three-digit number can have quite an impact on your financial future. As with any scoreboard, why not try and set the highest score you can? Your whole financial life will be better for it!

2020 TFSA Update

   For Canadians, the Tax Free Savings Account is an incredibly valuable investment tool. As the allowable contribution room that increases each year, anyone using this investment tool needs to be aware of the latest contribution limits. 

For 2020, the annual contribution increased by $ 6,000.00.

   If you have been over the age of 18 since the year 2009, your total lifetime contribution limit is $ 69,500. The chart below shows the annual contribution limits, and a cumulative total. To find your lifetime contribution limit if you were younger than 18 in 2009 (born after 1991), simply add the annual limits of all subsequent years after the calendar year you turned 18.

2020 TFSA

Contributions vs. Account Balance

   There has been some confusion about allowable contributions, especially when investments have grown. Contributions are considered independently of the account balance. This is especially important after the economic boom over the past decade. If you had investments that performed well over the past few years, it is quite possible that your account value has grown to beyond $ 69,500 already. This does NOT mean that you can’t contribute this year. As long as the amount you have contributed, your invested principal, does not exceed your lifetime contribution limit.

Example: TFSA Lifetime Contribution

   To highlight this, let’s look at Dominic’s situation. Dominic is a 30 year old Canadian resident, living in Canada on a continuous basis. Born in 1990, Dominic was 19 when the TFSA was introduced, and therefore has the entire lifetime contribution limit allowed.

   In 2019, Dominic received an inheritance, and invested all of his allowed amount into his TFSA, the full $63,500. His investments were predominantly stocks, and he saw significant gains over the year. On January 1, 2020, the balance in Dominic’s TFSA account was $ 73,000 - a gain of $9,500 over the year! Dominic hasn’t withdrawn any funds, but is concerned that his account balance is over the $ 69,500 lifetime contribution limit. Fortunately, as a BusinessMinded.ca reader, he knows where to go for information before making any rash decisions.

   Looking at Dominic’s situation, we see the following:

Lifetime Contributions: $ 63,500

Investment Growth: 9,500  

   Understanding that investment growth has no impact on lifetime contributions, Dominic can still contribute $ 6,000 in 2020. This will bring his used lifetime contribution up to the 69,500 limit, while increasing his account balance to 79,000 ($ 69,500 contributions + $ 9,500 investment growth).

TFSA: A Powerful Tool

   Understanding how a TFSA works is important for achieving financial freedom. Armed with the right knowledge, a TFSA will play an important part in your financial future. With $ 69,500 in cumulative lifetime contribution room in 2020, there are plenty of ways this powerful tool can be used to drive your personal financial success.

Where can I find more information about TFSA’s?

Read What is a Tax Free Savings Account?

How does this compare to an RRSP?

Read Which is better? RRSP vs TFSA.

How much will achieving your goals cost?

How much will achieving your goals cost?

   Knowing how to avoid the common pitfalls of achieving goals increases your chance of success. But there is one other often overlooked cost of achievement, and that is the financial cost of progress. For all of our goals or resolutions, there will be an impact on our bank account. Recognizing these costs will help you build them into your financial plans, and clear one last hurdle to your achievement.

What type of costs will you see?

   For my fitness goals, the gym membership will cost several hundred for the year. And while I have some gear already, continued use will ensure that needs to be replaced. By the end of the year, I expect to have spent $ 2,500 on gym memberships, workout clothing, running shoes, equipment maintenance, etc.

   As I progress my career goals, I will need to have the wardrobe for the positions I plan to be in. For new suits and dress clothing, $ 2,000. The courses and professional development that will get me to my career goals? Another $ 8,000.

   By now this is starting to sound like a MasterCard commercial, and that’s only considering the costs for two of my pillars. Once we add in social outings, date nights, romantic get-aways, journals, guided meditation apps, etc. The financial cost of all that I plan on achieving climbs even higher.

   Of course, achieving what I have set my sights on this year? Making this year my best year ever? That, is priceless. 

How much will achieving your goals cost?

   Setting the right goals will put you on the path to living your best year ever. But an important part of achieving your goals is to understand the costs associated with each of those goals. Here’s how you can be better prepared:

  • Pull out your list of goals
  • Under each goal, list what you’ll need to get there
    • A coach? Courses and seminars? A weekly entertainment fund? New gear / clothing?
  • How much do each of these prerequisites cost?
  • How much more do you need to set aside now, and ongoing, to ensure you can achieve your goals without undermining your financial foundations?

   Understanding the costs of achievement helps you plan accordingly. No matter the numbers you come up with, it is essential that you create the plan, and keep your eyes fixed firmly on the achievement of your goals. Because the cost is nothing compared to the value you’ll experience when you make this year your best ever. The value of that? Priceless.

How to use your Emergency Fund: Best Practices

   An emergency fund can save our hides in an unexpected event. That safety cushion can be used in an emergency, or as an opportunity fund. But using the fund is only part of the equation. We also need to replenish it, or risk going into the future financially exposed.

When is it okay to use your emergency fund?

   Sometimes unforeseen events happen that put a strain on our finances. For these situations, we can dip into our emergency savings to prevent us from having to borrow money from other sources, like bank loans and credit cards. Our savings are designed to protect against the struggles of life, designed to make our financial position stronger and safer.

   In general, your emergency fund is there to help with the one-time expenses that creep up on you. A car accident not covered by insurance, a medical emergency, or unexpected travel. Anything sudden that causes you to deviate from your current financial plan can be covered by your emergency fund. But be careful that the expenses that come up are really one-time items, and that you aren’t dipping into your emergency fund for everyday purchases. If that’s the case, your expenses are creeping too high and you’re in danger of living beyond your means. And that is a very dangerous road to travel. 

   You also could dip into your emergency savings for once-in-a-lifetime investment opportunities, after appropriate due-diligence of course. You don’t want to chase too good to be true promises with your financial safety net.

What do you do after you’ve used your Emergency fund?

   What’s next after you use your emergency fund? Whether it is to cover financial shortfalls from a real emergency, or simply taking advantage of an exceptional opportunity, that money has come from a loan. You have loaned yourself funding to cover an extraordinary item, but make no mistake, you are still in debt. The only difference is that instead of borrowing from a bank or other source, you have borrowed from your future. 

   If you do use your emergency fund, you need to treat it as you would any other debt, pay down aggressively until you are debt-free, or in this case, until your emergency fund has been restored.

   In the few times I have needed to resort to using my emergency fund, I treat that loan as equivalent to one my bank would offer me. That means that I charge myself interest on the loan I made to myself. As I pay down that loan, I also pay “interest” into my emergency fund, meaning my fund is larger than it started, and I have an even larger safety net to cover future financial shortfalls. 

   Using your emergency fund is okay, especially in emergency situations. That is afterall why we put those extra dollars aside. But when we do use our emergency fund, we need to remember that we are loaning that money to ourselves. When we consider the use of our emergency fund as going into debt, we think twice about using the money. If our cause is truly just, and we need to use our safety net, thinking about it as a loan also ensures that we pay it back quickly. That way we return to a state of equilibrium, where we protect our financial stability from the unexpected future.

Your Opportunity Fund

How much do you have set aside for emergencies?

   Common financial advice says you should be holding at least 3-6 months worth of living expenses in cash, just in case an emergency comes up. This should be a target of everyone’s financial plan, to save 3-6 months worth of necessary expenses, and have those funds stored in cash, readily available if you need them.

   Accepting that target savings amount can be hard, made harder still during periods such as the last decade. That seems like an awful lot of cash to be stored, especially when the markets are performing well. After all, isn’t it better to be invested in the market in the long term? Doesn’t that mean holding a large cash position is actually losing the opportunity for greater returns?

   The answer to these questions is yes, and maybe.

Let’s look into that further.

   Over the long term, every investment market has increased. That doesn’t mean that they increase every day, every month, or every year. But over the long term, they have gone up. Unfortunately, emergencies by their nature cannot be predicted. But neither can opportunities.

   And therein lies the beauty of your emergency fund. It is liquid cash, available for use at a moment's notice. If a once-in-a-lifetime investment opportunity arises, you have funds already available that allow you to capitalize.

   It has been said that fortune favours the bold. But courage alone is worthless without the resources and ability to act. It is time to reconsider how you think about your emergency fund.

   Think of your cash reserves as both preparedness for emergencies and for opportunities. This ensures you are not just ready for the worst case, but also that you are actively scanning for opportunities. 

What kind of opportunities exist?

   Just this month, a former colleague of mine was offered an opportunity to join a startup company. This opportunity brought tremendous upside to his career, but also introduced an increased level of risk. As part owner, some months he may even have to forego his paycheck to allow the company to chase bigger and more lucrative deals. Having a fund that allows him to take advantage of the opportunity without putting his financial position at risk is the purpose of his opportunity fund.

   Other opportunities exist all around us, if only we’re looking. A real estate investment opportunity to purchase into rental properties as part of an investment group. A company that the market over-reacts to bad news and their stock is temporarily under-valued. An opportunity to buy a rare and valuable art collection from an estate auction.

   These opportunities exist all around us, but not every day. When they do arise though, temporarily re-purposing your emergency fund and using it as an opportunity fund is a viable option.

   Keep saving, putting money into both investments and bolstering your cash reserves. And keep a weather eye on opportunities, because it isn’t about what could have been, but what could be. This is your future, and capitalizing on opportunities is a perfect way to make that future brighter.