Categories
Savings

How to save?

Written by

How to save? How to invest?

Put money towards your savings every month

Without savings there is no flexibility, you can’t make choices, you are stuck to a budget that does not allow you to reach your goals and if your level of income does not keep with the inflation rate your standard of living is eventually downgraded.  Savings provide security for the future and helps prevent the unknown, starting a saving plan is an important step for good financial health. Whenever we hear the word “savings” we tend to think this only refers to our retirement savings, but that’s not the case. Yes, a good retirement plan is important but we need to save for other things in life too, like a vacation, a new appliance and an emergency fund.

Having an emergency fund is crucial for a good budget to survive. All it can take is a bad muffler or an unexpected dental bill to completely throw a wrench in your budget. If you haven’t been putting a specific amount of money aside each month to cover these inevitable yet “unexpected” expenses, you’ll find yourself in trouble and most likely relying on credit to get you through it. You should avoid using credit cards for emergencies — it’s the worst emergency plan you can have due to the interest rates they charge. Plus, if you can’t afford to pay for an unexpected cost when it comes up, you likely won’t be able to pay for it next month when your credit card bill arrives either.

To save for an emergency fund please check out our recommendations:

Moneylesson first choice for high yield savings accounts in US:

 Access multiple high-yield savings products from FDIC member banks through the SaveBetter platform. SaveBetter is completely free with no hidden fees.”

Click the banner to learn more:

Saving starts with a conscious decision to cut everyday expenses. However it’s not enough to simply save money if you want your savings to outpace inflation, you have to invest.  Invest is a miracle to your savings when they grow similar to a plant that gets well take cared.  In the same way not all plants grow the be strong and produce flowers, investment is a delicate task that needs research and timing because it is risky.   A good investor is therefore the one who is aware of the risk inherent in each investment and can use this information to time the perfect moment to buy and sell an asset, just like with plants knowing when the rain season will benefit your crop.

How Much Should you Save vs. Invest?

Saving money should almost always come before investing money. Think of it as the foundation upon which your financial house is built. The reason is simple. Unless you inherit a large amount of wealth, it is your savings that will provide you with the capital to feed your investments. If times get tough and you require cash, you’ll likely be selling out your investments at the worst possible time. That is not a recipe for getting rich.

There are two primary types of savings programs you should include in your life. They are:

  • As a general rule, your savings should be sufficient to cover all of your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least three to six months. That way, if you lose your job, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from living paycheck to paycheck.
  • Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven. The stock market in the short-run can be extremely volatile, losing more than 50% of its value in a single year.

Only after that these things are in place, and you have health insurance, should you begin investing. 

What should you invest in?

As mentioned before, you should pick investments where you know the risk involved in order to determine if this asset matches your risk tolerance.  

What is your risk tolerance?

To explain this concept we will use the following situation.  Imagine you have to take a plane to go from New York to London and there are two airlines that offer the closes departure at the same exact time from Ney York however airline A gets into London tomorrow morning at 9 am and Arline B gets into London tomorrow afternoon at 2 pm. Which airline would you pick?  The most common answer for this question has been airline A arriving into London tomorrow morning at 9 am, however we forgot to mention one slight detail about airline A, which is that during the flight during sunrise the flight will experience significant turbulence with annoying bumps that would feel like the plain is thrown out of control with oxigens masks coming down the roof and passengers screaming for help thinking that it is the end of their lives, however the plane safely arrives at London at 9 am on the next day.  After the description of this scenario, which airplane would you take? A or B? If you still chose airplan A your risk tolerance is higher than those who chose airplane B.  Both airplanes will get into London but one will be arriving earlier than the other one which is in essence the price you pay for a riskier investment with a higher return (in this case, arriving earlier).  The trade off between having an extra benefit in exchage of risk is known as the risk vs. return tradeoff.

As you saw in the previous example not all investments are made for every investor.

What are the most common types of investments?

There are various ways to invest your money, such as stocks, bonds, and property. You should have a clear understanding of each option and the risk return trade off each offers in order to make the best decision for growing your money.

  • Common Stock: A share of common stock represents ownership in a legally formed corporation. For most companies, there is a single class of stock that represents the entire company. However, some companies have multiple classes of stock, including dual classes of stock . Often, one class of stock will have more voting rights than another class of stock. Owners of common stock are entitled to their proportionate share of a company’s earnings, if any, some of which may be distributed as cash dividend. The best stocks are usually referred to as blue chip stocks. Stocks are volatile thus offer more risk return trade-off
  • Preferred Stock: Preferred stock is a class of ownership that allows shareholders of a company to get a larger dividend, and that dividend is often guaranteed. Holders of such stock do not have voting rights, but they can receive special status if a company heads into insolvency. If a company is being liquidated and creditors need to be paid, preferred stock shareholders must be paid before common stock shareholders. In some cases, companies can repurchase shares of preferred stock from shareholders, often at a premium. It is also possible to convert shares of preferred stock into common stock, but not vice versa. Preferred stocks are less volatile than common stocks but still offer more risk return trade-off.
  • Bonds: In simple terms, a bond is like a loan. When you buy a bond, you are usually agreeing to lend money to a government or a company. Typically, the bond issuer promises to repay the entire principal loan amount on a future day, known as the maturity date, and pay interest income in the meantime based upon a coupon rate. There are many types of bonds, including those issued by governments, such as Treasury bonds and municipal bonds. These bonds are often used to fund government operations and capital projects. There are corporate bonds which help companies fund their operations and invest in themselves. There are investment grade bonds AAA-rated bonds and on the opposite end of the spectrum junk bonds. If you do not want to buy bonds individually, you can invest in bond funds. Bonds have less risk return trade-off than stocks.
  • Real Estate:  Real estate is tangible property, such as land or buildings, that the owner can use or allow others to use in exchange for payment. When you own a house, you own real estate. When you own a plot of land, you own real estate.  Real estate offers less risk return trade-off thank bonds and stocks however it has other risks such as liquidity risk and concentration risk.

The best way to invest is to do it yourself through an online broker. Here is Moneylesson recommendation for the lowest cost online brokerages in Canada.

Our recommendation is based on the fact that Questrade does not charges annual fees regardless of account size, and there is not fee to purchase ETFs (exchange trading funds) which are the investment vehicles that carry the lowest management fees. So you can build an portfolio with ETF’s for free. Bear in mind that if you trade stocks or bonds there will be a trading fees that ranges from $4.95 to $9.95, and their account minimum is $1,000. If you move an investment account from another brokerage Questrade will reimburse transfer fees up to $150 per account. The app is on of the top investment trading apps and your funds are covered by The Canadian Investment Protection Fund, which means your assets are covered, off course not your investment risks. Take a chance to open a questrade account and either get 10,000 managed for free or 50 dollars towards trading fees.

How we can help?

If you don’t have a financial plan we can help you set up one for free.

We empower Canadians to manage debt wisely with a Financial Plan. We believe that everyone deserves an unbiased financial plan to be able to achieve their goals. Since 2010 our Mission has been to promote financial literacy among Canadians through the reinforcement of saving for a purpose, self budgeting and conscious spending.

BOOK YOUR FREE ONLINE CONSULTATION

BOOK NOW

“This article is an expression of the author’s personal opinions. The Company will not be held liable in any way for the opinions expressed herein.”  

© 2020 All Rights Reserved by FINMARKET INC. ALL FINANCIAL ADVICE IS PROVIDED BY FINMARKET INC .FINMARKET INC. Owns and operates the website moneylesson.org and YOUTUBE CHANNEL FINANCIAL ADVICE. Finmarket Inc. makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained this youtube channel, website, video, Podcast or any media posted on any website and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. The information contained herein is for information purposes. Particular investment and Tax strategies should be evaluated relative to each individual’s objectives. Individual should always consult with their financial professional before engaging in any strategy or investment and understand that some strategies have higher risks and are not suitable for all investors.You should consult an specialist to evaluate your individual circumstances before engaging in any financial strategy.

Categories
Savings

How to save on income taxes?

Written by

Strategies to keep tax planning simple. 10 ways to maximize your registered retirement saving plan room (RRSP):

If you live in Canada one of the most powerful ways to reduce taxes is to maximize your registered retirement saving plan room. What is the RRSP room? Every year that you have earned income, you earn RRSP contribution room equivalent to 18% of your earned income. If you contribute money towards your RRSP room you can decrease your taxable income by the same amount you contributed and up to the maximum RRSP room allowed.

How to maximize your registered retirement savings (RRSP)?

Make your RRSP contribution to a high interest saving account or short term 3 month GIC such as the ones that we recommend with EQ Bank: A savings account that helps you get the most out of your money, with no everyday banking fees, no minimum balances, free transactions (free Electronic Funds Transfers and Interac e-Transfers®) plus one of the highest rates in the market, 2.3% at this time.   Click the banner to learn more:

1. Why does it make sense to Contribute Early to your RRSP’S?

Start contributing to an RRSP as soon as you are able, why wait until you are close to retirement age?

If someone made a $10,000 RRSP contribution and held it in his RRSP for 20 years at 5%, his RRSP would grow to more than $26,000.

But hold on, what if the same person contributed $10,000 to his RRSP at 5% and held it in his RRSP for 40 years? , his RRSP would grow to more than $70,000.

Doesn’t it make sense? A longer time horizon produces a larger RRSP due to the tax-deferred compounding.

2. Why does it make sense for your employer to contribute directly to your RRSP’s?

Employers can make RRSP contributions directly to their employees’ RRSPs

Or

Even employers can deduct amounts from each pay check directly to the employee’s RRSP.

Even Better, Imagine the full amount of a bonus, up to $10,000 can be contributed to an RRSP without deduction of withholding tax.  Isn’t this great?

Make sure you have sufficient RRSP contribution room though!


turbotax

3. Why does it make sense to transfer a retiring allowance to your RRSP?

Avoid being tax at your marginal tax rate!  A retiring allowance can be transferred to the ex- employee’s RRSP in the year it is received or within 60 days!

4. Why does it make sense to Over-contribute $2,000 to an RRSP ?

Did you know that CRA allows a $2,000 over-contribution to an RRSP without penalty?

You should note that the over-contribution cannot be deducted in the year that it is made but it can be deducted in a future year when RRSP contribution room is available…

Imagine a $2,000 would compound to more than $8,500 over a 30-year period at 5% when it grows tax free.

5. Why should you contribute to your RRSP now and deduct it in a future year when income is expected to be higher?

Did you know that RRSP contributions do not have to be deducted in the year in which they are made?

Contributions can be deducted in that year but also in any other future year. It is better to defer the RRSP tax deduction if the marginal tax rate will be higher in a future year.

• Imagine if you are expecting a large bonus or salary increase in the next year YOU will qualify for a higher tax bracket……..Defer the RRSP deduction for the Future!

• Imagine if your are a summer student and will graduate in the next year after graduation……..Defer the RRSP deduction for the Future!

• If you are on maternity or parental leave ……..Defer the RRSP deduction for the Future! Did you know that RRSP contributions do not have to be deducted in the year in which they are made?

Contributions can be deducted in that year but also in any other future year. It is better to defer the RRSP tax deduction if the marginal tax rate will be higher in a future year.

• Imagine if you are expecting a large bonus or salary increase in the next year YOU will qualify for a higher tax bracket……..Defer the RRSP deduction for the Future!

• Imagine if your are a summer student and will graduate in the next year after graduation……..Defer the RRSP deduction for the Future!

• If you are on maternity or parental leave ……..Defer the RRSP deduction for the Future!

6. Why does it make sense to give money to adult children to contribute to their own RRSP?

When children earn money in small jobs during the year they can also accumulate RRSP contribution room even if they make less than their personal exemptions (approx $12,000 ). By giving them money to contribute to their own RRSP the tax deduction can be deferred and claimed in a future year when the child has higher income plus is a good habit to teach them.

7. Why does it make sense to make a RRSP contribution in specie if there is insufficient cash to contribute?

 When you have assets such as equity shares , you can contribute these assets to your RRSP’s and get the tax deduction from income. If you don’t have cash you can contribute any of the following assets to an RRSP:

Don’t miss the opportunity to pay less tax today and save for tomorrow!

» Bonds, debentures and similar obligations guaranteed by the Government of Canada, a province, a Canadian municipality or a Crown Corporation (including Canada Savings Bond issues and Treasury Bills).

» Shares and debt obligations of Canadian public companies.

» Shares of foreign public corporations listed on a prescribed stock exchange outside Canada (or on NASDAQ in the United States).

» Foreign government bonds with investment grade ratings.

» Debt obligations of corporations whose stocks trade on an eligible foreign stock exchange.

» Debt obligations of the European Bank for Reconstruction and Development and the International Finance Corporation, and securities issued under Ontario or New Brunswick community development Legislation.

» GICs issued by a Canadian trust company.

» Certain annuities issued by Canadian companies.

» Units of a mutual fund trust or an insurance company pooled fund.

» The writing of exchange-traded covered calls on securities that qualify for an RRSP.

» A mortgage or interest in a mortgage or a pool of mortgages secured by real property located in Canada.

» Shares, bonds, debentures or similar obligations issued by certain cooperatives or credit unions and shares of certain investment corporations.

» Certain life insurance policies.

» Bankers’ acceptances (these are short-term promissory notes issued by corporations and guaranteed by banks thereby increasing the negotiability of the instrument and lowering the cost of borrowing);

» Limited partnership units listed on a Canadian stock exchange.

» Certain shares in the capital stock of a small business corporation, prescribed venture capital corporations or specified co-operative corporations.

» Investment-grade gold and silver bullion coins and bars, and certain certificates based on financial institutions’ precious metal holdings.

8. Why does it make sense to contribute to an RRSP and use the resulting tax refund to pay down your mortgage?

You can build equity in home and build retirement assets at the same time.  As you contribute to an RRSP you increase your tax refund and this tax refund can be used to pay down your mortgage sooner. 

Why does it make sense to contribute to my spouse’s RRSP instead of mine?

You can benefit from INCOME SPLITTING and decreasing taxable liability in the future when your spouse has less income to declare on retirement.  Sweet! More disposable income for both to travel and make your dreams come true.


turbotax

9. Why does it make sense to contribute to spousal RRSP by December 31 each year?

You have to know that at least 3 years have to pass before withdrawing spousal RRSP without being attributed for the contribution.  If you contribute on December 31 you will reduce the 3 year waiting period from three to two years and avoid income attribution on the contributing spouse.

Did you know that if you are older than age 71 you can contribute to your spouse’s RRSP as long as the spouse is younger than 71 and you have RRSP contribution room ?

10. Why does it make sense to maximize RRSP contributions even if money needs to be Borrowed?

When you contribute to your RRSP’s you can increase your tax return even up to the previous 9 years.  This means getting back money you already paid in taxes.  This refund can be used to paid an RRSP loan.

Let’s look at this into detail.

As an example if you have RRSP room that you have not used yet, let’s say 100,000 and you are in a marginal tax bracket of 40% you will receive a 40,000 refund from CRA if you contribute 100,000 towards your RRSP room. This refund can be used to pay both an RRSP loan interests of approx. 5000 / per year and have a remaining 35,000 to pay some part of the loan principal. In addition, your 100,000 RRSP contribution grows tax free until you withdraw it and becomes taxable income in the year of your withdrawal.

Exclusive savings. Save 70% on QuickBooks Self-Employed

Remember…

Proper tax planning starts by organizing your financials, having up to date information, organizing receipts, sorting expenses, tracking mileages, recording invoices, tracking sale taxes and ultimate making proyections to prepare taxes. In order to take control of your finances with one simple solution we recommend quickbooks an amaizing tool that uses the lastest technology to make your life easy: from Snap and save photos of your receipts with your phone so you capture proof and ensure deductions to connecting your bank account(s) to automatically download transactions.

A good way to start is using a software that guides you through a series of questions that match your specific tax situation. We recommend Turbotax which not only guides you in finding the tax credits and deductions that you are eligible but also guarantees that all calculations are 100% accurate and your taxes will be done right. Please click the banner below to learn more and to take advantage of 15% discount when filing your taxes.


turbotax

This article is an expression of the author’s personal opinions. The Company will not be held liable in any way for the opinions expressed herein.  

© 2020 All Rights Reserved by FINMARKET INC. ALL FINANCIAL ADVICE IS PROVIDED BY FINMARKET INC .FINMARKET INC. Owns and operates the website moneylesson.org and YOUTUBE CHANNEL FINANCIAL ADVICE. Finmarket Inc. makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained this youtube channel, website, video, Podcast or any media posted on any website and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. The information contained herein is for information purposes. Particular investment and Tax strategies should be evaluated relative to each individual’s objectives. Individual should always consult with their financial professional before engaging in any strategy or investment and understand that some strategies have higher risks and are not suitable for all investors.You should consult an specialist to evaluate your individual circumstances before engaging in any financial strategy.