It's Your Money  

Spring clean your finances

With winter behind us, many are taking part in their annual spring-cleaning rituals.

Time to clean out the garage, freshen up the garden and maybe even hold a yard sale to get rid of the items you no longer need.

While you might be planning to spring-clean your home or wardrobe, why not take a fresh look at your finances too? For this week’s column, I will share six tips for freshening up your own financial well being:

Create or update your budget

There is no way you can take control of your finances if you don’t know what it costs you to live each month and what each of your expenses are.

Creating a budget may seem daunting but once you start, you’ll likely be surprised how easy it can be.

See what you can cut out

Once you have a budget in hand, review each monthly expense to see what you don’t really need. Are there services that you pay for but don’t use? Can you cut your TV subscription from 200 plus channels to a more basic package?

Any subscriptions that you can cancel? You might be surprised how easy it is to free up an extra $100/month!

Take control of your debt

The only way to tackle debt is to create an honest an accurate accounting of how much you owe and to who. List your debt balances, interest rates and lenders in a spreadsheet and confirm what the minimum payment is on each account.

Then, figure out how much you can afford to pay toward the debt each month. With that amount in hand, pay the minimum only on each debt and put the balance leftover onto the one with the highest interest rate.    

Review your credit report

On an annual basis, you should request your free copy of your credit report from Equifax or TransUnion and review each account and item on it.

Most Canadians will be surprised to find an account or other item that either isn’t correct or closed, but still showing as active. You don’t want to wait until your applying for a mortgage or loan to do this!

Set your savings on autopilot

Consider setting up bi-weekly or monthly automatic withdrawals from your bank account into your RRSP or TFSA account. It doesn’t matter how much you contribute at the beginning, only that you get the ball rolling.

You’ll quickly forget this money is even coming out and it will be easy to increase your contribution amounts on a regular basis.

Make sure you’re protected

An important piece of your financial security is holding adequate insurance. If you rent a home, make sure that you have a tenant insurance policy.

If you have a spouse and/or kids, life insurance is simply not an option. If your family relies on your being healthy and able to work, a disability or critical illness policy should be considered.

Spring is the perfect time to get your financial well being freshened up and on track. The only thing preventing you from doing so is you, so start today.



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Outliving your savings

The average life expectancy for a Canadian is just over 82 years.

For those who make it to age 65, your updated life expectancy is around age 85.

While it’s nice to see lifespans continually increasing, longer life expectancies do complicate many traditional ways of calculating retirement plans.

With retirement phases now being measured in decades rather than years, many Canadians are rightly concerned that their retirement portfolios will not last as long as they do.

Additionally, further concern is being caused by the forward investment growth projections and the fact that much of the burden is shifting from defined benefit pensions to the individual’s shoulders. The latest projection assumption guidelines recently released by FP Canada call for a balanced portfolio to earn 3.74% per year on average.

These assumption guidelines are intended to be used for long term retirement planning being done today and 3.74% is likely a fair bit lower than the rates of returns being used in many retirement plans.       

So how much do you really need to retire comfortably and how can you make sure your portfolio lasts? The answers to these important questions cannot be fully explained in a short article but here are a few ways to do some initial calculations and help get the conversation started:

4% Rule

This is a very basic method of calculating how much you can withdraw from your portfolio each year without running out. The rule states that you can withdraw four per cent of your portfolio in the first year, adjust for inflation each year after that and not run out of money.

If you have saved up $500,000 in your retirement investments, you can withdraw $20,000 per year and make the money last as long as you do. However, many people lately have been saying that the four per cent amount is likely too high and should be lowered further due to people living longer and interest rates being lower.   

Rule of 20

Similar to the “4% rule,” in some ways, this strategy was developed a couple of years ago. This rule looks at the problem from the other direction and states that for every $1 in retirement income you desire, you will need to have $20 in your investment accounts.

So, if you think you’ll require $40,000 per year in retirement and you expect to receive $20,000 per year from CPP and OAS, you would require $400,000 saved away to make up the other $20,000 per year.

When you compare the above two calculations, you’ll quickly notice that they show very different results ($400K vs $500K required) and this is due to one accounting for inflation and the other one not.

10% Rule

This is a very basic way of trying to decide how much you should be saving now to reach your retirements goals down the road. It simply states that you should be saving 10% of your gross income throughout your entire working life.

The 10% figure really only works for those starting out in their early 20s. If you don’t start saving until a later age, you will need to increase this amount accordingly.

This simple rule does not properly consider age, income levels and future retirement needs so it should be used as a starting point only.           

In order to run a proper retirement projection, it’s important to include variables such as market volatility, inflation and the type of taxation that different investment assets can be subject to. No matter how thorough your projections are, the only thing that is guaranteed is that it will be wrong at least to some degree.

These projections should be a guideline only and be reviewed on a regular basis with updated figures to see if you’re ahead, behind or close to on track. Your withdrawal rates and other plans may need to be adjusted as required to ensure you stay on track to meet your goals.



Income-tax windfall ideas

If you’re like most Canadians out there, you probably waited until the last minute to file this year’s tax return.

If so, it was sent off sometime last week and many of you are checking the mailbox each day in anticipation of your tax refund.

So now the big question – what to do with the sudden windfall when it arrives in your mailbox or bank account?

Many of you have already planned out how you want to blow your money (yes, this is a refund of your money and not free money from someone else). A weekend getaway or a new TV will certainly be in the cards for many Canadians.

Some of you however, want to be more responsible with your money. A quick search on Google of “how to spend my tax refund” produced almost 28 million results.

The majority of these results will provide level-headed advice such as paying down debt or saving for your future.

Very sound advice for sure but it’s advice that’s been around for years and most don’t seem to bother following it anyway.

Instead of reciting the same old ideas, I thought I’d give you a few new ones to consider for this year’s tax refund:

  • Withhold less tax – If you’re getting a refund, it means that you paid more taxes last year than you should have. Consider your refund as proof that you made some mistakes in your tax plans (or lack thereof) and fix them for next year so that things balance out.
  • Make home repairs – While not quite as effective as paying down debt, investing in your home can potentially still help your overall financial situation. This does not mean you should go out and buy a new hot tub; but you could put in more efficient insulation or energy saving devices to lower your monthly bills.
  • Donate money – Donating some or all of your tax refund to a cause that you believe in can go along way to improving the financial status of the organization you donate to as well as your own happiness and well being. And you can benefit from a donation tax receipt too!
  • Think small – If your tax refund is $1,000 this year, you shouldn’t only consider items or ideas that cost that amount. Instead you could start by listing ideas in the $50 to $100 range and spread the refund out among several of them.
  • Invest in yourself – If you don’t want to invest in your retirement savings, consider an investment in you. This could be something like a class or gym membership to get back in shape or a course or certification to further your knowledge and get ahead at work.
  • Do nothing at all – There is absolutely no reason that you must spend your tax refund right away. Sometimes the best plan of all is to stick the money somewhere safe and wait a few months before you decide what to do with it. This will allow the more rational part of your brain to overcome the impulsive ideas you may have.

The traditional advice of spending your refund by paying down debt or investing in your retirement savings is still often the best plan of action. The idea of my above list is to give you some additional ideas if you are looking for something new.

If you don’t like these ideas either though, feel free to sort through the other 28 million suggestions on Google – there must be one in there that you’ll like.



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Are you buried in debt?

Canadians are broke and yet they keep on spending.

Almost half our population is on the brink of insolvency and our mounting debt loads are unsustainable.

While our consumer debt issues are not news, the problem is still getting worse and people still won’t stop spending. The latest survey conducted on behalf of insolvency firm MNP Ltd. found that the number of Canadians who are $200 or less away from financial insolvency has climbed to a staggering 48%.

The same survey last fall had the number pegged at 40% and it was around 30% two years ago. These regular check ins are showing just how drastically the debt situation is rising yet we can’t seem to get people to listen.

When this latest quarterly survey results were released, MNP President Grant Bazian stated that

“Canadians appear to be maxed out with no real plan for paying back what they have borrowed.”

In my mind, this perfectly summarizes the position our nation is in.

But simply stating that we have too much debt doesn’t mean much unless you consider what this really means.

How do Canadians expect to pay this debt down?

What happens if (when) the Canadian economy deteriorates further?

These are the tough questions that you need to be asking yourself now.

The increase in bankruptcy rates are caused by three main factors:

  • Consumers taking on too much debt
  • rising interest rates
  • an increase in people losing their jobs due to companies fleeing our un-competitive business environment.

There is not much you can do about our rapidly dissolving business climate and you don’t get a say in the interest rate decisions, but you can take control of your own financial situation.

There may not be an easy or quick fix to your debt load, but the earlier you face it head on the better.

In addition to already being on the brink of insolvency, many of these same survey respondents also stated that they expect to increase their debt load in the next year instead of reducing it, often just to make ends meet.

My guess is that most people resigning themselves to this fate have not done all they can to see if there are other options.

If you have any outstanding debts and you don’t have a budget and a debt management plan in place, you need to start on one, today.

Most people likely feel like they don’t know where to begin but MNPdebt.ca and many other sites have a lot of information to help you get started. The only thing holding you back is you.        



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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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