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It's Your Money  

Stop money leaks

Every time you choose to spend (or not spend) money, you have a chance to improve your financial well-being.

For example, spending $60 a month on a membership you don’t use or subscribing to online newsletters you no longer read, are money decisions you make that can lead to what financial planners call “leakage. “

It’s a term that applies to all the money that leaks out of your savings unnecessarily, and it is more important now than ever to be aware of leakage due to the impact of COVID-19.

What can you do to reduce leakage? Simply being aware is a good starting point but if you want to really get ahead, a full holistic financial plan is the best way to beat it.

Here’s four examples of how a financial plan can help:

Smarter budgeting

Every month, money flows in (income) and money flows out (expenses). Focusing on how and where you spend, can help make your money work smarter.

For example, cancelling a $100/month membership you don’t use, could divert $1,200 a year toward one of your registered accounts such as an RRSP, TFSA, RDSP or RESP.

Over time, your contributions to these accounts can grow faster due to tax-deferred or tax-free growth, just by stopping one leak. 

$1,200 invested into your RRSP for the next 20 years and earning a six per cent per year average rate of return would put an extra $46,104 into your retirement nest egg!

Minimize taxes

Not taking advantage of every available tax credit and planning opportunity is equivalent to giving money away.

For many established families, a detailed tax plan can reveal leakage caused by not maximizing credits and refunds or not taking advantage of alternatives such as income splitting or trusts.

A proper financial plan will show how to minimize taxes and why these savings are every bit as valuable as returns made on investments or other forms of income.   

Plan for and manage debt

A good financial plan sets out a series of steps that reduces leakage to debt and interest payments each month.

For example, when you consolidate debt at a lower interest rate you can either pay it off faster or use the savings to invest in longer-term goals such as retirement.

Paying extra interest that you don’t have to is the most painful of all types of financial leakage. Sometimes all it takes is a little bit of restructuring to wipe out five or 10 years on a debt repayment schedule.

Protect yourself now and in the future

Life, critical illness, and disability insurance are all designed to financially support you or your beneficiaries in case of an unexpected event. In effect, they replace the money and/or income that would otherwise leak out of your savings due to one-time or ongoing costs.

Failure to setup proper protection for you and your family can lead to leakage so large that it can be devastating to your financial future.

I would be willing to bet that most (if not all) Canadians have some level of financial leakage in their lives.

You need to be aware of it and stem the flow! For those that don’t know where to start, consider reaching out to a certified financial planner for help.





Mortgage 'vacation' ending

The six-month “vacation” that many Canadians took from their mortgage and other debt obligations is coming to an end.

It has been a little over six months since the official declaration of a global pandemic.

By the end of June, 760,000 Canadians had put their mortgages on pause and 2.6 million (or roughly 10% of credit consumers) had put at least one of their debt obligations on an active deferral.

These deferrals were meant to help households stay financially solvent during temporary unemployment with the hope that the labour market would significantly recover by the time the deferrals expired.

To further complicate the problem, the significant government handouts will also be ending around the same time. 

Last week, the latest Canadian household debt ratio numbers came out and they showed a dramatic decline from 175.4% to 158.2%, which sounded quite promising on the surface.

But the true story is that debt loads didn’t shrink at all during the past few months, only that disposable income went up due to the entire stimulus.

What happens if your deferral is about to end, but you can’t afford to resume payments?

Let’s look at two main scenarios and how to respond.

If it looks like you’ll be able to start making the payments again soon, you can consider several options.

A short-term loan or borrowing from a line of credit might be the simplest solution if you have either option available. But if you’re not confident you’ll be able to start paying again soon, this could put you much farther into debt in short order.

You should also consider reaching out to your lender and explaining your situation. If you can prove that you just need a little bit more time, they may be open to extending the deferral a little longer for you.

If you go this route though, be careful to fully understand what other ramifications their extension comes with. 

If it looks like you are nowhere near ready to start making payments again, some additional planning is likely going to be required.

It’s unlikely that a lender will do a significant additional deferral for you, but you should still discuss with them right away. If you wait until after you’ve missed a payment, your options will quickly dwindle.   

For some, a major decision may need to be made including selling your house or filing a consumer proposal.

Selling your home may not sound appealing, but it would be much better for you to be in control of that situation instead of having your bank foreclose and sell it for you.

A consumer proposal could allow you to reduce your non-mortgage debt and stay in your home as long as you can keep making mortgage payments.

What if you chose to take a deferral to build up a emergency cash reserve and can afford to not only start re-paying, but can also put that built up reserve against your outstanding debt?

At this point, the outcome of the pandemic is nowhere near clear and a second shutdown seeming more and more likely.

Even though you’re accruing a little extra interest from the deferral, you might want to consider going back to regular payments only and sitting on that cash reserve a little longer.

Once things fully settle down, you can decide what to do with your emergency fund then.

Regardless of what position you’re in, the worst thing you can do is nothing.

Be proactive in your financial situation, no matter how bleak it may feel and make the best decisions available to you by getting all of the information and the best advice.  



Tough year for students

In a typical year, many post-secondary students would have spent their summer saving up for school expenses.

But COVID related lockdowns have affected the ability for many to earn income and the stress of expenses for this school year are much higher than normal.

In normal times, the cost of post-secondary education is high. Tuition while steep is just the beginning. Books, lodging and living expenses all pile up to the tune of about $60,000 for an average four-year program.

A professional degree such as law, medicine or engineering will typically cost twice that.

While this year may be more daunting than normal, there are still a number of things you can do to help ease the financial burden. 

If you haven’t done so already, make it a priority to apply for every available scholarship, bursary or grant that you can find related to your school and program.

Your education institution should have resources available to help guide you through this process.

Doing extensive research is key here as some grants are harder to find and in many years, a lot of grants will go unclaimed due to a lack of applications.

You should also look into any government related grants and loans available. Google “Canada Student Grants and Loans” and you’ll find a one-stop-shop for applying through your province of residence.

The amounts you can receive depend on several factors including your province of residence, family income, if you have dependents, cost of your tuition and if you have a disability.

Due to the pandemic, another resource students can access this year is the Canada Emergency Student Benefit.

This should be explored for any students not currently receiving the CERB or EI. Again, there is easy to follow eligibility and application information available online but note that the final deadline for applications is Sept. 30. 

Another idea to explore is a part-time job during the school year. Bringing in some income can help ease the stress of finances during the year.

For some, it can also reduce the required borrowing amounts and leave a graduate with a much smaller debt load when they graduate.

While everyone’s situation is unique, the above tips can help set you up for the best chances of success this coming school year.

Reducing stress surrounding your finances can help you be more focused on your studies and lead to a more positive overall experience in your post-secondary education. 

Remember, while these pandemic times are no doubt a weird period for students because nothing like this has happened before, things will get better and this won’t last forever.

Focus on the things that you can control and get the most out of your advanced education experience.



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Ignore market; stick to plan

When the global financial crisis hit in 2008, many people close to or in retirement suddenly felt unsure of their ability to maintain their lifestyle after their portfolios went down so dramatically.

A fair number of those recently retired ended up going back to work and some who planned to retire shortly ended up delaying their retirement date.

With our most recent market drop in this spring, many Canadians at that same stage of life were left wondering what they needed to do.   

Fast forward almost 12 years since the 2008 crash (and a few months since the 2020 one) and the markets have not only recovered, but are again setting new record highs.

For those able to rationally weather the storm and stick to their investment plans, the market downturn has left no lasting effects. 

It was certainly a good wake-up call though and a lesson that some have already forgotten. 

Now that we’ve rebounded from the spring lows, what major risks are poised to derail your current retirement plans?

Will this recovery be a “V” or “W” shaped one? And should the answer to that really matter?   

The answer for most people is no, it shouldn’t matter. While the majority focus on a market drop as their biggest retirement risk, there are less obvious, but far more impactful, risks that should be the focus of your attention.

This week, I wanted to highlight the five main risks to your retirement so you can evaluate how well your own financial plan is prepared:

Longevity

With continuous advances in modern medicine, people are living longer than ever before. Could your portfolio continue to provide income to age 90? What about if you live to be 100? A sound financial plan will have modern longevity built in.      

Asset Allocation 

Particularly important to review after a strong market year or years, how much of your portfolio is invested in equity holdings and do you have “safe” investments to draw from during a downturn?

Maybe it’s time to take some “profit off the table” and move some of your equity holdings to less volatile investments. Proper diversity is key.    

Inflation

The potential for rising prices to erode the purchasing power of your investments is ever present. Over the course of 25 years, a two per cent per year inflation rate will reduce your “purchasing power” by 40%,

Make sure you’ve taken a realistic inflation estimate into account when reviewing your retirement projections. 

Withdrawal Rates

How much are you pulling out of your investments each year? Is the withdrawal rate you’re currently on a sustainable one?

Some argue that you need more money in the later years of retirement for health costs while others prefer to spend it while they still can. For most, a middle ground between the two is probably right but it’s important to know what you can really afford.  

Healthcare Costs  

Could a significant medical event severely disrupt your retirement plans? Or could the long term care costs of one spouse leave nothing left for the survivor to live on down the road?

Whether you’re about to retire now, still 15 years away or already well into your golden years, answering these five questions can help identify pitfalls that you may not be prepared for.

Being pro-active in your retirement planning can help you attain the retirement lifestyle you desire. 

A certified financial planner (CFP) can help you identify the type of retirement you want and create a plan to help you achieve it.



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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of 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 FP Canada 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]



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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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