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Top five financial tips to get you on track

There are so many misconceptions to do with financial planning, investments, registered accounts and mortgages. Milton has a lot of young families who are just getting started—a target group for increased debt and lending. Then life happens. You have another child; you may take maternity/paternity leave, a bigger house is needed, the car breaks down etc., and suddenly you have payment on payment and keeping up seems impossible.

Here are a few things to arm yourself with when setting up your own finances.

  1. Create an emergency fund. The minimum emergency fund that I recommend families start building is three months of salary earnings. Nothing can throw your financial plans out of whack more than an unexpected expense. Whether in a TFSA or savings account, having this money put away for an unexpected job loss, house or car repairs can help protect your overall financial well-being.
  2. Eliminate high-interest debt as quickly as possible. More than 64% of Canadians live beyond their means and carry credit card debt. Whether you absorb it into a mortgage, accelerate the payments or simply pay it off—you could save a lot of money in the long term. Start with your highest interest debt and work downwards.
  3. Understanding your mortgage. It’s the biggest payment and the biggest asset you have. How you set up your mortgage can make a massive difference in what you pay over time. On average my clients pay off their mortgages five-and-a-half years faster than amortized. That’s five-and-a-half more years they can use their mortgage payments to invest, go on vacation, or save. It also saves them between $15,000 and $20,000 in interest.

The first way is bi-weekly payments. One extra payment in a year will save you 2.5 years of payments. The second way is upping your mortgage payment just once by 10% (if you currently pay $1,000 bi-weekly, the new payment would be $1,100). This will take another three years off your amortization. In this example, once the mortgage is paid down, in the subsequent five-and-a-half years the cash flow in the household would be increased by $132,000.

A big mistake I see clients make is doubling up their mortgage payments to rush to get it paid off.  We are inherently conditioned to feel this way about debt. High-interest debt should for sure be treated with this urgency, however, your mortgage should not. The reality is as long as it’s paid off by the time you retire it’s not the end of the world. While the intention to get rid of debt is good, the logistics with interest rates this low is not. Investing the difference or putting it towards your long term financial goals is a much more effective use of that money and will keep your monthly cash flow more manageable.

4. Refinance your mortgage to consolidate high-interest debts or to pay for home improvements and renovations. Avoid loans and lines of credits from the banks if you have room in your mortgage to re-finance. A lot of families have credit cards and loans and lines of credit that are upwards of 19.99% interest. What happens over time is that you end up just being able to make the interest payments and no more and the debt piles on top of each other. We in the business call this kind of debt “bad debt.” A big part of my job is debt swapping—turning bad debt into good debt. Mortgages are considered good debt because the interest rates are low and the value of the house appreciates over time. Mortgage rates are at an all-time low, and real estate is at an all-time high. Consolidating high-interest debt or re-financing to pull equity from your house to achieve goals such as home renovations, RRSP top ups or education funding is an extremely effective way to keep interest payments low, increase monthly cash flow and increase your flexibility.

5. TFSA’s (Tax Free Savings Accounts). Since the inception of these accounts in 2009, TFSA’s have become increasingly more popular but the understanding around them has left a vast majority of people confused. Like an RRSP, a TFSA can have any kind of holding- stocks, bonds, mutual funds, etc. The money invested is with after tax dollars and the money can grow in this account tax-free. If you remove funds, in the next fiscal year you will earn the contribution room back. It’s extremely important to be aware of your contributions as over-contribution penalties are the same as an RRSP over-contributions and the CRA fines are 1% compounded monthly. In January, the government releases the annual contribution room for that year. Your contribution limit starts accumulating the year you turn 18.

   Years TFSA Annual Limit Cumulative Total
2009-2012 $5,000      $20,000
2013-2014 $5,500      $31,000
2015 $10,000      $41,000
2016-2017 $5,500      $52,000

 

If you have never contributed to a TFSA, and you were 18 as of 2009, you have a contribution limit of $52,000.  An average savings account will yield less than 1% interest. Inflation currently is about 2%. What this essentially means is that your money is losing 1% a year if left. TFSA’s are a great way to mitigate this risk; increase interest return tax free, keep your purchasing power strong and earn compound interest on even your emergency funds. Another common misconception is that TFSA’s make the funds less liquid. Although they are less liquid than a savings account, money can be transferred from a TFSA to a savings account if need be within 48 hours.

With any investments, there are 4 key things to remember:

Start early. The earlier you start saving for a goal, retirement, education, etc. the less money you will have to put towards that goal to get where you want.
Invest often. Dollar cost averaging, always buying shares despite the market is a great way to increase return and decrease the risk of market fluctuation. Set a dollar amount monthly, build it into your budget and make it automatic.
Let compound interest work FOR you. It’s not just starting early, it’s about being diligent in your efforts. Putting money away and leaving it away. The more money allowed to compound annually, the greater the return. Making large withdrawals are extremely costly long term.
Diversify: Putting all your money in one place or pulling all your money from one place in retirement is an extremely risky strategy.

Much like a fitness program, being financially fit requires you to be active and to commit to the daily things necessary to get you to where you want to go. If you’re going to make big financial changes, I won’t sugar coat it, it’s going to hurt a bit, in the beginning, to get things in order, attack high-interest debt and start to diligently save money, but over time the results are well worth it.

 

Liz Bates
Financial Advisor/Consultant
Investors Group Financial Services
2-1130 Steeles Ave. East Milton, ON L9T 6C8
Ph: 905-878-2700 Ext. 6238
Cell: 416-707-4167
liz.bates@investorsgroup.com

 

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