Unsuspecting costly habits

When trying to save money and get your finances under control, a lot of PF bloggers recommends bringing lunch to work, quit smoking, booze, drugs and lattes. Although these pieces of advice make sense, there are other costly habits to look at.

  1. Convenience. Do you buy everything at the supermarket? Do you withdraw cash outside of your bank’s network? Do you buy items from convenience stores? If yes, you are wasting money. ATM fees in Canada are $ 3.00 on each withdrawal. Supermarkets charge a premium on produce and meat; convenience stores have a huge markup on snacks and drinks.

 

  1. Gym membership. In order to break even with your membership costs, you need to use it several times a week. Most people don’t. You are better off running in the park and buying some basic equipment to use at home. Gyms make the most money with absentees and add-ons.

 

  1. Outsourcing. Do you pay people to do things for you? Do you have a cleaning lady or a dog walker? Do you take your clothes to the dry-cleaner instead of washing and ironing them? Although there are instances when it is better to hire a professional, systematically outsourcing has the same price tag as convenience. My hairdresser used to colour my hair. Once I started doing it myself, I divided my hair care costs by 2.

 

  1. Lottery tickets. In BC, the odds of winning lotto 6/49 are 1 in 14 million. Enough said.

 

  1. Impulse purchase. This habit is the costliest and hardest to break. We are all guilty of it. Marketers and advertisers are very good at making us buy stuff we don’t need. To break the cycle, it is important to monitor your urges and identify your spending triggers. Ask yourself why you want to buy an item; if it is something you need vs. something you just want. Give yourself 24 hours before buying anything. If you cannot resist buying, avoid the malls and online shopping sites altogether. It is not easy, but it can be done!

 

There are definitely lots of habits that could be added to this list, but these are pretty common. What are your costly habits?

 

Financial rules I like to bend or break

There are many financial rules we hear over and over again, and that we blindly follow. But before following any rule, we need to see if it is actually adapted to our own situation. The key word in personal finances is personal.

  1. Live within your means. Sure, this rule makes sense at first, when you try to get a grip on your money. But once you have done that, you actually need to live below your means in order to save. If you spend all your paycheque, how will you achieve this?

 

  1. Cut expenses drastically. You can only go so far in terms of cuts. I am a proponent of earning more instead.

 

  1. Have 3 to 6 months of living expenses or a minimum of 10K in an emergency fund. Who decreed these numbers were an absolute must? I personally don’t like the concept of an “emergency fund”. I have this theory that, if you focus and obsess on “emergencies”, it is exactly what you are going to get. I prefer using the term “back-up fund” instead. It is just semantics though. I am not saying you shouldn’t save, but the amount you decide to put aside is entirely up to you. If you have a good cushion, it shouldn’t be sitting in a plain savings account earning 0.5%. Consider investing a portion of it in a low risk product.

 

  1. Buying (a house or a car) is the only way to go. Do the math before abiding by this rule. Review your personal situation as well.

 

  1. Always max out your RRSP contributions. In a perfect Canada, we would all contribute the full amount to our RRSPs each year. But it is pointless to set money aside for retirement if you can’t pay your bills, or if you don’t have a back-up fund. An RRSP might also not be the right investment tool for you.

 

What about you? What financial rules have you broken or bent?

Things I refuse to pay for

We all have our financial pet peeves. Here are a few items I refuse to pay for:

Cell phone. A lot of people receive bills equating to a car loan payment or weeks’ worth of grocery shopping. Have you noticed how a $ 25 monthly plan always balloon into $ 50 or $ 60? I have! I am probably one of the few people on this planet not glued to my cell phone. I haven’t upgraded my cell in years and I am on a prepaid plan that costs $ 11 a month, not a cent more.

Bottled water. Here, in the Lower Mainland, we are blessed with top-quality tap water. For the most part,  bottled water is just regular water that was purified, with a mark-up of 4 000%! Most people complain of gas prices, yet have no problem forking $2 or more for a liter of purified tap water…

Coffee or tea. The mark-up for a cup of basic coffee or tea made by a barista is around 300%. It costs pennies to make your own coffee or tea.

Movie tickets and popcorn. The mark-up on the popcorn is close to 2 000%. This form of entertainment is not cheap. I use my air miles to pay for this–popcorn included-.

Big, fancy cars with fancy gadgets. I don’t understand why people spend tons of money on a depreciating asset. A bigger, fancier car will cost more in terms of gas, insurance and maintenance. It won’t do a better job in getting you from point A to point B than a basic, smaller model.

Gluten-free food. Unless you have been diagnosed with Celiac disease by your doctor, there is little to no scientific evidence that going gluten free will make any difference for you. Your wallet, however, will definitely feel it. Gluten-free items cost 2 to 3 times more than regular ones.

What about you? What do you refuse to pay for?

 

From saving to investing

I have always been a saver. I understood from a fairly young age that I needed to save money if I wanted to do anything. I did not learn this from my parents themselves, unfortunately. “Saving” was not -and is still not- part of their vocabulary.

I think I became a saver in reaction to my parents’ non-saving habit. For many years, my savings were primarily for travel; then I saved to move to Canada.

By saving, I mean setting money aside in an account that would pay me variable, low interest. This is the whole principle of saving. Easy, isn’t it?

During my first years in Canada, saving came to a screeching halt, as I simply didn’t have money to save. When my finances were back on track, I resumed saving, but a thought was constantly nagging me: “saving is not enough”.

Most regular savings accounts earn from 0.5 to 1.5% of interest. As you probably have noticed, prices increase way more than this. The Bank of Canada has a very good inflation calculator here. $ 1 000 saved 5 years ago do not have the same buying power today.

Inflation is on average at 3% per year, although it has been lower over the last few years. Simply put, if you don’t want to lose your buying power, your savings need to earn more than the inflation rate.

This is when investing comes into the picture. Since a regular account doesn’t cut it, you need to choose another product, such as a mutual fund, an ETF, stocks, bonds…etc. All these can earn way more than 1%. Unfortunately, you could also lose money.

Feeling scared? I hear you. My introduction to investing was less than stellar. Then, I began educating myself, and doing my own research. I believe it is the key to investing. I also believe 0.85% -the interest currently paid on savings accounts by my bank- is not much for my hard-earned money.

After a thorough review of my personal finances, I switched to D.I.Y. investing and opened an online brokerage account. Contrary to popular belief, you don’t need a ton of cash to do so, nor do you need a salesperson to make financial decisions for you…and cash-in on your dollars in the process.

My experience has been a pleasant one so far. I only wish I had done it sooner! At the end of the day, no one cares more for my money than me…it should be the same for you.

Learning to say no: co-workers ‘edition

When trying to get your expenses under control and down, you may have realized the workplace can be a mine field. Between birthday cakes, cards, gifts and other charitable donations, you can spend a ton of money without realizing it.

Here are a couple of tips to keep both your wallet and sanity in check:

  • Remember both gifts and donations are not obligations. That pushy co-worker should remember it too! Don’t feel bad or guilty about declining cash requests. It is your money
  • Don’t engage into the same behaviour yourself. Don’t go desk to desk asking for donations for your favorite charity. Don’t expect anything for your birthday.

Now we have the basics covered, let’s get into additional strategies.

#1.Donation trap: we have all had colleagues who keep asking everyone to pitch-in for their kids ‘school projects or their charity. These requests are legitimately annoying, not to mention the pressure it puts on people.  You feel like you “have to” donate or that it could impact your relationship.

Solution: If you don’t want to give and don’t want to offend the person, say something like “I have already exhausted my charity budget for the year” or “it is a great cause, but I can’t afford it”. Sometimes being up-front is the most effective.

#2.Gift trap:  This one can be a bit tricky. If you work in a small office and one of you co-workers is having a baby, you will probably have to pitch-in.

But if you work in a big company and don’t know -or barely-the recipient of the gift, just say something like “thanks, but I don’t know [insert name here].” Or “thanks, but I can’t afford to contribute”. Again, being up-front is sometimes the best line.

#3.Farewell party/lunch trap: This one can also be a bit tricky if you work in a small office. I personally believe employers should pay for the lunch or going-away party of their employees. If you don’t know the person well, you can excuse yourself from the occasion altogether. You can say you are on a “tight deadline” or “already have a commitment that evening”.

You may also want to approach your Manager and see what policy is in place, if any. If there is none, you may suggest one.

I have always been lucky to work in companies where cash requests are pretty much non-existent. My employers paid for birthday cakes or going-away parties. This is the way it should be. It is not my responsibility to financially pitch-in for causes I don’t care about or people I barely know.

Understanding fees in mutual funds

There are a lot of discussions on how the Management Expense Ratio –or MER- of a mutual fund directly impacts its returns.

As a reminder, mutual funds are actively and professionally managed. It results in a myriad of expenses, paid from the fund, regardless of its performance. These are the MER.

However, there are other charges that you may have to pay out of your own pocket. When reading documents pertaining to a fund, watch out for these common terms:

Front-end load: The amount you pay when investing into the fund. It is usually a percentage, and yes, it is taken out of your money.

Back-end load or sale-deferred charge: The amount you pay when redeeming or selling units. Usually, the longer you keep the fund, the lower the charge will be. After a certain number of years, it is eliminated.

Low load: this works like a back-end load, except the period of time is usually shorter.

No load: means you don’t have to pay to buy or sell units. However, because a fund is “no load” doesn’t necessarily mean it costs less.

Switch fee: amount you pay to transfer into another fund of the same family

Redemption fee: amount you pay when selling; usually a flat fee.

Short-term trading fee: Fee for buying and selling within a short period of time, e.g. 30 days.

Administrative or account fee: some funds charge you a fee if you don’t have a minimum amount invested or to open an account.

Although it is important to understand all the fees associated with a mutual fund, it is not the only aspect to look at before investing.

Mutual funds basics

Image result for mutual funds

This investment product is very popular in North America. But what is a mutual fund and how does it work?

A mutual fund is a pool of money collected from many investors and used to buy securities such as stocks, bonds, money market instruments and other similar assets.

The securities in the fund are known as the portfolio.

As an investor, you own units, which represent a portion of the holdings of the fund.

A mutual fund is professionally and actively managed. The funds are invested to generate capital gains and income for investors.

Most mutual funds are open-end, meaning you can buy and sell units at any time, without any restriction. You can purchase units by lump-sum or regular contributions.

The unit value is called NAVPU or Net Asset Value per Unit. It is calculated daily, at the end of business day. The formula is:

(Assets- liabilities) / Outstanding # of units

A capital gain is triggered when the fund sells some of its securities at a higher price than purchased. Income is earned from interests on bonds and dividends on stocks.

Both are distributed to investors throughout the year. A lot of mutual funds automatically reinvest these earnings and investors receive more units.

If the securities increase in value and the fund doesn’t sell them, the unit value increases and investors can sell for a profit.

A mutual fund will usually earn you more than a plain savings account at your bank. OK, during a recession, you will probably lose money, but quite frankly who won’t?

The main disadvantage of a mutual fund is its cost, and particularly in Canada. It is said the costs of mutual funds here are amongst the highest in the world.

As stated above, mutual funds are professionally and actively managed. This results in a myriad of expenses. These expenses are paid from the fund, regardless of its performance.

They impact the fund’s returns to the investors. They are called MER, or Management Expense Ratio.

Let’s assume a fund returns 6%, excluding MER. Let’s assume the MER is 3%. The fund’s return to the investors will then only be 3%.

You have to carefully look at both the fund’s performance and the MER when purchasing.

There are also additional charges that you could pay out of your own pocket as an investor:

  •  Sale charges or loads: amount paid when buying or selling
  • Other transactions and administrative fees: switch or redemption fees, account fees

There are thousands of mutual funds available in Canada. There are also websites that compile data and info on them, such as Fund Data Canada or The Fund Library.

TFSA vs RRSP for retirement planning

Image result for tfsa rrsp

This debate has been pretty heated since the introduction of the TFSA back in 2009. What is the best investment tool? Which account should you contribute to?

To see what makes the most sense, you need to look at a number of factors in your current situation, but also at what your future situation might be like.

First, here is a quick recap of the characteristics of both accounts:

TFSA RRSP
Age requirement & limit Need to be 18; can keep the account for lifetime Can keep the account until 71
Income requirement No Yes, need to have filled a tax return to open an account
Contributions $ 5 500.00 for 2015 plus any unused contributions from previous years 18% of your income up to $ 24 930.00 for 2015 plus any unused contributions from previous years
Tax deductible No Yes
Tax on withdrawals No Yes, except for Home Buyer Plan & Lifelong Learning Plan
Impact on government benefits No Yes, withdrawals are considered as income. Could trigger claw-back  on O.A.S. and/or cancel G.I.S.

 

If you are currently not earning much money and are expected not to throughout your career, you might be better off contributing to a TFSA. Since you are in a lower tax bracket, you won’t benefit that much from the tax deduction of RRSP contributions. When you retire, you won’t jeopardize government benefits and minimize your tax liability by withdrawing money from your TFSA.

On the other hand, if you are a high earner and/or have a company or government pension plan, contributing to an RRSP makes more sense, as you will benefit the most from the tax deduction. However, when you retire, your tax liability will most likely remain the same as when you were working. With the O.A.S. claw-back, it could actually even be higher.

That’s why you may not want to invest all your retirement money into an RRSP.

If you are in the Middle Class, it won’t make much of a difference if you contribute to a TFSA or an RRSP.

An RRSP will usually earn you more interests in the long run but it is important to remember that withdrawals are taxable and that they can trigger claw-backs on government benefits.

It is not the case with a TFSA.

As you can see, answering this question is actually not that easy, and there is no “right” or “wrong” answer. Both accounts have distinct advantages and disadvantages.

Personally, I tend to lean more towards the TFSA because right now, the withdrawals are not taxable and have no impact on government benefits. But I also contribute to my RRSP to get some tax relief….

RRSP basics

As tax season is around the corner, a lot of “experts” urge us to contribute to our RRSP. But what is an RRSP?

RRSP stands for Registered Retirement Savings Plan. It is the most popular way to save for retirement in Canada. It was introduced in 1957.

As indicated in its name, the plan is registered with Canada Revenue Agency. It works on a tax-deferred basis, i.e. money is only taxed when withdrawn. The interest earned is tax-free and re-invested into the plan.

Any type of investment is possible, such as cash, bonds, mutual funds, term-deposits, GIC’s…

In order to open an account, you need to have earned an income in the previous year. The contribution limit is 18% of your income for the previous year, to a maximum amount set by CRA – $ 24 930.00 for 2015-. If you do not contribute the maximum amount, unused contributions can be carried over for the lifetime of the plan. You can find the exact amount on your Notice of Assessment.

The main advantage of an RRSP is that contributions are tax deductible. They reduce your taxable income and potentially lower your tax payable. You don’t have to use your contributions as a tax-deduction if you haven’t earned a lot of money in a given year. You can defer the amount to a future year.

Be careful not to over-contribute. If you do so, you will have to pay 1% per month on any contribution exceeding $ 2 000.00.

The purpose of an RRSP is to supplement your government benefits during retirement. Ideally, you should never withdraw money from it until that time. If you take money out, you will have to pay taxes and report the amount on your next tax return. The current federal tax rates are:

  • 10% on the first $ 5 000.00
  • 20% up to $ 15 000.00
  • 30% on amounts over $ 15 000.00

You may have to pay additional fees and taxes, depending on your province of residence and the type of plan.

Two programs allow you to withdraw money from your RRSP without the tax implications: the HomeBuyer Plan, for first-time home-buyers, and the Lifelong Learning Plan to finance education.

It is also possible to have a Spousal RRSP. This plan is only interesting if one partner makes more money than the other or has a pension plan. The partner who earns more contributes to the RRSP of the other and takes the tax deduction. When the partner who earns less withdraws the money, it will be less taxed. It is the basis of income-splitting.

Some companies also offer Group RRSPs. Usually, contributions are taken out of your paycheque. Your employers may or may not match them. Since your employer manages the plan, you may have a limited choice of investments. There may also be other requirements. A group RRSP only makes sense if your employer also contributes.

TFSA basics

The Tax-Free Savings Account or TFSA was created in 2009 to help Canadians save more and potentially earn more interests as well.

The major advantage of a TFSA is that any contribution or withdrawal is tax free. Any gain and interest also are, and they do not affect the contribution room. You do not have to report your TFSA’s activities on your income tax return. It also does not have any impact on amounts from Old Age Security or Guaranteed Income Supplement.

From 2009 to 2012, the maximum contribution was $ 5 000.00 per year. Since 2013, it has increased to $ 5 500.00. If you don’t contribute the maximum amount, you can carry forward the unused contribution amount. Let’s say you opened a TFSA last year. You contributed $ 500 and did not make any withdrawal. Your contribution room for 2014 is $ 10 500.00.

You can have pretty much any type of financial products within your account such as bonds, stocks, cash…. You can also open several TFSAs. However, the annual contribution room is for all accounts.

You need to be 18 and have a Social Insurance Number –SIN- to open a TFSA. You also need to be a resident of Canada. You don’t need an income. Contributions are not tax deductible.

It is important to know your contribution room to avoid over-contributing. It is even more important if you make withdrawals.

Let’s get back to our example above. Let’s say this year you contributed to the maximum $ 10 500.00. You decide to withdraw the full amount to help your child pay for university. Your child decides not to go to university. Unfortunately, you cannot put the $ 10 500.00 back into your TFSA in 2014, as you have no contribution room left. You have to wait for January 2015 to do so.

If you put this amount back in 2014, you will be over-contributing and charged 1% on the highest excess amount for each month the excess remains in the account. You will also have to fill-in plenty of paperwork!

You can check your yearly contribution room with Canada Revenue Agency –CRA-.

A TFSA is definitely an interesting financial tool. Depending on your financial situation, it may actually be the best place to invest your money.