Did you know that according to the Financial Consumer Agency of Canada, less than half (46%) of Canadians have a budget, yet the vast majority (93%) of those who do budget stay within it most of the time. What does this mean for you? It means that if you put in the effort to start a budget, you will probably stick to it. It also means you can feel more confident about your future – a budget can completely change your financial destiny.
Last week I talked about some of the common myths of retirement, here is a continuation of some of those myths.
Myth #4 – Never touch your capital.
Conventional thinking and approaches often work on keeping your assets intact. That may work for the wealthy, whose investments generate plenty of cash flow so that they can preserve their capital for their children and grandchildren.
For the rest of us, it’s okay to spend your capital as a way of providing lifetime income. While saving may be a goal in itself during your working years, plan on an orderly spending of what you have saved during retirement. Isn’t that what you planned? It really is okay to spend your capital. That’s what it is there for.
The idea for many is to spend down in retirement. That’s why you save. Work with a retirement income planner on ensuring that you have enough capital to provide you with the cash flow you need no matter what happens; no matter how long you live. Look at alternatives to provide legacies for children and favourite causes while giving you the cash flow you’ll need.
Myth #5 – You need 70 to 85 percent of your current income level in retirement.
A growing number of analysts and researchers on retirement income and spending patterns have found that most people will be fine if they target 50% of their pre-retirement earnings. Statistics Canada has many years of supporting data on this.
You see, the focus should be on consumption dollars, what you spend on yourselves and your own lifestyle. For most Canadians, that excludes mortgages, child rearing costs and saving for retirement – things you wouldn’t necessarily be spending money on during retirement. You will need 100% of your consumption dollars and some extra money in the early, active years of retirement for those special trips and experiences you have dreamed about for years. Your actual replacement income goal will depend on your marital status, whether you own a home, whether you have children and how much money you earn, so the range can go from 40 to 60 percent.
Working with an advisor trained in the unique field of retirement income planning can prove greatly beneficial in order to work out what you need and what you want to do throughout the various phases of your retirement.
Myth #6 – You need that initial level of retirement income, indexed for the rest of your life.
I’m sure you can come up with a list of things that don’t fit the “set it and forget it” philosophy. Set the cruise control and forget it. Set the room temperature and forget it. Invest in a certain investment that has a particular risk associated with it and forget it. You need to make adjustments as the situation changes, as your needs and priorities change. Retirement income planning works like that.
Retirement isn’t one long vacation. It isn’t one period in your life. It represents the longest set of phases in your life. Each phase will have different needs for cash flow.
You’ll need more money in your early, active years. You then settle down to a more normal retirement where expenses drop. Then late in life, poor health, the loss of your spouse or partner, losing your driving license and your attitude and behaviours may cause you to spend even less money.
Yes, you may require money for long term care needs, but hopefully you planned for that before your retirement so that those needs aren’t coming out of your regular cash flow late in life. The amount of money you’ll need and the most efficient means of getting are important points you should review yearly. Set up an investment and income stream that is flexible and adaptable to changing circumstances. Stress test the plans, strategies and components to make sure they continue to do the job they were designed to do. Life changes and your needs for income will change with them.
Grant Galloway, CFP, CLU, CHS
Grant can be reached at email@example.com or at 519-579-7324 ext. 1 or 1-866-328-7324 Toll Free
Recently, we discussed things you need to be aware of when buying a home – I want to talk specifically about the various options to building your savings for the all-important down payment.
Let’s say you’re a young adult, just establishing your savings plan – with the ultimate goal of, one day, owning a home. The minimum requirement for a down payment is 5% (*The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000), with Canada Mortgage and Housing Corporation (CMHC) insuring your Mortgage.
There are a few ways of going about saving this money – I’d recommend using a Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). Each have unique costs and benefits.
RRSP Savings and the Home Buyers Plan – If you are currently, or have considered contributing to an RRSP, there is a program designed to allow you to withdraw up to $25,000 from the plan (without penalty) to put towards a down payment. The plan requires that you repay the amount back to the plan, just as if you borrowed it. If you don’t make repayments over the allowed 15 year period, you would claim 1/15th of the withdrawal as income in the given tax year.
What I like best about this strategy is, you take advantage of your smart investment moves and open an opportunity for another investment. This plays very well into long-term building of your net worth and, if your employer is making matching contributions to your RRSP, you can quickly build up your savings balance.
Running short on your RRSP contributions? It might be worth considering an RRSP investment loan to catch up on unused contribution room. The increased contributions can drastically reduce your taxable income and yield a larger tax refund.
A really smart move would be to contribute that tax refund to your loan – or, contribute the refund to your RRSP’s.
More information on the Home Buyers Plan can be found on the Canada Revenue Agency website: http://www.cra-arc.gc.ca/hbp/
Tax-Free Savings – Similarly to RRSP’s the interest earned on any deposits in your TFSA are exempt from taxation – meaning, your hard earned dollars will receive interest and you will not need to claim the returns as income. Withdrawals from the plan are very simple – there are no penalties, and the funds can move freely from the plan to your down payment without filling out any extra paperwork.
You cannot, however re-contribute the money taken from the TFSA until the following calendar year. And, there is no additional tax benefit for contributing money to your TFSA.
While the TFSA is a great investment vehicle for short or long-term investing; I am of the firm belief that, when it comes to down payments for first time buyers – it’s best to take advantage of the Home Buyers Plan mentioned above.
So, you may be asking yourself, what if I don’t have an RRSP or a TFSA and I’m not very good about saving money – what else could I do?
Well, some Mortgage companies, Banks and Credit Unions will offer a personal loan for your down payment – but I’d caution against this. In addition to making payments for the Mortgage, Property taxes, heat/utilities, insurance – you’re also going to have to make an additional loan payment. If your budget can sustain this – by all means, it’s worth looking into further.
Alternatively, you could also venture in the direction of having a gifted down payment from a family member or really good friend (and trust me, they’d be a very good friend if they are willing to give you money to buy a house). This is becoming more of a norm in the home buying market. With house prices rapidly increasing in the region, you may feel like you’ll be playing a game of cat and mouse – your savings grows, but the price of housing grows too. So, sometimes having Mom and Dad or a grandparent help out, is a great hand up.
Here are some great links to CMHC’s website for more information and tools:
CMHC – Homebuying Step by Step: http://www.cmhc.ca/en/co/buho/hostst/index.cfm
CMHC – Ready, Set, Home App: http://www.cmhc.ca/en/co/buho/buho_018.cfm
** Ready Set Home is a tool to help homebuyers, especially first-time homebuyers, make informed choices when buying a home. Ready Set Home offers tools to guide you to figure out how much you can comfortably afford to spend as well as keep track of all the details during your home buying process.
5 Ways Living On a Budget Improves Your Health
You’ll be eating less food that’s bad for you
We all know how easy it is to slip through the Tim Horton’s drive through on the way to work, grab a quick lunch at McDonalds, and/or order pizza on Friday night because we’re exhausted by the end of the week. However, these spending habits add up! Several years ago my husband and I were in the habit of ordering pizza every Friday night for our family of five. With an average bill of $40 including tip, I calculated that we were spending about $2,000 a year – on pizza! We now make our own pizza every Friday night – it not only costs less, the toppings we use make it much more nutritious. Plus, it’s delicious!
Budget friendly entertainment often involves more exercise
Consider going hiking, playing tag with your kids, taking a bike ride, or going to the community pool. Budget friendly entertainment can take you outdoors to explore, walk and play, which is great for both the body and mind. It’s also a terrific way to improve your health in the process.
When your budget is in place and you aren’t creating more debt, you will have less stress
Financial strain is one of the biggest causes of stress in most families. Added stress can lead to health issues like:
- Heart disease
- High blood pressure
- Depression and anxiety
- Gastrointestinal problems
When you are living on a budget, you can relieve stress by paying off debt, and staying out of debt. Creating and maintaining an emergency savings fund will also help to relieve stress.
You have more money to spend toward a gym membership or equipment
A budget does more than just provide a blueprint for living within your means. It can also help you to save money for things that really matter to your quality of life. This could include a gym membership, personal exercise equipment, or working out with a personal trainer.
Poor spending habits hurt relationships, while good spending habits can help relationships
Relationships are greatly impacted by a family’s financial situation. The stress of poor financial decision making can cause overwhelming stress and friction between family members. Not only does this effect relationships, it can lead to worsening physical health. Changing spending habits and decreasing debt load can alleviate stress and force couples and families to focus more on their relationships. Parents also provide a good role model to kids, because kids tend to emulate the spending habits of their parents.
The moral of this story? Living on a budget really can help you to improve your health. Your health is more important than owning a fancy car, designer purse or an expensive house you can’t really afford . By creating and adhering to a realistic budget , you can improve both your physical and mental health.
Need help creating a budget that you can live with? Contact your local YNCU branch to make an appointment. We have locations all over Southwestern Ontario, and now in Sault Ste. Marie and Timmins too!
- Use up the leftovers, instead of throwing them away. Invest in some Tupperware, and use for lunch the next day. Or create a second dinner from your leftovers by mixing together into a soup or ragu. This won’t just save you money, it will save you time!
- Make your own coffee. Have you ever added up the amount you spend on take-out coffee or tea? A daily Tim Horton’s coffee can set you back over $600/year, while a daily Starbucks Latte could easily drain $1,400 from your wallet every year!
- Make going out for dinner a once a month event, instead of a weekly ritual. Admittedly, millennials aren’t the only ones who plan social activities around eating out. But when you have a limited budget, spending $50+ on a meal (easy enough to do with an appetizer and drink) can easily add up to $1,200 or more every year!
- Brown bag your lunch, rather than eating out with co-workers every day. Again, eating out adds up fast. $10/day, 5 days per week equals $1,200 every year. Brown bagging will probably cost less than half. An added advantage is you will almost surely be taking in fewer calories.
- Avoid ‘fast fashion’. While low prices on cheaply imported clothing and shoes is enticing, keep in mind that ‘cheap’ also often refers to the quality as well. Here is a challenge: Compare your closets to those of your parents or grandparents. Are you guilty of buying a huge quantity of clothes (often ‘on sale’), and wearing them only a handful of times? While your parents and grandparents clothing probably cost more relatively speaking, they probably lasted years longer due to their durability. Sometimes paying more for classic styles (i.e. long lasting) ends up costing far less in the long run.
- Avoid Brand names. Do you really need brand-name chips, brand-name ibuprofen, brand-name toilet paper, and brand-name hair products? Do they really taste better, feel better, or work better? Think about that.
- Take advantage of your company pension plan. This is a no-brainer, especially if your company matches your contribution. Retirement is probably the last thing on your mind right now, but the truth is that you are in the best period of your life to take advantage of compound savings.
- Stop paying ATM fees. Paying ATM fees to use a bank that isn’t your own is a total waste of your hard earned money. This is when belonging to a credit union really makes sense – you can make transactions at any credit union in Canada without incurring fees (that’s why it’s called ‘ding free’).
- Negotiate. Negotiate. Most things can and should be negotiated. Don’t be afraid to negotiate the price of your cable and/or cell phone package. The same goes for the interest rate on your credit card. If you are able to speak to the store owner, you can even negotiate the price of clothing, office supplies, and dog food. Store owners are often happy to settle on a lower selling price if in return they can obtain a loyal customer.
- Good food isn’t necessarily organic. You’ve been brought up to believe that organic food is better. Is it? It is definitely more expensive. Do your research in order to learn which foods are really worth buying organic. Then, save money on the rest.