Finding the Perfect Gifts

 

Christmas is a time of giving and receiving gifts. You may be both the giver and receiver.  If you are anything like me when I shop, I have a tendency to stumble upon things I would like when shopping for others.  Surprise! Surprise! These items I want have a way of finding their way into my shopping bag.   Although material gifts are beneficial, I know gifts of peace, joy, and love surpass them.  Somehow the comparison is bleak when you have a new sweater but peace, joy, and love are lacking. What gifts are you in need of finding for yourself this Christmas?

Recognize that money worries have a tendency to steal these precious gifts of peace, joy, and love.  What can you do to prevent this? One way which helped me break the cycle of worry is taking note of my thoughts. How do I think? What things do I say to myself?  In turn, I ask you the same question.  What kind of thoughts do you generate in your mind?

One of the greatest inspirational books ever written is The Power of Positive Thinking by Dr. Norman Vincent Peale.  When a book makes the bestsellers’ list you know it’s good.  When a book sells over 5 million copies, you may want read it. Amazing how much a book can offer a person when you have an open mind to what it is teaching. Dr. Peale’s commentary on the back cover states, “This book is written with the sole objective of helping the reader achieve a happy, satisfying, and worthwhile life.”  If money worries are taking away your ability to live a happy, satisfying, and worthwhile life, this book may offer some solutions.     

Ways of finding the perfect gift for yourself

The gift of peace is derived from a positive attitude.  Winston Churchill said, “Attitude is a little thing that makes a BIG difference.”  You will make significant progress by adopting a positive attitude.

 

The gift of joy comes from reading positive and encouraging resources, books, and articles.  Replacing negative thoughts with creative and healthy thoughts happens when you feed yourself a generous dose of inspiration.

 

The gift of love will propel you to be, to do, or have everything you want. The first chapter in Dr. Peale’s book starts with “Believe in Yourself! Have faith in your abilities! Without a humble but reasonable confidence in your own powers you cannot be successful or happy.” 

 

If you are hunting for these precious gifts, you may choose to follow a guiding light within you, a gentle nudge that will lead you in the right direction. However, it’s up to you to interpret which direction to take. Take stock of your life and live within your means. This is the best advice a financial planner can give. As the New Year approaches have faith and hope that your dreams will be attained. Perhaps they will not come as soon as you may like, but they will come.

Merry Christmas!

Good Advice is Like a Gift

Once people read To Whom Do You Listen, they were invited to share the best advice they received from family, friends, or colleagues.  Most financial advice is derived from parents’ and grandparents’ experiences, both good and bad.  Their advice, both inspirational and cautionary, is shared because family members love their children and want only the best for them. Their sincere intentions are to protect them from making bad decisions.
 

Good advice doesn’t cost anything yet it can also be an expensive gift when applied.  During the Christmas Season, we have a tradition of sharing gifts.  Are there any gold nuggets of financial wisdom in the list below which you can use?

Best Gifts of Advice My Colleagues Received From Others:

• Start saving your money from your early years, the beginning of your working years.

• While it is important to save, it is still important to live in the moment and spend some of your money to enjoy life and create memories because you can’t take it with you.

• Life is short; don’t be afraid to enjoy the money you’ve earned but most importantly, don’t forget to save it also.  Find a good balance.

• Don’t be afraid to take “educated” risks while savings and investing.  Educate yourself through research or asking people who are trained to help.

• Every penny saved counts.

• Don’t buy something if you can’t pay for it with cash.  This meant non-essential items.

• “What are your priorities?” “Slow down.” If you know what your priorities are then it is easier to allocate funds for those things.  If you slow down you do not spend as much on extra things and make better choices on where you do spend your money.

• Prepay your mortgage by at least one payment (just in case) or have it available in a savings account as back-up.

• See an estate planner.

• If you want something bad enough, then buy it (or do it), even if you can’t really afford it.  If you wait until you can afford it, your health might not be there for you to enjoy it, and you will live with regrets for not doing it when you could.  Just be careful not to use this as an excuse to buy anything and everything.

• Farming philosophy is not getting into too much debt; just keep building slowly and your asset base just keeps building. (The turtle and hare philosophy!)

• Start putting some money into RRSPs from a very young age once you have completed university.

• Pay more than the minimum required on debts even if it’s only an extra $5 or $10 each payment. These little bits will add up over the long haul.

• “Don’t bite off more than you can chew.”  This means don’t take on more debt than you can handle. 

• My Grandmother started me on the path to having a “save-something-for-a-rainy-day” mentality from an early age.  Her advice of “a penny saved is a penny earned” has taken me far in the area of family budgeting.  She taught me that the “early bird catches the worm” phrase applied to learning to save some money at a young age as well.  I continue to teach my grandchildren the same principles of “counting the cost before going ahead”, both in finances and relationship decisions. 

As this year comes to a close, you may be seeking good advice to apply in the new year.  Although you may want to make many changes, I recommend only starting with one.  Too many changes at once may cause you to become overwhelmed which in turn may lead you to do nothing.  What’s the point in that strategy?  As you look back on this year, examine your experiences, both good and bad.  See where a change is necessary and accept some worthy advice.     

Can Your Savings Be Hiding in Your Taxes?

Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.”   You can attest to the fact that taxes are real and they eat away at your earnings.  Whether you are an employee, self-employed, or owner of a corporation, everyone must file a tax return.  Understanding the federal and provincial tax brackets will help you determine appropriate tax planning strategies. Just as much as the government needs money to support their spending habits, so do we.  The question is how we can keep more change in our pockets.  

The first step is being aware of your annual income. As an employee, both your T-4 Statement of Remuneration Paid and last pay statement of the year indicate the total amount you have earned.  This information is significant so you can identify how you will be taxed according to Canada Revenue Agency’s tax brackets.  As your income climbs so will your tax bill.  If you wonder where some of your money is hiding, check Box 22 on your Statement of Remuneration Paid.  Your savings may be hidden there.  Your annual income will determine whether you want to regain some of this money.

These two charts illustrate the tax rates for each respective bracket.  Since every province has different tax brackets and rates, you will need to check the province where you reside.  For example, Alberta has only a flat tax rate of 10% regardless of income.   You can expect both governments, federal and provincial, to be waiting for your dollars.

 Don’t be fooled into believing that all your income is taxed at one rate.  The marginal tax rate (MTR) refers to the rate of tax a taxpayer will pay on his next dollar of income. What this means is you start at the bottom and pay the lowest rate until your income crosses the threshold to the next bracket.  Only then will your next dollar of income be calculated at the next level.  If you live in Saskatchewan, your tax rate starts at 26% (15% Federal + 11% Provincial) until your income is higher than $43,292.  Once you step over this line, you can expect the portion of your income above $43,292 to be taxed at 35% until you reach the next bracket.      

As discussed in the last week’s blog, A Season and A Reason for Your Investments, knowing your annual income today and in retirement is important.  This information determines whether you use a Registered Retirement Savings Plan or a Tax Free Savings Account for saving money.  Since you can’t run away from paying taxes, your best hope is paying the least amount.  When you cross over the threshold to the next tax bracket, contributions to Registered Retirement Savings Plans become beneficial.  Depending on your available RRSP contribution limit, reducing your taxable income to the top of the lowest bracket, $43,292, (or to the nearest bracket) with an RRSP contribution will fatten your savings in two ways.  You will pay less in taxes and your money will now be in your hands earning income inside a tax-sheltered investment.   Your options then multiply.

• You may receive a tax refund to place inside a Tax Free Savings Account to fund other goals.  
• The withdrawals from your RRSP may be “pension-split” with your spouse in retirement to create more tax saving opportunities.
• Money withdrawn from your RRSP can be use either for a home purchase or post- secondary education.

The most complicated topic in the financial planning spectrum has to be taxes. How can it not be when the Income Tax Act is 3,259 pages?  Generally, if there are any savings to be had, it’s in the taxes you pay.    When you examine your previous year’s tax returns, notice the three income levels before the Canada Revenue Agency determines your taxable income:  Total Income, Net Income, and Taxable Income.  Not only do they determine your taxable income but also whether you are eligible for government benefit programs such as Child Tax Benefits, Old Age Security, Guaranteed Income Supplement, and Allowance. 

Writing about various tax saving strategies is best completed in segments.   So for now, the most significant step is to understand the tax brackets. Knowing your annual income is the starting point.  Even if you are self-employed and your income continues to rise significantly, setting-up a corporation to allocate income differently is a valuable strategy.  Savings may be hiding in everyone’s tax bill.

A Season and A Reason for Your Investments

At one time or another, you may have heard the familiar Ecclesiastes verses, “There is a time for everything and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot.”   I bet you never thought this could apply to your investments. 

Throughout life’s journey, your reasons for saving will vary.  You save for a vehicle, children’s education, retirement, home renovations, and vacations.  No doubt your list is endless.   The important strategy is choosing the appropriate investment vehicle and type of investments.  This is where the confusion begins.  Investment vehicles are different from types of investments. Investment vehicles, Registered Retirement Plans, Tax Free Savings Accounts (TFSA), and Non-Registered Accounts, have specific features and benefits.  Once you understand their uniqueness, you can determine a suitable fit for you.  

One way to explain investment vehicles is to associate them with the automotive industry.  We understand the differences between a truck, car, and van.  Each one services our needs differently. You may require a truck for work, a car for family purposes, and a van for travelling with young hockey players and their equipment.  You may prefer one versus another specifically because of fuel mileage, comfort,  or  safety.  Whatever your reason, you match your choice to your need.  Therefore, if you can relate investment vehicles to the vehicles you drive, you will be one step closer to differentiating Registered Retirements Plans, Tax Free Savings Accounts, and Non-Registered Savings.

Another element which adds to the confusion is the types of investments held under the respective investment vehicles. The diagram above shows that the types of investments are the same.  Whether you strictly hold GICs (Guaranteed Investment Certificates), specific bonds, stocks, or mutual funds will depend on your time horizon and risk tolerance.  {Does this sound familiar? I covered this topic in my previous blog, Can Investing Actually Be Easy.}  Again, consider types of investments linked to automotive industry as a “make” of vehicle: Ford, General Motors Canada (GMC), Toyota and Honda.  You can purchase either a truck, car, or van in your preferred "make".  GICs, bonds, stocks and mutual funds, are all different investments, yet you can purchase them as a Registered Plans, TFSA, and Non-Registered Accounts.  Once you grasp this analogy, your choice of appropriate investments will be made easy.

In order to choose the right investment vehicle, you need answers to these questions:

What is your purpose for saving?  This crucial question is important for your plan to succeed. Money set aside for retirement is invested differently than money set aside for emergencies.

What is your annual income today and what will be your annual income in retirement?  This important information determines whether utilizing a Registered Retirement Savings Plan is preferred over the Tax Free Savings Account. 

Understanding the investment vehicles’ distinct features helps you identify the benefit you can derive from its use.  Just as your vehicle has special “must-have” features like cruise control, 8-way power adjustment driver’s seat, and push button start, your investment choice also has special “must-have” features. The chart below explains some of the features to help you determine whether you can benefit from each specific investment vehicle.

Registered Investments	Tax Free Savings Account	Non-Registered Savings
Contribution room calculated as a percentage of earned income.  RRSP contribution limit reported on Notice of Assessment.	Contribution room became available in 2009 with an annual limit of $5,000.  In 2013, the annual limit increased by $500 to $5,500 indexed by the inflation rate.	Contribution limits do not apply. The sky’s the limit.
Contributions when applied reduce taxable income.	Contributions do not reduce taxable income.
Eligible to contribute the maximum amount with the option to apply the deduction to your taxable income in any given year.	Once the maximum contribution is made, the amount is reported to ensure contributions remain within the limits.
Contribution room varies according to earned income.	Contribution room is set the same for all Canadians. The exception may occur as a result of income earned on the principal.  When TFSA proceeds are withdrawn in its entirety, the new contribution limit is then equal to the principal and earnings.
If contributions are not made in current year, then the contribution room is carried forward to future years.	If contributions are not made in current year, then the contribution room is carried forward to future years.
When a withdrawal is processed, contribution room is lost and cannot be restored.	When a withdrawal is made in the current year, contribution room is restored in the following year for the same amount.
Contributions end at the end of the year of 71st birthday.	Contributions permitted from age 18 to any age.	Contributions can be made at any age.
Earnings are tax-sheltered.	Earnings are tax-sheltered.	Earnings are not tax-sheltered.
Withdrawals will be included in your income and taxed accordingly.	Withdrawals will not be included in your income and are taxed.	Withdrawals will not be taxed.  Earnings are taxed annually.
Income will affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.	Income will not affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.	Income will affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.
Purpose for savings: retirement, financing your first home under the Home Buyers Plan, training or post-secondary education under the Life Long Learning Plan, or as a tool for tax deferral.	Purpose for saving: vacations, vehicle, furniture, emergency, renovations, and even a home.  May be used for children’s education if your RESP (Registered Education Savings) have been maximized.	Purpose for saving: vacations, vehicle, furniture, emergency, renovations, and even a home.  May be used for children’s education if your RESP (Registered Education Savings) have been maximized.

Understanding your investment vehicle helps you fulfill your purpose for investing and gain the greatest advantage from your investment selection. The most satisfying reward is to discover an easy way to achieve your goal by implementing smart investment strategies.  Just as all vehicles come with many options, so, too, do investment vehicles.  Using appropriate investment vehicles will allow you to drive your future dreams.      



Investing in the Rise and Fall of the Markets

Up until now, I have been leading you to see the big picture.  Believe me, there’s more to come.  In the last month we have talked about savings versus investing, investing can be easy and paying yourself first. Now that you have a good understanding of “why” these topics matter, let’s talk about how to put investing into action to fuel your dreams.  

Have you ever walked into a fast food restaurant and only kind of had an idea what you wanted to eat?  Weren’t you grateful that places like Dairy Queen, McDonald’s, or A&W made your selection easy?  When you looked at the menu board, the choices were simplified.  You knew in advance you wanted the basics: a burger, fries, and a beverage.  You then only had to decide whether to choose chicken, beef or fish.    The reason you went there in the first place may have been to pick up something quick and simple so you could get on with your life. 

Oddly, people often ask questions like “What can I do” or “How can I do it?”   Needless to say, we neglect to add, “the simple way.” 

“What can I do the simple way?”

                                 “How can I do it the simple way?”

If things become too complicated or if we believe things are too complicated, we avoid doing anything. This happens way too often when it comes to investing. Is there a simple way to invest? The answer is yes unless you prefer the complicated route.

You may have heard the term, “mutual funds,” but you weren’t sure what they were or whether they were suited for you.  The word “mutual” by itself means common.  Having something in common generally means we are interested in the same thing, the same goals, or achieving the same results.  With mutual funds, we are simply combining our money together in one pool to be invested in different securities, such as specific stocks, bonds, and cash investments.  The best news is that professional managers, who oversee the funds, do the work of researching investments with potential earning power for you.  Not only do they select quality investments, they understand when to take advantage of buying and selling opportunities in the markets.  All the decision-making about the individual investments is left in their hands.  Imagine all these diversified investments bundled into one package suitable for you! Whether you are interested in Canada, U.S., international, or global funds; bond, stock or index funds; balanced or specialty funds, the suitable combination can be found. You have choices that are simplified to meet your investment needs.  

 Can Investing Really Be Easy is written to help you understand what type of investor you are based on your time horizon and risk tolerance. This is important because next you will be choosing the specific investments.  The way you walk into a fast food restaurant and make your selection of food choices, can be virtually the same experience with your investments. The biggest difference is having a competent investment advisor help with your selection.  You are not walking this journey alone unless you prefer to go with on-line trading.

Now you are ready. You have made the commitment to pay yourself; you know which investment is suitable; and now it’s time to find the best way to accomplish this.  Your money can simply be placed first into a savings account and later invested into the market but there’s a better way with the “Dollar Cost Averaging” approach. To minimize your risk, the recommendation is to make regular consistent investments over a long period of time versus a one-time lump sum investment.

The Dollar Cost Average Advantage
Investment Amount	Unit Price	Units Purchased	Total Units
$100.00	$ 10.00	10.00	10.00
$100.00	$   8.00	12.50	25.50
$100.00	$  5.00	20.00	45.50
$100.00	$  6.00	16.66	59.16
$100.00	$  7.00	14.28	73.44
$100.00	$10.00	10.00	83.44
Total      $600.00		83.44

                       

When money is invested into a mutual fund, you purchase “units”.  Since we understand that markets are like roller coasters, you can expect the unit prices will rise and fall based on the value of the securities. Because we never know how markets will react at any given time, on-going consistent investments allow us to capture both the high and low prices.  When markets fall, this presents an opportunity to acquire more units.

Imagine going to the grocery store and seeing the items you need on sale.  Don’t you love a good sale? Why? Simply because you are able to buy more with the money you intended to spend in the first place. Whether it’s cans of Campbell’s Soup, Bush’s Best Baked Beans, or GoldSeal Sockeye Salmon, you can have more items for $10 when they are on sale compared to when they’re not.  The same strategy applies when buying units in any mutual fund.  When markets drop, you capture more units. Waiting for markets to reverse directions (and they eventually will) will help you realize that more units at a higher value results in more money for your dreams.  At the same time you are reducing your risk and reaping the rewards from the rise and fall of the markets with Dollar Cost Averaging.
 

Fear is useless when investing in the markets.  Even though investing sounds and looks complex, having an open mind to who you are as an investor and the willingness to learn some of the basic investment fundamentals will work in your favor.  Fully understanding your options is one way to overcome fears so you can put investing into action.