This week Christine talks about all of the hidden advantages of opening up an RESP for your kids at a young age. Here’s a hint, do it right and get free money put into it every year.
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Welcome to its personal finance Canada. I’m Christine Conway and I’m Cameron Conway and this podcast is a very personal look for personal finance in Canada. *Hi Everyone, and welcome to It’s Personal Finance Canada. As always, I’m Christine Conway here with Cameron Conway, and today we’re going to be talking about the very fun subject of saving for your children’s education. *Yeah, because they don’t really pay for themselves until they get older and they have a good job. But to get a good job you really need an education now. I remember when I was younger, just having a high school diploma was considered the baseline for competency, but now it seems like you need a master’s or a doctorate for even for a basics kind of job these days. So it’s really important now to save for education, because it’s getting more expensive and the requirements for even simple jobs are just getting higher and higher. *It is true, the bar is definitely getting higher and just kind of taking a quick look at some of the stats on the Internet earlier today. The cost of a bachelor’s degree in Canada is all the way up to nearly $30,000 these days. So as parents, we all want to give our kids the absolute best in life and as much of a head start as they can so that they get to the place where they’re able to have a good job themselves one day. Raise a family, pay for housing and all of the other increased costs that are happening. And I know as a young parent or as a parent in general, there are a lot of things that are pulling for your money. Money is going in different directions all the time. You know you’re managing your household, paying for diapers and kids activities and things like that, and savings for a child’s education. It can kind of fall by the wayside and I think that’s part of the reason why some of the plans that we have available, some of the programs the government has put out, have some pretty big incentives to help us save and any extra money that you can get for your kids to help them along the way. It’s a great thing. Think of it as found money. *Well exactly, we’re getting taxed anyway, so we might as well get some of the benefits out of this. And if we’ve got kids, you want to put them in school one day so they can have a better life here or another country at all, pay better if they had a high education. *It’s true, you know what, a lot more people are looking internationally, and one of the benefits of being Canadian is, relative to some other places, like our neighbors down south, education here is still reasonably priced for the quality of education that you get. *Well exactly, this is why it’s good to plan ahead. Either they go to college, university, trades or something. You want your kids to have the best start once they get out of high schools. They get trained up and who knows, maybe they’ll be taking care of you someday. *And then all that saving and hard work will pay off, right. So let’s let’s talk about how to get your kids on the right track and look at some of the differences in the plans that are out there and why you would want to do these in the first place. You know, why put your hard earned money towards this through a registered education savings plan instead of sticking it under your mattress or in some other device. *I prefer the floorboards. *Whatever keeps it safe and out of trouble, right. *So, you mentioned before you can get some free money from the government. Everyone loves free money from the government. So why do I need an RESP to get this. *Well, the RESP is actually the vehicle that will get you that free money. You need to have a registered education savings plan to get it. The registered part, similar to your RRSP, which is a registered retirement savings plan, just means it’s registered with the CRA so that there’s a little bit of tracking involved. They know how much is going into the plan and also they can see how much is getting paid out to your child in the way of government grants and other incentives that they may be eligible for. *So how much are we talking here? *Sure, so the big grant when everybody looks at opening an RESP for the first time, kind of the big ticket that you’re trying to go for, is called the Canada education Savings Grant, or the CESG. And this one is lovely because it’s not an income tested benefit. So if your family makes a hundred dollars a year, or if you’re making several hundred thousand dollars a year, you can still get this grant for your child. And what it is is it works out to 20% per year on the first $2,500 that you put into a registered education savings plan. So the maximum that you can get in a year for that year is $500. And if you’ve missed a year, you’re allowed to go back one year at a time. So they’ll pay up to a $1,000 in grants. If, let’s say you had $5,000 available and you wanted to put it in right away to your children’s education, you could do that using the Canada Education Savings Grant. *So let’s say I’ve got like an eight year old or a ten year old. You’re saying I can apply now and I could get some back pay, it’s probably not the best way to say it. But you can get that room back, as long as you put in a big enough to deposit in initially? *Yeah, grants carry forward and the CESG grant will pay until the end of year the year that your child is seventeen. So if you’re starting a little bit later, your kid is a few years old, or even ten, thirteen, fourteen, fifteen, you can still, like I said, go back, but you’re only allowed to go back a maximum of two years at once. So this year and then one prior year. So the maximum Canada education savings grant that you can receive in any given year is a $1,000. Also, the maximum you can receive from the Canada Education Savings Grant is $7,200 per beneficiary. And a beneficiary is just the fancy RESP lingo for the person who will be going to school one day and receiving the benefit from this money. So over their lifetime, over the whole period of time that you’re contributing into the RESP for them, which is to the end of the year that they’re seventeen, basically what you’re trying to do is get that $7,200 put into the RESP through this grant so that you’ve taken the maximum. So, in our conversation about carry backs, if, like we said, you’ve started a little later and you have $5,000 per year, in just over seven years, you could have got the full shebang put into the RESP for your child from the government. *Well, that sounds good and this is probably better to start in the kids are young to then you got the compounding going on with the investments, you got the grants being poured in. So really, the earlier you start that grant just goes even further in the long run, doesn’t it? *That’s absolutely right. RESP’s are another great way for tax deferred growth. So, unlike an RRSP you’re not getting any money back or anything like that. When you put money into it. You’re using after tax dollars, but the money does still grow tax deferred. And there’s another benefit later that if your child does not decide to go on to post secondary education, you can actually get a return of your original contributions if you were the subscriber. Sorry, the subscriber is the person who’s putting money into the contract. So if you’d put this money into the contract, you actually have the ability to take the money that you put in, not counting the grants or the growth, back tax free. So it does not get added to your taxable income. But little bit more about that later. *So then, how will this work on a year by year when it comes to taxes? Are you getting taxed every year like you would end like a non registered plan, or does it get taxed towards the kid when they’re in school? *Yeah, so there’s there’s kind of two different ways, two separate this out. Well, the money’s in the plan. It’s tax deferred, so if you make any changes to the way that the investments are structured within the plan, you’re not getting a tax bill. So you want to get as much growth as you can because that growth is not going to be taxed until later on when your child is in school. And here’s kind of one of the sweet spots of having these plans in general. If your child is the one that’s receiving the money and they’re attending a qualified educational institution, which, to be very honest, a lot of them are. You can look at all up online if you’re not sure if your particular college or institution is accredited. The government of Canada has a site where they track all the institutions. That’s a sidebar. The sweet spot is actually that when a child takes the money out for their education, you can have it structured so that all of the growth that was in the plan is taxed in their hands and not yours. So I’m the adult that put in the money on behalf of my son and my son is now seventeen or eighteen and he’s going off to college. Well, maybe he has a part time job, maybe he doesn’t, but his income is likely going to be lower than mine. So there’s a huge benefit there to him taking it out at a much lower tax bracket then I would get. And, like I said, all of the growth on the money that we’ve made together within the RESP is what is the benefit to him? *Well, this could get interesting then when if the kid when they go to school, whether or not they’re working, because if they’re not working and then the money to take it out of the RESP, if that keeps them below the exemption threshold, they could give them a bigger break on their taxes to so that’s kind of something the debate whether you need to work or not when you’re in school. It’s how the tax from RESP could factor into all this and whether, or not you can stay below that threshold if you need to. There’s always a benefit to having it taxed in the child’s hand. If the child goes goes on to post secondary so’s it’s usually no to very low taxation and especially depending on the program I mean when you’re looking at the annual costs for some of these programs, you might be paying a couple thousand dollars per year. That’s a pretty low amount that you’re taking out of the of the plan. In that particular year. Right. So you can split it up over a period of time. *Well and as you’re saying, you can structure where you said, you can take the grants and the interest first. So then what happens when this just the principle left? Is that still tax towards the child or is that been cleared already? *Yeah, so let’s let’s back up just a little bit and talk about money coming out of the RESP. So we’re fast forwarding now. It’s been in the plan for a while and your kids ready, he’s you put on his backpack, he’s ready to go off to the big school and you’re ready to take money out of the plan. So the first thing that’s going to come out of the plan is the grants that you’ve received from the government and the growth that you’ve had within the plan. So the grants and the growth are the two portions that, if your kid does not go to school, that’s where you can get a acts bill and the grants, those would just go back to the government. So they actually, like you just said, get paid out first, and this is a huge advantage because if your child only does a year or two, there’s potential that they can be using that grant money, in that growth money and reducing the amount that would be taxable to you as the adult if they choose not to use their RESP. *So you’re saying that the kid goes in, does half a degree, drops out, burns through all the growth and the grants. I can get my principle back. *Yeah, you can get a return of your principle tax free, as long as you were the subscriber. So you were the person that put in the money. And a subscriber doesn’t always have to be the parent, right. It can be a guardian, it can be a grandparent. I mean if a child is in the public system, it can be a legal guardian or something, someone else who is providing care for that child. There are also different ways to structure these programs where you can have more than one subscriber. So sometimes the parents will go on jointly and say we’re both subscribers into this. In my experience there really isn’t a huge advantage to that. It actually complicates the paperwork because now you need two signatures for everything instead of one. What I prefer to see is a replacing subscriber. So if I’m the subscriber and I pass away, rather than the the RESP getting tripped up in my estate, because now I’m gone and it’s property of my estate. I would set it up so that Cameron becomes the subscriber after me, so that way there’s only one of us having to do all the paperwork at a time, but it still stays within the family, quote unquote, should anything go wrong between now and the time that the child needs the money. *So circling back a little bit, you mentioned before both the Canada education statements grant kind of being a flat payout to everyone. Is there any special exemptions where you can actually get more, because we know how government’s work? *Yes, actually so the basic education, Canada Education Savings Grant, the CESG that we talked about at the beginning. Like I said, that’s the main one, that’s the one that will pay you the most and that’s the one that the majority of people do go for right off the bat. But of course you want to maximize what you can receive. So there is an income test that can come into play that can get you more money into your RESP for your child if your income is in a lower bracket. So in 2021, if you had family income of $49,020 or less, which, ironically, here and BC, if you look at the combined BC and federal tax brackets, that’s actually the top end of a tax bracket. So there’s a little Easter egg there. I mean you’re paying tax at 22.07% but I digress. So with $49,020 or less, you can actually get another hundred dollars of the CEESG applied that year. And if your income is between that $49,020 and $98,040 which is another combined BC federal tax bracket of 32.79% for a little spoiler there for those that like that kind of stuff like I do. You can get up to another $50 for that beneficiary in that year. Now that basically just helps you to get to the limit of the $7,200 maximum faster. So you don’t necessarily get more money than the family that’s making higher levels of income than that, but you’re putting less into your RESP and getting more grants. Does that make sense? *Yeah, it’s it’s a little bit of a top up and every year they can afford one more textbook. *Exactly, it’s it’s helping you along the way a little bit more. And while we’re in the subject of grants, there’s another federal grant that is also income tested, that is is kind of targeted to people that might have a little bit of a lower income, and it’s called the Canada Learning Bond. So that would give you up to another$2,000,. It’s $500 in the first year and then $100 per year after that for up to fifteen years and up to the up to age twenty one on that one. Now, eligibility for the Canada Learning Bond, well, it’s income tested. It actually works a little bit differently. It’s based on the number of children that you have and your income. So if you have more kids you can actually have a bit of a higher income and still qualify, but the most common is for someone that has between one to three children. It’s in that same bracket as the Canada Education Savings Grant. So 2021 It was income of $49,020 or less, and that’s family income once again. But Hey, it’s an extra $2,000 that will go into your kids education, so we say why not? *So all these grants you’ve mentioned so far are federal full disclosure. We’re in BC. Are there any provincial grants available to us or like or could have an equivalent in another province? *Sure, yes, and this is something that is always changing. They change with the whims of the current government. So you can see provincial grants that are here today, gone tomorrow, and then a new one might appear or nothing may appear. So if your child meets the criteria for provincial grant, we always say grab it as quick as you can because you never know what their shelf life will be. And, as a Sidebar, not all of the providers of RESP plans will offer provincial grants. So you really want to make sure that you can get these in the RESP plan that you have. And again, that’s because these things are so changeable in nature. Right now in BC we have the BC Training and Education Savings Grant, or the BCTESG. And if you as the parent and the subscriber, are a resident here in BC, and residency is important. You have to prove through BC ID like a driver’s license or a service card, that you are permanently living here. You can receive up to $1,200. grant for children ages nine, sorry, six to nine. The real benefit is you don’t have to put any money in whatsoever to get it. All you have to do is apply. So if your child is in that age range and you live in BC open up an RESP, apply for it and boom, you’ll have $1,200 of free provincial money just waiting for your kid to to use when they graduate and start going off to post secondary. Now other provinces have other grants as well, but those will of course vary. And always see what’s current now because, like I said, they do change quite frequently. *And don’t forget, the earlier you do this that $1,200 can grow to a few thousand dollars and every little bit’s going to help for either residency classes, tuition, books, commuting and everything else. So if you have this it’s worth filing some paperwork to set up an our RESP just to get this $1,200 up front right away, *And it’s pretty easy to do. There’s lots of places you can go to get RESPs. But I should mention as well you do need to be a resident of Canada and your beneficiary needs to be resident here as well. So just please make sure that you meet those tests also before you apply, and your child will need a valid social insurance number. *So I remember with like our RRSP talks, there were different kind of types of plans available. I’m assuming that you’d be something similar with RESP. Is it just like one type of RESP for all people, or other different varieties you can apply for? *There are different kinds of RESPs and they do vary quite a bit in how they work. So choosing the right plan is probably the most important first step, and when you’re doing that it’s important to look at what you’re trying to accomplish and who you’re trying to accomplish it for. So let me let me explain. The two most common types of plans, or the two that we do all of the time at Braun Financial are individual plans and family plans. And individual plan is set up for one beneficiary. So let’s say you have more than one child. You can decide if you want to set up a family plan or if you want to set up an individual plan. Some people prefer individual plans because then they’re not having to track whose money is who’s right, because as the years go by over time there’s going to be different growth rates through the markets doing what they do. Some people like having the separation of this money is for my daughter, this money is for my son, that’s his, that’s hers. It’s clean and easy to track. You kind of know what’s gone into the plan. You can see these are the grants that apply to this child and it’s not kind of the big smush of everything getting in there together that you have with a family plan. Maybe, before I go a little bit further, let’s talk about kind of the major players in these plans as well. So you’ve heard me throw around the word subscriber before, and a subscriber very simply is just the person who’s putting the money into the plan, and in an evident individual plan that can be a parent, caregiver, can be a grandparent, it can be anyone really that cares about that child that’s wanting to give them a few bucks for their education. So an individual plan it can be you can put money into it for up to thirty one years and most of these plans, though they do have a lifetime, they have to be closed after thirty five years. There are some exceptions. Sometimes you can get it pushed to forty years and special circumstances, but for most people it’s thirty five years and then the plan is going to have to be closed and if there’s still money in their grants get paid back to the government and any growth is taxable. Or we can look at some strategies a little bit later on to mitigate some of the tax that might occur on on some of that. There there’s also a lifetime limit per beneficiary of $50,000 dollars, and that’s something that you’re going to want to track carefully because, like every other registered plan out there, if you go over there’s a penalty. So the the CRA will be sending you a tax bill of one percent per month if you go over that annual sort. It’s not an annual limit, it’s actually a lifetime limit, so you don’t have to worry about it until you’ve hit over$50,000 for one beneficiary. *So are there any benefits the family plan? Like can you save money and expense fees? Do you get better compounding rates? Why would I want to have a family plan if I have two kids? Do I get any benefit or should I just have the two separate plants going? *So I guess the big benefit from having a family plan is if one of your children chooses not to go to school or maybe chooses a program that’s shorter, like maybe they went to a one year diploma program or to Trade School that was only two years and they didn’t use the whole amount that was in the plan, then you’re looking at a situation where the growth and the gains can still be shared by your other children. So remember when we said when we take the money out of the RESP, the only thing that can be taxable to you as the subscriber, is the person who put it in, is the growth and gains, because the grants go back to the government and or hopefully the child takes them. Right. But potentially that’s where the trap is, that’s where the taxation to you would be, because your contributions come back tax free because they were essentially tax paid money that you put into the plan. So we see people move to family plans when it’s looking like that. One of the kids is maybe not going to fully utilize what’s in their RESPs. Now there are some rules here too. If you’re doing this, the beneficiaries have to be under the age of twenty one before being added into a family plan. Unless it’s a transfer, they have to be related, and related can be blood or adoption, so they’re part of your household in terms of your family. From that point of view, one of the advantages of a family plan is that the growth and gains within the plan can be shared between your children, and that includes the grants. So the CESG and in some cases the Canada Learning Bond as well, can be paid if the beneficiaries in the plans are siblings. Now a side note to this is that that each beneficiary can only receive the maximum of their personal lifetime maximum, which is the $7,200. So if you had two siblings and they each had received CEESG’s of $3,000 and one of them does not go to post secondary education through a family plan, that beneficiary that is going on to school could receive the full $6,000 in grants. In most cases. You’ll just have to make sure that the family plan only has your children named, because in some cases family plans can also include stepchildren grandchildren in addition to brothers and sisters. But it is a good idea to check with your provider just to be sure. *So we talked about family plans, we talk about individual plans and those are kind of your standard ones. Are there any types of our RESP’s for people should steer away from? Yeah, so the family and the individual plans, like I said, those are ones that we do very commonly at our office. I’ve never done a group plan. There is so there is another RESP type called group plans, or you may have heard them referred to as education funds or scholarship funds. They’re usually offered by scholarship or group plan dealers and they’re sold by Perspectus. So the way that they work is they take a whole pool of people and they invest everyone the same. So they’re all they’re all pulled together, administered together, and they have a date of maturity on the plan based on the beneficiaries date of birth, where they’re essentially saying okay, now you’re ready for school. The plans that I’ve seen that have kind of come come my way over time. They usually have strict rules, so you are usually signing up for a very specific amount of contribution over the lifetime of your child, and I think the biggest drawback of these plans is that if your child decides that maybe you know they’re at the age where they should be going to school but they’re just not ready yet, so they’re deciding not to start at the same time as everyone else in that group RESP that they’re part of, you can actually lose some of your earnings in the plan. So if you drop out or if your child decides not to go to school, it’s not like a regular individual or family plan where you can get your money back tax tax free, minus the grants in the growth like we’ve discussed. It’s actually a completely separate animal where this is property of the plan and that’s part of what you sign when you sign up for one of these. So your savings are combined with those of other people and it’s all shared. So you have to wait to the maturity date, your kid has to go to school on time. There are going to be limits to what is received. That gets a sharing of the growth in the plan. So’s it’s a lot more restrictive, and the thing that gets me with them is if I’m putting away my hard earned money for my child, I sure want to make sure that either they get it or I get it back, and because that can take this off the table. That is enough of a caution for me to not want to pursue that course of action. *It sounds like there’s a lot of negatives going that route and really going the individual and then the family roots sounds like a more secure and desirable way to go if you want to RESP especially you want to take care of your kids, no matter what decisions they making the future, because why change yourself to something that may not have a proper return or could just be more trouble for you than it’s worth? *Right? So, if someone’s really sold on one of these things because of maybe the marketing material that they’ve been shown by that particular provider, I will just encourage them to read the fine print. Read the Prospectus, is what they’re called. It’ll really tell you the INS and outs of how the plan works, when you will get your money, when you won’t get your money, and what will happen if you decide to stop, like, let’s say someone loses a job or money gets tight for a while and you just can’t. You know, that’s that’s real life. That’s real life for a lot of people. So you need to be in a product where it has to be flexible enough to handle that. Things. Things will happen and things don’t always go to plan. So just make sure that there’s there’s enough money on reserve for these if you two decide to make the commitment to them. But, like I said, it’s not something that I recommend. *Okay, after that little PSA we just had about the good kinds, the bad kinds of RESP’s let’s say I’ve got a kid or two. I got an RSP when they are really young. I’ve been claiming all my grants. I maxed out my contribution room at the RESP we’re fast forwarding eighteen years, how do we start actually pulling money out of this RESP and what can we do with it? *Right? So this is the part that gets a little bit confusing for a lot of people. So we’re going to get a little bit technical here and I’m going to throw out some strange language to you that hopefully, when the time comes, you can look back and say okay, yeah, you know what. I’ve heard about this before. The sounds familiar and we’ll try and make this this as simple as we can. So the first part is we’ve confirmed that the child is going to a qualified educational facility and program and that they’ve met the required length of the program. There are minimums in terms of if it’s full time part time. *Really it’s a lot of the same checks they do for student loan application, right? *It’s similar yeah, it’s basically the same idea of they want to make sure that you’re legitimately in a real program that’s going to benefit your future down the road and that you’re not just kind of auditing a class or going when you feel like, but you’re committed enough to completing this program in a reasonable period of time. So when your child applies for an RESP payment for the first time, they’re going to hear this funny little acronym called EAP. It stands for Educational Assistance Payments and, like I mentioned, there are some limits on them. Once you’ve been accepted into that qualified program, like, let’s say your full time and you’ve done thirteen consecutive weeks, you can get up to $5,000 out of your RSP for that program and once you’ve passed that thirteen week threshold, there’s no limit. It’s what the cost of the program is. If you’re a part-time student and you’ve met that qualifying educational program threshold. Again, they look at each thirteen week period individually. So because you’re not going at this full time, it’s a lower maximum as well. You’re only going to be able to take out about $2,500 per pop. So that’s each semester, each thirteen work week period. You’re going to have to re submit some documentation, which is going to include a letter from the register’s office of your institution basically saying you are enrolled, these are the dates of your programs, all of that fine logistics and stuff. That essentially just proves your enrollment. So what is an Educational Assistance Payment? See, it’s even hard to say. So this is paid to the beneficiary, which, like we’d said before, is what you want because they when they there is a taxable portion, are going to be taxed at a much lower rate than what you would be taxed at. But this portion, the EAP, is actually all the good stuff it’s your government grants and it’s your earnings on the investments and the incentives that have been invested in the plan. So all of the stuff that you want to have come out of your RESP first is going to be coming out through an EAP, through an Educational Assistance Payment. So get as much of that as you’re able to do. And, like I said, once you cross that thirteen week threshold, it’s wide open, based on the cost of your program and the other qualifying costs that can go along with it. So, because this is the grants and the gains on your RESP, this is included in the beneficiaries income and put on their tax return for the year that it is received. So this is going to be taxable but, like we’ve said a million times in this in this podcast, better tax in their hands than in yours. *Yeah, like we said earlier, especially if they’re not working, they should still be under their exemption threshold. So it shouldn’t be too bad on them. So let’s jump ahead a little bit further. So let’s say the kid goes through school, finishes the program but they didn’t use all the money in the RRSP. What options do I have as the subscriber. *Sure, so when and when it’s become clear that an RESP has run its effective lifespan, so that can be, like you’d said, the child is completed all the post secondary education that they’re going to complete, or the plan is coming up to its thirty five year maximum time that it’s allowed to be open and it needs to be closed. If there’s money that’s still in there, you might have to receive what’s called an AIP or an Accumulated Income Payment. Now that sounds confusing, so let me let me explain a little bit about what it is and what it isn’t. So the first thing that you’re going to do is you’re going to ask to get return to you, tax free, as the subscriber, any money that you’ve put into the plan, the grants, if there are any CESG, CLB, or provincial grants that haven’t been used, those would be repaid to the government at this time. And then everything else, so any earnings on the contributions, any earnings on the grants, basically any money that you’ve made that’s still in the plan after it’s run it’s useful life. Is What’s going to be called an accumulated income payment. And that’s going to be taxable to you as the subscriber of the plan. And this is where you have to be a little bit careful, and this is why we try and encourage the kids to use these as much as possible, because not only is it taxable at your marginal tax rate, so that’s added to the income that you’ve already made in this year through your working career, but there’s an additional 20% tax that’s added on top of your marginal tax rate. So this is really something that you want to avoid. So for most people this is not the bulk of the money, because you were able to take out your principle. It’s not the grants, it’s the growth, it’s money that you’ve made in the plan, but now it’s going to be pretty heavily taxed unless we can come up with a solution. *I understand why they putting these penalties and limits. They don’t want people using these the wrong way, use them as tax shelters. As places are you shouldn’t be doing investing without the proper parameters. But let’s say, just in case there is some money left behind and there are these restrictions of place, is there any kind of solution we could use get the money out? *There is their subject to limits of course as well, but one of the favorites is you can sometimes move property from one RESP to another. So it can go from an individual plan to another individual plan, because your kids are going to be different ages right so presumably if one plan is closing, a new plan will still have a few years left on it, so you can transfer some of the growth within the plan to another plan for another child at a different period of time. So there’s typically not not many restrictions in that area, except that the beneficiaries have to be sibling and, like we said, that can be adoption or blood and that age twenty one is still an important number in that the beneficiary that will be receiving the money has to be under the age of twenty one when that receiving plan was opened. So there if the kids are spaced out enough in age, this could be a strategy that would work. Now, if you’re at the stage where all of your kids are done at this point and there’s still some money sitting around in there, then you can contribute. So you can’t go over the lifetime maximum, which is $50,000, but it can go into your RRSP or your spouse’s is RRSP, which will give you the tax deduction your marginal tax. Right now there’s still that 20% extra tax. But if you have the RRSP contribution room available, you can put the money into either a spousal or an individual RRSP in your own name and claim that deduction. Now there are some rules. In most cases you want to be the original subscribers, so you want to be the person that put this money in. So it might get a bit stickier if the money came from someone else, or it may not be eligible if the money came from someone else. But the best strategy is always to minimize the problem right. So encourage your kids to get as much education as they can handle. It’ll benefit them and it’ll benefit you as well. And, like I said, because of the order of the withdrawals, the grants and the gains come out first. So hopefully, as long as your kids have done a few years, you’ve been able to take out the gains and the growth and in an ideal situation the money that’s left over is the return of your own contributions, which is tax free. So that’s that’s really what we’re going to making sure that they’ve done enough post secondary education that they’re benefiting for it from it in their own career. And you’re benefiting from it in that you’re not going to have to pay this Sur tax of twenty percent in addition to your regular tax. *All this sounds well and good, but how do I actually go get an RESP right now? Let’s say I’ve got kids. All this sounds great. I want some free, sweet sweet government money coming my way. How do I get the RESP? Where do I go to? Who do I talk to? *Yeah, for sure. I mean, obviously we’re a little bit biased in that we always love to have new people come to see us at Braun Financial so that we can help set you up and help you avoid some of the pitfalls in structure that cannot can happen when things aren’t set up correctly. But otherwise, I mean most of the banks, credit unions, things like that will have them. You can go direct to some companies as well, but I always recommend working with an advisor for these kinds of things, just because the devil’s always in the details and through experience your advisors probably come across a few things that can be used to help you out with your own planning. So that’s that’s our overview about our RESP’s today. We hope that this can help you help your kids out secure their future or at the very least give them a nice head start. And, like I said, there’s tons of benefits from tax deferred plan like an RESP, and there’s certainly huge benefits from getting free money from the government. So we hope that wherever you are, you can use these to the best of your ability, maximize the money that you can get and give your kid every advantage going forward in their life. So that’s all from us this week. Take Care and until next time, all the best
This week we get into the nitty gritty of how an RRSP can help you defer taxes and put more money in your pocket today and in the future.
If you live in British Columbia, let us help you take care of the people you love and visit braunfinancial.com
Welcome to It’s Personal Finance Canada. I’m Christine Conway and I’m Cameron Conway and this podcast is a very personal look for personal finance in Canada.
Welcome to its personal finance Canada. I’m Christine Conway and I’m Camera Conway and this podcast is a very personal look for personal finance in Canada. *Hi Everyone, and welcome to It’s Personal Finance Canada. I’m Christine Conway and I’m here with Cameron Conway, and we are in the middle of a very busy RRSP season. *Everyone is looking back and all the good they did last year, all the money they saved or didn’t save, the income they made. And they’re trying to figure out what to do in this coming year. So what are their options? If what’s this RRSP thing we keep talking about? And why should I take my hard earned money and throw it at it? *Yeah, so today I think there’s an incredible advantage that a lot of working Canadians can find within an RRSP. So that’s what I wanted to go over today, because there’s some incredibly powerful tools that you can use to get a good handle on what this can mean for yourself and your personal tax situation. So let’s start right at the top. What would you say if I said, for most people, that if you put money into an RSP, you would actually increase the amount of money that you had available after you file your tax return to either save or put towards your other goals. *I’d say you’re wearing a wire and you’re working with the CIRA? *Not Quite, but the tax law in Canada does allow for people to put, not an unlimited amount, but a controlled and limited amount of money into an RRSP program. Now, keep in mind that an RRSP is a tax deferral program. And essentially what that means is that the money that you put in is not taxed today, it’s not tax tomorrow, it’s not taxed three or four or five years from now. Unless or until you decide to take the money out. So that’s one of the powerful tools that come with an RRSP. But the one that we really want to talk about today is the fact that an RRSP provides you with a tax deduction. So what is a tax deduction, you might ask. A tax deduction is very different than, let’s say, a tax credit, which reduces the amount of tax owing. A tax deduction actually reduces your taxable income, and that’s very important because here in Canada we have a system where as your income increases, your tax rate increases. So if I said to you that as your income increases and your tax rate increases, you can actually take a look. there’s there’s a way, and I’ll show you how to have kind of a sneak peek at how the tax brackets, both federally and in your province, integrate. So that you can determine how to get the most tax back relative to the amount of income that you’re making today. *So how does this work exactly? If I crawl up the tax ladder, do I get the same percentage points for every single dollar I earn? Is it different? How can I use this mystery program you just talked about to kind of give myself a better picture where I’m sitting? *Sure, so, it’s by province. So depending on where you are in this fine country it’ll be different. And today, because we’re here in BC, we’re going to talk about British Columbia and how those rates particularly integrate with the federal government. But if you’re somewhere other than BC, feel free to take a look at one of my favorite websites. I use this all the time specifically for this chart that they use. It’s called taxtips.ca and every year they compile schedule of tax rates by province. So if you have regular employment income. Even if you have dividend or other capital gains, information that is in there as well, but for our purposes we’re just looking at regular income. *So this site, it’s not just for CFP’s like you, anyone can use it and understand it. *Absolutely and the chart that I’m that I’m referring to is incredibly straightforward. Basically, all you have to do is determine what your income is, your earned income is for the year, and then boom, you’ll see what tax bracket you’re in and you’ll also see which tax brackets you’ve moved through to get there, so you can see how tax started at a lower rate. So, for example, here and BC in 2021, on the first $42,804 of income earned, you paid tax at the lowest combined federal and provincial bracket of 20.06%. And I should just say as a side note, that when you’re actually filing your tax return it’s not quite this simplified. So think of this as a tool just to give you a visual it’s a combined representation of federal and provincial tax rates, which are actually separate on your return. You’ll pay provincial tax, you’ll pay federal tax, but this is just so much easier to conceptualize and it is broken down by brackets. So if there’s a change to the federal bracket or a change to the provincial bracket, it is reflected immediately in the schedule. So it does work out on a dollars to dollars view as well. *So when I actually pull up this website look at it talks about earned income. Does that include like my lemonade stand? What does that mean exactly? *Good question. So we’re going to take this in the context of what qualifies for an RRSP deduction, because if it doesn’t qualify then you’re not going to get the tax back, and it’s a bit of a moot point. right. You’ll still get the benefit of tax deferral, but you won’t necessarily get that same extra bump that’s going to accelerate your your goals and the other things that you’re working towards. So if you are a working Canadian, most likely any employment earner or self employment income. That could also include rental income or royalties, things like that. So something you had to do something for. That’s typically considered earned income. Now if there’s income that was received from from other sources, like more passive sources. Dividends is a big one. If you’re a self employed individual, you have a decision of taking salary or dividends, and one of the little tricks here is that dividend income is actually not usable to create ours p room. So if you can’t use a dividend to create RRSP room, you do not get the corresponding deduction. So if you are self employed person and if you have dividend income, just keep in mind that that’s not counting in this particular context. *I guess another side note about dividend income, it can also make some murky waters and you’re applying for a mortgage or they will want your salary instead of dividends. So that kind of adds to the conversation of how you’re going to pull money out if you are a business owner. It’s kind of the pros and cons of little as tax up front, we don’t get the RRSP contribution room and it can make a harder apply for a mortgage even. *Absolutely, and I mean the tax system in Canada very much looks to equalize the tax is paid regardless of the source that it’s it’s being collected from. So well, there have been maybe greater advantages in the past in different forms of income splitting, things like that. I mean there’s now tax on split income rules. There’s all kinds of things that, as people find loopholes, the CRA looks for ways to close them. So what we want to do is take advantage of available loopholes, such as ours RRSP’s as much as possible. So as long as they’re still available to us, to continue to save this way. *So are you seeing that RRSP’s and this whole tax thing is a approved loophole by the Canadian government? *I would say so, you know what, and it’s it’s got a very specific design. The design is just this. It’s that people are not saving enough for retirement. We’re all kind of staring down the the barrel of a very long, hopefully and healthy retirement, but not a lot of pensions these days, fewer and fewer employers wanting to give them out. So this is again the CRA’s way of trying to be a bit of an equalizer and and saying, you know what, if you have a pension, maybe you get a little bit less RRSP room. But we are giving you an option to get some money back in taxes. So, like we had said before, because it reduces your taxable income, it’s as if that income wasn’t even earned. So the money that you would have otherwise paid to towards taxes, all other things being equal, is money that you’ll now receive back in your hands to spend. And I should make a comment as well that, when I’m talking about receiving a refund from an RRSP, it’s most common that if you’re a salaried employee, your employer is taking off the required amount of tax for the particular salary that you have. So if you were in $50,000 or $85,000 a year, whatever the number might be, they are actively remitting to the CRA on your behalf from your paycheck. You can see it every time you get a pay stub, it just comes off. So when you get that money back from the RRSP contribution, you’re actually getting paid tax back that you had already remitted to the CRA through these payroll deductions. *Yeah, there’s given you your money back without interest, kind of. *But it’s money that would be lost otherwise, right it’s money that would otherwise be collected and go into taxes and go into. *Rebuilding the prime minister’s house. *I was going to say general revenue, but all of the good and fine things that we have to do is contributing members of society. The other note would be is, let’s say, if you’re a self employed person or if you have multiple jobs, where maybe you haven’t been withholding as much tax as you will need to pay. When you look at that taxtips chart and you realize, okay, you know what tax has been withheld at a lower rate than what I’ll actually need. In those cases an RRSP contribution. It’s still reduces your income, but if you haven’t put forward enough income already in the form of prepaying those taxes, you could still owe money or you may owe slightly less because you’ve made that RRSP deduction. Is that kind of does that kind of make sense? So it’s not an instant money back. It does depend on how much you’ve paid already into the system. *So I’ve heard a lot of people say they’ll take whatever refund they get from contributing RRSP’s and they’ll say they should just put it right back into the RRSP. Is that a good strategy or they use that money for something else? *That’s an incredibly personal decision. I mean it is a great strategy in the fact that RRSPs have that tax deferral that we’ve talked about. And with saving for your retirement, you have to frame that conversation around how much money you have saved already, what government benefits you’re going to be getting, whether or not you already have a pension plan. Or is there another goal that you’re working towards? Maybe credit card repayment that has a much higher interest rate than you would get through your investment, let’s say, if you’re a low risk or medium risk investor and you’re trying to decide between putting that refund back into your RSP, where you’re targeting making maybe four or five percent, or paying down your credit card at eighteen percent. Well, you would take the one that provides the greatest opportunity. So I I like to say that, because this is found money, you use it to accelerate the goal that is most important to you and also that makes the most financial sense. So which one will get you the furthest ahead? *So if the goal is retirement, then throw any in that little bit extra money you can help you upgrade from cat food to spam. *It can super charge your savings and keep it keep in mind when you’re investing for retirement, because of the power of compounding interest, your biggest advantage is time. So the more money you can get in as soon as possible, the longer you’re giving yourself to allow that money to compound and grow. And I know I keep saying tax deferral, but it’s so important when you have money outside of an RRSP or outside of a TFSA, because, I mean, those are still relatively I guess you can’t say new anymore, but they haven’t been around forever kind of thing. It is such an advantage to not have to pay tax year over year over year on the growth. So that’s another huge reason that you would want to put money into your RRSP. That being said, when you’re choosing how much to put into your RRSP or at what level of income you should consider putting money into your RRSP, it’s it’s a good idea to take a look at how these tax brackets breakdown because I as I’ve said previously, with the emergence of TFSA’s, if you think you’re going to be putting money into an RRSP and then taking it out at the same tax bracket, and that usually happens if you put money in in a low tax bracket, so your income is under $42,000 in 2021. That’s the lowest tax bracket, or even the the second lowest tax bracket, which is just a couple percentage points higher, goes all the way up to forty nine $49,020. So under that threshold, if you’re in the first two brackets and you have TFSA room, I like to encourage people to look at using those. You get the same benefit of tax free growth and the advantage of taking out to it out later tax free as well. In the past, be before we had TFSA’s, people would put money into their RRSP’s just to get the tax deferral but they would save deducting it until a later year when they would be in a higher income. So if that’s something that you see for yourself, that you know you’ve got a career path where your income is going to be higher, it can be a great advantage to stalk up those receipts and save them for a later day. *How long can you hold onto those receipts and deductions for, like how many years you carried over for before they expire? *So there’s actually no limit. You can carry forward those the ability to take those deductions indefinitely. But you absolutely want to take them well you have employment income, because otherwise, if there’s nothing to reduce, you’re not going to get the money back, and getting that money back is one of the biggest advantages of being able to use an RRSP in this way. Also, I guess the other the other thing to keep in mind is the CRA rule, is that by age seventy one, your RRSP has to be converted into something income producing, whether that’s a RRIF, a registered retirement income fund or an annuity. But those are those are subjects for another day. So at that point in time, once the conversion is done, there’s of course no benefit because now you’re pulling income out and your past the stage where you’re putting income in to a savings program so it’s no longer an RRSP at that point in time. *So far it seems we’ve kind of talked about you as an individual using RRSP’s to your advantage. But what if you are married or in a common law relationship? You get any extra bonuses through this system? Or how does this work if it’s two of you together in a legal sets trying to use these RRSP’s? *That’s actually a great point. If you are in a common law or a marriage relationship, you have an extra advantage that is not available to a single person or someone who’s not filing their tax return as a common law status or is a married status, because now you get to choose between two individuals who probably have two different income levels, and you can decide which person is going to get those deductions. So think about it like this. If you have a person making a $150,000 and you’ve got a person making $40,000, the person making $40,000 is only going to get tax back at 20% if they put money into their own individual RRSP. But the person making over a $150,000 is getting tax back over 40%, combined BC federal. So that’s double. Essentially, that gives you a chance to double the amount that you can get back to accelerate your goal. So if you’re working as a couple, huge, huge advantage there. *So how common is this strategy? This has come up a lot in your firm? *Oh absolutely, and just to be clear on what the strategy is. So there are the ability. When you’re talking about a single person saving in an RRSP, they have no choice but to use an individual RRSP. When you’re in a common law relationship or a marriage relationship, you can add a new type of RRSP and that’s what allows you to pick and choose whose income you’re using to make the RRSP contribution. So the way that that would work is the higher income earning spouse. So let’s say I’m making a $150,000 and sorry, Cam, you’re making $40,000. Sorry, and let’s say that I want to take advantage of the strategy. Well, if I have available RRSP contribution room, because it’ll be my contribution room that’s going to be used to do this, I can open a Spousal RRSP in your name, and when I do that I’m doing two things. I’m contributing to a new account that now belongs to you, so I’m effectively giving you full control over this money. That means the investments will no longer be invested the way that I want. I could not do a withdrawal from this account. It becomes 100% your property. So what I couldn’t do is say I want to open the spousal account and we’re going to invest it a hundred percent in Tesla, because that’s what I’ve decided. What we would have to do is say I’m going to open this account and put it in, but actually you Cameron, are the owner in this account. It’s invested according to whatever your preference in stock is. *So you’re saying I confess everything in beans if I want to. You can invest everything in beans and even though I’m the contributor, I would have no say over what you would do in your account. It’s your property. So before someone takes this on. *I would just deal with you rolling your eyes every time I check my invoices? *That’s the one. Yeah, but before taking on this strategy, you would want to make sure that you’re comfortable giving this money to your common law partner or your spouse. Keeping in mind that in Canada, RRSPs are marital assets and that counts if your common law as well. So they are fully dividable. If you do separate or divorce. So even though you’re giving up ownership, essentially it’s a joint pot either way when you’re looking at it from that legal point of view. What about from his State point of view? Is this transferable for one to the other under the under these rules, or is they go to the estate? *No, if you set it up so that your spouse takes over your contract, there can be a tax deferred roll over to your spouse, even if it was a spousal account, and when the person, the previous person, passes away, the spousal designation is actually removed and it just reverts back to being a normal RRSP or a normal RRIF if it’s in the income producing phase. So let’s let’s talk about common law here in Canada and for the RRSP’s the federal definition actually applies. So if you’re filing your tax return common law, that’s very important because that’s something that will be looked at while you’re when you’re trying to open a RRSP for a spouse. You do want to make sure you’re filing common law. But the rule is actually just twelve months in a marriage like relationship and they even have a little loophole in there that if the relationship over that twelve months was bumpy and let’s say someone moves out, there’s a ninety day period if you’re if you’re separated for less than ninety days, you can still be considered common law. So it’s actually a fairly low threshold. But there are other considerations before you jump on the Common Law Bandwagon. A lot of government benefits are income tested. So when you go from a single person to a couple through filing your return as common law, that will automatically cause a readjustment to a lot of these government income tested benefits. So just keep that at the back of your mind. That is to say, this isn’t something that you would want to do just for this purpose. You would want to do it because you’re in a legitimate long term common law relationship and that is how you should be filing at that stage. So if you do decide that a spousal RRSP is the way that you want to go, and that difference in the combined BC and federal or whatever your province and federal tax brackets might be, provides that significant advantage to offset those other maybe just changes in the structure right like giving up the ownership, giving up control of the money, giving up the other person’s ability to take the withdrawals. That advantage can really help accelerate your timeline. So in my example, where one spouse was earning $150,000 and the other was earning 20%, or, sorry, not earning, earning the $40,000, then the tax is paying or the amount that that person would get back on the next dollar was was basically double. So that’s a pretty cool thing. There is a catch, and every catch we got to talk about those two. If your spouse decides to take money out of a spouse to a spousal RRSP within three years of you putting the money in, it gets attributed back to you. So that 40% that you got back your paying in tax at that same rate. Or maybe higher if your income has gone up. *So is that three years when you open the account or is that for every single deposit? *Every single deposit. So keep it running in the back of your mind every single time you put money into an RSP for someone else and just make sure that you’ve had that conversation with that individual and that you trust them to kind of do the right thing. And I mean a worst case scenario. It’s just undoing your tax planning really right and, like I said, you hope your income has an increased too much, because the big downside of an RRSP is you don’t ever want to take out money at a higher tax bracket than what you put it in at. You always want to take it out at a lower tax bracket than what you put the money in it. *And this is why it’s good to talk to actual financial plan or sometimes about these kind of things because of the rules changing and all the delicate intricacies were want to make sure you’re actually getting the most out of your money and your investments and you don’t accidentally do something that causes more problems down the road. *Exactly, well, and there’s always a sweet spot when we do these calculations, and every single person and is different because they might have different things going on right, different sources of employment income, different and with holding that’s done, pensions, things like that. But what I like to do when I’m doing the calculation for someone is I like to come up with a no more than or never exceed number for that particular tax here. The best time to do this is exactly now you’ve finished and closed out a tax here and then you get that first sixty days to take your last looks, to do your final calculations and to put any money as a top up into your RRSP. Now I always recommend that people save month to month to month anyways, just because it’s so much easier from a budgeting point of view to have it just calm off your paycheck right into an RRSP, right into a regular savings plan, so you’re not kind of scrambling last minute to get those dollars together to get that deduction. But you may find when you do your last looks that you want to do a lump sum to offset some tax. But let’s talk a little bit more about this concept of having a never exceed number for your RRSP and your fiscal red line. *Kind of is it’s like if you’re flying an airplane and you’ve got that never exceed line. Exceed the line, you’ll blow up right, it’ll become structurally unsound, bolts and nuts and things will start shaking. You don’t want your wings to fall off. This is essentially to keep you in a higher tax bracket. Or, sorry, the better way to say that is to keep your deduction in the higher tax bracket and to make sure you don’t accidentally cross down into a lower tax bracket where you’re receiving less of a benefit than you would otherwise. *So do you have a quick way to help figure out what this red line is? *I do, if you’ve gone to taxtips.ca or any other website that does this combination of federal and provincial tax brackets. What you’re going to want to do is look at what tax bracket you fall in now and how much room do you have, accounting for any other deductions or pension contributions things like that that would take you to the next lower tax bracket. So let’s say, as an example, you earn $60,000 in just a job that you have as an employee. You’re a T4 salaried employee and you don’t have any other income sources. So it’s what you got, it’s what’s coming in and it’s what you’ll pay tax on at the end of the day. Now, when you look at $60,000 of income, and I’m looking at my combined BC and federal marginal tax rates, that $60,000 the tax on the next dollar earned is at 28.20%, and the bracket goes from $49,020 all the way up to $84,369. So your $60,000 is right in there. So what I do is I subtract out the $60,000 from the top end of the next bracket because once you’ve dropped your income below the $49,020 in 2021, you’re only going to get tax back at a rate of 22.07%, which doesn’t make more sense. You’d rather save that for a following year or carry it forward to a following year where you could get tax back at 28% or whatever the tax brackets maybe in future years. But I would say in that scenario, if, let’s say in this example, you don’t have a pension that you’re contributing to, there’s no group RRSP’s or anything, you’re doing this all on your own. There’s no major credits like tax deductions, or there’s no major charitable or medical or things like that. Essentially, I’m just subtracting out the two numbers and that would give you $10,980 that you could potentially get tax back on at 28%. But any more, so if you put in $11,000 or $10,981, then that dollar, that extra dollar that’s over that threshold, you’re only getting the tax back at 22.07%. Does that kind of make sense? *Yeah, it does. It helps kind of set of target of how much of your RRSP contribution to actually use to benefit you more today. *Exactly, and it’s really trying to maximize the fact that we have this progressive tax system in Canada. So why would I want to get a deduction at a lower rate, especially when I have access to vehicles like tax free savings accounts, which gives me more liquidity and more flexibility with access to my money? But if I’m in a higher bracket or if I have a spouse in a higher bracket and we’ve decided we’re interested in espousal RRSP strategy, there can be a huge advantage to these higher tax brackets. For example, the highest bracket last year was at $220,420 and tax on that dollar back any amount over that was at 53.5%. Granted your paying tax at that rate. You’re paying tax at 53.5%, but if you can get some of it back, why not? Kind of thing. And really, if you look at these schedules, the breakdown at this stage, once you’re over about $150,000, you’re crossing into that 40% mark and it just kind of goes up from there. That being said, these things can change, right. It’s subject to the whims of the governments and politic king at the time. But but all you can kind of do is look at this year, look at last year and make the most of essentially what you have today. *Ok, I guess I think I understand your fiscal red life or our RRSP. So I let’s say that, example, I’ve got $10,000, but do I actually have $10,000 dollars worth of room to put into an RRSP without CRA coming after me? How do I know how much I can actually put into a RRSP without setting off all the bells and whistles out in Ottawa? *That’s a great question. So I will say two things about that. The first I would say is if you were in our example at the $60,000, that $10,000 gives you $2,820 back that you can use to something else, and I always encourage people to use that money towards something else. Now to your point of not setting off all the alarms and all the bells and whistles and all of that stuff. The best way to find your personal number is to go straight to the source, the CIRA. When you file your tax return, after they’ve received it and reviewed it, they send you back what’s called a notice of assessment and it essentially means someone here at the CIRA has taken a look, we’ve done our checks and balances, and that’s where they tell you, Yep, we’ve accepted your return, you have nothing left to pay, or you owe us a bit more money or oops, we screwed up, here’s a little bit more back. It’s kind of their their own last looks at your return before they set it aside. *So they just kind of confirmed they you paid what you owed. You got back what you’re supposed to get back, they spun the wheel of audits, make sure you didn’t have to get one, and they tell you what you can give for your RRSP for the upcoming year. *Yes, and so what they do is, throughout all of your employment history they’ve kept a running tally of 18% of your income up to the maximum, and that maximum in 2021 was $27,830. So what that means is every year either 18% of your income or to the maximum, which is added to your contribution room, which means it’s available to you to put that amount of money, but no more, into your RRSP. *So let’s say I haven’t contribute to my RRSP for five years. Do I have the 18% for those five previous years available to throw in? So let’s say I finally got a really good job. I pushed up a couple tax brackets. I’ve got five years of contribution room can I just make one big lump sum? *Absolutely, but keep in mind are never exceed line. Right. So if you make a big chunk into your RRSP this year, take time talk to your tax preparer, talk to a financial planner do that calculation and make sure that you’re not dropping yourself too far in the tax brackets. But you’re absolutely correct in that your unused RRSP contribution will remain available to you for the rest of your care are all the way up to seventy one really, when your RRSP is no more and becomes something else. That being said, if you’re lucky enough to have a pension or a group RRSP or one of the very many other kinds of savings that are now available that employers come up with. Like there’s deferred profit sharing plans, there’s employees share purchase, there’s a whole bunch of them these days. There are always reductions to your RRSP contribution limit if someone else, AKA an employer is putting money in your behalf. So that’s in your name, into a retirement product. So it’s a product that is designed to pay you income later on when you retire. Group RRSP’s and define contribution plans are actually one of those tricky spots just because of how that they’re handled. Your employer who’s making a group or RRSP contribution or define contribution for you does not necessarily have to withhold that tax or make that tax deduction for you from your paycheck, but they do have to include it as a taxable benefit. So it’s going to be taxable to you because it’s money that the company has given to you, but they may not have necessarily remitted that tax to the CRA on your behalf because, depending on the type of plan and how its struct sure they may not have had to. So that is something that you would want to keep in mind. More commonly, if you have a defined benefit pension plan, so that’s that’s kind of those gold standard you know what you’re going to get at age sixty, sixty five and beyond. Those are called registered pension plans, and a registered pension plan will give you what’s called a pension adjustment, and that’s pretty well exactly what you were referring to. If you get a pension adjustment, that’s $5,000 on your $7,000 limit, it will reduce it by that amount. So then you would only have $2,000 that you could put into your RRSP. And because the CRA doesn’t necessarily like people going over, you actually do get a $2,000 buffer. So until if you over contribute by accident and your less than $2,000, wait until the next year when you’ve got a little bit more room accumulated and you can kind of call it a wash. But if you’ve really gone over that $2,000, the CRA will take notice and they’ll start penalizing you and you’ll be paying tax at about 1% every month that that excess stays in your RRSP. So it’s really not something that you want to do. But going back to employers contributions into RRSP’s, like I said, because there’s so many different types and sources is and ways of setting up these plans and such a huge variance there, what is the easiest, other than talking to your HR department, because of course they can always help as you can always look at your T4 slip, your T4A, depending on what you receive. They have to show on on your slip if there’s been a contribution on your behalf. So like, for example, … registered pension plans, you’re usually going to see a contribution in box twenty and if there’s been like a past service or something like that, it can be either in the other information section or in a box seventy five, kind of thing. But if you’re not sure, you can take your tax lips to a tax preparer or to an accountant and essentially say, can you please explain to me what has been taxed, what has not been taxed? Can I get a deduction on this amount? What about my employers contribution? And they can provide some clarity there. So that was our little cheat sheet to help you do it yourself, if that’s your thing, or if it’s not your thing, at least to give you some understanding on how this all works. It’s not Voodoo. It’s usually very simple math and it’s just more having an understanding of what the moving parts are, what parts are are deductible, which have been deductible, what hasn’t been, that kind of thing, and how it integrates with the rest of your ex picture, which is a little bit more than we’re going to have time to get into today, but that is, of course, maybe more of a complexity to something that that we showed as a very basic calculation. So the the straightforward calculation that we showed you will work. But if you have a bunch of extra stuff going on with pensions or with other medical or charitable or other things like that, you can always come talk to us. We love helping people set up RRSP’s at Braun Financial, and I mean we always say to feel free to talk to your accountant or your tax preparer. They’re there to help and they’re a great source and a great wealth of information. I know I’d be lost without my accountants, so it’s it’s good to have as much knowledge as you can. But hopefully that gave you a little bit more clarity on what is usually shroud in mystery and made to be much more complex than it has to be. So, until the next time, thanks for joining us. I’m Christine Conway, sitting here with Cameron Conway, and thanks for tuning in and will will talk to you next time. Until then, take care and all the best.
Welcome to It’s Personal Finance Canada. I’m Christine Conway and I’m Cameron Conway and this podcast is a very personal look for personal finance in Canada.
Christine: Hi Everyone, and welcome back to It’s Personal Finance Canada. This is Christine and I’m sitting here with my husband, Cameron, and we hope you had a wonderful holiday season.
Cameron: Yeah, it’s been a quick three week break for us, but we finally finished de-Christmas-ing, putting all the kids toys together and getting cleaned up, and now we are ready to talk about what we think the markets and the outlook is going to be for the first bit of 2022. Christine:
Christine: That’s right, it’s January and with the New Year comes a new outlook for 2022. So what we do, a big part of what we do over at my company, Braun Financial, is we have the incredible privilege of getting updates from an incredibly vast think tank of economic power houses. We get reports on a regular basis from Manulife, Canada Life, our RBC, Sun Life, IA Financial and the list goes on and on. So for the first part of each quarter we spend a good amount of time going through these reports looking for consensus, trying to figure out what the top economists are thinking, what the portfolio managers are doing in the different portfolios. How they’re positioning portfolios for the year to come or for the quarter to come. And sometimes for three to five years to come. So we try and consolidate all that information and come up with our own house view. Which is just what do we think they got right, What do we think could be improved on and where do we want to position our investors for the beginning of 2022.
Cameron: Yeah, it really gives us a good advantage to try and talk to our clients to kind of give them a general idea of what the markets are shaping up to be. So it helps us to determine their risk factors, what they want to do with their money and where they can get the best bank for their buck, so to speak. Whether you want to go equities, GIC’s or other things where you can just go back to our little RRSP/TFSA talk a couple weeks ago. We use these information packets and these webinars so we can help people understand where their money is going and how it can grow in the best way to meet their needs.
Christine: So let’s start by taking things back to this summer of last year, so summer of 2021. That was the point where we had all kind of felt a little bit break of a break in this covid pandemic. There was that light at the end of the tunnel that seemed closer, maybe closer than it actually was. But at that point in time restrictions were being loosened people households that had been sitting on a whole bunch of money, because we’ve all been in our houses and in our own little bubbles. People are starting to get out there and spend and get out there and participate in the economy again. So at that point in time, so last summer, we saw a really good uptick in economic activity.
Cameron: Yeah, we had that little narrow window between the primary strains and the Delta wave come through and the taps started to open up, so to speak. People were starting to get out of their house again, they’re doing some more discretionary spending. The markets all just shot up, either on the TSX, Dow and NASDEQ and there’s that bit of optimism before the crushing depression came back in September.
Christine: That’s right, but a lot of people are looking at it with the Omicron strain now, at what they’re calling the peak or coming up to the peak at this stage
Cameron: Varying by region, UK, South Africa, they seem to hit their peak. They’re calling for us in Canada and probably another week, one to two weeks.
Christine: Right, but that might be a little bit of foreshadowing of things to come. Where households have been sitting on a lot of cash, people are ready to get up and go see their friends again. Enjoy a nice meal, go to a bar, go to a pub, who see a movie, reintegrate into society and just feel human again.
Cameron: Actually see real humans?
Christine: Actually see real humans beyond our very limited social circles at this point in time, and I mean that’s a change not just for you and I sitting at home here today, but for businesses across different sectors as well. This, this whole coronavirus recession, has been very sector specific in terms of how the impacts have played out. With of course, the customer facing and the front-line workers and the people in service in the service industry being the most impacted and potentially, and rightly so, maybe the most reluctant to return to that type of environment. Where, well, the risk is still present, you are in front of people who may or may not have the virus.
So let’s take a look at what we’re seeing right now what the consensus is. So, with that peak that we saw happen over the summer, a few things happened. Valuations in the stock market, and I mean of course this is this is relative. This is a very general statement, as different portions, different sectors perform differently, but generally speaking, valuations were on the higher or more elevated level. So that means that typically, when your valuations are high, there’s a little bit of a risk or pressure to the downside, that if these corporations that are generating these profits aren’t generating new orders or generating that demand side. You can look at that and say, okay, maybe they’ve run up a little bit, but we still think that there is room to grow.
Cameron: And this is actual growth. It’s not that fake growth when they just cut expenses to make the net look higher. This is a demand sided growth that a lot of sectors are looking at and hoping for. We can even see that energy prices are starting to creep up, food prices starting to creep up where you kind of have this double edged sword where what’s best for your wallet on a day to day basis and what’s best for you as an investor? We have to kind of find the medium ground between the two. For the market look is there is a hope for demand to come back, despite what we’re seeing with some of the inflation numbers down South and up here. There is hope that a lot of these companies should start to normalize and if you start tracking something edge of individual stocks, you start seeing that play out. Even companies like Microsoft or Cisco or up like crazy, falling the work from home. But on the TSX, a lot of energy companies are starting to creep back up on a year to year basis. So there is some growth and we’re hoping that there isn’t the same kind of stagnation going forward.
Christine: And a lot of these companies really did go through the exercise of having to cut costs through the pandemic because we were all in the situation where cash flow was down. People just weren’t spending money, so we had to look for ways, or companies in general had to look for ways to make the machine seen run a little leaner and run a little smoother. So the idea is if some of those changes can carry forward, that can be good for the bottom line. And like Cameron was saying, we’re hoping that there’s enough demand.
There’s plenty of studies in research done showing that households in North America, so that’s here in Canada and our friends down in the states as well, that they’ve actually increased their savings considerably over the pandemic. And you don’t want to count out the consumer. If there’s any one thing that’s kind of consistent, it’s people like to spend money and I think especially after this period of history that we’ve had, people are certainly ready to spend some money.
Cameron: Well, exactly a lot of people. They’ve got kind of two years of sitting on their hands at home. They want to kind of undo that emotional strain. So why, people are just going to go out and do as much as they can despite some of the restrictions, depending what province you’re on or even know here in BC. But people, there’s that desire to kind of go back to normal and any little corner and crack they can find they’re just rushing to it.
Christine: Yeah, and when we’re looking at other parts of the economy as well. So here in Canada we’re obviously looking to the oil sector because that’s a significant portion of our economy here.
Cameron: Yes our economy is based upon real estate, finance and energy, and if you think it’s something other than that you’re not paying attention.
Christine: Yeah, and so the oil prices. What did you say it was today? It’s about eighty three bucks for WTI?
Cameron: WTI is eighty three right now.
Christine: That’s right. And so that, of course, is tied to our Canadian dollar, which is around.
Cameron: Seventy nine and a half cents.
Christine: Seventy nine and a half cents. So better for spending, maybe not as good for exports. So we’ve got to keep that in in our mind as well in terms of our ability to it’s goods.
Cameron: It’s a delicate balancing act. We don’t want the dollar too high, otherwise we can’t export our goods out. Or even, okay, we live in around Vancouver in the lower mainland, and the whole TV and film ministry thrives off that lower dollar. So it’s thousand job there. So these all these little things where a one side we want a parity of the dollar again so we can go to the states and buy cheaper groceries and gas. But the same time we can go too far and that a lot of companies will just leave.
Christine: That’s right. And if you’re turning your eye to the manufacturing sector as well, I mean the Purchasing Managers Index. That’s something that we keep an eye on as well. That’s essentially people that are making buying decisions in the managing sector, sorry in the manufacturing sector. There essentially surveyed on a regular basis and they answer the question how are their orders going? Are they positive, are they optimistic, or are they going to be cutting some spending? And we’ve been seeing a positive trend. Certainly not neutral there. It’s to the positive and that can be to backfill some of these demand issues that we’ve been talking about already, but it can also be I mean, think of all of the goods that are produced right. They’ve got to be produced somehow.
Cameron: Well, not only do they have to be produced, they have to be sourced. I worked in manufacturing not long out of high school and the vast majority of the resources we need to make the goods all came from the States. Everything got shuttled up by truck across the border and then we just assembled everything in Canada and shipped it out. So that’s something to take in consideration too.
Christine: So now if you move on to the banking sector, which is a major part of even the indexes here in Canada, there has been quite a bit of talk from the Bank of Canada here and the Fed down in the states about the interest rate and the interest rate policy over the next couple of years. So this this is kind of a two pronged thing. So from a banking point of view, the idea of raising interest rates is hugely positive. If I’m a bank, I’m going to have better margins, I’m going to have the ability to lend out more money at a greater capacity. But if I’m the Bank of Canada, this actually is falling in one of the risks that we see for this coming year.
So let’s talk a little bit about the risks to the economy that that we see at this point in time, and I think to point at the obvious. This inflation is a major, major one. Cost of everything going up and this interest rate policy or this conversation about increased interest rates that that we’re starting to have, and they do go hand in hand. So let me explain. The idea is the Bank of Canada has kept and so is the Fed. They’ve kept interest rates, or the overnight rate is at a record low right now it’s just a quarter of a percent, and it was expansionary monetary policy. What that means is if you keep interest rates low, you’re trying to encourage economic growth. So, especially because we were going through a hard time, they wanted to make it so that businesses that might have cash flow constrained in other ways, ie. Consumers not coming to their door because they’re stuck at home. They wanted to give them the ability to borrow money. So that’s part of why interest rates went as low as they did and stayed as low as they did. But I mean, if you if you zoom back out on the chart, we’ve actually been a in a downward trend in the interest rate field for quite some time now.
So it’s well and good time to start interest rate increases, the hikes in the interest rates, but that does come with some impact. So when you increase the interest rate, there’s a bit of a side effect of as borrowing costs go up, people will may not be as likely to borrow money. So that could be individual households in terms of purchases that they might make. So discretionary like a vehicle or a major decision like a house, which is tied to your mortgage, is going to be tied to the interest rate, as well as your credit score, among other things. But if you raise rates too much too quickly, it kind of has this this effect of putting the brakes on the economy. So you’re kind of hitting the brakes a little bit every time the interest rate goes up. And that being said, the talk is to do gradual, small increases at this stage in time and of course the Bank of Canada can change this at any point in time, but for the time being that’s where we are.
Cameron: Well, part of this too is the Bank of Canada is kind of forced to keep up with what the Fed in the states do. Like I’ve seen some projections where the calling for like five to six increases in the states over the next year. And if the Bank of Canada doesn’t keep up to a certain degree and keeps our interest rate even lower, that’s going to drive away investments, going to drive away growth. So if they stall out a times it’s better for a homeowner but if they don’t do it they can hurt the overall economy because a lot of this it’s a tug of war really between an average person and the investor economy as a whole.
Where if interest rates go up even I saw one project and if it goes up a quarter percent, you have a $500,000 dollar mortgage. That’s an extra $100 a month out of your pocket. So if you’re a homeowner, you don’t want the extra $100 a month. But if you are investor, if you have individual stocks, if you have SEG funds RRSP’s or TFSA’s, you want the bank to get that extra hundred dollar because you get a better dividend out of it. It keeps your portfolio growing. So it’s hard to find the middle ground here where interest rates can go up at a stable level, where it doesn’t hurt your pocket too much, but it also protects your retirement and protects your investments going forward. We kind of have to have both sides be benefited and both sides be hurt a little the same time. So there could be an overall growth. So it’s not too far on one side and not too far on the other.
So this is why it’s very delicate to manage all the stuff and you can’t just flip a switch and push up interest rates a couple percent or go backwards at the same time, because interest rates to go up, your loans go up, your HLOC’s go up, your mortgages go up. But at the same time, if they don’t go up, and then a lot of the investment money is going to leave the country and then that devalues the currency, that devalues the goods and services. So this is why it’s a tricky subject and there is no like one trick, one solution that either there the Bank of Canada, federal government or any government in the states can just say, all right, we’re going to fix this problem instantly all of a sudden inflation is gone, interest rates are okay, everyone’s thriving, everyone’s happy. There’s always a price to pay with no matter what decision you make here. And part of these market outlooks is trying to show you kind of the good, the bad, the ugly for you as an individual for you as an investor, so you can figure out how to prepare yourself going forward, either as in a cost you more to live, as it costs you less to live or you’re going to have less in retirement or you can have more in retirement. This is all part about the planning structure, so you can just be ready to adjust your own life to what all this myriad and all these different things that are happening.
Christine: Yes, so now that you’ve gone over the interest rate increase side, let’s take a look at the flip side, which is inflation. So if the Fed or the Bank of Canada here does not do anything, or does not increase interest rates or even puts them lower, we could be in a situation where inflation is running rampant. And we’ve already seen massive increases, both reported and not reported, because there’s a little bit of a stickiness there between the official numbers and what we actually feel in our pocket books. But interest rate increases do check inflation and that’s been proven historically. That was a big contributing factor through in the late 70’s and the 80’s when they had the stagflation situation, which was the stagnant economy and rampant inflation. That’s something that we’re actively trying to avoid at this point in time. People are quick to point out both these similarities and the differences from these periods in time. But the bottom line is inflation hurts the growth of the economy because you and I suddenly have less money to spend. If that extra hundred dollars a month now has to go to my mortgage, being most of us in Canada were in five-year fixed mortgages, so there could be a delay of up to five years before that type of increase hits your pocketbook. But during that point in time it might not have just been the one or two percent point interest in interest rate increases that they’re talking about now. We could be much further down the road in terms of interest rate increases. At that point in time.
Cameron: Well, that ties in, like your food prices are going up, or even when I was driving to work a couple days ago, gas is up to $1.76 per liter, and then all these other little areas where inflation is creeping in. So rather than one are two places taking more of your pocketbooks, you’ve got about twenty or thirty place to take you more out of your pocket. So you have less to invest, you have less to pay down your debt, your debts with, and it is just trying to scrimp and save. I guess even saw one report where even meat consumption in candidates down significantly just because of the costs.
Christine: And that brings us to the amount of debt that the Canadian household is holding, and that’s an incredibly important conversation to be having, because that debt will be impacted at some point in time by these interest rate increases and the capacity of a household to constitute, to continue to service its debt is something that’s going to be very, very important.
I mean, I know in my own practice I’ve seen a lot of people where the banks have already convinced them to re extend their mortgage to the twenty-five year maximum to get lower rates or to have lower payments. But when people have done that already, there’s kind of nowhere to go right. So one of the tricks for people that are having trouble making mortgage payments is they might try and get a longer amortization period. They might have to use some of the equity in their home.
Cameron: They put up a tree house in the back and rent it out.
Christine: Yeah, they’re trying to prevent the scenario where they have to sell the house. But a lot of people have used this period of time, and we’ve seen this not just in these past few years with covid but before as a trend where, with low interest rates, people were borrowing huge sums of money for discretionary purchases and also for their households, right, purchasing a home, purchasing vehicles.
Cameron: Well a lot of those loans were tied to people’s houses, people who did have equity, they burned through all that equity wagging either lines of credit or h locks, and that’s all. That’s all coming home to roost to speak.
Christine: Well, it was the idea of cheap and easy debt right, and the conversation now is, will that cheap and easy debt remain or for or how long will it be cheap and easy or is it going to be a lot more difficult because of the housing affordability crisis? Among other things, there is a review by the Ministry of Housing Right now where they’re looking at the amount that people can borrow from their homes, from their home equity, line of credits for the purchase of second properties and things like that, specifically investment properties. So there may be new rules coming down the road.
So let’s pivot really quickly to supply chain issues, because we all need to have access to the goods that we want to purchase and if you can’t access them, you can’t buy them kind of thing right. And this has been an incredibly difficult year for a lot of reasons. Here in BC we’ve had some flooding. With the flooding came a massive loss to both agricultural and livestock in terms of the production that we usually see come out of BC. It was it was devastating time.
Cameron: Not to mention all of our land access to the rest of the country got cut off for a few weeks there.
Christine: right, and there’s policies. I mean there was recently a policy announced in the news from the federal government where they’re not wanting unvaccinated truckers to be crossing the border. Things like that all have an impact on distribution of goods and Cam also had been touching on the higher price of gasoline. I mean, if I look out my window today at the nearest gas station, it’s about a buck seventy and when you think about the gas price, it hurts my wallet at the pump, but it’s also hurts the price of pretty well, everything you buy, because most of our goods at this point in time are, at least at some stage in the supply chain, shipped by truck. Pretty well everything, right?
Cameron: It’s either long haul or short haul, like even a couple of the restaurants by us they’re serviced by like Sisco, and they pay their truckers. They got to cover their gas and they got to pay someone else. You move stuff by their truck. So something that’s sitting on your local shelf at a grocery store, or retail store is, probably been about four or five different trucks and possibly a barge as well.
Christine: Yeah, and the price of that includes the price of fuel, because things like this are always passed down to the end user. So that’s to the consumer, and when that happens it has an inflationary effect as well. We’re talking about inflation for different reasons. There’s inflation because of the added monetary the added money in the system, so that’s from the covid benefits. But there’s inflation because of the additional cost of production and shipping of goods, and then there’s, honestly, just some increases because it’s been harder to get certain goods and people are capitalists and companies take advantage of that.
Cameron: Yes, for better for worse, but we have to be aware of that. This is just how it happens. Like even a day or two ago there was a big quote from Jim Pattison, one of the big business guys out here, in BC which who flat out just said just pass on all these costs of the consumer. It’s how a lot of businesses think can operate. So we have to be ready to respond to that as both as a consumer and both as an investor. So these supply issues, they can have a bit of an impact on the overall market outlook, but I don’t know if it’s going to be as big as it was over the last two years because mostly in the movement of goods that’s being affected right now and not as much the production side. Even something like semiconductors and chips for computers. I saw in NVIDIA they said they should have most of their issues cleared up by the middle of this year. So a lot of companies, manufacturers are starting to get over the supply issue. It could still be know the six months, but at least we’ve kind of started to turn around. As long as we can keep things moving at a good rate, we should have some benefit going forward and won’t be the same con sort of slog and drag we’ve seen before. But all these things have an overall impact on how your discretionary spending, goes and how your investments go.
So the question I have for you is, what kind of action items can we take as both a individual and an investor, going through all these expectations we’ve seen for the next three four months?
Christine: Sure, so let’s tie it all together and just kind of summarize the overall investment outlook for this period of time and I think across the board we’re seeing, and you know this is no one’s favorite to say, it’s fairly neutral with some upside to the equities. So we are encouraging people to invest in the markets at this point in time if your risk profile allows it. One of the largest risks is going to be risk to the bond market, the fixed income side of it. So typically people will use fixed income or bonds in their portfolio as kind of the steady Eddie sure thing, and in a normal environment bonds do just that. They pay their coupon. If interest rates are good, you’re making more of interest rates aren’t great than you’re not. But the big problem in a rising interest rate environment is that suddenly there will be new bonds on the market in the very new future that are going to pay a higher amount than the bonds that we all hold today. So when that happens, the bonds that you hold today will actually drop in value and when they drop in value that can have the bond portion of your portfolio have negative returns and of course a negative return is something that no one wants to see.
Cameron: Yeah, exactly really, unless because even with us we only really see bond holders with people who have RRIF’t their RRSP’s and are relying on it as retirement income. But it could be a hard sell right now where who wants a half a percent or a one percent bond? We can get eight to twelve on the stock market or you get thirty, forty percent with a house.
Christine: Well, and who knows how long that’ll be sustainable for. I mean interest rate increases won’t fix the supply issue with housing, but it will change the affordability structure, so how much people can borrow, which should have a flow through effect to a certain degree on the pricing of housing.
But back to fixed income, it is an important part. You’re mentioned retirees, but people of all ages do, for different reasons, keep fixed income in their portfolios. If they have shorter time horizons for a specific portion of their money, so that money is earmarked for a purchase, like, say, someone is saving for that down payment, they may want a higher bond content just because they don’t want the ups and downs of the stock market.
Cameron: But the same time you’d probably be good to talk about shorter terms for those bonds. Like not a lot of people are going for the three and five your bonds anymore. They’re going for like the one year or even shorter they can get it.
Christine: And this is what we’ve seen the portfolio managers do. They’ve shortened what you’ve just described as called duration. They’ve shortened the time, the duration of the bond portfolio, so the number of years that you’re holding that bond for. So shorter bond duration is less risk to a portfolio overall, because the risk is really the spread. It’s the difference between the one that you can get tomorrow versus the one that you have today. So in the bond market a lot of people also look to corporate bonds because a lot of the risk or a lot of the portions of a bond portfolio that will immediately feel the impact is government held. So either provincial or different levels of municipal or federal bonds. Those would have a more direct correlation to an interest rate increase. So people might be looking, like you said it, shorter durations in their bond portfolios. They may be looking at utilizing more corporate bonds as holdings, just because of corporate will usually pay a higher percentage than a government issued bond will. So you’ve got more of a spread to begin with and if these interest rate increases are pretty small, you might not get to that spread. So it could still be a net positive holding for you.
Our portfolio managers are also recommending that people look internationally for higher rated bonds. There are some. If you look at the Moody’s or the Finch’s, like the different bond rating agencies, there are some good bonds coming out of places like Singapore and Hong Kong. But I mean that’s kind of very quite a bit and a good amount of analysis has to go into vetting these bonds, these debts. Where they coming from? What are they supported by? Who’s backing them? That kind of thing as well. There’s also a greater appetite. I don’t necessarily agree with this for everyone, but it’s happening. So it’s worth the comment for maybe a bit of a higher yield bond, and what that means is a lower quality bond. So sometimes people are saying to get a higher rate on my bond, I’m going to decrease the credit rating that this bond has. So just keep an eye on that. If you have an actively managed bond portfolios, sometimes that gets added in there and you just want to make sure that you’re monitoring and controlling how much of that is in your portfolio.
Cameron: Yeah, something to say. Well, those higher yield ones, it’s because of the risk. It means there’s a greater risk that you won’t get your money back.
Christine: That’s exactly it. And if people want to be completely safe, so no loss whatsoever. There’s always GIC’s. A GIC is very different than a bond in that a bond is actively traded every day, which is why the bond prices can fluctuate immediately with changes. I mean even with the interest rate announcement. So nothing has happened yet, but when the Bank of Canada announced that it would be increasing interest rate, it actually dropped bond prices on the market. So that’s something that always has to be watched. Where on the flip side, if you buy a GIC, yes, the interest rates are very low and yes, you’re locking yourself in for whatever period of time you’ve selected, but there is no risk of loss. I mean, you’d want to see who you’re borrowing from, of course, so like a government issue, G see or you want to go from someone credit worthy that you know will repay the GICE, but it’s a much more secure investment at this time in that it’s not going to change overnight. So what you’ve agreed on is what it will be.
So we encourage people to take this time to review their investment portfolios and take a look at what your personal goals are for this year. That can be if you have short term or long term goals, or if you have other objectives. How does your current investment allocation align with that? Have you taken steps to manage the risks in your portfolio, whether that’s market risk, currency risk or interest rate risk? And if you’re not sure, feel free to give us a call. You know we’re always happy to meet new people. Talk about all these things and with COVID restrictions and things like that, we’re happy to meet over the phone or through video as well. So there really is no restriction and we’re happy to talk to you. So, until next time, take care and all the
Christine: Hi everyone and welcome to its personal finance, Canada. This is Christine, and I’m here with Cameron today. And today we’re going to talk to you about the different types of accounts that you can invest in.
Cameron: What do you mean by different types of accounts? Like checking accounts savings account?
Christine: Talking a little bit more big picture, so people have their RRSP’s, there’s nothing more Canadian than an RRSP. Their tax free savings accounts, non-registered accounts, locked in accounts. There’s just so many out there. So what I wanted to do today was shed a little light on these different types that we have and when we might want to use different ones.
Cameron: I like RRSP’s because it reminds me of pirates. Rrr arrrr, defer mi taxes.
Christine: RRSP’s are definitely one of the most favorite Canadian ways to save. And I mean honestly they’ve been around for quite some time now. So that’s part of the reason I think that they’re popular. And we can jump in and talk about those right off the bat if you’d like, but they fit within my number one rule for investment accounts. Which is you want to choose an account that has preferential tax treatment, so that means you’re looking at either an RRSP or a TFSA. And we’ll talk about the TFSA’s a little bit more later.
Cameron: So what makes these RRSP’s So special? And what do you mean their tax preferred? Do get an extra little gold star from the CRA if you use them?
Christine: Well, they’re, called RRSP’s or registered retirement savings plans because they’re registered with the CRA. So really that’s the big trick. And the registered part, all that really means is the CRA is tracking how much you’re using. Them just to make sure that the you’re not using them more than you should be?
Cameron: Well how much am I allowed to use it then?
Christine: Sure so every person can put in up to eighteen percent per year and there’s kind of an overarching higher amount. That kind of acts as a cap at the top. It’s an annual limit and it changes every year. So in 2021 that was $27,830 and that would be reduced by RRSP and it would also be reduced by any money that went into a pension on your behalf or into a group RRSP or really any kind of savings for your retirement.
Cameron: But who has group plans and pensions and all that at work any more? Are we kind of just on our own most of the time?
Christine: A lot of us are you know, so that’s why it’s really important to look at these different types accounts and when we might want to use some of them more than others. So for the person that you just mentioned, that maybe doesn’t have a group plan or doesn’t have a pension at work and is just on their own for savings. We all know how difficult it is to save these days right, we’re kind of scrimping and saving trying our best to get by and sometimes long term savings like retirement seems to be the last thing on people’s lists.
Cameron: Well, even just going back a couple weeks ago to one of our last podcast, where most people are spending all their time, saving for a house, so retirement kind of falls by the wayside and all this.
Christine: And it does kind of get pushed down the line, which is why it’s really important to talk about it, just to get it back in the forefront of people’s minds, because I always like to remember people or like to try and remind people that you’re actually funding thirty plus years of your life, where there’s no pay check coming.
But let’s talk for a second about people that should not use an RRSP. And that’s kind of what you were hinting at there. If someone has a lower income, then an RRSP might not be the right fit for them. And what do I mean by low income? There’s the basic personal amount. We’ve got one here in BC and there’s a federal amount as well. In BC, it’s just under $14,400 for 2022 and the federal is basically is going up to $15,000 by 2023. And what that basic amount is. Is you get? It’s called a non-refundable tax credit and that’s a bunch of mumbo jumbo that says if you earn less than that amount, so let’s use the federal$15,000 in 2023 if you earn less than that, you can reduce your tax bill to zero dollars. But let’s say you had more credits then, and it would take you beyond that zero. You don’t get money back, so you don’t get that refund back, which is why it’s called non-refundable.
Cameron: So the goal is to have a job where only make $15,000 per year.
Christine: No! But I’m just saying for someone, that’s earning that amount and that’s it for the year, and I mean that could be a number of people with COVID right. Some people were laid off. They had limited earnings during the year or maybe they just received some of these partial CERB benefits. If income was at that level or lower and of course the the personal amounts will vary by province, but there’s absolutely no good reason to put money in an RRSP in that tax year, because there’s nothing to reduce there’s no tax credit, there’s no room for further deduction, which is why you would use an RRSP.
Cameron: So then, who would benefit from using an RRSP if you’re making more than the $15,000 a year and you actually have a full time job?
Christine: Yeah absolutely, so there actually is kind of a sweet spot that I like to look at. And when I’m looking at this, I’m going to talk again about BC, because that’s where we are here. So what I do is I look at the combined BC and Federal tax rates. Which sounds much more complicated than it is. But basically, what you’re trying to look at is your marginal tax rate, which just says how much tax am I going to pay on the next dollar earned. And basically, if we’re looking at 2022, if someone had an income in BC of just over $43,000 so $43,700 they’re paying tax at about 20% and between that that threshold there and up to $50,197 the tax is about 22.7%. So you can see there that the taxes are fairly low and after that, so after you’ve kind of crossed that $50,200 that’s when it starts increasing to the 28% and then the more you earn, the more you pay. Because tax rates in Canada are progressive, so it just means they go up as you earn more so who could benefit from an RRSP? I would say it’s most beneficial for someone over that second tax bracket. So someone that’s earning more than say $50,200 and these numbers can change as the tax brackets change year over year. But below that you could find yourself in a position where you’re putting money in you’re getting your tax deduction. But when you take it out down the road you’re still paying the same tax rate, so you could still be in that lowest tax bracket or the one just above it, and then there’s really not one of the big advantages of an RRSP that you can use and that is to pay less tax now and then benefit from the deferral, which means your money can grow without being taxed for the whole length of time that you’ve got it in the plan. But then the ultimate goal is to take it out at a lower tax right. Does that kind of make sense?
Cameron: Oh yeah for the most part.
Christine: Yeah, so basically you’re looking at three different things. The first thing is making sure that you’ll put the money in and get a refund at a lower rate than when you’ll take the money out later on. That’s kind of the big trick number one with an RRSP.
Cameron: So if I’m understanding this right, so let’s say I put $5,000 into an RRSP. I get a $5,000 tax credit for this year and then all that $5,000 dollars goes into account where it can grow untouched until I finally decide to take it out and then it gets taxed. Because otherwise, that $5,000 dollars you take off a third and what’s left could go to investments. But this way the entire $5,000 can go and grow and just get tax at the very end right yeah?
Christine: And it’s actually it’s a tax deduction that what you get. So what that means is it reduces the amount of tax that you’re paying, and so let’s say like in your example. Let’s say you had a salary of $5,000 you put in the $5,000 into your RRSP. Well now, your taxable income is going to be the $45,000 instead of the $50,000.
Cameron: Which can be good sometimes because, if you kind of play it right can actually drop you down a bracket.
Christine: Exactly- and that is very much the name of the game, and that is how we determine not only who should put money into an RRSP, but how much. Because, like I said, once you get into those lower tax, brackets, you’re really kind of minimizing the opportunity, because you’re not getting as much back as you could had, you put it in when your income was higher. Or in an a one off year, where you may have received a taxable severance or some other lump some amount. That would really increase your taxable income for that year. So, when you do put money in your RRSP, what you’re actually getting back in a lot of cases is tax that you’ve already paid. So most people, it sounds a little silly, but most people have tax withheld from their pay checks. And it’s you kind of get used to it right. You get used to the amount. That’s going into your bank account every two weeks and you don’t really think about your gross your before tax before deduction amount. So because this tax has already come off the top. Now that you’ve made an RRSP contribution. You’re really just getting it back.
Cameron: And if you get enough of back, you get a refund to the end of the year.
Christine: You do yeah. So that is a positive thing and there’s also with an RRSP. Let’s say you’ve gotten you’ve put in more than you think it makes sense for you to use in that year. You can actually carry forward the usage to a future year, so you don’t necessarily have to take the full deduction, because if you get into a situation where you’re getting too much money back, you may have dropped yourself into a lower tax bracket where once again, you’re minimizing the percentage of tax that you’re getting back. I mean that’s not to say that no one loves a good refund. We certainly do but to a certain extent it does mean that you’ve overpaid taxes that year
Cameron: So all of this sounds well and good. But what happens if I put too much money into an RRSP in a single year?
Christine: If you take too much and you’ve gone over that limit? So let’s say: You’ve used up all of your RS P contribution and you’ve gone over that $27,000 and change, which is the maximum for this year. You can get penalized and this is something that the CRA tracks. So I do always encourage people to look at their My CRA account if you visit that online. Or even just your notice of assessment, which is the sheet of paper that you get back after you’ve, filed your tax return. Once someone has looked at it where they basically say yep you’re doing a ok, or nope, we’ve reassessed your account and guess what you owe some money. Or here we’re giving you back a little bit more. But that notice of assessment will give you the figure of what you have unused. If you are over, then you can be assessed penalties so there’s about a $2,000 wiggle room that they’ll give you. But then you’re taxed at about a 1% per month for whatever period of time that that excess amount is in your account. So you really, really don’t want to leave it in there. It’s a bit of a hassle, but it’s certainly worth it to get that money out if you have gone over. But let’s continue with our conversation and talking about maybe people that should not use the RRSP. You know and it’s a little contrarian because, like I said, nothing is more Canadian than in an RRSP. People here seem to love them and it was the only game in town for years and years and years. But going back to your very first example where you were saying.
Cameron: With the pirates?
Christine: Not the pirates. Where you were talking about someone who maybe didn’t have a pension at work and didn’t have group savings and were really all on their own. So all of their retirement savings is going to come down to what they can do for themselves and if you put that same person in the position where, like you said, they’re trying to save for a down payment, maybe they’re trying to put their own kids through school through post secondary. There might not be a lot left to save. So in those situations where people enter retirement with very little saved. There’s a bit of a reliance on the government benefits that become available to people as early as sixty, but sixty-five is kind of the number for the bigger ones, but a lot of the government benefits care about two things: they’re, looking at your marital status, which is really just because they want to know if there’s two people earning an income or collecting a benefit in your household but they’re. Also looking at your total income and your income is very important because it will determine whether or not you meet these thresholds to qualify for some of these government benefits.
And if you find yourself in a position where your income is too high, because let’s say you put money into an RRSP and you’ve deferred it for all these years, and then you turn seventy one. Then the government starts to say: Okay, you know you’ve had all this great deferral time to pay some tax. So money has to start coming out of these plans at the absolute latest age seventy two. So you’re converting them over at seventy one to something that’s going to produce income, that’s usually either an annuity which is very similar to a pension plan or a registered retirement income fund (RRIF), which is where people get a percentage of the total balance in their count back every month and then anything left in there eventually gets taxed and paid to your your beneficiaries.
Cameron: If I’m understanding this right, you’re saying that you can only have your RRSP running for so long and then when you turn seventy one, they force you to convert into RRIF and you have to start taking withdrawals out of it. So you can’t just keep this money locked away indefinitely.
Christine: That’s right and that’s where the government benefits kind of come into play. So the big one is the Guaranteed Income Supplement and that’s for people that are over age sixty five, and the qualifying threshold and keep in mind that this changes every year,. But right now, if you’re, a single widow a divorce. So if it’s just you and your household, the threshold is about $19,248 So that’s pretty low right, so that’s really a person that is just receiving government benefits, and maybe they have money in a tax free savings account that they’re also taking income from on a regular basis. But that does not show up on your tax return. So you can’t actually it would not affect qualification. The way that a withdrawal from an RRSP or a RRIF would. And it’s not chump change we’re playing for either the maximum pay out for a guaranteed income supplement is just under $950 per month if you’re single and it’s lower, if you’re a couple. It’s about half, $500 and a, more than half, $571 and the income test goes up as well to the mid $25,000 range. But that’s something that if you have more taxable income than you would have, otherwise that could affect your ability to qualify. There’s also the Old Age Security benefit, which is something that’s very familiar to Canadians, and that’s one that has a threshold on the higher end. where, let’s say your income is higher, so you’re not receiving the guaranteed income supplement, but you could be in a position where your old age security gets clawed back. If your income is over just over $79,000 this year. And it’ll be gone completely if your income exceeds $128,000 and change, and that’s again this year, because this does this does adjust annually. So it’s a bit of a moving target. The amounts are always different. So those are things that you want to consider: it’s not necessarily just putting the money in and getting that tax deduction. It’s making sure that you’re using the type of a count that makes the most sense.
So if we pop over to TFSA’s that we kind of touched on briefly here, you know they started out small and people really weren’t, maybe giving them the attention that they needed. Because it was originally just $5,000, and you know that that doesn’t really move the needle for a lot of people. But if you were eighteen, when the plan started in 2009 and you’ve been getting your contribution room every single year by 2022 that’s $81,500. So if you’ve got two people and they each have TFSA’s that they’ve been maxing out over these years. Then it becomes a significant amount that you can play with a so. I love TFSA’s for two different reasons. The first is, they are an excellent way to save and watch your money compound and then take it out tax free down the road. So when we’re talking about deferrals for RRSP’s, take out the deferral part, this is just fully tax free. So I like, if someone tells me they’re, using their TFSA for long term savings or for eventual legacy reasons to pass to their children. I love putting the highest growth assets in a TFSA because you want to maximize you’ve only got so much contribution room. So you want to maximize how much you can keep tax free as long as possible.
Cameron: If So you’re saying your experience: Do you prefer putting like managed, equities or seg funds like that into TFSA’s instead of like bonds or GIC’s?
Christine: That’s right. When TFSA’s first came out, you saw the banks do, we had so many people that you know would say to us? We’ve got this TFSA being offered to us by the bank, and they really didn’t realize that you can hold such a wide range of product within either a TFSA or even an RRSP. And we saw a lot of people put GIC’s in these TFSA’s which, in my mind, is a great under utilization. Because A interest rates are so so low. So, yes, you’re not paying tax but you’re not paying tax on a couple bucks. So what was what was the point right? Is that something that would have been better served in in your bank account and your regular checking account or something like that, because your tax bill would be very minimal. And maybe the TFSA could be used for something else. So going back to my number one rule where you want to use a tax preferred account, it’s an RRSP or it’s TFSA. And TFSA’s as hold a lot of great advantages for people who, in their later years, when they’re, trying to control their income want to take out lump sums. So think about it this way. Just picture yourself as retired. So you’ve stopped working life is good, but you know, maybe you don’t have a pension, you’re living off of your own savings right now and you’re trying to keep your old age security, and you know you can’t bump your income up over a certain threshold. But this is the year that you wanted to take a nice vacation. Maybe it’s a big wedding anniversary, but your car just broke down and your roof needs to be fixed. So there’s a number of things that will require big chunks of change like big lump sum, withdrawals of cash. And where’s it going to come from. I love TFSA’s for this type of reason. Because it’s not going to show up on your tax return and that can be a really, really good thing.
Cameron: Well, in some ways they could be a better alternative than sort of like the HLOC’s way people go, they have a big bill and they just take a line of credit out against their house. But you’re stuck paying interest on that. If you actually build up and take care of your TFSA, you can just take that money out. You’ll still have money there accruing interest, you just pay back at your leisure without any kind of penalties.
Christine: Exactly and I mean there’s other good benefits to like a lot of people. We’ve talked about downsizing before and we’ve talked about people that eventually need to move into care, or you know in BC here we have income tested facilities. Where kind of the standard is they look at your tax return and take about 80% of your income. TFSA does not show up on your tax return right and even a non-registered plan. Non-registered. So if we said RRSP is registered with the CRA so that they can control how much you put in non registered basically just means that it’s not. So it’s a saving type, that’s not tax preferred. And what that means is you’re going to pay tax each year on any income that you’ve generated within that account. So any growth or any gains.
Cameron: Not only are you being charged tax, but you’re also dealing with capital gains you’re dealing with dividend income taxes, you’re dealing with a whole bunch of different things that you don’t have to really worry about with the TFSA. So, with a lot of people better to like kind of max out your TFSA and then can go, the non registered route later. Where a lot of people do it the other way around. They have their non-registered, but they never used their TFSA and they’re, stuck dealing with capital gains, dividend income, basic income tax and all that.
Christine: Yeah and that’s a huge, missed opportunity. Since the TFSA’s are available to us, if you’re eligible to open one. Why wouldn’t you kind of thing right because, like we said you can you can invest in most assets that you would want to invest in in a non-registered anyways. So that can be segregated funds, which is something that we use quite a bit for estate planning at our practice, which is it’s a very, very efficient way to pass money to the next generation? You can hold mutual funds. You can hold ETF’s, you can hold a whole wide range
Cameron: And even some companies will let you hold just stocks through your TFSA.
Christine: Ya you know, and if we’re circling back to RRSP’s self directed RRSP’s were very popular because some people want that ability to manage things themselves. But going back to non-registered plans here. Capital gains, that’s kind of one of these. These big uncertain question marks right now right when, when we’re talking about the capital gains inclusion weight, so half of it, it’s fifty percent right now, which means half of your gain or growth, is taxable. But the government can change that just by means of a policy change you know, kind of whenever they want and with our federal debt being at a record high. That’s definitely something that is probably going to be grabbing people’s attention in the near future. So when you use a non-registered accounts, you really are leaving the taxation in someone else’s hands to a certain extent, because you can’t control what that tax rate is going to be what the inclusion in your income is going to be so, like Cameron said, I love the idea of TFSA’s first and then non registered as a last resort and the RRSP’s fit kind of somewhere in the middle, depending on what your income will be during retirement. And I think that that is something that more people. It really serves you well to do an income retirement income projection just so that you can kind of ballpark where your income is going to be, because that will really help you make a lot of these other decisions about. How much should I put in my RRSP give that I could have tax deferred growth, for whatever the period of time is from now until your retirement. But if you do decide that an RRSP is the right fit for you, there are kind of other variations of RRSP’s that you might want to look into as well.
Spousal RRSP’s are something that we’ve seen are very underutilized and they’re an incredible tool. A Spousal RRSP is basically where you have a couple that is either married or in a common law relationship, and one of the two partners earned significantly more than the other. So or maybe one is a stay at home parent, but in either case there’s a difference, a significant difference in income and for this strategy to work well, the higher income earning spouse has to have some room available to make a contribution. Because the contribution will reduce their unused RRSP contribution room and not their spouses. So basically, if I’m the higher income earning spouse in the scenario, I would put money in to an RRSP in Cameron’s behalf. I would get the tax deduction, but the money that I’ve put into the RRSP becomes his property, so I’m actually giving that over to him and down the road when we’re both retired. Instead of just me taking out from my RRSP, which couldn’t push me into a high tax bracket, we now have two registered products, two RRSP’s to take out of. So now. He and I can both move through the lower tax bracket all the way up, or as far as our income goes, so that were really splitting the income. We’re splitting the effect of taxation between two people, and that’s just one of the benefits of if you’re married or, like I said, in a common law relationship. You can use that to your advantage, and it really does help lower your overall tax build during retirement.
Another great use of RRSP’s if you have a group plan at work. Now, we’ve seen group plans become quite a bit more popular and I mean it’s a product that we do as well. Maybe that’s why we’re seeing it. But fewer employers, unless your part of the public sector are willing to make that commitment to give you a defined benefit pension plan any more. And what a define benefit pension plan is. Is it’s a product that basically says when you’re sixty-five you’ll get x amount of dollars and they guarantee that for the rest of your life? Now that can have huge unfunded liabilities that can cost the company lots and lots of money, or in this case the government, so there’s been a shift away from these
Cameron: Yeah with defined benefit, it’s essentially, you’re guaranteed to get a certain amount, no matter what happens in the markets. But the same time. companies are unwilling because of the cost, or we have other examples, such as when Sears folded a couple of years ago. There are still all those pension liabilities that are being fought out in court right now. So you need the company to survive, and you need the markets to cooperate. Which is why a lot of non government employers have kind of pulled away from this.
Christine: And what they’ve been doing instead is these group RRSP’s, and most of them are structured with a match. And what a match is, its basically, the employer saying we’re going to offer you up to a certain percentage of your income. So it might be one percent, two percent five percent, but you’re only going to get that from us if you also put in that same amount up to the maximum. So the one percent, two percent, five percent. And a lot of people kind of scratch their heads and go, jeese, do I really want five percent less in my take home pay? But they miss that it could actually be ten percent compounding on their behalf for as long as they remain with that employer.
Cameron: Yeah. I believe legally that after two years you get to keep all of it.
Christine: Yes, that’s right, that’s a vesting requirement and that’s pretty standard. And essentially what it means is, if you leave before the two year mark, you would just get what you put in back your own contributions. So in our example, that’s your five per cent. But if you’ve stayed past that to your mark, then that money becomes vested to you. so it becomes your property and at that point in time, if you leave, you would get that full ten per cent and, depending on how the plan is structured, there may be a requirement to transfer it over into a locked in plan. That’s a whole other conversation for a different day, but basically it has minimums and maximums and a bunch of rules around what you can take out and when so we’ll let that one be for now. But group plans with a match, always a great idea. If you have a group RRSP please talk to your HR and find out if you’re maximizing your usage in that plan. There’s also usually a representative with the company that is doing your group RRSP that can talk to you if you have any concerns about, if you’re investing in the right thing in your RRSP or if what you’ve chosen is appropriate for you. Because one of the downsides of these things is you’re kind of usually left alone to select it yourself. Unless you take that step proactively to talk to a representative from the company.
Cameron: And not just for employees but also any small business owners, this is also a great way to help retain employees and to act as like a reward system. Because it’s getting harder and harder to keep employees in a lot of sectors right now and any kind of added benefit like this can actually go a pretty long way.
Christine: It can, and it’s one of those good will things right. It makes everybody feel good, and you know we’ve seen some cases where employers are used to giving like a small cost of living adjustment. It might be under one percent or something like that, but sometimes they’ll just view this as part of the same thing. So it’s just something that has to be done to keep your employees interested so that they don’t go to the competition.
And there is another benefit of having money in your RRSP. If you are trying to get into that home for the first time and yourself and your partner or your common spouse, or marriage partner have not yet owned a home. You can actually use your RRSP for up to $35,000 that you can borrow from yourself without having to have this be taxable. And you get fifteen years to pay it back. And that’s a really good advantage, because, when you’re saving with an RRSP, we were talking about how you get that refund right. So, depending on where your income lies, you might be getting 20% back. You might be getting 30% back. You might be getting more. What a lot of people will do if they have a goal like using the home buyers plan, is they’ll put money in the RRSP, with the idea that they won’t go over, that $35,000 limit and then they’ll use the refund that they got from putting that money in the RRSP’s to put it back in the RRSP, generate more of a refund, and it actually gets them to that $35,000 goal faster. Because not only are using your contributions, you’re accelerating it by also using your tax refund. And when we do, this kind of planning for people will look at where they fall in the tax brackets and we’ll look at how to maximize that. So we’ll set up a certain dollar amount that they should put in each year over a period of a couple of years, just to get that taking care for them. There’s also the lifelong learning plan, which works in a very similar way to the home buyers plan. And it’s for people, even adults that are looking to go back to an accredited secondary education. That one has a maximum of $10,000 that you can take out per year for a couple of years. So it’s a bit of a lesser benefit but still useful to some people.
Cameron: All this sounds great, but how do I actually get an RRSP or a TFSA? Do I just go downtown and yell on the street, Hey, give me RRSP and someone from some financial firm will come downstairs. Or how does this all work?
Christine: Yeah, I mean lots of people, do them at their banks. My big concern there is, you might be getting the flavor of the week and maybe not necessarily the financial planning advice that could go with that.
Cameron: And with the mutual funds, the new Know Your Product regulations, a lot of banks are actually getting rid of a vast majority of their investment offerings. All of the third party stuff is gone. So you’re getting a very, very small pool of options. Now,
Christine: That’s right. We’ve always been advocates of using an independently owned and operated firm, which full disclosure we are. But I think the big advantage there is, I’m contracted with a number of these big banks, as well as a number of other companies as well across Canada. So we can really take a high level of view. Look at product look at fit and there’s such a huge range of funds available. We like managed funds solutions, but we also have passive funds for people that like to follow the indexes and just do some bench marking at much lower fees than you would. If you had like an actively managed solution. So we always encourage people to shop around and if they come to our door, we can kind of show them that you know we have a lot to choose from and that really does help us give a better fit.
Cameron: With an independent, firm like yours, you can kind of show people the good, the bad and the ugly from about a dozen different carriers and banks right?
Christine: Absolutely. So I always encourage people to get a second opinion and I to make sure that they’re getting advice, because, whether you do it at the bank or you do it at an independent planning firm like ours, you are paying fees in the form of the management expense ratios if you’re using a fund to invest, and we want to make sure that you’re getting good value for the money that you’re paying. So we always offer our planning services as part of the package when someone chooses to use us for their investments. So rather than saying: okay, yes, we’re going to bill you X amount of dollars. We like to keep our phone lines open so that people feel comfortable calling us at any point in time when things change or when they just want to chat about what’s going on in their lives and how it impacts their finances. So we’re always available we’re always happy to meet New People, and you can check us out at braunfinancial.com we’ve got lots of content. That’s coming up on a regular basis, so feel free to follow us on social media, subscribe and check it out. We’re happy to continue to give you little nuggets and share little bits of information here and there, and hopefully, one day will get to meet you in person. So until then take care and all the best!
Christine: Hi everyone and welcome to It’s Personal Finance Canada. This is Christine and today, Cameron and I are going to be talking to you about year end planning for your personal finances. As well as just some ways to get yourself thinking and ready for the New Year.
Cameron: It’s Christmas time spend all the money, no worries, no consequences.
Christine: That can be part of the problem. You know a lot of people get caught up in the season and what a season it is, especially after all of us been that have been locked down for so long. You know we want to see family, we’re missing our friends and it is so easy to spend that money and then just kind of wait for the credit card statements to roll in in January.
Cameron: But it’s so easy to go spend money right now. Even last week I was out at a toy store. Like eight thirty at night it was still full of people. This is just the mood people are in right now. They just want to spend now and just worry about the consequences tomorrow. That is a future me problem.
Christine: Well and with COVID, a lot of people actually were saving quite a bit of money when they were spending less on discretionary purchases. So eating out. you know the things that we like to do going to the mall going to the movies. Of course, that’s not everyone. Some people legitimately had very hard times if there were job losses and things like that, but I think that with this Christmas season, Tis the season to spend. So let’s take a quick look about how to keep some of your income, and some of that can be done through some planning, quick disclaimer, of course, we’re not accountants, we’re not lawyers. We kind of just touch on these things for planning purposes, and then we always encourage people to talk to your own accountant or lawyer as relevant to get kind of the absolutely perfect response, that’s appropriate to you.
Cameron: So we’re going to talk about how to make the most of this time of year. Well, do you promise it’ll be 100 hundred percent Grinch free though?
Christine: I don’t think the season is ever completely Grinch free. So when I’m talking to people at the end of the year we’re looking at the ways things have changed over the past year and there’s a number of things that can actually affect you from a tax point of view. And you know when we’re caught up in the Christmas season. A lot of us aren’t really thinking about tax season. That’s just around the corner in the spring, but a lot of the planning that we do today can make that next season a little bit easier to handle.
Cameron: Tax season, an aka this season after the credit card bills come in.
Christine: That’s right so think of December. As your last looks and what I mean by that is, I usually kind of like to run through a little bit of a checklist with people to see what has changed and how some of those changes might have affected them in this past tax year. So, let’s first talk about COVIDI mean a lot of people were working from home in 2020 and 2021.
Cameron: Including us of all people.
Christine: Absolutely you know our office was part of that as well. We got closed down in March of 2020 and well we are reopen, and there is someone in there every day, five days a week now. We are still doing some flexible work from home hours as needed, because I think it did prove the model to a certain extent, but the government, the CRA, has actually acknowledged that people have different expenses. You know in these last couple years because of COVID and there’s an ability to deduct some of your work from home expenses up to a maximum of four hundred dollars. That came in in 2020 that we have again this year as well in 2021. Even if you don’t get the traditional slip, which is the T2200, that you usually need to get work from home deductions. So the CRA has a nice and fancy calculator on their website that can kind of help you through it, but it’ll it’ll. Let you take into account things like your phone costs, Internet, property taxes, some supplies that you might have had to spend a little bit of extra on all of the extras. So extra heating costs maybe if you’re in your house a little bit longer. Not necessarily furniture or the mortgage that kind of thing, but there is an allowance to kind of take that little bit of bite out for the extra costs that we had to incur to be home throughout COVID .
Cameron: Well, for us personally one of those costs included a new printer for you, because you had to replace your big fancy Ricoh Printer with something you can use in the house, so that would have fallen to on those expenses right.
Christine: Right and a lot of people will use cell phones right. That’s pretty common as well. Maybe it’s a call forwarding that’s been done from your place of employment to your phone at home. And a lot of employers I mean they still have the costs of maintaining their office space. So the employees are kind of on their own in terms of managing their own costs. The offset, of course, is you’re not commuting. There is some savings in terms of your wardrobe, your fuel, you know, maybe the depreciation, the wear and terror that could be happening on your automobile, but that being said, yeah, it costs a few bucks to live here and and eat here and and kind of continue business as usual from the home. Another thing that was very common throughout COVID is a lot of people switched jobs. I mean for some people they were laid off. They had to look for employment elsewhere for other people. There was just a change in their industry and I may be going forward. They kind of saw that the work arrangement was not going to be sustainable long term, so they were looking for something better and, to be very honest, a lot of people just love the work from home and are looking for a new situation that caters to that, so we’re seeing a lot of people change jobs at this point in time.
Cameron: This whole thing is kind of fueling the whole anti work movement even if you go on Reddit at any time r/antiwork is the big hot thing right now and a lot of people have gotten used to some of the changes. That’s happened in the last year. Some people want more out of their jobs, they want more out of their careers and lives. And all this is just creating a perfect storm where people just don’t want to work in the job they worked in before they want more, they want better. So it’s kind of make things more interesting going forward.
Christine: I think it also shone a light on work life balance. You know we were all on the great big treadmill before and we never took a break. It was just this continuous working all the time and no one questioned it. We had never really had a model before where it was feasible to finish at four o’clock or five o’clock or six o’clock shut, your laptop walk into the living room and be done for the day. Right or roll out of bed at eight o’clock and start at nine kind of thing, and I think people appreciate that especially families with young children, where maybe they need that flexibility and that little bit of extra time to help the kids get ready for school in the morning or off to day care. And I think it really has changed how we prioritize what’s important but from a tax point of view. It’s interesting because if you have had a job change, every employer that you work for, they really don’t know what you did before right. So how much you got paid at your previous employer and specifically how much tax was withheld. So let’s say you made eighty grand last year, but you worked two jobs and you made $40,000 at each of them. Well, each of those jobs is not taking into account the other, so there withholding tax at a tax rate that is appropriate for you having a $40,000 income that year and of course, they don’t know that you actually had $80,000 of income. So, even though you’ve had tax come off your paycheck regularly throughout the season throughout your working year, it might not fully capture the higher amount of income that you actually had. Because the tax rates in Canada are progressive and all of that means is, as you make more money, you pay a higher percentage of tax, both provincially and federally
Cameron: It’s sort of like a teared structure. It’s a certain percentage from like ten to twenty another percentage from thirty four of us to like everything is at thirty or forty is like the first ten is at a certain rate and then twenty to thirty is at a certain rate. It just kind of stacks on top of each other. And yeah, if your employers don’t know they could have slipped you in the wrong bracket, so it would take some adjustment at the end of the year With the flip sides, true with even things like EI where there’s certain caps where they may have overcharged you. So all his has to get bounced out at some point. So it’s not a huge surprise for you come April.
Christine: That’s right and yeah. Well, the decisions that each employer made have made were perfectly correct for their situation. It might not have taken into account the whole picture. Another thing that we saw a lot of this past year in 2020 as well were severance payments right all people that were getting let go often they would receive the letter, the big ominous letter, but also the package. So a lump some payment part of it is usually tax deferred. So you could put it in an RRSP, or a locked in account for later. Meaning it doesn’t affect your taxes in the year that it was received, but there’s usually a portion of that that is added as taxable income. And it’s a big chunk, that’s usually representing, depending on how long you’ve been with your employers anywhere from a couple weeks to several months worth of pay right. If you’ve been there a good long time, it can really add up and some employers kind of increase that because they have to account for the years that you’ve spent with them.
Cameron: Especially if you’ve been there longer and they’re trying to push you out, bringing someone to do the same job for half the rate.
Christine: That is a sad reality right. Cost of labor for a business that struggling is labor is usually one of the largest line items for any business. So it’s something that has had to be controlled if a business is maybe not bringing in that same level of revenue, even with all the coved benefits that they were pre pandemic. So if you received a severance, you would want to really make sure that you have a clear understanding of what portion of it was taxable and how much is going to add to your taxable income that year and then, like Cameron was saying, think of it like a stack. Stack that income on top of the income that you’ve earned at your other jobs and find out how much additional tax you’ll owe for that portion.
Christine: And there’s a kind of a quick, easy way to check one of the tax websites that I like and don’t hesitate just because I called it a tax website. “Tax Tips” is a great resource and they put out a combined provincial and federal tax bracket chart every year. You know it sounds a little tedious, but it’s very very clear. You can kind of look at it and say I’m at $40,000, this is what tax I will have to pay I’m at $80,000 this is what tax I will have to pay. And if you get your year end, your final tax pay stub and you can kind of see what’s come off throughout the year from all jobs. Plus you’ve looked at your severance as well now. You can kind of figure out what remains and then you’ve got a few options right like there’s, always RRSP contributions that can be made. So that’s a double benefit. Your helping future. You save for your retirement that big, long stretch of time where there won’t be a pay check, so there’s a huge benefit there, but there’s also the benefit of that deduction that you’ll get right, because once the money is in the RRSP you get your tax deduction and then future growth becomes tax deferred until you take it out one day. And if you’re feeling philanthropic charitable giving if you have the means, is another wonderful way to earn some tax credits that can be helpful to you. There are both federal and provincial credits up for grabs, so the federal one is the one that everyone talks about on your first two hundred bucks. It’s fifteen percent; okay, that’s not that exciting, but it’s twenty nine percent! For the remainder after that, and if you look at us here in BC, I mean okay you’re only getting 5.06% percent on your first two hundred, but after that it jumps up again as well to 16.8%. So when you combine these, it’s a nice little bit of a tax break and you’re doing a good thing as well, and that’s a that’s kind of a nice way to end the year.
Cameron: Well, that’s sort of the whole reason why you get tax credits, it’s supposed to be some funds donated to some organization to better or benefit society, to essentially take some of the burden off of the government. So that’s why they give you these credits to encourage you to go out and help these other people, so they don’t have to use your own tax income to solve the same problems.
Christine: Now, let’s move on to other changes that happen in people’s lives as well. I mean we just got through a period of time where people were spending unprecedented amounts of time kind of locked, literally in their houses with their families. And I think, unfortunately, as a result of that, we’ve seen a lot more separation and divorces come out of this pandemic time. And there’s, of course, the stress of the pandemic. There’s the stress of the new work from home arrangement. Lack of child care with a lot of the day cares that were closed.
Cameron: Or the flip side could be you weren’t able to work from home. So you have the added stress of being out in public with people who are already stressed out, so some people have the stress from being home, but a lot of other people have the stress of having to have been on the front lines during all this, and then you just bring that stress home.
Christine: Absolutely and that’s definitely something that we don’t want to forget or ignore right. Those people that were out there working have all of our respect because they kept society running at a time that was incredibly difficult and usually for very little extra pay right, if it all. But back to back to the planning point of view when we’re looking over our year and we’re looking at things that have changed if you’ve gone through a separation or a divorce. As a result of this, this can have implications on your tax return as well. I mean, if you’ve got young kids at home there are government benefits that are income tested and they’ll, be looking at your family net income. So things like the Canada child benefit or even GST/HST credits, that’s based on family income. So if your family income situation has changed, there may be a different eligibility in the following year for, for tax credits. That can be helpful, especially if you find yourself in a situation where you’re going from duel income household to maybe stepping out on your own for the first time in a while, which can be scary and challenging as well. If spousal support is something that you kind of foresee in your future or that you’re coming up to next year, I mean that is taxable as well, so that will be a change to your personal taxable income and, to my knowledge, child support is not taxable. So if there’s care being received in terms of a monetary amount for the children and that’s usually something that’s not claimed on your income tax.
Christine: Another thing you might want to look at is capital gains or capital loss planning, and this is typically done at year end, because that’s the point in time, if you have stocks or mutual funds or other types of funds that have capital games or loss, they will put out their distributions reports at towards the end of the year. So that you can kind of take a look at how much either you made or didn’t make over that period of time.
Cameron: And on the stock market this tends to be the time of year, where a lot of holding companies and hedge funds and mutual fund companies tend to dump some assets just to lower their own capital gains, so keep an eye out for that too.
Christine: That’s right! This is definitely seasonal and there is some capital loss selling that will be done very strategically to offset capital gains. And I mean you can’t really have the capital gains conversation without talking about the capital gains tax rate. Right now, it’s at 50%, but there’s been a lot of talk and, of course talk is just talk until it becomes policy, but there’s a lot of talk about using capital gains, a higher rate it. So it’s been, it’s been more than 50% previously and there’s talk of having it go back to 75% to pay for some of the COVID spending, and things like that. So I think that’s something that’s going to be on people’s minds as well this year, because we know that it’s not changed for 2021 , but we have no idea what it’ll be at later points of time in the future.
Cameron: It is a minority government right now so really expect the unexpected.
Christine: Well, that’s true! Everything can be negotiated right. It puts a lot of extra things on the table, and I mean budget management is going to be something that is coming up in conversation with all of the debt that we’ve incurred as a nation over the last couple of years.
Christine: Speaking of COVID benefits, if you’ve received some keep in mind that the most common ones are taxable. So the CERB benefit that was very widely received is didn’t have tax come off of it right? So you received a gross amount, but that will also be added to your taxable income. So it didn’t get added to your taxable income, but you’ll have to do the job of making sure that you have enough money set aside to pay that tax bill when it comes.
Cameron: And on the flip side, CRA seem to be pretty active on just taking it back if they don’t agree with the reasoning that you applied to CERB in the first place, so you have to make sure you squirrel away at least a third of what you had and CERB come in over the past year. So you can pay that tax bill and just make sure you actually applied honestly for CERB, or you like to pay back all of it.
Christine: Well, and I think that stands for a lot of the benefits that were received. They were handed out very, very liberally during that period of time, and you know I guess that had to be done to make sure that there was money in the hands of people that needed it so that they could eat and keep house keep their housing expenses paid, roof over their heads kind of thing. But I think now the sentiment has shifted and if you speak to a few accountants, you kind of get the sentiment that there is a day of reckoning coming and there was a letter that was floated around someone had received an audit from the CRA. And I mean you’ve seen a few stories I’m sure about this in the news as well, where I think there’s going to be a lot more review of, and audit of these benefits because well, the purpose was to get money in people’s hands quickly. Now the government’s job is going to have to be to make sure that the people that received it were actually the people that needed it and that it wasn’t kind of just given out willingly to the wrong people. Or to the people that were technically not qualified. So that’s something to kind of keep in the back of your mind as well right. We’ll see what they do and how hard of a line they draw with this, and it may be different for businesses. It may be different for individuals; we don’t know yet the reality is we haven’t seen it.
Christine: But let’s, let’s switch focuses now and let’s talk more about the positive with the year and there’s always a new beginning. So that means January is coming right around the corner and we’ll go from saying merry Christmas to happy New Year and this period of time for a lot of people is a period of reflection. So you’ve looked back and we’ve talked a little bit about the tax implications. But after looking back, it’s always great to look forward, and by that, I mean this is when people will kind of set their intention for the year to come. And I don’t necessarily mean the New Year’s resolutions that you know seem to be quick to fade out into the future. But we do like the idea of using December as a great month to set some measurable benchmarks for personal finance goals. And I talked about this a little bit in our first episode, where I love to see goals that are both measurable by money and measurable by time. Because you’re wanting to make sure that you’re doing everything in your power to get there and when people kind of have high and lofty goals or even just goals that are not clearly defined in terms of how much effort or money. How much work is it going to take to get there? Then it’s usually a lot less likely that they’ll follow through, whereas if you’ve kind of done the work ahead of time, you’ve costed it out in terms of money in terms of effort in terms of time and then you’ve stuck a timeline on it. So that’s to say, I’m going to have this done in you know three months, I’m going to have this done in a year. I’m going to have this one done in two years or if it’s a longer term retirement goal. I’m going to take this step to figure out how much money I need to be putting aside every month so that I can retire at my current income level.
Cameron: I guess you can say this is the difference between a goal and a wish. I wish you just kind of think it up in your head. You think, oh I wouldn’t be great. If I did this, it’d be great if I did that. But there’s no follow through You just kind of have this great idea or this half-assed idea in your head, but nothing materialize as this is why you need to be honest and take initiative in your life. A lot of people have made a lot of money writing all kinds of books on this subject, and all of it boils down to just write it down and be intentional. Figure out what you want come up with a couple ways you can get there and just keep yourself accountable, either yourself or someone you know, or even just put it on your wall with some Gold Stars tracking your way. Just to take it from a desire or a wish into something that’s real and attainable, which is what a goal is supposed to be.
Christine: That’s right, and I think your comment about just tracking your steps. Tracking your progress is one of the areas that people miss quite a bit. Every goal should have some milestones. It should have some definable and measurable points. Not the arrival at the goal, but on the way towards the goal where you can kind of say: Yes, you know what I’m not there yet, but I’ve done this, so maybe it’s I’ve saved my first $1,000 or I’ve paid off half of my credit card. So, rather than just waiting until you get to the very end, it’s making sure that you’re celebrating these little victories that happen along the way.
Cameron: But to give you an example, one of my personal, personal finance goals is to knock off my student loan this year. You figured out how much we to contribute. How much you need to work, how much we need to save and be disciplined and every single month we have our target goal that will hopefully entirely pay off my Master’s degree by the end of the year.
Christine: That’s right and that’s a worthwhile goal, because not only do we know that that money is now working towards paying off that debt. And the added bonus is it’s currently interest free. So we want to absolutely take care of that or take advantage of that period as long as possible.
Cameron: This is one of those COVID benefits. In BC and some other places both federally and provincially they’ve turned off interest up until, it’s either March 2022 or March 2023 It sounds like they’re going to hold up till March 2023. So this isn’t an excuse not to pay off your student loans. If you don’t have it, I’m saying this is a great time to power through it before the interest turns back on.
Christine: And the added benefit for us is once we’ve achieved that goal at the end of this year I mean a we’re not going to have that debt anymore. But B the money that we’ve allocated to that debt that we’re now used to not having as part of our regular spending, is available for the next goal. So what you do is you eventually get in the habit of having a certain percentage of your income or a certain dollar amount of your income? That’s working for you to help you achieve the things that are important to you, so one of my big things is to ask people to cost out their major goals and what’s it going to cost all in, because that number is crucial to figure out how long, how many months of payments at that rate? Is it going to take you to achieve that role and then from there you can say. Yes, this is reasonable or no it’s not, I better add more money each month towards this goal, but it kind of gets into this very positive cycle where your goals start to snowball. You’ve heard of the debt Snow Ball, where you pay off one and then another and another, and it feels like you know, your accomplishments are getting larger and larger. This can work in a positive way for your goals as well, because, like I said, the money is already going towards something positive that you value and that you can get excited about.
Cameron: Instead of having a debt avalanche, we’re trying to build something positive for the future by getting these habits and these practices in place so that you’re not always being chased by debt. You can actually be proactive in your life. Start saving, get ready for retirement, get ready for whatever expenditures you’ve got your eye o. Whether it’s something that’s you need to do for the house, something you want to do for fun, something you want to buy for yourself or you just want to start stalking stuff aside, so you’re ready to retire later or even early.
Christine: It’s all about momentum, and then, after that, once you’ve got that momentum going it’s everything that you think is important to you to focus on one. So keep that momentum up, and hopefully it can carry you into the new year and years beyond, and you can start setting and achieving your financial goals and if you’re in New Westminster or even in the lower mainland or anywhere in B C, we do we love to talk to people. We love to kind of help them get on track to achieving the things that are important to them, whether that’s retirement or some other goal. So give us a shout. We do virtual meetings as well as meetings in person. You can also visit us on our website at braunfinancial.com, and until then, all the best.
Christine: Welcome to It’s Personal Finance Canada. I’m Christine Conway, and I’m Cameron, Conway, and this podcast is a very personal look, at personal finance in Canada. Hi, everyone, it’s Christine and welcome to It’s Personal Finance, Canada. Cam and I are here today and wanting to tackle the very multifaceted home and housing affordability situation that we find ourselves in here in Canada.
Cameron: Are we promising to fix the problems?
Christine: Oh, my goodness. I wish it were that easy. But I would like to say that you know I fell into the trap for a number of years of thinking. It’s one thing: If we fix this, one issue we’ll solve the whole problem. And, unfortunately, for me it seems to be quite a bit more complex than that.
Cameron: Well, if it was that simple, I’m sure someone in Ottawa or in Victoria would have figured it out by now, but.
Christine: We would hope so and as a disclaimer, we are not professionals in this area at all, we’re, not economists. We are just two people that have an interest in this subject, honestly for our own personal point of view as well.
Cameron: Our own personal point of view of plus this is also something that you see a lot in your practice in the office, because this is the kind of thing that most people hit up again. It’s do I invest, do I buy a house? Do I have enough money to do anything that I want and housing is such an enormous part of your personal finance and your budgeting. That when it goes insane like it is recently like with thirty percent increase year of year than a twenty percent increase the year before that, and twenty percent increase the year before that. What used to be, Oh yeah, I’m gonna, go by a house, is now, can I even afford to live in this province anymore?
Christine: Well, that’s exactly it! You know five years ago, if you’re looking back 2016, 2017, it was a bit of a no brainer right. For half a million dollars you could buy kind of a starter home. You know it doesn’t have to be anything fancy, but you could have a bit of a yard have a little bit of a fixer upper but a place with enough space in a nice neighborhood to raise your family.
Cameron: I remember years ago to a still working at the post office. I would get so many real estate flyers, maybe the four or five six every single week, and I remember looking at them in my area, I’m thinking, wow, seven, eight hundred cave these houses. These are expensive, but now fast forward. Five, six years later, those seven hundred eight hundred thousand dollar homes are like 1.5 to 2 million dollars now and that’s putting it out of reach for so many Canadians.
Christine: So that brings us to a whole lot of problems. One of the most important impacts I think for our society is that we’ve got a whole younger generation that is looking at their future and realizing that it’s not going to be kind of what they felt like it would be when they were a little bit younger. So we all have that dream of maybe raising our kids in a nice house in a nice neighborhood and that single family home dream seems to be getting further and further out of reach for a lot of people, and not just you know, people that are struggling to make ends meet well paid professionals that are you maybe they’re, making six figures. Maybe they’ve got that career, but it’s still not enough.
Cameron: Yeah, its kind of sad that if you actually want to own a house in a lot of places in Canada these days, a six figure income really is the minimum wage.
Christine: It kind of feels that way, and on top of that, you need someone to be living there with you right. So that that puts everyone that single of perhaps more career oriented at a bit of a disadvantage just because it really does take to income these days to get into something other than maybe a starter apartment or town house depending on your region. So, let’s take a look at what I’ve kind of viewed as the major drivers of the housing problem, and I don’t think we’re going to get to all of them today, but we’ll do our best at kind of laying out what the key issues are and then in subsequent podcasts we can kind of continue this conversation.
Cameron: So we can figure out on a scale of one to ted how bad things really are?
Christine: Well, like I said I think generations to come will have that vote for us, but we are in a situation right now where people are having to rely on support from families right from their families from their parents, from that older generation to even get that down payment together. Because as the housing price goes up, you know getting that twenty percent is so much more difficult.
Cameron: Well and that’s not even a guarantee like if you’ve listened the last couple weeks with ours, disability insurance or critical illness talk and all of that. Depending on things, go your parents inheritance could have been eaten up by other stuff. So it’s even then it’s a 50//50 chance of getting some money from the Bank of Mom and Dad. So I can go put a down payment on this one point five million dollar eight hundred square foot shack from the 1930’s.
Christine: Well, we don’t want to find ourselves in a world where the only way you can have a home and own a home is inheriting one right. I mean that kind of steals the Canadian dream it takes us out of the realm of being able to pull up our boots straps and do it for ourselves and into the, oh, if someone doesn’t give this to me, then maybe I won’t have it.
Cameron: It kind of feels like a long depressing marsh right back to feudalism.
Christine: So, let’s, let’s do a bit of a pivot here and I’m going to start by talking about my one thing. So for years I was of the opinion that monetary policy and the Bank of Canada, so that his interest rates, were kind of the key piece that was fueling, the increase that we were seeing in housing prices and I’ll kind of explain my position there a little bit. When you’re qualifying for a mortgage, one of the key factors in determining how much you can afford and also what your payment will be is the interest rate. And, of course, over the last decades so not decade. It’s been a number of years now, where we’ve seen this great downward trend in the interest rate. And for a while, you thought, okay, great you’ve got more purchasing power, but unfortunately, what seems to have happened is people will go to their mortgage broker and they’ll get their pre-approval and because this market has been so competitive, they’re, basically having to spend everything that they qualify for. Whether or not that’s a good idea that’s another conversation.
Cameron: Well, they kind of have to get whatever they can because they’re competing with a whole bunch of the people, they’re competing with corporations. Like I heard a couple months ago to even Zillow down in the states had to lay off a whole bunch of staff, because he they’re automatic bots or buying up houses way over asking, they’re struggling, so you’re fighting with people from every single different direction. All of them have more capital. So if people are kind of forced to get every single, nickel and dime that can get out of a bank.
Christine: That’s right, but if the Bank of Canada controls the interest rate, so they set the overnight rate and what that is. It’s the interest rate that banks used to kind of trade to each other, to even things out at the end of the day. But it’s also the rate that they use kind of as a benchmark when each bank is kind of determining what they’re going to lend out to the general public. So a lower rate is essentially trying to stimulate growth and that’s why we’ve had interest rates so low for so long. So when you’re looking at the Bank of Canada, they have four core functions and the one that I want to kind of talk about a little bit today is monetary policy. And that is essentially directly tied to the interest rates and they kind of have a bit of a duel pronged mandate where they want to see stability in terms of jobs and the job market, but they’re essentially saying that they’re trying to preserve the value of money by keeping inflation low, stable and predictable. And you know if you read a little bit further through the information that they put out on their website, they’re trying to say that they want everything to be kind of secure for Canadians and they want cost of living to be manageable. And I’m paraphrasing a little bit here. But they have a target at this point in time. They do have a mandate that renews so it can change in the future. But right now the target for inflation is between one to three per cent, and it’s quite a bit higher than that.
Cameron: Oh Yeah. We’ve been kind of budding up against four, four and a half, five and it’s the same thing in both sides of the boarder. Americans to have been fighting with five percent inflation month or month since about August.
Christine: I believe I think it’s over six percent over there now and the Bank of Canada has kind of been like okay. Well, let’s not shock the market too much, although they have been starting to forecast that they will be raising the rates in 2022. and beyond.
Cameron: So Bank of Canada is kind of taken the frog in the pot mentality. Just do it slowly and we won’t notice? Or are they worried, that’s just going to blow up in their face if they don’t.
Christine: I feel like we’re in a situation where it’s kind of like whether you do or you don’t there’s, there’s negatives on both sides right. So, if you leave the interest rate, low people will continue to borrow so that will essentially add fuel to an already hot fire and how high can it go? Well, how much money can we borrow right collectively and it’s not just what you can borrow? It’s what can you lever if you’re already in a property and you’ve had all these great increases to your equity? But if you leave it and don’t do anything, then this inflation is going to start running out of control and then you’ve got a problem where it’s not just housing that becomes unaffordable, it’s everything.
Cameron: Is that kind of what happened in the States and parts of Canada back in the 60’s where energy prices, inflation started going out of control. And then you get to the 80’s and then you have ten fifteen twenty percent interest rates, which was kind of the backward swing to kind of combat all those other problems that were having before.
Christine: And in the 80’s we had something that got to be known as Stag-Flation, which was basically stagnant economic growth. So not a lot being produced of value in terms of our GDP. And inflation that’s been going absolutely crazy and I think it puts the Bank of Canada in a precarious position where they almost have to increase interest rates. Or at least that’s what we saw historically just to kind of say, okay pump the breaks here guys stop borrowing money. That’s why those two things go hand in hand. So in one point of view, productivity is slow right, so you want to stimulate that productivity, but when inflation is too high and everything else is gone out of control, then there’s no stability for day to day people just because, when things increase in value it’s so hard to see them go back. That other way right like when prices of food or other goods increase, we don’t often see them, adjust downward.
Cameron: Well, no because a lot of companies they just what’s the point? We’re charging this right now people are buying so just keep it at that rate. Lets keep it that high. Unless people fight and complain and go somewhere else, then it’s not a problem. But the problem is especially in Canada, is we’ve got so few companies and so little competition, there really is no ere else to go to half the time. When prices really do start to go up. Even with groceries, we got what three or four real options and if they all jack their prices at the same time, there’s not much you can do with that was that whole bread pricing, scam that was going on a few years ago were Loblaw’s and some of the others got caught. So there’s no incentive for the companies to really lower prices afterwards, because then they just boost their own income. They kind of fall into that same wage, verse productivity trap, we’ve kind of been into since the 80’s where productivity has skyrocket, wages have a kind of stayed stagnant. But amongst that stagnation of wages, the housing prices have gone up exponentially.
Christine: And this is the conversation about inflation. It’s really all about the devaluation of a dollar, so your dollar today purchases less than it could previously, and what I think for me is concerning with the housing market is not only are we fighting. The high cost of goods were also in a position where interest rates are so low that if the Bank of Canada kind of does keep its promise and rise raises the interest rates we’re going to start seeing not immediately, but on the renewal of your term, your mortgage term, that pricing structure getting quite a bit higher. So if you’re in a mortgage today and all of a sudden, you know it’s a couple hundred bucks or more higher on your renewal, I mean you have a couple choices, one of the banks, nasty tricks which I don’t like, but you see it all the time. is they like to try and extend your amortization period. So, let’s say you’ve been in a mortgage for ten years, you’ve made a ton of progress, you’re starting to pay down your principle. It’s feeling good, and then they say. Oh, we got this great deal for you, but all you have to do is re-extend your period to twenty five years. But that means you’re back at the beginning. And we’ve seen this quite a lot with lower interest rates where people were trying to drop that payment even further. Trouble is now if you’ve got a longer amortization period, you’ll have less wiggle room. If you have to extend your mortgage in the future because of a legitimate interest rate increase.
Cameron: Well, then you’re paying exponentially more than what you actually paid for on the house, like even on a standard like twenty five year mortgage, you spend a million dollars on a house, you’re, probably spending one six hundred and seven total after interest. And if you keep dragging this out for another five years, another ten years he could have spent two or more million on a million dollar house.
Christine: You’re, essentially paying expensive rent to the bank right. But think about it from the bank’s point of view, even though you on paper on your home, they have a right to it to a certain extent. Just in the sense that if you don’t make your payment there’s a repossession around the corner, so that stability that comes from owning a home. You know it’s kind of questionable and of course it’s in their best interest. If I’m a bank and the most important thing to me is being profitable, then of course I’m going to want to keep as many people locked in for as long of a period of time as possible. But the problem is that if we truly are now at the bottom of the rate cycle, and I mean the overnight rate, is so, so, so negligible right now that if they do start going up, your payments will increase right. And that’s something that people aren’t prepared for, maybe necessarily, but also that those dollars are going to be competing with the increased cost for everything else. With this inflation problem that we’re talking about.
Cameron: So when it comes to the banks, are you saying the only way you can actually win it just to go buy some shares in the bank?
Christine: Exactly get some distributions through dividends and things like that. A lot of them paid great, stable dividends. But yes, you want to be in the owner class and kind of not on the other side of it. So when we’re looking at interest rate history- and I mean I just pulled this quickly off of Realtor.ca There’s no shortage of calculators on online that will give this information to you.
Cameron: And a loan to go with it.
Christine: And a loan to go with it. So competitive out there. But when you’re, looking at the average five year, fixed rate mortgage, which is the most common type, it’s what most of us have and you’re looking at the period of 1980 and 1990 that average rate was 11.92 percent. And you know if you go from 1990 to 2000. It was 7.23 percent and even just a little bit further 2000 to 2010 it was 3.89 percent. So you can see how people have kind of gotten accustomed to things, getting cheaper and cheaper and maybe not prepared for what will happen when things get more expensive. I think, in my mind the greatest risk factors these people that have purchased in the last few years.
Cameron: Well. I think it’s more in the last two or three years since the real spike has happened.
Christine: I was going to say with COVID we’ve completely changed the way we make decisions about where we live and work right. I mean that was never really part of the conversation before.
Cameron: Yeah, even a here in Metro, Vancouver with the whole work from home movement. Before there is a pretty clear difference in housing price, depending on which side of the river on. If you’re out in like Richmond Burnaby, Coquitlam it was a higher price. You cross over go to Surrey, Langley, Delta is much cheaper. But now this whole transition we’re finding that a place like Surrey is now on average, more expensive than Burnaby and Coquitlam and parts of Richmond, and that buffer zone or affordability places like Metro Vancouver. You see the same thing in Toronto with the GTA. Even I are like places like Sarnia, Ajax or other places that you don’t see that decrease in price anymore. Everything is essentially priced, pretty close to or as the same as the main core.
Christine: And that is giving people less choice right because it used to be the trade off of your commute to work versus location, and yet it does to a certain sense, feel like that’s gone out the window and we’ll see how things level out in the next few years see what kind of work models come out of this. You know if more people are working from home part time and they’ve chosen to live a bit further out than maybe they would have considered otherwise. Is that something that they feel will be sustainable if they have to go into the office three days a week? We’ll see you know that part is yet to be written, but I think now that we’re talking about variances and prices you’re talking about the GTA or even the lower mainland here in the Vancouver area. Let’s talk about the rest of Canada, because it’s not just a single note across the whole country, there’s such a wide variance and when you look at praising, so I love to go back to Winnipeg a for comparisons. right because I mean that’s where we’re originally from.
Cameron: Not to live there again?
Christine: Oh my goodness, it’s a whole new world right, it’s a whole different world out there. And but if you look at kind of the two, the two big areas, so the Toronto area, the GTA and the Greater Vancouver area as well, and then you kind of compare that to the prairies. Obviously, we’ve had big, big affordability, challenges here and out east as well, and much less so in the prairies. ReMax. Canada just put out a housing affordability report where they were looking at salaries, so salaries as a median per household across different geographic areas and what the housing costs so in Winnipeg you’re. Looking at a median household income of about $97,750 and housing prices on average, of course, of about three hundred and five thousand dollars. Where in Vancouver the median housing price is over a million now, but the median income is still about $97,620 twenty dollars. So actually slightly less than our Manitoban counterparts. So when you’re looking at quality of living that you can have, when your dollars are maybe redirected elsewhere as opposed to housing, you can have a stronger economy just because you’ve got people, consumers that have more money available to spend locally, as opposed to the problem that we may face here in the future, where the same amount of dollars are chasing fewer resources because more is going towards housing. So that’s part of the concern- and I mean it’s not just across the prairies if you look at Alberta, they’ve actually had decreases in their housing prices there. So I mean, I guess you can hand it to the Bank of Canada. It’s very much geographical, the problem.
Cameron: Well, that’s kind of what they’re saying they’re, even there was a report that came out last week, where the saying there isn’t a big national bubble to worry about they’re trying to say it’s just certain key areas like Greater Toronto area and the whole, well really now is the entire bit of southern Ontario, which is essentially price the same as Toronto. That stretches up all the weight of places like Thunder Bay of all places.
Christine: And that brings us to the conversation about supply and demand, and I don’t think you can talk about the housing affordability crisis without talking about that, and I think part of what the reason that housing in these areas or the Metros are so much more expensive, is because the demand just seems to be so much higher right. You’ve got immigration. You’ve got interprovincial migration that happens as well, so people moving from province to province to get somewhere else.
Cameron: Yes, we were part of the problem.
Christine: Yeah we’re definitely part of the problem, but you’ve got a large number of people chasing a limited supply in these in these areas, so I mean in BC here. we’ve had some things happen to kind of try and address this, and it’s going to be interesting in the years to come, to really evaluate the successfulness or not of these programs. And what I mean by that is, I mean in BC here, we’ve got the speculation and vacancy tax, which was essentially an effort to curb, or at least get some money out of people, not Canadian, so foreign investment that was using essentially Canadian real estate, as a piggy bank as a place to just stash some cash in the hopes that you would have this crazy appreciation that we actually did have over the last number of years. And then cash out, thank you very much have a nice day and also the Transparency Registry, which is another significant step forward. A part of the problem here is that it’s not just you and me, and your neighbor buying houses any more. It’s you me, your neighbor and a numbered company represented by who knows who that are also competing for that same property down the street.
Cameron: Yeah, there was a story a few months ago, out in Ontario, saying, they’re (this corp), going to pump like two billion dollars to go buy up single family homes. Or even just south of the Boricua, like ZIllow, that has essentially deployed their army of bots to go out and buy all these houses online. Now it’s bit them in the foot. Now they had to layoff a huge chunk of their staff because they over bought and over bid. This is what we’re competing with is not just people going to an open house and taking a flyer home with them. It’s people buying houses on mass, people with huge amounts of credit, people buying their third. Fourth, fifth, six house, you doing the same thing with corporations, it’s just a lot harder now to actually just, or just a regular family to go out and get a house without a bidding war or just over paying for it.
Christine: That’s exactly the problem, so you mention corporations and even every day people. You know they’ve seen these incredible increases in the price, and this is the very nature of any asset class bubble. Prices go up and up and up and people think they’ll, never ever come down and they want to jump on that gravy train. While it’s still going and I mean even today, I was reading the Financial Post and they had an article out. I posted it on my LinkedIn and my Facebook as well, so you can go back and take a look. But it was saying that half of the spending, so non consumption spending, was on housing and what they’re getting to was, if you kind of go through the article, was that people are taking money, investment income that would otherwise be going into productive assets, so non residential investments, like maybe buildings or infrastructure equipment or software, the business side of the economy. It’s just getting put into real estate right and- and this is the numbered company problem that we’re bumping up against where the Transparency Registry here in B C, is attempting to address this. Who are these individuals who is controlling this property? And the whole point of the Transparency Registry? Is that if you own over 25%, then your name goes on the list and they can kind of see the province. I mean, can kind of see all of your associations, so I control company number one, two, three four and five, and what’s in them?
Cameron: Well you just going back to that Financial Post article you’re talking about it, also adds to the entire problem of the stagnation of the economy and wages, everything else, because so much money is just being thrown into these properties and into these mortgages that it just can’t go out anywhere else. and that was the whole reason why even the states they had all this stimulus this money just to throw cash into the economy, get people moving and doing things. But more in parts of Canada, all that money, all the disposal income is just going into a mortgage. It’s not helping the overall economy, it’s not helping people in general. It’s just being squirreled away in someone’s basement to sit there for twenty thirty years.
Christine: So the question is will prices just go up and up and up and up, and I think that’s a very regional question that we have to ask. And I think that part of that looks at the movement of people and where people want to live so part of that is. This is all part of the demand side of the problem, so part of that is immigration and like we were touching on interprovincial migration as well. But if you look at Canada’s immigration policy, so in 2021, even with everything going on in the world right now, we were on track to and I think we did bring in 400,000 people this year. And if you look at their projections for the next couple years, it’s like 411,000 in 2022 and 421,000 in 2023 So I mean that’s another 1.23 million people and presumably families down the road as well that are going to be looking for homes. And when you look at those numbers kind of without saying if this is good or bad you’re. Looking at where they’re going and you’re saying, okay. Well, if we look at the last census, so statistics, Canada in 2016, thirty six percent of those folks ended up in Toronto and twelve percent in Montreal, and thirteen percent cent came here to Vancouver. So you’ve got an ever growing population that needs a home because you know you can’t bring one with you kind of thing.
Cameron: It’s essentially an ever growing bidding pool for houses and whether it’s buying or renting. And the housing starts are just not keeping up like we’re probably about twenty years behind on housing starts and then you’re dealing with the whole and NIMBY aspect. Like even in our neighborhood we’ve had what one or two towers canceled because of locals complaining, every time they try and bring some any kind affordable housing it gets shot down by people. So you have this fight of there’s no land to build. The people don’t want the building and where all these people going to go? Even in downtown of Vancouver, they’ve, essentially run out of industrial space to rezone, and they’re being forced to push out into the single family areas to try and get some more density in. But every step of the way it’s just a huge fight and where else do you go?
Christine: Well, and this is the supply side issue right with an increase of population. There has to be densification, especially when people want to live in the same areas and that’s not just saying the same cities, but it’s also narrowing the down that further and saying they want to live close to transit public transit. They want to live close to major city, centers shopping malls, other parts of the infrastructure in our society, where people want to be right where the action is.
Cameron: Or even for us on a local level you look at Surrey like around 104 and King George, that’s exactly you’re, seeing. You’re, seeing dozens of towers going up. You got the hospital there. You’ve got SFU, you got the UBC expansion coming, hospital right there and you see that core just exploding, because they’re actually trying to build up that area. Take it from those single families or those four or five story- apartment complexes, they’re putting in thirty forty story towers, but a lot of areas they’re not as willing to go that route.
Christine: So let’s talk about NIMBYism, so that’s the, not in my backyard mentality. That can really hinder the change of use that we need to see to house all these people. And it’s, I don’t want to, this is not a political discussion in any way. We’re not going to kind of show any colors or take any sides on this. But a lot of zoning takes place on a municipal levels. So that means the city that you live in makes a lot of the decisions about how land can be used. Is it going to be single family? Is it going to be multi family homes and some more established neighborhoods have the mentality that you know: We’ve had single family homes for ever. This is how we like to you know raise our kids. We’ve been here for generations will pass this home to our kids one day and they don’t want to see multi family homes or town houses or apartments in that area, and, like you had just mentioned, we’ve seen some of that in our city, as well and in the surrounding cities, also, where there’s a huge push back. And this is where it gets political, because the people making these decisions- the Mayor City Council, they are under a lot of pressure from their constituents, so the people that are throwing their votes their way or not as to whether or not they’re going to allow this and how they’re going to vote now. There was a proposal from the city of Vancouver that I don’t believe it’s gone to counsel. Yet I think it’s in January of 2022 where to deal with their need for dentification and as you’d mention lack of land. The proposal, and this is going to be a little bit crude and probably not as exact as it needs to be, but they were proposing using a normal residential lot and giving the owner of the lot discretion to have it rezoned into six sub lots that could be individually owned and to essentially try and densify that space. And I mean we’ve talked before about row homes as a solution. Non strata, so we’re not talking about a situation like we have here commonly now where, if you want shared home, you have to be a part of a community, a strata community.
Cameron: Well, this isn’t an out their idea, even the community. I grew up in to help with affordability issues they built several streets of row, homes that were not strata even in Europe, it’s pretty common. So I can see why they’re trying to bring this in here. Just try and deal with some of these issues, especially in a place that’s getting so densely, packed in like Vancouver, even as you see places like Toronto or Montreal.
Christine: But the big. The big question is: will these communities will these municipalities actually accept? These types of proposals- and I think it has to go beyond a municipal level as well, because when you’re looking at building affordability, building, affordable housing comes with a big price tag right, so you do need funding and you do need support from other levels of government as well. So this is not just a municipal issue, it starts at the municipality, but it must be supported by the province and has a much larger. Conversation must be supported on a federal level with real hard dollars, and that’s not just okay, we’re going to put in you know a couple hundred homes. It’s nowhere near the need like if you’re looking from a supply point of view. As long as there is a supply shortage in a major area, it will be very, very difficult to see a decrease in housing prices, because there will always be that level of competition.
Cameron: Like you said, we need support from multiple levels of government and we kind of saw some embers of this a few months ago during the federal election. But at the same time you have a politician’s willingness to help in this situation and then you kind of have the power of the NIMBYism, because as much as you don’t want to accept it, you look at what it takes to form majority government in Canada. It’s only probably like four million people. You need thirty, two to thirty three percent of the people who vote, as you vote for your party. We only have fifty to sixty percent of people in general voting that draws the number down. So if you have enough people among that four million that are an unhappy because of NIMBY or something else, you see a great unwillingness for a government to try and come in and step in and make these changes. Because of how close the races are. Since we sit since we essentially are in endless minority governments right now to federal level, it’s hard to look at them and expect them to come in and help. So it many ways were kind of left on her own to try and figure out how to deal with this housing and affordability issue.
Christine: So before we get too political, we should probably call it a rap about there Of course, there is so much to discuss and unfortunately, this problem is not going away. I think the best thing that you can do is get as educated as possible. I mean it affects not just you and me: It affects our whole future as a society in our ability to retain good, educated people that want to be here long term. This is really one of those tipping points I feel in our history. As Canadians, where you know, are we going to fix things and give hope to the next generation, or are we going to slowly evolve as a nation to the point where maybe people don’t want to be here any more and that’s a very sad thought, especially when you think of how unique and Multi Cultural Canada is and all of our strengths?
Cameron: I think one of the frustrating things is. I look it back at my grandfather. He got discharged by the army, he got his job at the rail line and he was able to buy a house pay it off. Take care of a family of six and retire comfortably, and even just retirement and owning your home just seems so impossible these days. It’s easy to see why people get disenfranchise and frustrated, but it’s also why we need to take more personal responsibility to try and figure these things out. So we can at least have a semblance of what other generations had that really we kind of took for granted up until a few years ago.
Christine: So, if you’re looking for an action item, education is always wonderful, but it really does start in our own backyard. It really does start locally and in our municipalities. So if this is an issue that affects you, bring it up to your local politician, bring it up to the people that can make these decisions and, from a personal point of view, make sure if you do have your own mortgage that you’re not just appropriately stress test from the banks, point of view from the lenders point of view. But that your budget can handle potential interest rate increases that could be coming down the road. So we want to make sure that people are not in the position where they’re going to be losing their homes if things get unaffordable and if their amortization is already as extended as it can be. There is a buffer there for a lot of people who have equity, but then again with the huge turn around and housing that we’ve seen. You know if, if you need a second opinion, please talk to a financial planner and just try and make sure that you are protected, that your family will be safe and that any of the changes that come can be managed.
So that’s it for today, we’ll have more interesting conversation next time. Until then from Cam and I, all the best
Christine: Welcome to Its Personal Finance Canada! I’m Christine Conway, and I’m Cameron, Conway, and this podcast is a very personal look at personal finance in Canada. Hi everyone and welcome to Its Personal Finance, Canada. Today we’re going to be talking about two of the most important living benefit insurances that you can buy. That’s critical, illness, insurance and Long-Term Care Insurance, and this is kind of our follow up to our talk about disability insurance on our last podcast.
Cameron: That’s right, we’re trying to make sure you are set up for the long run. It’s one thing to tell you about budgeting and how to cut here and safe here, but until you get these core pillars in place. A lot of these other things are a moot point because of how chaotic and unpredictable life is. So we want you to get this kind of stuff set up in your own life, so we can go into the real meat potatoes later so something does happen. It doesn’t ruin your entire financial future.
Christine: That’s right! Disability insurance was about protecting those pay checks and also it’s the premium that you pay to essentially secure your hopes and your dreams and your plans for the future. So when we were talking about it last week, we were talking about making sure that there’s money available to cover the every day these are for different periods in your life, so critical illness insurance, like the name implies, is when you have been diagnosed with and survive a critical illness. And typically in a contract, you’re going to see about a thirty day, waiting period that you have to fulfil before a benefit will be paid out. But the big point is survival, and I think when you look at the statistics these days, more and more people are recovering and wonderfully so and continuing on with a good long life after receiving a devastating diagnosis. Whether that’s cancer or heart disease, or any of these other horrible things that can kind of happen unexpectedly, at any point in time in our lives,
Cameron: Yeah, that’s true! Well, we both know people who have survived strokes and heart attack and it’s been five six seven years for some of the others. It’s been almost two decades.
Christine: And that’s the thing. Anyone you talk to these days has a story about someone that they know and they love that has had one of these major illnesses. The big ones in in most critical illness contracts. So the ones that pay out most commonly are heart attracts stroke, so any kind of cardio vascular issue as well as cancer. Those are the big ones as well, and besides our personal story, I mean you can always see the heart and stroke foundation or cancer. The Canadian Cancer Society they’re always providing us with updated facts and figures about the number of people that that this sadly impacts. So did you know nine out of ten Canadians have at least one risk factor for a heart condition, whether that’s a stroke or a heart attack down the road. Like that’s pretty scary, and when you look at the Canadian Cancer Society, their statistics they’re saying it’s, cancer, unfortunately, is the leading cause of death for Canadians up to twenty eight percent. This is 2019 stat people sadly passed away from cancer. And think the scarier part for me is when they’re doing these projections into the future. they were saying a couple years ago now that 44% of men and 43% of women are expected to develop cancer at some point in their lives. I mean that’s, that’s terrifying. You know there’s two of us in the room here today. That’s a pretty scary thing. But I think the even scarier thing is out of the 44% of men of men and 44% of women, 26% of them and 22% of women pass away. So that means every one else survived and that’s what this benefit is all about.
Cameron: Well, that’s true, like we hear about new developments for gene therapy and all the other kind of things, but there’s no guarantee it could be there in time. And there’s also no guarantee we could have that kind of treatment here in Canada. They could have developed in other countries first or we could be waiting for something made a happened or it could just be too far in the future. So we need to take a serious look of what’s possible good. What’s possible bad and especially something like this critical insurance. It could help us get treatment somewhere else other than Canada if need be.
Christine: Well, that’s exactly what it’s for so critical illness is a lump, some benefit it’s tax free if you were paying the premiums for it yourself, meaning not your company or not an employer paying for it for you. But I mean we know firsthand we’ve seen stories of people who’ve had a cancer diagnosis trying to go over to the states to get a a treatment that was not yet available here and the cost it can blow through some one’s entire life savings so quickly. But when there’s no other option, people will spend the money right, they’ll sell whatever they have to sell, because the value of a life, the value of that person they’re trying to save, is worth so much more than any stuff. You have anything anything at all, so critical illness insurance is trying to prevent that worst case scenario you’re already in a time of incredible stress and you don’t want to add more financial difficulty on top of it. So this is how a policy like this can really really benefit you today and not just you, and you know the people that you love. Your parents if they’re getting older, your family members, even friends. Cancer heart attack all these other illnesses they are so common these days. You know you hate to think of it from that point of view, but in terms of the ability to claim on on this type of insurance, it’s getting very, very high and critical illness claims. They are very easy to claim on if your condition is covered in the contract. All that you have to do is you and your doctor, just just prove to the insurance company that you do have this diagnosis. You wait the thirty days or whatever your contract stipulates, and then the money’s in your hands and the best part is there’s absolutely no restrictions on how you spend the money when or or for what reason. So, we’ve seen people do everything from pay off the mortgage because they didn’t want their partner to be burdened with that down the road. Or put some money aside for a family vacation. You know if recovery, the prognosis is looking really good, but the most common, I would say, is spending on getting better now trying to take that uncertainty in that financial stress off, so that you can explore other options and, unfortunately, for us that means going south down south, quite quite a bit.
Cameron: Or you go down south or if you’re, really desperate, you go further south or if you get extremely desperate, you go east to like Serbia Eastern Europe if you’re, really desperate. But still these are all cause that you have to pay for somehow. It’s just the whole game of I’m trying to survive, but if I don’t have that lump sum to try and do it, then you don’t really have hope.
Christine: It’s giving you options and options that are not attached with a big payment later or the financial worry that you’re going to burden someone that you love, whether that’s your partner or you know if you’ve still got young kids at home. That’s something you want to avoid!
Cameron: Yeah, you don’t want to just go into like a home equity line of credit and just burn through all of your equity and just make things harder for your family later on.
Christine: That’s right! You want to make sure that your partner or anyone who’s dependent on you can maintain that standard of living and that they can still have that lifestyle that you’ve built that you’re accustomed to. and we’re trying to to keep it keep in normal. A certain sense of you know what this has gone horribly wrong, but if there’s kids involved, you know you want to make things feel as normal as possible and it takes money to do that. So that’s that’s! How this helps that’s how this can benefit? It’s one, less thing to worry about, so that you can put all your full attention into recovering or, if you’re, the partner or the spouse in that situation, you can use your time and energy to help your partner recover. I mean we’ve seen situations where the person who has the illness will get on a disability contract and the month to month is covered, so they may choose to use part of their lump sum from a critical illness policy to have their spouse stay home and help, because that makes a huge difference in terms of managing young children managing household duties. I mean we all have to cook and clean and- and you know, try and keep our homes as comfortable and livable as possible. So that’s not necessarily something you might think of right off the Bat, but having your partner available. If you can kind of pay their wage quote unquote or not need that wage for a year or two years or whatever that period of time might be. It can make a huge difference just to your own peace of mind.
Cameron: Well, all that sounds good, but how does someone actually get this kind of insurance? You just kind of click, your heels and hope for the best, or what do you talk to and how can you actually qualify for something like this.
Christine: Yeah, so critical, illness insurance, it’s a huge market here in Canada as well, and there’s a number of insurance companies, life insurance companies that provide critical illness insurance coverage. I always recommend that you speak to someone that has a certification in this area. We have the certified health insurance specialist, that’s something that I have. But we also always recommend that you speak to an independent professional with an independently owned and operated firm, which is, of course, something that we are over at Braun Financial. But what that allows us to do is to shop the market for you and look at the pros and cons of all the different carriers, as well as the pricing structure, because it can vary quite a bit more than you might think.
Cameron: So do all these carriers only cover these two or three things, or does it vary?
Christine: Oh there’s. Definitely different contracts out there, there’s kind of the quick and dirty approach where you’ll get like a shorter list of more common critical illnesses. Those policies typically cost a little bit less, but there’s also much more comprehensive policies. That’ll cover the big ones like cancer, heart attack and stroke, but also a much longer list of potential things that can go wrong, so we’re just kind of talking about the ones that are the most common today. Just because that’s that’s where the stories are, you know that’s what people seem to very, unfortunately relate to. but really there’s a lot more out there that, unfortunately, people do get sick and and eventually, unfortunately, pass away from sometimes right. So it’s protecting all of these instances and all of these different things that can go wrong. So critical illness insurance when you look at it and when you’re kind of deciding how much you want to spend on your different types of insurance, because let’s face it money and budgeting, it’s tough these days with inflation, with the cost of everything going up, our dollars are always competing for for something right, whether that’s food or whether that’s having to pay the car insurance. Sometimes it’s hard to reach into the pocket and pull out a little bit extra money for something like a critical illness policy. So that’s when you can look at structuring it in different ways, and what I mean by that is, you can look at again what’s covered under the contract, but you can also look at the length of time that you want to be covered for and that will determine a large. It play a large role in the cost.
Cameron: So is this like a ten year thing twenty year things: Can you get it for life?
Christine: Yeah, so think of it similar to life insurance? You can cover a temporary period of time so for most people and like we spoke about in the last one, a lot of people really what they’re trying to cover is their working career right, because that’s when, typically you have the most expenses, that’s when most people will have their mortgages. Although you know these days and mortgages going into retirement is becoming more and more common and is something that has to be planned for as well, but that’s a story for another day.
Cameron: Oh, we can’t talk about the multi million dollar, the shacks anymore.
Christine: Well, Oh, we definitely will, but, but maybe not today, so most people might want to choose a policy that covers them to age, sixty five or even to age. seventy five because that kind of gives you a good enough time where you’ve, either discharged the majority of your debts or for most people or you’ve at least earned all the money that you were going to earn during that period of time. And if you receive a diagnosis while you’re still working that lump sum can be used to either pay down the mortgage put into an RRSP. Maybe start a conversation about early retirement or any of the other things that we’ve kind of discussed already, but a shorter term will always cost you less so ten year term insurance is the least expensive initially, but that comes with a kind of a big star at the end of it, where a policy that is cheap to begin with will often cost you more over the long run. So if I’m thirty seven today and I buy a critical illness policy and then I’m forty seven when it renews well they’ll, be basing my renewal at my age ten years down the road, so naturally it’s going to cost a little bit more right and then the older you get so for people that choose cheap up front. They may end up having to give up this coverage if it gets prohibitively expensive down the road, which is what can happen with term insurance, whether that’s life, insurance or critical illness insurance.
Cameron: Is there a way to kind of level off the cost if you’re going the really do want to hold on to this for a long time?
Christine: So we can look at those term costs two age, sixty five or to seventy five. But again that is temporary coverage with the term insurance plan. You’re expecting the contract to end so you’re basically saying I want to be covered for x amount of time, and then it will stop. There is also permanent insurance, although I will say a lot of the providers have that we deal with here in Canada, have backed away from permanent critical illness insurance and that’s because of the cost. So, yes, you can still get it, but there are fewer providers here in 2021 then there were when I started in the industry sixteen years ago. And that’s just because people are claiming too many people are claiming and that affects the premium and it also affects how these insurance companies managed their risk and if they decide they want to shoulder that kind of going forward.
Cameron: What about the other side, though? Let’s say I drink my super foods and I get my exercise and I never claim on this, do am I just throwing my money away?
Christine: There are return of premium features, so there can be a return of premium on your passing on the surrender of the contract. If you decide, I don’t need this thing any more. You know I’ve saved enough money.
Cameron: My brain could be uploaded to neural net.
Christine: Oh, jeez or on expiry of the contract, not on expire of Yourself, Oh yeah. I guess that’s return of premium on death. But those of course extra features cost a little bit more, but it does guarantee that some of your premium will come back to you if you don’t claim during whatever period of time, you’ve specified. The other thing that I should mention for critical illness insurance is that it is very, very heavily waited on what you just mentioned: lifestyle and also family history, because when you apply for a policy like this they’re going to be looking at, are you an active person? Do you have a job that requires you to kind of sit on your butt all day, or are you kind of out there moving around moving things? You know they? They won’t ask if you your vegetables or not, but they will be looking carefully at your BMI, like your body, mass index they’ll be looking at your weight, your height, if you’re kind of within what they view as being a healthy range, and they may ask about the types of activities that you engage in as well.
Cameron: So, like skydiving, Bungee, jumping that kind of thing.
Christine: Those are actually questions on pretty well all of the major insurance application questions.
Cameron: What if I fly my own by airplanes?
Christine: That’s a life insurance question. Those are life insurance.
Cameron: What if I fly my own RC airplane planes?
Christine: Oh dear, I don’t think that’s going to affect your ability to claim, but a family history will so family history is in your family. Is there kind of a reoccurring theme of something going wrong and what I mean by that is some families might have like a reoccurrence of people getting breast cancer or prostate cancer, and you can kind of see it go generation for generation and well, of course, that’s not the kind of thing you want to pass to your loved ones. It is something that does seem to happen whether it’s lifestyle related or genetically related. You know, I don’t know, I’m not that that advanced in that in that way, to give any kind of prognosis on that, but but it is something that the insurance companies will look at. So if this is something you’re aware of just no going in that, they will ask you, you know, has your mother, father, brother sister, he you know anyone that you’re directly or closely related to have they had any of these covered conditions, and that is something they will consider before, making you an offer. Just because there’s a higher likelihood that you may need to claim as a result of that.
Cameron: So then, it’s probably a good idea to get this as young as you can, or stuff creeps up or other relatives have somethings happen it’s best just to get to get this dealt with early.
Christine: Exactly and you know what, when you’re, looking at any type of insurance, especially critical illness or life insurance, it’s not just changes in your own health that you have to worry about its changes in anyone else’s health that you’re closely related to so so you know in in our family, my mom had a breast cancer diagnosis and she she had it before I applied for a larger policy, I had a smaller one, but needed more with changes to our circumstances with buying the business that kind of thing, and that does have an impact so t all of a sudden. This is something I have to disclose and now there’s follow up questions, okay, who else have you known that have had cancer or specifically breast cancer? And as soon as you mentioned, something like that on an insurance application, the insurance company is going to dig a little bit deeper.
Cameron: Again are those the actuaries hiding in the basement?
Christine: They are.
Cameron: The mole people as we like to call them.
Christine: Or in the software be nice to them, they determine whether or not you’ll get a contract. And that’s that is what they’re assessing. So they are trying to see if they’ll give you a contract at all. If they’ll give you a contract at a higher cost than someone that they would put in a normal health category or if they’ll exclude some particular condition, so they may say you know what your mom had: Breast Cancer, your Grandma had breast cancer. Your Great Grandma had breast cancer, we’re taking breast cancer off the table just because the probability is too high. So when all of those events have happened in your family, it becomes something that you just can’t cover. It’s always worth it to try and I would say as well. This is the benefit of having someone able to shop this around for you something that we’ve done in the past, for our clients is, we can go to multiple insurance companies before you apply and just say, here’s the situation. What do you think and they’ll give us the thumbs up thumbs down and what that does is, rather than you getting kind of a black mark next to your insurance history, because you’ve been declined. And side. note if you weren’t aware there’s something called the Medical Insurance Bureau, where all of the results of any application for insurance that you’ve applied for are documented. So the companies can kind of check and make sure that you’re not shopping around and got declined, declined, declined, and then someone takes the risk. So you want to give us a chance to get some answers for you ahead of time before you take the plunge, from that point of view. The other part of that is, some companies will do what’s called reinsurance and from this point of view, it’s actually a good thing. Reinsurance is when an insurance provider ask another insurance company to take some of the risk for you, and what that can do is it can allow you to either get a policy that you might not have been otherwise been able to get or get a larger amount than the initial company that you are working with, would otherwise offer you. Because they feel that the risk is too high for them, particularly to shoulder. So it’s kind of like a risk sharing it’s spreading off the risk. Your premium only goes to the one place that only goes to the insurance company that you’re contracted with you only ever see their name on your statements. Things like that, but behind the scenes there may be, someone else also sharing responsibility for potential of a claim.
Cameron: Well, I guess, at the end of the day, with these insurance companies, they know they’re going to pay up, but at the same time they don’t want to lose money off of everything. So they have to do a little bit here, do a little bit there. Share the risk with the third party sometimes, or just make sure that their own stuff is shored up so that they can pay out and they can cover themselves. As bad as it sounds as they can pay out the person on claim and still pay their shareholders at the same time
Christine: Right and the most important thing for an insurance company to maintain its credibility is they need to have the money to have claims paid out in a timely manner right so there’s factors that they all have to have. Those actuaries have to be on top of just to make sure that there’s enough money and reserve to play pay the claims as they come. That’s why they’ll segment down different people that are similar in nature in a similar type of policy so that they can manage that risk for those particular individuals.
Cameron: So they’re like match makers for risk tolerance.
Christine: Something like that.
Christine: The next thing I wanted to talk to you about was long term care insurance, and this is becoming a bit more of a hot topic now, just because we’re seeing so many more people, a big lump of the population getting older all at the same time, the baby boomers are all retired, now, they’re just about they’re, retired, a retiring, and you know not just them, but also their parents. People are getting into that phase of life where they retired, they had lots of good years. You know they traveled. They hit that bucket list hard, and now things might be changing a long term care Insurance is all about a loss of independence. It’s what happens when you can’t take care of yourself any more or maybe otherwise stated who will take care of you if you can’t take care of yourself- and this is a question that as people are aging they’re starting to ask themselves, because you don’t want to put your kids in that position, I mean kids are grown at this point. They have their own kids, they have their own lives.
Cameron: And they may not even be in the same city or province as you anymore.
Christine: That’s true, you know the support system, especially from a family point of view, may not be what it had been in previous generations, where there was maybe more of that expectation that people will take care of of the older generation but long term care when we’re having that conversation and when we’re talking about the loss of independence so think about this in terms of your parents or, if you’re a little younger your grandparents and maybe for yourself down the road, but really when people are in that older age category, that’s when it’s really needed. So it’s looking at. What will you do when you can’t take care of yourself? Do you want to stay in your home? Do you want to move to a facility and kind of receive care around the clock? I mean here in B C, if, if you don’t have anything in place- and you cannot take care of yourself and you mid all meet all kinds of tests and things like that and your doctor and their assessor’s kind of agree that okay, you know you don’t have the money to pay for this privately, but you absolutely need something. The province here does have something for you. It’s an income tested program. What they’ll do is they’ll take right now, it’s up to 80% of your after-tax income paid monthly. So they’ll be looking at your income up to eighty percent of your after tax income. So, whether that’s your pension or your registered retirement income funds they’ll be taking into account kind of all of your hard work up to that point in time and taking eighty percent of it and for a lot of people that becomes the option if they hadn’t self funded, something through a long term care insurance or you know, sometimes people will sell the house. Sometimes people don’t like the idea of selling the house but get to the point where they have to because their care needs have increased and not only does that have an impact on their standard of living, but it also impacts the inheritance and the legacy that they’re going to leave for future generations. Because now an asset here which I mean we’re in B C. now, let’s be real: it’s over a million dollars for most people right.
Cameron: You own. a square foot of grass it’s over a million dollars.
Christine: And that’s getting started and who knows where we’ll be five ten fifteen twenty years from now, but your legacy will change if you’re selling that because we’re in in a reality now where a lot of the younger generation unless things change drastically from the time that we’re having this conversation in November of 2021. A lot of young people just won’t be able to do this themselves right without help. So if, if your help or if everything that you had accumulated over your lifetime, that you were planning on using to benefit your kids and give them the only fighting chance that they may have to get a property of their own, that can just be gone, it can be eaten up by medical costs. And if, if you haven’t looked recently and of course, this changes as well and it can vary by the facility. But we’ve personally seen- and I know this is in a correct ballpark. If you need 24-hour care in a private facility and you want your own room, you’re very, very, very easily, looking at between eight and ten thousand dollars per month.
Cameron: That’s about triple what an average mortgage is out here.
Christine: It yeah and people, don’t think that end of life and it’s not even end of life. You know, if you have a cognitive impairment or let’s say you had a stroke and there’s just a few things that you can’t do for yourself any more. This may become a very real part of your life and, like I said, if it’s in home, that’s great, but where does the money come from and if it’s in facility? Yes, it’s probably coming from your house, but man, you can sure burn through ten thousand dollars a month, pretty quick if you’re spending a hundred and twenty thousand dollars minimum a year, not counting you know, medication or other changes or modifications that you’ve had to do to parts of your living space or to your vehicle if you’re, driving or even just like, if you need wheelchair or other assistance like that, those are all costs that add up to right. So we’re just talking a roof over your head, meals, prepared and nursing coming in a few times a day to help with medication check on you make sure that you can move from one place to another bed to chair, chair to bed chair to table that kind of thing.
Cameron: That’s even if you’re worse off, there’s still a lot of people. where there’s just a couple things they need help with look kind of going to these in between facilities where they have some independence, but they still need some assistance and even those the cost can be pretty high.
Christine: That’s the bottom line. Long Term Care can very, very quickly drain your savings. And that’s why this is becoming part of the conversation now I’ll side note right here once again and say that a lot of insurance providers here in Canada have actually pulled back offering this product just because it’s.
Cameron: And this is before everything has happened in the last two years.
Christine: Yes this is pretty COVID. You can still purchase this product, there’s just less choice available on the market now. So we’ll get into a little bit about how the most common version of this product works. Just to give you an idea of what it is that you’re getting at. But for whatever reason, a lot of the major players in the insurance market in Canada have pulled away completely, while they’ll still honor the contracts that they have on the book, but they’re, not writing any new ones. So who knows what’ll happen to these products in the future? But I do know that we’ve had a big big shift in the market place and you know there’s nothing to say that that doesn’t continue or that this product may not be available at some point in time during the future. Again, anyone that has one can keep it, but if they’re not allowing us to write the new business, then then people are kind of stuck with the self funding model and that’s kind of what we were talking about. Where does the money come from?
Cameron: So you say it’s a lot of these carriers have bailed out, so there’s what five or six carriers that still carry this?
Christine: It’s more like one or two, it’s a much smaller space right now and there’s a lot less selection and even the product that you can get on the market today, it’s written in their contract that they can make changes in the future right. So, even if you purchase one today, they have left it a little bit open ended so that you know if a risk category is not performing as well, your premium might go up. In most cases they cannot cancel the contract on you again. You have to really watch for that, because you don’t want to be a surprise, but they can make modifications, so that is something to be aware of in this space. So let’s talk for a minute just about what are we talking about when we’re talking about loss of independence and when you’re, looking at a long term care insurance policy you’re looking at six things and the six things are called the “activities of daily living,” and it’s essentially a list of things that we kind of do without thinking about day to day. But if you can’t do them, it materially impacts your quality of living and your day to day experience. So this, the six things are bathing, eating, dressing, toileting, transferring and continence. So seems pretty basic right like these are all things that we do every day. These are all things we kind of take for granted, but deterioration of health usually happens in stages. So policies like this: It’s not like all of a sudden. You know one day bam, unless you’ve had an event or something that’s happened where your health has changed quickly. Of course that can happen as well, but for a lot of people, it’s gradual and you’ll see a phase in their life where they need a little more help in home and then it’ll slowly transition to needing more than what they can get from. You know a few visits a day.
Cameron: They can start off with just getting harder to roll at a bed in the morning because you’re back or it could be harder to chop your vegetables to make your dinner, but it can kind of start off in these little areas and just progress.
Christine: Right. So what Long Term Care Insurance is in its most common form and the there are variances, but we’re just going to talk about the main one. It’s what you usually purchase is access to a pool of funds. So what I mean by that is, let’s say you decide I’m going to need five hundred thousand dollars or two hundred thousand or a hundred thousand, whatever the number might be for you. You’re purchasing the ability to access up to that amount at any point in time during your lifetime. If you meet these six definitions is usually you have to lose functionality in two or three of them, depending on what your contract says and then there’ll be a split in most long term care contracts, so it will actually specify in your contract. If you need care at home, we will give you x amount of dollars per month, and if you need care in a facility, I will give you x amount of dollars per month, and often these are on a reimbursement basis. So in this case, unlike critical illness insurance, where you’ve got a blank check- and you can just spend it on whatever you want- this is more of a reimbursement basis. So they’re looking for proof that you actually needed this and that you actually have someone coming into your house- and this is what it’s costing you or you’ve actually moved into a facility, and this is what it’s costing you. So if you think that it’s even a remote possibility that you or a parent or grandparent or someone that you love could be in the position where they’ll be needing help, either in home or in facility down the road, this is something that you might want to think about or speak to. You know about for the person that’s involved and if you’re a power of attorney or even if you’re, an executor, I mean powers of attorney more than more than executors.
Some decisions may fall on your hands as well, and you’d want to make sure that there’s funding available it’s hard enough when you’re trying to manage someone else’s finances, especially when you have siblings and it’s much easier when there’s cash available and you’re not faced with a decision like do we have to sell the family home. Or how angry is my sister or brother going to be when I tell them that mum and Dad’s inheritance is now spent, and you know for all the right reasons, because it was their money, it was spent on them during their lifetime to give them the highest quality of living possible.
But getting older, unfortunately, can come with a huge cost, so the whole conversation today was just to make sure that you have a little bit more information about what’s available, even in this limited market that we’re finding ourselves in just so that you can start thinking about how these things will get paid for or start having, the conversations with your loved ones or even with yourself. If you’re going to be a power of attorney one day and you think there might be some difficult decisions, it’s always best to get these things out in the open on the table ahead of time. And what that means is it gives your parents a chance to kind of have their own say? What did they want? Did they want to stay in their home as long as physically possible? Are they okay moving into care under what situation, and if there are multiple assets which assets do they want to have sold or how do they plan on paying for it? A lot of parents? Take it very personally with the idea of having their kids have to come and help them out with some of these very personal things like toileting and things like that right, you know, you don’t want to put your kids in that position or you don’t want to be an adult child in that position, where you’re trying to do right by your parent, but maybe their cognitive ability has gone down, and you know they’re not even necessarily appreciating the effort that you’re putting in by no fault of their own, of course, but just because circumstances have changed.
So I would encourage you to day just consider critical in this insurance or long term care insurance for yourself with all insurance products. The best time to take a look at this is always now. If you want our opinion, feel free to give us a call. We’ve got our email contact information on our website, BraunFinancial.com and we’re always happy to meet new people and have these conversations. We try and make it as personal as possible. So we’ll get to know. You you’ll tell us about the people that you love and will tell you how to help protect them and take care of them. That’s our motto, that’s what we’re here, for we want to help. You take care of the people, you love, and we want to be here to give you the knowledge that you need to do. So until the next time take care and all the best.
Welcome to its personal finance, Canada, I’m Christine Conway, I’m Cameron Conway, and this podcast is a very personal look at personal finance in Canada
Christine: Hi everyone. This is Christine, and today we’re going to be talking about one of the most commonly missed elements in a financial plan,
Christine: Well yeah, that can be a pretty important part to overlook. But what I’m actually wanting to focus on is income replacement insurance which doesn’t sound all that interesting. But it’s actually one of those make or break elements of a financial plan, and when you kind of take a closer look, you can realize that everything else everything that you want out of life. All of your goals, retirement savings that Nice vacation, everything that you’ve got planned is based on your assumption that you’re going to keep earning an income at the same level that you are now or better.
Cameron: So you’re saying I can’t just can assume that I get to keep my two or three jobs that I’m working at the same time forever.
Christine: Well, income replace insurance is all about what happens if so the whole idea is, there will always be a certain percentage of the population that either gets hurt or get sick unexpectedly. So it’s these kind of one off events that you didn’t anticipate happening ahead of time. So it’s not like oh you’ve, already got this chronic condition. You know, if that’s the case, it might be a little bit more challenging to look at a comprehensive income replacement policy, but there’s usually still something on the market. It’s more to plan for the unexpected.
Cameron: The unexpected that we have to expect, because it’s unexpectedly expected expecting the unexpected.
Christine: I think that’s exactly what it is. It’s just making sure that your plan is bullet proof and making sure that I like to say Unstoppable that no matter what life throws your way, you’re going to be ready, you can continue to keep a roof over your head, feed yourself and feed your family.
Cameron: Well, that doesn’t sound too terrible. I haven’t really heard a lot of this kind of stuff before usually is just buy your Life Insurance get an RRSP and hope for the best.
Christine: Well, when you start thinking about disability insurance and that’s the that’s the type of income replacement or living benefit that will talk about first, you really have to frame the conversation with kind of what’s already out there and what’s available. If you do nothing kind of thing, so some people will have group plans and we can talk a little bit more about those later. They often have big holes in them in terms of areas that may not be covered, especially where longer term disability.
Cameron: Are You thinking that most people think their group plan is his big, solid, chunk of Cheddar, but really it’s just Swiss cheese.
Christine: A little bit there’s often holes and some group plans they may have more provisions than others. So the issue is, unless you really look at the contract and read the fine print which most people are not all inclined to do.
Cameron: Click to agree.
Christine: Well exactly right. So, that’s usually why you would want a representative or a professional who has experience in this area to take a look for you. So we have the Certified Health Insurance, specialist designation, which is kind of a good guide post. If you find someone with one of those, it’s CHS. for short it not quite, but it’s. It basically means that they’ve been specially trained in the area of income replacement, so that would be disability, critical illness, long term care and also group insurance. So they would know what to look for and what potentially could be missing if anything from your plan, but either way having a review done is a good way so that you have the information that you need to know if there is in fact something missing, and if there’s not that’s great, you can kind of go on your way, knowing that you are covered and protected,
Cameron: That doesn’t sound too bad.
Christine: So, let’s circle back and just kind of talk about what’s available. If you do nothing so we’re all familiar with EI, that’s a short-term benefit that pays under very specific situations. They’ve been broadened. I guess with COVID and I think they’re going back to somewhat more of a normal state, but it’s never meant to be a long term solution. Yea. I was always designed to kind of bridge the gap, so it’s to make sure that a paycheck continues to come in over the short term when someone has lost a job so not quit, but lost a job kind of by no fault of their own.
Cameron: So, they either get laid off or there a teacher or their road worker is out in the prairie, so they can’t work in the winter.
Christine: That’s right, yeah! So some people do use those provisions on a regular basis to supplement their income if they know that there’s going to be a gap in their pay cycle, but it was really designed, as kind of a last resort, to give you a paycheck for a limited period of time. Well, you transition and if that is kind of not once you’ve exhausted those benefits, then really the only other thing that you kind of have to look for or look forward to is CPP has a disability program. So it’s the CPP disability, and that is a program that you will only qualify for if you have a long term disability, it’s very, very difficult to get, and essentially your doctor and one of the fine folks over at tea. The program CPP disability program have to agree that, essentially, your disability is severe and prolonged enough that it’s highly unlikely that you’ll return to any form of normal paid labor in your career.
Cameron: I actually know someone who is on CPP disability, and it was excruciating hard to get accepted for flip side, though, because of how stringent it is, it and made it easier for all his other claims to go through one CPP accept in it because of how rigorously they test these things,
Christine: And that actually is a valid point. A lot of other providers will look at CPP disability as a test of whether or not you are considered seriously disabled enough. For example, like the registered disability savings program, the two are in a sense not formally, but in a sense, tied together in that your disability does have to be serious enough, that you were accepted into that program. But acceptance is one thing and I mean I know as well. Some people that take two or three tries. You know to kind of get into the program over a prolonged period of time where they may be denied, and then they try again a year later or two years later, just because things haven’t gotten any better.
Cameron: And all along the way they still have their bills to pay and groceries to buy gas to putting your car if you can even be mobile. Or at least just paying your utility bills, so you don’t freeze during the winter.
Christine: Well, that’s the issue. The bills don’t know you’re unable to work right, so the payments continue and you still have to pay the bills regardless. The bills don’t care the bills don’t know. Your landlord, your mortgage provider, it doesn’t matter right, so somehow the family is going to have to continue to pay for things in order to meet the same standard of living. So at this point in time, if someone finds himself in their position, usually the first thing that people will look at is liquidating assets and unfortunately, well. This is a good short term solution for some people, depending on kind of the cause and the nature of the disability. It can really set people back in terms of other goals or other hopes and dreams that they’d had. Usually you were saving for something, so usually you weren’t saving just to take all the money out and pay for a disability or to continue your pay checks, because you can’t go to work right now.
Cameron: No, you wanted to retire. He wanted to finish paying off your house. You wanted to buy a house or a car, put the kids through college or something else.
Christine: Right, and then sometimes people will find themselves in the reverse position where they actually end up going further into debt. As a result of this so they’ve exhausted their savings, they’ve exhausted the assets, which unfortunately means some of the long term goals are out the window at this point or have to be seriously reconsidered at a later point when earnings are back on track. But when someone starts taking on debt in a disability, it really is going to matter if the disability is going to be long term or reoccurring in nature, or if this is just a short term thing a couple years that you kind of have to work through and retrain and then get back on track. But even so you know, if it costs to let’s say you’re, making fifty grand beforehand and it costs you all of your income to maintain your household. Then I mean it’s very easy over a four year period to be two hundred thousand dollars into the hole right or adjusted for tax, of course, but the point being that, if there’s nothing in place, you find yourself creating the situation where you’re kind of eating your assets, you’re living off of things that you were hoping would support you in the future and not the other way around.
Cameron: Then you end up paying credit cards with credit cards with lines of credit and everything else, because once that daily day, income is gone, is hard to just suddenly replace it out of nowhere.
Christine: That’s right and when you look at CPP disability and what people actually get the basic amount of the disability, I believe, is only about five hundred and ten dollars. Right now give her take and then, on top of that you’ll get an adjustment based on how much you had earned and contributed into CPP over the years so based on the length of time you’ve been working and the amount of money that you’ve earned her year over your career. I believe right now, on average people get about a thousand dollars a month, which is just look at rent, you know.
Cameron: That doesn’t even cover a one bedroom basement out here.
Christine: That’s right and the maximum. I believe at this point in time. So it’s November 2021, it’s about fourteen hundred dollars a month and that’s really hard.
Cameron: It is hard because things like this are so sudden- and like you said it’s hard to proactively plan for this when all these other things are pulling out your attention, either physically, emotionally or financially, where we just don’t want to think about the possibility of something at this happens, whether or not we know someone that it happened to or not. We are just so stuck in the daily day paying the bills that is hard to set aside, above and beyond the three months emergency fund that next to no one has in the first place.
Christine: Well, most people are eternal optimists right and I think that that optimism can actually hinder people when they are thinking about income replacement, because it’s that whole mentality of it’s not going to happen to me. You know accidents, illness, that happens to other people, but the issue is statistically. It sure happens to a heck of a lot of people and I think that we are often caught by surprise when something does happen right because we think to a certain extent, were immune or were invincible or whatever it might be, especially if you’re, young and healthy. And I think one of the traps that we fell into personally was we had other goals that we were very, very focused on so for Cameron, and I paying off our house and becoming debt free was our number one goal. And it was something that we focused on four years and our desire and what we actually did was to put every extra dollar that we had towards our mortgage and towards our mortgage repayment. And I viewed and we kind of had looked at disability insurance Cameron had a long term disability policy at work. I have a personal policy, but we looked at his coverage and we kind of said okay. You know what this is probably good enough, nothing that we really have to worry about here.
Cameron: Exactly, it’s a Crown Corporation with a strong union. We did, we thought we’d, be fine.
Christine: Yeah, and essentially, we didn’t want to take any dollars away from our goal to put them towards the premium for a disability insurance policy. When we had the thought that okay, the probability of this is pretty low, you know we’re both healthy we’re both active people. What are the chances it would happen to us?
Cameron: Well, we thought that was pretty low, even though I had a bit more of a physical job, but then one day five seconds later and it happens.
Christine: Well and that’s it and, in our case Cameron, had a concussion at work and it took us about five years of retraining, so the other part of disability insurance that you have to consider is, if you can’t do your job, what else are you qualified for to do? What else would you want to do or what else by your experience, would you do and for a lot of people, especially people that might be in a trade or in a physical job? That’s might be it right. That may be the training and, if you’re no longer able to do a physical job, then where do you go
Cameron: With my injury? I had motion issues, so I couldn’t do the physical job and even after I left it took almost three years for the issues to go away. So then I had to go through my retraining process. I got my bachelors, I got my masters, but that was five years without a steady income on top of education cause that we just had to find somewhere to pay for it. So either student loans line of credit on the House Because, we didn’t think it could happen and if they did, it wouldn’t be. Take this long to recover get back into a new industry and we thought the plan I had in my previous employer would cover us better than it did.
Christine: That’s right. So that’s why at this point now we’re trying to talk to people and encourage people to take a serious look at their plan and if you don’t have a plan at all, please please, please find someone who is certified that you can talk to about it and that can give you some good advice about what you would be looking for in a contract. Especially these days, because contracts can be tricky. So again, if you don’t have insurance, I mean there are some other provisions out there. I mean we’re here in BC, there’s ICBC. If you are in a car accident. However, I mean they’ve recently capped some of the what they call lesser injuries in terms of what the pay out will be, and there is workers compensation benefits, but our experience, our personal experience with workers compensation and to no fault of their own. This is their job. They are trying to get people back into the workforce as soon as they decide that you’re ready. So it doesn’t matter if you are or not all that matters is, can you perform the duties of the occupation and if they decide you can that’s it so systems like workers, compensation or auto insurance, ICBC out here really, the goal is to keep people out of the courts right. They don’t want massive liabilities, tying up the court systems any more than they already are, so it’s essentially, they call them no fault systems because, rather than saying you know, this is your fault. You made an accident, or this is our fault. We were negligent, it’s just okay. How do we re have this person and get them back to work as soon as possible?
Cameron: Any work any job. Any task. Can you drool in front of a cash register when you used to be someone highly skilled kind of thing?
Christine: Well, and that’s, what’s scary in my mind about especially group plans, most group plans will have a change of definition and we’ll talk about definition of disability in a little bit, but it’s essentially it’s not cut and dry. There are different tears and different contracts in Canada, express them a little bit differently. Essentially, the gold standard is your own occupation. So if you have a disability policy that protects your own occupation, you’re protecting your skill set, you are protecting your years of experience, you’re, protecting everything that is uniquely you that you’ve developed over the course of your career and with an own occupation policy on an individually owned disability plan. You can actually work another job if you’re deemed disabled so deemed unable to work at your own occupation, but you could still change course, retrain and get back to work and own occupation is usually purchased by a more highly specialized individuals.
Cameron: A good example would be okay. How about Steven Strange from marvel the super wiz surgeon who couldn’t do his job any more. So he could have been covered for his surgery income, but the same time. You can go and get a job at UBC or another university and teach other people how to do that. Work you’d get your claim from your previous job, but you can still make a whole new secondary income as a teacher or doing something else.
Christine: That’s actually a perfect example and long term disability through a group insurance policy will not do the same thing. So if you get on claim and manage to stay on claim, essentially. You cannot work at all. If you can work, you’re no longer considered disabled so back to work you go.
Cameron: You could go from doing surgery to sweeping the floor.
Christine: Well, and this is the biggest problem with the group plan in my mind, and it’s simply that most group plans have a built in change of definition after two years. So usually, what you’ll see in a group product is they’ll, be looking at a regular occupation definition. So it’s a step lower than own occupation, but it does protect the most substantial duties of the job that you’re doing at your employer. That offers the plan so essentially after those two years have gone by, they will assess your ability to continue to do the regular duties full time of your occupation, and, if you can’t do them, it switches definition to what’s called any occupation. Now any occupation scares the pants off me. It’s absolutely terrifying as a definition, because unless you are very, very disabled and unable to do basically the daily functions of life. They can have you back at work in a completely different industry. Just like Cameron was telling us earlier. So I’ll say you know you can sit and you can talk on the phone great you’re at a call center, and you can stand on your feet good for you, you’re working, a cash register in retail. It’s very unfortunate that you’re wasting these very particular skills that you’ve developed over the whole course of your career yeah.
Cameron: One second you’re, a high powered lawyer next thing, you’re a greeter at Walmart how. This is how we could work if you can do anything of any kind of job they’ll, just slap you in or they’ll take away all your disability payments.
Christine: That’s right and there’s also a gray area that I think is really important to look at as well, and that’s the area of partial disability. So a group contract can offer partial disability, but it is very, very, very uncommon in practice to actually see them. So well, it’s not impossible. It’s highly likely that your coverage, if you do have a group plan, doesn’t have it and what does that mean? That means partial disability is usually defined, as you cannot work, fifty percent of the time and then there’s an al another provision called residual disability, which means that your earnings drop by twenty percent. So if you do not have this partial disability clause in place, any transition, so any disability that limits your ability to work, maybe a couple days a week, you would not qualify under that definition in the contract.
Cameron: So, with this extra provision, it essentially means you can go to work, locking for four hours and get paid for seven or eight.
Christine: That’s right and for business owners, the residual disability clauses a very interesting one. So let’s say your business depends on you to get sales and it’s less about you, clocking in and out at the end of the day and more about the activities that you do. You know the knowledge that you bring to the table that gets people to sign up and essentially pay your staff, pay your wages and put profits on the table if your profits drop, because even though you might be at work, maybe your capacity is a little bit less. A residual disability benefit will cover that and, like I said, the most common, so anything that we’re talking about today, it can be changed in different contracts. It really is the wild west out there, which is why I keep saying you got to look at the contract, but in most contracts, residual essentially means a twenty percent loss of income, so think of that as one day out of five.
So since we’ve kind of come to the conclusion that most group policies are essentially in some way lacking, let’s look at an individually owned policy and again, if there is such a wide variety of what’s available out there these days, what you would want to be looking for is, what’s called a non cancellable policy contract. What that means is, once you have the policy as long as you hold up your end of the bargain and continue to pay for it, then, essentially, the insurance company can not make any changes to the contract going forward. Now. This is the part that to me gets a little bit scary, there’s a few other levels of contracts that you can buy to day in the Canadian market place. So there’s guaranteed renewable there’s, conditionally renewable and there’s cancellable policies and, as the names suggest, the way that they work is, in some cases, they’ll be reviewing everybody that’s in the same class in the same category, and so let’s say you buy a policy and a hundred other people by a policy, and they have a similar occupation to you and a similar income to you. The Insurance Company is monitoring how many people are claiming on these policies on a regular basis, because.
Cameron: Those are the actuaries in the basement checking all the numbers.
Christine: That’s exactly those guys. So that’s what they’re doing they’re checking all the numbers. You know it might be a software algorithm these days.
Cameron: So it’s not the mole people downstairs anymore?
Christine: Maybe not they’ve been relocated. Oh No, so, essentially, what is happening with disability is its pooled coverage. So that means that the people who are not on claim that are actively paying premiums are helping to pay for the percentage of the people in that group that are not on claim. So that’s why the actuaries software or real people will be looking at how that a particular group is doing. They want to know are the premiums that are coming in enough to cover off the claims that were receiving or not, and I mean some types of contract. So if you have non cancellable, you’re locked in your good, the next step below that is guaranteed renewable and that’s where they can change the premium for the whole group. And okay premium change that doesn’t sound that horrible, but.
Cameron: It sounds like a normal day in the insurance industry.
Christine: Well, what you really want to be careful of is the types of policies where they can cancel coverage completely. So those are the cancellable policies but they’re. Also in some cases they will not. Let you renew like conditionally renewable policies. They might have something written into the contract that you probably didn’t read that will say you know. Let’s say you change your occupation or you’re, not working full time or you relocate somewhere outside of a specific area that they have defined in the contract like the province, they might say. Oh sorry, we’re revoking your policy, and the scary thing to me about that is if your health has changed, there’s no guarantee in the future that you can buy the same plan that you could buy today. and that’s essentially, when someone buys income replacement insurance. Not only are you protecting your pay checks, so you’re protecting your ability to retire to meet your hopes and your dreams, but you’re also protecting your ability to maintain your standard of living and disability insurance is incredibly difficult to self ensure because it’s based on money that you haven’t earned yet. So how do you save a dollar that you haven’t made yet, especially when most people need all of the money that they have to pay the bills, and this is what disability insurance is really protecting. We want to make sure that your standard of living does not change or that the people that are depending on you, so that might be a spouse partner. It could be kids, you know, how do you explain to the kids that we have to move to back to mom and dad’s or grandma and grandpa’s. Or, to you know, a lower income neighborhood.
Cameron: But it’s really cold where Grandma and Grandpa live.
Christine: Well for us. It is but you’re protecting those future dollars. So if you earn about fifty thousand today, it’s about 1,750,000- let’s say you’re thirty years old and you’re, working to sixty five, so you’re covering the rest of your career and in that same example, for a thirty year old working to sixty five. If you are earning a $100,000 to day, that’s $3,500,000 now a disability plan will not cover a hundred percent of your wages because there has to be some incentive for you to return to work. So there’s always going to be a little bit of that, but you can usually get pretty close to the seventy percent range and essentially, what you’re wanting to do is make sure that your mandatory bills, all of the things that go into your lifestyle, now can be covered with the amount of protection that you have in place. Now I mean in our story with our obsession with paying down our mortgage, we had already been in the habit of essentially saving half of our income. So we were two people both earning about forty grand when we started.
Cameron: I was working at the post office during the day and then the last two, three years I was writing articles for Seeking Alpha in the evening just so we could have a bit more disposed income just to throw towards that debt.
Christine: Right, but we survived because we were used to living off of one person’s salary. So if you’re a single person there’s no safety net, it’s really just what you’re able to do for yourself, and so I think income replacement is absolutely crucial in those positions and if you are in a partnership or in a marriage where you have kids, there’s people financially dependent on you and you need both of those pay checks to maintain the same standard of living. Then I mean absolutely that’s a no brainer to me if I know that I can pay my bills and I can protect my family and protect our standard of living and still stay on track to achieving my goals. For me, that’s powerful. That’s incredibly empowering that, even if I can’t go to work, I can still provide for my family so just quickly a couple other things that you would be looking for in a disability policy is, you would want coverage that pays to your retirement age and that covers your own occupation or the next best thing if own occupation is not allowable for your particular industry, all the way to the age that you think you’ll retire.
So for most people, that’s age, sixty five- and this is very, very important. This is how you will get around those changes of definition that you see in a group plan where it’s going from protecting a regular job to any job. What you would essentially do, let’s say you had a group plan. You could keep your group plan and cover yourself for the first two years and then maybe by a plan that starts two years after your disability, to fill that gap in your own occupation or regular occupation as it’s defined for you all the way to sixty five, that’s how you know you’re safe, no matter what and disability insurance coverage is twenty four hour coverage. So it does not matter where, when or how you’re injured. So for the other programs that we talked about like workers compensation. Obviously, you have to be injured at work or auto insurance. Obviously, you have to be in a car accident. Unfortunately, that’s not always the case. I mean there’s sports injuries, there’s things that happen to people.
Jeez. I had a very close friend of mine, we had some really bad wind and rain and flooding over the past week and a friend of mine was just driving down the road in Victoria and a tree fell on her car and thank God she was okay. But that’s how random and chaotic and unpredictable life can be. You know a few seconds and she might not have been okay and that’s absolutely terrifying and that’s why we have these products, because you just don’t know you can do absolutely everything right and by no fault of your own, something goes wrong. And that something like Cameron said can be five seconds and it can change your plans for a lifetime. So another thing that you might want to look for if you’re looking at a disability policy, is you want to look at how they’re treating reoccurring claims?
So, let’s say you receive a payment for a claim and then you get better you’ve rehabilitated you’re back in the workforce and then you’re injured again. What is your policy going to do? Are they going to have a cap on how many times that they’re going to pay you for that particular injury? Are they going to say? Okay, you know what we’re only paying you for two years or we’re only paying you for five years and then we’re done we’re off the hook. It’s in your contract. You want to make sure that there are not very many limitations Some of those limitations can be contractual. So there are a lot of policies on the market to day that will exclude certain types of either common or harder to define illnesses. So we’ve seen exclusions on entire contracts for mental health, and that has nothing to do with whether or not there’s something in your application in that area. The contract just says we do not. We do not look at this type of illness period. There are other contracts in the market today where they might not look favorably at soft issue damage just because it’s more common, it can be more reoccurring. I think they say your back and mental health are the two top claim areas for disability, or at least that’s what it was a few years ago.
Cameron: It’s probably more so now, especially for the mental illness claims, but even the back thing. That’s they probably cut that off, because that can flare up over and over again over time, which is like what you said is good to find some of these plans. That will kick back on to an original injury for a few more months longer if it’s possible, because it’s one of those things where you can feel fine today feel fine for six months. Then you get out of your car the wrong way and you’re back on the floor.
Christine: Well, and you want to make sure you’re protected until you retire, because this is your ability to pay the bills and it’s your ability to save for the future, so that alone makes it all worth it. Other provisions that I encourage people to take a look at when they’re looking at their policy cost of living adjustments. I mean we’re going through a major period of inflation right now. Our Grocery Bill just keeps. I shake my head every time we go to the store, we’re buying like cereal and bananas, and I don’t know how. But a couple hundred bucks seem to be gone every week where it was substantially less. It feels like even a year ago, but I mean times, have changed: There’s supply issues, there’s supply chain issues that are compounding the problem, as well as a whole bunch of extra money floating around in the system that wasn’t there a year and a half ago before COVID. But essentially a cost of living adjustment or a COLA clause t what that will do is while you’re on claim, so it doesn’t apply until you’re on an active disability claim. It will have a specified percentage or it would tie it to CPI, which is the Consumer Price Index, so as the cost of goods gets more expensive, the benefit that you receive is not stagnating. So you’re, not finding yourself with fewer dollars to try and chase expensive goods or ever increasingly expensive goods.
Cameron: It couldn’t even be that it could also just be you sat on this contract for ten, fifteen years and a jug of milk was four bucks when he bought the contract, but now it could be eight or nine dollars.
Christine: That’s right. You know things do just seem to get more expensive over time. So that is something that you’d want to take a look at, and that also brings us to the next one, which is the future insurability option. So, if you’re in a career where you anticipate that your earnings are going to be going up over time, then this is something that you want to have it’s a rider. So it’s just something that you add on to a policy and you’re saying that I want to lock in my health today, because I don’t know what my health is going to be to morrow. So I want to lock it in to day, and I want to have the option to buy x amount more insurance. Should my earnings go up during a specified period of time, so you’re essentially betting on yourself doing well and you’re, saying I think my earnings are going to go up and I don’t want to chance it. You know, I don’t want that ten or fifteen years to go by and you know I’ve had an injury or I was in a car accident or something went wrong. And now, if I were to apply after something has gone wrong, then I may not get a contract or I might get a contract with limitations on it, where it would not pay to cover something that had happened.
Cameron: Yeah, because that helps cover you, like, even like the whole stereotypical. I started off in the mail room and made my way up to management. You want to get hurt and still by making the mail room wages. Or how does it work where you have people changing jobs every five years they could go from one salary to another just by switching companies, rather than just trying to drag it out for one to two percent increases every year of their old place.
Christine: That’s right, and I mean when people look at the premiums because, as you will add, on these different riders, these different extras, it can increase the price tag quite a bit on these things.
Cameron: Wait you’re saying the insurance company won’t give you this for free?
Christine: They do not.
Cameron: Not out of the goodness of their little heart. No, no goodness out of your hearts. This is something you buy for yourself and you view your premium dollars as protecting your goals and your dreams. That’s how I’ve had to look at it. That’s the only way I can justify paying what we pay now for insurance. So sometimes just to handle the increased costs. Some people will look at a few features. I view them as more optional they’re, definitely not for everyone, but there are return of premium features that you can buy. It does make your policy more expensive, but they will give you back a portion of the money if you don’t claim after a certain number of years, essentially it’s usually eight years and what it means is you’re, paying a little bit more into a contract, but it’s sort of like force savings. You really have to look at the numbers on that to make sure if it makes sense, there is also a return of premium on death. That is, can be added to a lot of these contracts .What that one does is, should you pass away prematurely the premiums that you’ve paid will be returned to a beneficiary that you name. So again, any time you’ve got a return a premium situation, it’s going to be costing you a little bit more, but that’s some people like the peace of mind, knowing that they’re not just feeding money into a dark hole.
Cameron: They’re, not just endlessly pouring money into something that well, on the one hand, they don’t want to claim and get the money back out of. But at the same time they want to feel like they just threw it away for nothing.
Christine: It’s like every other type of insurance that you have it’s exactly that you just pay your premium. You know insurance is all about either protecting yourself or protecting someone else. So it’s just coming to terms with this is what it is. This is what it costs, and this is, if I want to have this protection- that’s what it takes.
Cameron: So I am new to this whole industry and you, and over and over you talking about different contract here different contract there. How do you get a grasp what’s actually out there and what’s available, and how do I know which company to go with?
Christine: Well, I think it’s incredibly important to work with an independently owned and operated firm. So that’s something that we are over at Braun Financial, and what that means is that we’re contracted with pretty well all of the major insurance companies across Canada. And that allows me to go through all the fine detail for you. So we’re not worried about getting the wrong contract or missing out on an important feature, and I mean there’s more than in the interest of time that we’ve even gone through today. But I mean we could talk about this for hours and frankly, you probably don’t want to listen that long. So the bottom line is if you work with an independent firm and, as I mentioned before, you want to work with someone. That’s actually specializing in this area of living benefits, because it is the wild west out there. So an independent firm will get you access to a greater range of product and selection, and that is important in making sure that we’re able to buy the right product for you.
Cameron: Because I’m guessing each company, a kind of has their pros and their cons and different people would be served best by different companies. The way this seems to be laid out.
Christine: That’s right. Different companies will focus on different market places, so some companies want to insure doctors. Other companies are more about the trades people. You know, maybe people that are driving a truck for a living things like that and some are in between, but it’s really understanding the nuance difference of who is this product built for that helps us rather than just walking into.
Cameron: Whatever one you see first on the street.
Christine: Well, that’s right, a walking choosing one randomly! You know unless you have that detailed knowledge about who they represent, what their contract will do for you, how it handles claims. I mean there’s also a really important note about how companies will pay claims. Some companies will handle claims internally. Others will maybe shift some of that to another their called reinsurance. So they’ll be another company that’s backing what they do. So it’s it can be helpful in some cases to go for a company that handles their own business in house. Although it’s not always necessary.
Christine: So the last thing that I want to say, that’s also a benefit of buying. Your own policy is, if you’re paying for your premium out of your own pocket, so not an employer paying it for you, but you’re paying for it yourself, because you’ve bought your own contract. That actually makes your benefit tax free and when you’re looking at ways to make those dollars on claim, go farther. It’s kind of like a little built in bump up that you can give yourself. So there is some benefit to doing it and paying for it yourself
Cameron: So that kind of indicates how you’ll never get a hundred percent of your income back from what you get from employer because you’re getting this money tax free. So it makes it a little easier to pay the bills going forward.
Christine: It does make it easier, so you’ll still not be at the full, a hundred percent of your wages, but yes, you’re, right you’re used to receiving after tax dollars when taxes are withheld from your pay check and in this case no taxes right so no withholding required. and when you are considering when you’ve purchased a policy and you’re looking at going on claim all policies have something called an elimination period. What that is.
Cameron: sounds pretty threatening
Christine: It’s not scary, but what it does mean you have to wait and usually an elimination period is set at ninety days. So that means that once you’ve had an event that it means you can’t work or you’re, not working right now, you’ll have to have savings to bridge the gap between when you apply for your claim, your claim gets processed and accepted, and then your elimination period begins. So it can actually be quite a bit longer than the three month which is kind of the standard provision. So we really encourage people to make sure that they have that Emergency Fund just to make sure that the bills can be paid.
Cameron: And I’m guessing to that. The longer this Elimination period is the cheaper, the contract is right?
Christine: That’s exactly it so like we were talking about with group policies and having an individual policy start after the two years. What we’re really doing is we’re having a twenty four month, elimination period, so you would technically submit your claims for both and you would just start waiting until the new benefit pays. But getting a claim accepted is all about your doctor and the Insurance Company, agreeing that you meet the definition in the contract, and that is why all of this Jibber Jabber about contracts and definitions is so important, because that is all that they will look at. Does your doctor agree with the Insurance Company that the event that you’ve had is covered in the policy that you have and if it is that’s, when you go on claim so protect yourself, please seriously consider buying income replacement insurance and keep in mind. Disability Insurance protects your pay checks. It protects your standard of living and, if you set it up correctly, it will protect your ability to do your job for the rest of your career. So it will protect your earnings over your entire career, and that is so, so, so important.
You know. We hope that you can continue in your career, but heaven forbid. If something happens like it happened for Cameron where you have to make a sudden switch. You want that income to be there. You don’t want a few seconds to leave you with years without income. We’ve made that major mistake in life. For you and now we’re here to tell you find a professional find an independent firm to work with. You can check us out at Braun Financial dot com if you’re in the BC area. We love talking to people about this and helping them out. but if it’s not us just find someone qualified and they’ll be able to walk you through all the pros and cons all the costs, all the different features. there’s more than what I’ve gone over here to day and it’s so widely varied. So please get someone who knows what they’re doing?
Well, that’s our time for today. So hopefully, we’ve been able to give you some information. that’s valuable and that’ll help you out protecting your own career and protecting everything that is unique to you and helping you sleep at night. Knowing that, no matter what happens, you can take care of the people you love all the best until the next time.
Christine: Hello, everyone and welcome to Its Personal Finance, Canada. This is a podcast that we myself and my husband have put together to share with you a little bit about what we’ve learned on our personal finance journey in a very Canadian way. My name is Christine Conway, I’m also designated and have been in the financial services industry for the last sixteen years being everything from a receptionist at a managing general agency to the President of a company that has been in existence for forty-four years. Ask me about that later. It’s pretty interesting story, so we’re here today to help you learn and to give you some ideas that might be of benefit to you in your life and as we evolve, I’m sure this podcast will change, but for the time being we’re trying to keep it light, trying to keep it personal, because everybody needs a little bit of story and a little bit of interest in personal finance.
Cameron: Well that sounds fun! Well, I’m Cameron. Conway, surprise, surprise, a little bit about my background. Lately, over the past five years, I quit my job at the post office gotten a bachelor’s degree. I got a master’s degree. I’ve published two books, I’ve written for Motley Fool Canada and Seeking Alpha so I’ve got a bit of an interest in investing, and we feel that we have the right mix of understanding of insurance, personal finance, budgeting, investing and everything else to help you tame your finances and achieve the goals you’ve been trying to do, but it just seems right outside your grasp. So that’s why we’re here for Its Personal, emphasize the space Finance Canada.
Christine: But the bottom line is we’re just regular people, pretty middle class. We own a town house here in Surrey. We have a one year old son that we spend most of our time chasing around the house and a dog who’s affectionately named Winnie the Poovier, after our home town of Winnipeg Manitoba, and it’s unofficial mascot Winnie the Pooh. We’re trying to take our personal interest and my career and translate into something that’s usable for you today. So not to be outdone by my husband. I also wrote a book that chronicled our personal journey, just as regular folks trying to make debt repayment and mortgage repayment a priority in our own lives and the things that we got right and the things that we got wrong were talking along the way.
Cameron: We’re talking about the wrong stuff?
Christine: We’re talking about all this stuff, uh oh so Debt-Free Lifestyle is a book that I put out. I wrote it in 2016 it came out in 2017 and it’s going to be rereleased shortly, just because in the last five years
Cameron: The housing market has gone insane and no one can afford a house anymore.
Christine: The world has changed. The pandemic completely changed the way we look at the use of space, work from home transformed where people want to be living and everything’s value has shifted in a fundamental way that just wasn’t the case five years ago. Interest rates are still at a record low and that has been driving prices up for years now, along with their supply shortages that we’re seeing and when people are interested in larger spaces and there’s only so many to go around that naturally changes the value of these properties.
Cameron: So there’s a lot of issues that are both political in nature and financial in nature that that are driving the housing crisis and the affordability crisis that we see today so is that why we’re here to figure out how to make every dollar and cent well, nickel? I guess now go a little bit further because of how crazy and seeing all these other things have gone.
Christine: Well, everything’s gotten more expensive, so I think there’s never been a better time to look at our own lives and figure out just how to survive. I mean really that’s at the end of the day. What we’re all trying to do we go to our jobs, we clock in we clock out we’re trying to pay the pills, feed our family and fight the ever-inflating grocery bill at the end of the week. Just so that we can eat our food and keep a roof over our house, But the Debt-Free Lifestyle is a core concept that has driven us in our own personal finance journey, and I call it the Debt-Free Lifestyle, because our quest was to become debt free and mortgage free and to do that as quickly as possible. Because I fundamentally believe that if you could live a life without a mortgage payment or rent or other debt payments that opens up so much cash flow to be able to do other things. Now. I understand that that’s not a reality for a lot of people today, because the pricing structure has changed so dramatically, but what we called the Debt-Free Lifestyle is really all about: building a lifestyle that will gives you enough free cash flow to reach your goals in a reasonable amount of time, whatever they may be. So what is the debt Free Life Style for me? Could be the take a vacation once a year, lifestyle for you or it could be the put away enough money to retire one day, lifestyle.
Cameron: Wait. We can retire now?
Christine: We’re hoping so you know we might have to grind for another thirty years.
Cameron: But, but CPP’s there right?
Christine: For the time being well, we’ll see how they shore that up in the years to come, but I know they just increased the amount that employers are having to pay for that. So lots of changes down the road and sustainability for programs like that are always a bit of a challenge. When you have a large percentage of the population that need the benefits and a smaller percentage of the population, that’s paying for them.
Cameron: It sounds like a system, that’s guaranteed, to work, Ah, nothing like putting a retirement in the hands of the government.
Christine: Well, that’s something you don’t want to do so when you’re, creating your own Debt-Free Lifestyle, whatever that might be you’re going to be looking at ways and the big picture to make sure that there’s enough money coming in at the end of the month, so that you can working towards your goal becomes easy and it’s not an onerous process and it’s not trying to skimp and save a dollar here and a dollar there. Because not only is that exhausting, emotionally and physically, it’s very, very, very hard to sustain unless you’ve got Herculean self discipline.
Cameron: It kind of sounds like those fad dies where you do it for a week or two, then you kind of go insane because you just want to carve or a piece of steak but you’re stuck eating kale or whatever the flavor of the month food is. Is quinoa still a thing?
Christine: Well, that’s exactly it you’re starving and when you’re starving, all common sense goes out the window and you will just splurge and spend on whatever. Has that shiny appeal to you at that moment in time?
Cameron: But what if I like the shiny things. It’s a serious question. We gravitate towards the things we want now. Why should I skimp and save and deprive myself of a coffee every day when the temptation is there for me, just a hop an elevator and go down stairs to Starbucks is giving you into those types of temptations once a while really going to ruin my future and my retirement or what’s the reason that actually to be disciplined?
Christine: Well, he whole point of the exercise for us has been to get to the place where something like that isn’t substantial enough that it makes or breaks your budget. I mean think about it. If a five dollar a day cup of coffee is going to absolutely ruin your retirement plans you’re doing something wrong.
Cameron: But what about a six dollar one?
Christine: Well I mean, I think, with inflation, that’s basically the same cup of coffee. The point is that a lot of people don’t want to sacrifice on these little things that give us enjoyment in our lives really at the end of the day. That’s all we have. We have these little bright moments, these little spots of time that we enjoy. So if there’s something that costs five or six dollars, that gives you a little bit of pleasure during the day. Why not? Why not find other ways to drive your financial success forward so that you’ve built in the allowance to do these things? So there’s a couple different ways that we’ve looked at, that I mean the first is if you’re a fan of budgeting- and not many people are like you, we can always just a lot a certain amount of money, that’s discretionary spending each month to use for whatever you want. In our case, we call it fun money, and maybe it’s an adult allowance- I don’t know, but it’s no questions asked money that you can use towards. Whatever makes you happy at that period in time,
Cameron: It’s actually not that bad. For years, I try to keep it to like twenty or forty dollars a week, and I’ve managed to amass a few nerdy things, some Lego, guitars and other fun things that you wouldn’t expect to be able to pull together, like that, and I managed to do all of this without racking up the credit cards. Essentially, what you’re trying to do is do the opposite, what you do with a credit car instead of paying the twenty thirty bucks a week, plus soul, crushing interest you just save up the twenty thirty forty dollars a week before you go on your big spending spree and you don’t have to worry, with the consequences until my wife finds out about what I did.
Christine: Well, but that’s the point you’re not deprived, and if the money’s there, your wife, doesn’t really care what you’ve spent the money on and that’s why, in our Little Town House here, we’ve got an entire floor, dedicated to Cameron’s knickknacks and toys.
Cameron: Which is becoming more and more interesting for our one year.
Christine: Yeah who’d have ever thought that Star Wars, collectibles would be fun for a small baby.
Cameron: I shed a small tear the first time he turned on one of those light sabres.
Christine: So, in addition to the fun money, the second thing that we focused on when we were building our own debt free life style was making sure that we had the big ticket items in place in a way that was sustainable for the long term. And what I mean by that is. We wanted to have some decisions made ahead of time so that you’re not fighting with yourself every week, you’re not struggling to make these decisions about where your money would go. The cash flow is there automatically and the only way to drive that amount of free cash flow that will materially move you forward towards your goal is to get some of these big ticket items right and what is right will be different for absolutely every person. But what was right for us at the time was to buy a town house in Surrey which cost substantially less at the time than a single-family home, which we couldn’t afford any ways.
Cameron: Full disclosure, we managed to buy during the two thousand and eight housing crash. So we did pretty good.
Christine: That was, that was not a bad timing thing, but you could argue were on the reverse side of that now and still in a town house in Surrey, which is fine, but it is a a debt free mortgage, Free Town House. So there’s some appeal there as well, so the system does work.
Cameron: It’s almost like you wrote the book because you knew what you were doing and not because you told me to say that.
Christine: Or I wrote the book because it detailed what we went through and what we had to do to get there, and I think part of the learning experience for anyone is to make the mistakes or have some one else make the mistakes for you. So part of our experience can teach you and can help you see what we did wrong. What we did right and hopefully you’ll be able to move forward with a much smoother ride than what we had.
Cameron: I think once a wise person said, those who don’t learn from history are doomed to repeat it, and those who do learn from history are still doomed to watch. others repeat it.
Christine: But getting back to the core concept. So when I talk about the big ticket items, I’m talking about the areas that take up the largest percentage of your budget, so that would be things like housing, transportation, child care, even entertainment, and what should choose to eat every week. All of those things are choices that will move the needle and once the choices are made, people often take the approach that they’re set in stone. Oh my housing costs me this amount. Every month it’s not going to change. Hopefully it’s not going to get higher, who knows with rising interest rates, but we’ve got that mentality that this is a fixed expense. When really you have more control than that, you can decide where you want to live. What your proximity to work is going to look like the size, the space, the type of accommodation, the location all of those things have an impact on your budget and when you’ve assessed what your goals cost, you can decide how much money you need to have each year to move closer to words, those goals in an amount of time that you deem reasonable. So it’s essentially goal setting backwards, you’re, costing out your goals and you’re figuring out how long it’ll take you to achieve them. If you have a certain amount of money available each month, then you’re making the decisions that you need to make ahead of time so that you know e, the money will be there every month and then you can go downstairs hop on the elevator and have your cup of coffee.
Cameron: So I guess some ways: It’s just getting the habit of not living a reactionary type of life. Where you’re trying to take some control instead of just jumping for one fire and one problem to the next. You’re, trying to decide exactly how you want to do something and where you want to go like even the entire location thing you were talking about. We ended up in Surrey of all places because it was a decent price. You worked in New Westminster, I worked in Langley and we chose it because we can either live comfortably here or we could be pulling out our hair in some other neighborhood.
Christine: Also, we had very little understanding of what the neighborhoods were like at the time having come from Winnipeg just a year before, and we spent the first year here renting in Abbotsford, so didn’t really have the best feel of the lay of the land. But we also did choose this location because of its proximity to a main road and the sky train station, so that we could easily take transit and save costs on our vehicles. That way, if we chose to do so really, this is all about figuring out which items for you will move the needle and move you effortlessly closer to your goals every month. If you can jump on the sky train like I could and save some money on car insurance or on gas, as you travel tune from work on a regular basis, then that’s money that can automatically be redirected to a goal. Whatever you decide, that goal might be
Cameron: So, after you’re hearing all its what something that we can do to implement all this. We spent a lot of time talking about why this is important. Why we should think about this, but what can we actually do to make a lot of this a reality that we can just actually commit to, rather than just have this be a nice idea here?
Christine: Well, I think one of the major things and major changes that I’m making to the book when it’s going to be re released in January 2022, is that exactly that I wanted to take it out of the realm of theory and into the realm of practical application, because apparently not everyone enjoys math as much as I do.
Cameron: Well. No, but you also have six or seven designations in the finance industry, me not so much.
Christine: Well, you’re working towards it. You’ll get there to one day, but for people that are wanting to take a step closer. I always urged them to start by writing out their major goals in life and then prioritizing those goals kind of by giving themselves a bit of a gut check. So once you’ve put in on put on the page, all of the things that you want to accomplish take some time stare at the list for a while and put them in order of importance to you and if you have a spouse or a partner or someone that you share financial responsibilities with then it’s a good idea to have them go through the exercise at the same time as well. I’ve seen situations where couples can have the exact same top three goals, but completely different priorities. So, even though they think they’re working towards the same thing and could even have conversations about these three things that are so meaningful for them. One of the person thinks they’re going on a vacation next year and the other person thinks no no we’re going to save our money and get that down payment ready for our house,
Cameron: Ooooo. No, don’t don’t insert the Sitcom ooo’s and aaaa’s to the couples fighting in your office.
Christine: No, it’s not fighting it’s! It’s realizing that sometimes, even when you think you’re on the same page, conversations might have left out certain steps that were necessary to come to a full understanding of what is actually important for both of you. So it’s not necessarily just Oh. Yes, I want to buy a house one day and oh yeah. We should also go to Hawaii, but it’s what do we want to do now? What do we want to focus the majority of our resources towards now
Cameron: So they’re on the same page they’re, just in a different paragraph?
Christine: That’s exactly it and part of the challenge. When you start prioritizing your goals. Is that if you really want to accelerate your progress towards a goal and get there faster, you have to be a little bit more single minded in your effort. So I’m I like to take the approach of rather than scattering money here and there at two or three or four or five or ten different objectives at once. We come up with a Master Plan that your priority lists turns into a top three and then your top three comes into the one big thing that you’re going to be working towards right now, and I always put a caveat on that for every person that I talk to. If retirement planning is not on the list, I’m putting it on the list for you, because life goes by far too fast to get to the end of your working career and realize you’re, just not prepared and you’re stuck with CPP
Cameron: And you can’t even resort to eating calf food because that’s getting more expensive to.
Christine: Well, you know the lines of the food banker getting longer and that’s not meant to be a joke. It’s actually a sad reality, but once as a couple, you’ve set your financial goal and gotten your priorities in order. The next most important step that I think a couple can do or a person can do if you’re working on this on your own is to cost out the goal that you’re working towards, and this part can actually be quite a bit of fun because you get to go online.
Cameron: Is this real fun or is this finance person fun?
Christine: This is finance person fun. This is anyone who likes detail fun. No, it’s actually an exercise in what, if which can be quite a bit of fun, because you get to daydream a little bit.
Cameron: Kind of like that “What If” Marvel series?
Christine: No. It’s more of a, what will my vacation look like? What resort will I stay at? How much will my flights cost things like that? So, if I was at the place where this goal was being accomplished to day, what would it cost me all in to have the experience that I want to have or if it’s a debt repayment once I’ve factored in the interest costs? What are my costs all in to repay this debt in the period of time? That, I think, is reasonable and the other part of that is, if you don’t know what amount of time is reasonable, you can actually do a check where you start by looking at the amount of free cash flow, that you’ve generated by your big decisions and also your budget decisions. So if you know ahead of time how much money you have free each month, not counting discretionary purchases, but how much money you’ll have available to apply to your goal, you can actually divide out the total cost of the goal that you’re trying to achieve with the amount of money that you have each month. And you’ll come up with a number of months that it will take you to get to the achievement of that goal. So once you have that number you’ll be able to look at it more objectively and say: Oh, my goodness, this goal is going to take me two years and all I want to do is get to Hawaii. That’s not reasonable. For me, I better increase my savings. If I want to go next year- or you might say well, I’m saving for that down payment. It’s going to take me five years, I’m okay with that. You know what let’s give the housing market a bit of a time to maybe settle down and let’s hope that people get back into normal or whatever the new normal might be post pandemic or in this kind of continuance.
Cameron: Is that normal with a question mark or an exclamation point?
Christine: There’s a bit of a question mark there, but I think normal is, as you define it. I think normal is a little bit different for every single person. So as we find our new normal in society, you’ll have something to look forward to, because you’ll have a goal that you now know when you’d be able to achieve it with the amount of money that you have so far. So the other part of the equation is what, if you look at your spending, you look at all the different areas that are taking up cash flow and the free money that you have available is just not enough to achieve your goals in any reasonable amount of time. What do you do, then.
Cameron: Buy Bitcoins!
Christine: I suppose you could buy Bitcoins, but beyond Bitcoin you can.
Cameron: I can train the dog to o Tricks on Reddit.
Christine: Or YouTube is that is that too old?
Cameron: Depends on the day. Isn’t Tick Tock, the new hip young thing.
Christine: I don’t even know I never been on tick Tock. So there you go. That’s my extent of social media. I’d also like to say that the Debt-Free Lifestyle or the work towards whatever your goal may be lifestyle as you define it. It’s substantially different for different people, but it’s also completely not tied to the amount of income that you make, even though, of course, having more income is always a good thing, and what I mean by that is, I you can have a Debt-Free Lifestyle earning thirty thousand dollars a year, living out of a rented room and still making progress towards your goal or on the opposite of that, I’ve actually seen first hand, people that live in the dream mansion in one of the most prestigious neighborhoods around making over three hundred thousand dollars a year in a house, that’s rented and if their income ever stopped, the dream would stop in an instant. The Debt-Free Lifestyle has absolutely nothing to do with the way things look on the outside or with how much money you’re bringing in it’s all about creating that margin that free cash flow and making sure that the amount that you have fits with the goals that you have there’s nothing else. Everything else is smoke and mirrors. I mean we’re all familiar with. Keeping up with the Joneses and I think more than ever, there’s such an illusion between social media and kind of what you see and what you hear. You really don’t know or have that experience of what someone’s reality is you don’t know how far behind they could be on their bill payments?
Cameron: It’s kind of like those Instagram filters. You don’t actually know what the person looks like, except is with their finances or how many times, even in our neighborhood, we see some of these lesser houses with Jaguars and Mercedes parked out front.
Christine: Right and that’s a certain way of prioritizing, what’s important right. So people thinking I you’ll, never come by my home, but let me impress you with my very expensive car and then all of a sudden you’re, the guy that has the nicest car in the crappies apartment in town, But going back to social media. It can be like a different person every day right where you don’t really know what the person looks like or what their finances are behind the curtain. The appearance of success has absolutely nothing to do with the reality of success or stability for a lot of people. Anyone can buy the appearance of success, any one can buy status, symbols or put them on your credit card and just pay for them later with interest. It doesn’t mean that you are successful and I mean there’s a whole millionaire next door movement. That’s completely based on the idea that the people that are maybe a little bit more focused on their goals are a little bit less focused on the appearance right now. It’s that same idea of either you work hard now or you work hard later, so for a lot of people you put in the time now and then maybe life becomes a little bit easier further down the line. But, unfortunately we live in a society that doesn’t really value that mentality. Everyone wants to look good and be successful today, but unfortunately I think it was Edison that said, a lot of people miss opportunities because they’re dressed in overalls and they look like hard work.
Cameron: Oh Edison, the bane of Tesla. But it is just putting out the appearance and to make all the stuff actually work in the real world. It does take intention and it does take work and we can’t just click the ruby slippers together and everything is Oki-doki all over and we have to be realistic with what we want and we have to make a commitment to try and bring these things in it. Isn’t just wishing and hoping that all my financial problem, so go away, is actually taking some responsibility, which is something not many people really want to hear. It’s just have this idea that everything should just be showered upon us and given to us and life. Should you just be as easy as I can, but the real fulfillment comes through the work with through the disciplined ashy have an accomplishment that you were able to do these things that you wanted to do through being intentional and through this kind of work in this discipline, and then you find out that that’s where the real success happens, because it was crafted and it wasn’t just the show piece. It’s like those old towns from the Western movies in the 40’s and 50’s where it was just this wall that was supposed to represent an entire building, but behind it it was hollow. So a lot of times where we want to do the easy things where you just want to be reactionary. We build these entire towns in our life, whereas just these fake facades, and there’s nothing behind it. So taking these responsibilities actually implementing this kind of stuff and a lot of the other stuff we’re going to be talking about over the weeks and the months is how to take control and put in the right kind of work and do it in a smart way. So it doesn’t ruin or consume your life, but it helps set you free in enough areas where you can actually have some fulfilment, some satisfaction and something to show for at the end of the day. That is real
Christine: And I think you nailed it it’s all about the journey and not always about the destination. Unfortunately, when you’re living life, this way I mean the journey is not going to be impressive, so people are going to have to decide between having the appearance of financial success to day or having actual success financially down the road, and it’s kind of like a great secret when it’s when you’re doing it right. No one knows no one sees it, but it’s something. You can kind look at your partner and just giggle a little between the two of you and say you know what we’re making it happen and we’re working towards something that is important to us. And if you value that more than looking good to day, then this is the kind of podcast for you, and this is the kind of lifestyle thinking that will help you move forward. So I hope you enjoyed our ramblings. As we said at the beginning. This is a great experiment for us. We’ve never done anything like this before. So I’m sure this conversation that we’re having and that you’re listening to will evolve as we go through it and I’m sure that we’ll get a little bit more polished as time goes on. But for the time being, if you’re interested in following our journey and learning a little bit more along the way feel free to stay tuned, we’ll be here. We hope you join us and until then take care of you guys.
Q: I am having trouble overspending each month. I’ve tried to budget but it’s too much work to track everything I spend. I’ll start but then give up in a couple of weeks. What can I do differently to have more success?
A: This answer starts with knowing how much you spend each month and how much after-tax money you bring in. But before you start worrying about creating a dreaded budget and tracking every nickel and dime per category, let’s look at a different approach.
My personal budget has two categories in it: fixed and variable. Fixed expenses are how much you need to spend each month to maintain your lifestyle. While variable expenses include what you are accustomed to having on hand to really enjoy your lifestyle, such as money for a fancy coffee. To keep track of my expenses I maintain a spreadsheet that lists out all regular the bills needed to keep a roof over my head, my family (and dog) fed, and gas in my car; while everything else is considered a variable expense.
Next, keep an eye on where you tend to overspend. Overspending tends to happen in one or two areas so rather than focusing on the whole budget, focus on the areas that are giving you trouble. Is it late-night online shopping tempting you with free next day shipping? A hobby that’s draining your disposable income or collection that’s gotten out of hand and is filling up a second room?
Forcing yourself to give up something you enjoy rarely works, but at times some recreational “triage” needs to take place. You can either replace it with something else that you enjoy that costs less, or if you decide the enjoyment is worth the money spent then set a maximum spend per month or even make a game of finding great deals for your hobby each month. Another tactic is to set aside a fixed amount of “fun” money each month that you can use freely for your favorite hobbies and activities. Having a set amount helps you to stay disciplined without feeling like a hermit wandering the fiscal desert of life as punishment for rampant overspending. In many ways having this set “fun” money could actually help you enjoy your hobbies and give your budget a much needed break as well, as things become predicable.