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All You Need to Know About Credit Cards

Guest Post: Samuel C.

All_About_Credit_Cards

Which credit card is right for me?

There is no definitive answer for this question. Each person is different and that is why there are many credit card targeted for different customers. I will cover the most frequently used ones, however the important part is that before applying for any credit card, please consult GreedyRates for best offers currently available.

Now, let’s talk about the available options:

For Students:

  • You are new to the credit card world and you want to start building your credit background. Well there are a few credit cards for you. Those cards are easy to get and does not have any special requirement. They do not have any annual fee, carries small perks and rewards. They also have small credit limit. My favorite student card is BMO Mastercard SPC Cashback

Bad Credit

  • For whatever reason, if you have bad credit and you want to rebuild it, these credit cards are for you. They are what we call secured cards. You need to deposit some cash to your card issuer before they can give you a card. Should you default on payment, they will use your deposit as payment and cancel your card. When you have this kind of credit card, you cannot allow yourself to default on payment. Any bank will offer this product. My favorite one is Capital One, one of the easiest to obtain. Some card issuers require full limit deposit (500$ deposit for 500$ limit) and some of them requires a percentage. (50$ for 300$ limit). After 12 consecutive months of good payment and behavior, they will refund your deposit and upgrade your credit card to a non secured one.

For Salaried Class

  • Depending on your preferences there are many cards which are available for you. The rewards are usually travel, cashback, points etc. These credit cards also carry many benefits such as insurance, fraud protection, extended warranty etc. There are many people using credit cards as a way to get free stuff/travel. It’s called churning. And I will talk about it later.

Business Owners

  • If you are a business owner, you should seek business credit card. These cards carry many benefits with many companies. Their annual fee is tax deductible. The reward could be discount, higher point reward per dollar purchase. They also have high credit limit. Amex offers some of the best business cards.

As always, please verify and compare before applying for a credit card.

Should I accept a pre-approved credit limit increase?

Yes! This will lower your credit utilization ratio, on the card and overall, therefore improving your credit score. However, if you think you will spend more or spend out of your means, please do not accept the limit increase. Remember the money you charge to your credit card is borrowed. High credit limit does not mean you can afford it.

However if your credit limit is very high, sometimes some lenders might ask you to lower the limit on your current credit product before accepting your application. This can happen when you apply or renew your mortgage. The reason behind this is because credit limit counts as available money at your disposal. So if you suddenly spend 90000$ in credit because of any xyz reason, then you can’t pay back all. Their risk tolerance does not allow them to give you additional credit if you already have too much.

Should I accept a pre-approved credit card?

Depends. Some pre-approved credit card does not require a hard pull from your credit report. You can always call the card issuer to ensure that no hard pull will be done should you accept the card. A pre-approved card is issued to you because they’ve already done a soft pull either for marketing purposes or targeted advertising and they’ve determined that you are within their risk tolerance. If you think you can manage properly and the new card has attractive benefits for you, then Go for it! The only downside is that the short term credit score drops. (Your average age of trade is now lowered).

Should I cancel a card that I don’t use anymore?

Yes and no. Remember, you should never cancel your oldest credit card. That card is very important for your average age of trade. It helps greatly for your credit score. You should keep it and keep it active (Buy a pack of gum every few months). If the card has an annual fee, then you can call and ask them to convert the card to a non fee one.

You should cancel the card if the card’s age is lower than your average age of trade or you cannot manage multiple cards and might forget a payment…

Upgrading, downgrading, merging credit card

It is possible to upgrade, downgrade and merge multiple cards with the same card issuer. This usually does NOT necessarily involve a credit check.

When upgrading and downgrading, you need to ensure that they use the same account but just have different card type. Upgrade and downgrade does not affect your average age of trade nor does it affect your credit limit. Your spending power stays the same with just a different product.

Merging credit card happens when you have 2 or more credit cards with the same issuer. Instead of managing all of them, you just want one. When merging, card issuer will add up all the available credit limit and combine it to 1 card.

What to do if my credit card application is denied?

You can and should appeal your case by calling their customer center. They will usually give you a general indication as to why your application is denied. You can always ask if there is anything you can do to get your card approved.

My credit card’s credit limit.

Your credit card’s limit is calculated by an algorithm by each card issuer. All of them have different algorithms, so you can also call this as risk tolerence. Generally speaking, the higher the income you have, the higher limit you will be granted. Premium credit card such as World Elite from Mastercard and Infinite & Infinite Privileges from Visa does not have maximum limit but does have a minimum limit. Ordinary cards’s minimum limit is usually 300$. But this is often not written.

For every limit increase request, they will do a hard pull from your credit report. However sometimes there are pre-approved limit increase as stated above that does not require a hard pull, because your card issuer considers you very trustworthy. You can also request a limit increase without a hard pull. They will sometimes agree to do it or may deny it. The best way to know is call in. If you are requesting a limit increase on your card issuer’s website, it will automatically be a hard pull.

For limit decrease, there is no credit check involved. Credit limit decrease can be done at anytime without any questioning.

What is a charge card?

The major charge card issuer in Canada is Amex, a charge card must be paid in full every month. It has amazing welcome bonuses and rewards. Charge card does not have a preset credit limit, but that does not mean you can spend whatever you want to. Charge card issuers will authorize the transaction case by case. The “invisible limit” is set by your credit file and your spending behavior. You can call the card issuer to give you an approximate limit of your charge card.

If a charge card is not paid on time and/or the balance is not paid in full, you will be penalized heavily. It carries a 30% interest rate vs 19.99 of credit cards.

For the curious, you can read on American Express Centurion (AKA, Blackcard)

What is Churning?

Many credit card companies offer attractive welcome bonuses so that you can become one of their clients. Churning is getting those welcome bonuses and then once you get them, cancel the card and go for next one. These welcome bonuses usually range from 200 to 600$ in terms of cash value. People trade a credit check for those cash. Churning is delicate and needs to be done with precaution. Obviously it opens many accounts in same time and lower your average age of trade. If you are in need of a loan or mortgage, you should not churn 1-2 years before the due date. When churning, it is important to know your credit background and score and also know when to stop before you receive negative impact.

How do I redeem those rewards from my credit card?

Reward redemption has different rules. You can sometimes redeem monthly, yearly and sometimes at your will. You can always find this information from the card issuer’s website or your card’s brochure.

Credit card billing cycle & how to pay?

For instance, you opened your credit card on the 1st of a month, your billing cycle will be 1st of each month to the last day of each month. And on 1st of each month you will receive your bill. When you receive your bill, you will have a grace period (interest free) of 21 days to pay your balance. During this time, you must pay all your balance of your previous bill in full. Remember it is 21 calendar days and not 21 business days. (The due date is always written somewhere on the bill). If you do not pay in full, the rest of balance will be carried over to the next bill and interest will be levied.

It is also recommended to always let your credit card report a balance to credit bureau. Otherwise the credit bureau will ignore the credit card in the score calculation. (partially, due to credit limit counts toward the overall ratio utilization).

Can I have a credit card with a bank that is not my bank?

Yes, you can apply for a credit card at any credit card issuer. To pay the credit card, you simply need to find the bill name for the card issuer and the account number is always your card number.

What to do if I have credit card debts?

Credit card debts are the worst debt in the market. At 20% and 22% interest rates, you could lose money very fast. These are the general rules you should follow.

  • Budgeting, cut all unnecessary expenses. Earn additional income if possible.
  • Cut your credit card and spend money only on debit or cash.
  • Seek a way to pay your debt. (Consolidation loan, balance transfer, payment plan with card issuer etc.)
  • See below:

Consolidation loan is offered by bank to help you to pay back your debt at lower interest rate, and it is a personal loan.

With Balance Transfer, you can transfer your current card’s balance to a new one and apply for a new card.

With Payment plan, you can negotiate a deal with your card issuer and schedule a payment plan. Just like consolidation loan, there are terms and conditions you need to abide by.

How to be a responsible consumer?

Ask yourself these questions whenever you are about to purchase something.

  1. Is this something I absolutely need?
  2. If I need it, is there a cheaper alternative that is as good as this one?
  3. If it’s non essential for living, is it a luxury? If it’s a luxury, can I afford it? (If you need a payment plan or loan then you can’t afford it)

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What is an IRA in the United States and Why You Must Care

Last Updated: 5th March, 2019

Guest Post: Author J.D.

IRA

Individual Retirement Account — What is an IRA in US?

The technical term, according to the Internal Revenue Service, is an Individual Retirement Arrangement, though it is more commonly called an Individual Retirement Account.

An IRA is simply a holding account. It’s a label. The difference between an IRA and an ordinary investment account is twofold:

  1. Your contributions to your IRA may be deductible for income taxes. (More details below.)
  2. All the gains (dividends, interest, and capital gains) accumulate untaxed as long as they stay in the account.

When you open an IRA, it contains nothing. It’s like a bucket — it’s just a place for you to put something — and what you place in your bucket are investments.

For example, you might buy stock through your retirement account or maybe government bonds. Some people use their IRAs to buy real estate; and some simply let their cash sit there, earning interest, just as it would if it were deposited in the bank down the street.

Smart people mix things up over time. Their buckets may contain a combination of stocks, mutual funds, bonds, and real estate. But they don’t have to be diversified at all. Your IRA can contain a single index fund if that’s what you want to do.

Point to remember: An IRA is not an investment — it’s a place to put investments.

401(k) and IRA Contribution Limits Boosted for 2019

The limit on annual contributions to an IRA increased to $6,000 for 2019, from $5,500. And the additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000, the IRS has announced.

What is the benefit of an IRA?

The primary benefit of an IRA is that the returns on an investment are not taxed.

Untaxed, the gains earned in an IRA compound much faster compared to an ordinary investment account where what you earn is taxed every year.

In addition, depending on the type of IRA you set up, either your withdrawals or your contributions are not taxed. Over your lifetime, a tax-favored personal savings arrangement, or IRA, can add tens of thousands of dollars to your balance which you may not have had otherwise. It’s a benefit the federal government offers workers to encourage them to save for retirement, and the advantage is significant enough that it shouldn’t be overlooked.

Types of IRAs and their tax advantages

There are two major types of IRAs — a traditional IRA and a Roth IRA. In order to understand the difference, let’s first step back and look at a normal investment account, i.e., one with no tax advantages.

Normal Investment Account (no tax advantages)
When you use a non-retirement account, you invest post-tax money, meaning that you have already paid taxes on that income and you invest some of what is left over after taxes. Depending on how you invest, you may also be taxed on the interest, dividends, and all other gains along the way. You will also be taxed on any appreciation when you sell your investment.

As compared to a normal investment account, investing through an IRA has three different tax implications:

Traditional IRA – With a traditional IRA, you can deduct the money you invest from that year’s taxes, but you will pay taxes on any withdrawals you make from the account.

  1. Your contributions (i.e., the money you invest) will be tax-deductible.
  2. All gains (i.e., interest, dividends, and capital gains) will not be taxed as long as the money remains in the account.
  3. When you withdraw the funds after age 59 ½, you will pay normal income tax on the amount you withdraw.

Roth IRA – With a Roth IRA, you invest money that you have paid taxes on, but your withdrawals are not taxed.

  1. Your contributions are not tax-deductible.
  2. All gains (i.e., interest, dividends, and capital gains) will not be taxed as long as the money remains in the account.
  3. When you withdraw the funds after age 59 ½, you will not pay income taxes on the amount you withdrawal.

We will discuss when it makes sense to choose one or the other in a following post. For now, all you need to know is the primary difference between the two major types of IRAs.

In addition to the two types of IRAs, you can also open an Individual Retirement Annuity account. In general, those are structured like conventional IRAs, but there are limitations as to who the beneficiaries might be. The premiums have to be flexible in order to allow for lower limits in future years and count toward the IRA contribution limit. In other words, it’s an IRA investing in a specified investment vehicle (annuities), but it has to be in a separate account.

IRA restrictions

Below are a few general limitations. You can get full details, written in clear language, from the IRS website by typing “590-A” in your favorite search engine. Chapter 1 will deal with traditional IRAs and Chapter 2 with Roth IRAs.

1. Not everyone can open an IRA account. In creating IRAs, the government specifically intended them for people who work for a living. Having a job, therefore, is the number one requirement to qualify for an IRA. Very wealthy people or retirees who live off their investments can’t open one. Once you do open an IRA account, you can keep it as long as you live.

2. There are contribution limits. For 2015, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 — it’s $6,500 if you are 50 years of age or older — or your taxable compensation for the year, if your compensation was less than this dollar limit. (These amounts change annually, so it’s worthwhile to check the Form 590-A website referred to above.)

  • The IRA contribution limit does not apply to 401(k) rollover contributions and qualified reservist repayments.
  • For married couples, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.

3. You can contribute to an IRA even if you contribute to a 401(k) or similar retirement plan at work. However, once your income goes over $60,000 (single) or $96,000 (joint), limitations kick in. The IRS Form 590-A web page spells out the various scenarios clearly with two tables (Table 1-2 and Table 1-3 if you’re looking for them).

If neither you nor your spouse has a work retirement plan, there is no reduction in your contribution limit.

4. There is an annual cut-off date. You can’t make contributions for a given year after April 15 of the following year. You are not obligated to make a contribution every year, but you can never catch up once you have passed the cut-off date.

5. Your IRA can’t invest in things that are under your control, like your business. The restrictions are few — you can, for instance, invest in real estate — but as a general rule, the things you invest in cannot be connected with you (like your home or your business). You also can’t sell property to it or buy property for your personal use.

6. You can’t borrow from your IRA or use it as security for a loan.

7. Your IRA can’t invest in collectibles, with the exception of gold coins minted by the U.S. Treasury.

When you engage in what the IRS calls prohibited transactions, your IRA will be reclassified as a regular account and you will be taxed as if you made a complete withdrawal on the first day of the year.

Where to open an IRA

Because an IRA is technically just another investment account, thousands of institutions that offer investment accounts also offer IRAs. Each has its advantages and disadvantages.

  • Many banks and credit unions offer IRAs, but they may only allow the money to be used for certificates of deposit or money market accounts.
  • Big-name mutual fund companies like Vanguard are great places to open an IRA, but they often require a minimum initial investment of several thousand dollars and provide a limited universe of investment choices.
  • Discount brokerages like Sharebuilder and E*trade allow new investors to begin saving for retirement with no minimums, and they usually have smaller fees or no fees at all.

There is no one right place to open an account. You will need to search for a place that is good for you.

Questions to ask as you research where to open an IRA:

  • Is there a minimum initial investment?
  • What fees are assessed to the account?
  • Does the company offer automatic contributions?
    • What are the limits?
  • What investment options are available?
    • Stocks?
    • Mutual funds?
    • Real estate?
  • Is it possible to download statements automatically into Quicken?

Remember: The perfect is the enemy of the good. It is far better to open a Roth IRA now through any provider than it is to delay because you are worried about finding the very best place. Do your research. When you find a place that meets your requirements, open an IRA. Don’t fuss and fret, worrying about whether or not it really is the best choice. Find a good choice and go with it.

Conclusion

Don’t be afraid of IRAs. With a little homework you can add these valuable accounts to your retirement strategy.


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How to read your Paycheque

Paycheque

Before you dive into budgeting, saving, and investing, it’s important to make sure that you know how to read your paycheque. After all, we can only save and invest money that we’ve earned in the first place.

Here, we’ll dig into these key concepts:

  • Gross salary
  • Taxes
  • Deductions
  • Net salary (also known as take-home pay)

Gross Salary

When people talk about their annual salary (e.g., $40,000 per year) or hourly salary ($20 per hour), they are almost always talking about “gross salary”. This is the headline number that appears on your employment contract.

This figure is only a starting point.

Unfortunately, the money that appears in our bank account after each pay day is lower than what our gross salary would suggest. Think of your gross salary as the entire pie. After taking off slices for taxes and deductions (discussed below), the remainder is of the pie is what actually gets deposited into our bank account.

Taxes

It’s morbid but true: ’Tis impossible to be sure of any thing but death and taxes.

When you earn money from your job, your employer will automatically subtract taxes off of your gross salary (boo). Your employer sends this money to the government on your behalf.

The main form of tax taken off from your paycheque is income tax. The amount of income taxes you pay are based on the concept of “tax brackets”. As your income gets higher, the percentage of your income that you pay in tax increases — but only on the extra portion.

Here’s an overview of Canadian income tax brackets:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html

Side note #1: It’s a common misconception that you should try to stay below certain income levels, since shifting into a new tax bracket would reduce your overall take-home pay (i.e., higher salary but lower money coming into your bank account at the end of the day). This is absolutely NOT true.

When you move into a higher tax bracket, it’s only the money earned within that new bracket which is taxed a the higher rate, not your entire salary.

However, you may see a higher amount of tax withheld (see below) when you have a big, unusual paycheque (e.g. a bonus), because of the way tax withholding is calculated for paycheques.

Side note #2: The taxes taken off your paycheque are a “withholding” tax, meaning that they are just an estimate of the amount that you should owe. At the end of the year, the actual amount of taxes that you should have paid will be calculated on your tax return. The resulting difference between what you paid and what you should have paid will be settled at that point (either through a tax refund or additional taxes owed).

Keep this in mind if you see something odd happen with your taxes on your paycheque (for example, when you receive a bonus). You will always get “trued-up” at the end of the year.

The bottom line: the higher your income, the more tax you pay. However, making a higher income will always increase the pay that hits your bank account.

Deductions

Depending on what company you work for, you may have other deductions that are taken off of your paycheque. These could include contributions to an employer stock option plan, an employer pension / retirement savings plan, or an employer health plan.

When you were first hired, HR may have given you forms to sign up for an employer retirement savings plan (often known as a “Group RRSP” account in Canada). If you signed up, you’d be contributing a portion of your paycheque towards these savings plans (e.g., contributing 2% of each paycheque towards that account).

These amounts are deducted directly from your paycheque. As such, this money never arrives in your bank account. Instead, it’s held separately in a different account.

Net Salary (Take-Home Pay)

Gross salary is the full pie that we start with. After taking off a slice for taxes, and another slice for deductions, the amount of the pie remaining is what’s known as net pay or take-home pay. This is the amount of money that actually gets deposited into your bank account.

Your take-home pay is the most important number for you to know, since ultimately this is the money that you have control over. This is the money that pays the bills or gets saved for the future.

Knowing the amount of money that you take home each month will serve as a key input for your financial plan.

An Illustrative Example

Let’s take an example from a hypothetical Canadian paycheque:

Paycheque

  • For these two weeks, John earned a gross salary of $1,140 (regular pay plus overtime pay)
  • John paid total taxes of $239.97. This consisted of income tax, employment insurance (EI), and Canada Pension Plan (CPP) payments
  • John also had deductions of $104 for health insurance, registered pension plan, union dues, and Canada savings bonds
  • As a result, John had take-home pay of $796.03 for these two weeks ($1,140 minus taxes of $239.97 and minus deductions of $104)
  • John’s average tax rate was 21% for this paycheque (total taxes of $239.97 divided by gross pay of $1,140)
0 comments on “Passive Investing in 2019”

Passive Investing in 2019

Passive_Investing_2019

Passive Investing for Beginners

Passive investing is a growing trend in the investment world. Because of the broad success of index funds, many investors are beginning to question the importance of active money management and whether it may even hurt returns in the long term. Due to the costs associated with actively managing investments, passive investing strategies have an inherent advantage that is difficult to overcome.

At its core, passive investing is a fancy way of saying buy and hold. It’s all about minimizing fees and hassle while striving to build wealth over time. Having to constantly research and make decisions is costly in terms of time and money. Then there’s cost of making an actual transaction, which can be substantial if you’re making a lot of them. When you buy and hold, you hitch your fortune to a wagon and let it ride. Buying and holding is the simplest form of passive investing, but there are also some strategies which can be used to manage risk.

Diversification

It’s important not to hold all your eggs in one basket. Companies and economies go bust all the time, but they generally don’t go bust all at once. If you buy lots of different things across different sectors, economies, and asset classes, you can effectively spread your risk and average out your returns.

These days it’s easier than ever to build a diversified portfolio. Instead of buying individual stocks, there are index funds and Exchange Traded Funds (ETFs) that represent just about anything you could invest in. The simplest strategies involve just a few broad market ETFs or index funds that can be adjusted for your risk tolerance.

Rebalancing

Once you’ve decided how to diversify your portfolio, you need to ensure that it stays diversified. Different asset classes have different rates of return, with the riskier classes generally having higher returns over time. Due to this, your holdings will tend to become skewed towards riskier assets over time, which makes your whole portfolio riskier than intended by your diversification plan.

This is where rebalancing comes in. In order to get your portfolio back into alignment with your target, you need to buy (and possibly sell) some of your holdings. If you are making frequent cash contributions, simply buying your most underweight assets is often sufficient to stay on target. However, if your portfolio eventually drifts too far, you may also need to sell some of your overweight holdings so that you can purchase more of the underweight. Due to the cost associated with buying and selling, it’s best to do full rebalancing only infrequently.

Discipline

Perhaps the most important aspect of passive investing is discipline. If you don’t have the fortitude to stick with your investment plan even in the midst of a recession, you may lose more than you ever gain on your investments.

Many investors panic during downturns and pull their investments out of the market once they’ve seen their investments drop in value. It can be physically painful to see your net worth drop by 30% or more. The key thing to remember is that in the long run, the market always recovers. If you sell at the bottom, you’re jumping off the wagon and locking in your losses. So remember – you’re in it for the long haul.

On the flip side, it’s important not to get greedy or chase high returns. It’s easy to be enticed by the media’s coverage of the latest investing craze or flashy stock that is “set to perform this year”. Always be skeptical of what the media says and remember that if it’s in the media, it’s probably too late. Often times, investors following trends just end up buying high and selling low. If for some reason you have the urge to follow the advice you hear in the media, then make sure you do your homework and most importantly ask yourself: Am I really a passive investor?

5 steps to passive investing for retirement

So you’re interested in becoming a passive investor? Well look no further, you’re in the right place. This article will help you get started in 5 simple steps. Before we get started with investing, you should have learned how to prioritize your money and cleared all of your high-interest debt, such as your credit card and student loan debts. The interest on these is a lot higher than the returns you’ll make with your passive investments. Also, the money you are investing will go solely towards your retirement nest egg, so you shouldn’t be investing with money that you will need in ten years or sooner.

Finally, this guide assumes that you will be investing in low-cost Exchange Traded Funds (ETFs). As discussed in our Primer on Passive Investing article, passive investing is all about minimizing fees, staying diversified and being in it for the long haul with the expectation of getting the market returns. Remember, 80-90% of active managers do not beat the market’s returns. With that said, let’s begin:

Step 1: Develop a plan based on how much you can afford to invest.

Let’s say you intend on retiring at the age of 65, under the assumption that you will live to the ripe young age of 100. After all, we have made great strides in the field of medicine and it is not unreasonable to expect to be around a bit longer. According to MoneySense, the typical middle-class couple can live comfortably on $42,000 to $72,000 a year, assuming no mortgage or child cost. That equates to between $1,470,000 and $2,520,000 over the course of 35 years.

Who wouldn’t want to have a nest egg valued at over $1,000,000? But the reality is, the amount of money you can afford to invest is determined by what your monthly expenses are. Before investing, you should pay off your monthly expenses, then determine how much of your disposable income can be allocated towards retirement. Don’t forget to take your lifestyle into account. Depending on your lifestyle, you may decide to scale back spending in order to save more towards retirement. The main point of this step is to have a plan that works for you. The truth is, there is no perfect plan and the fact that you have one is a good start. The right time to start investing for retirement is now.

Step 2: Determine your asset allocation

Consider asset allocation as the process of “splitting up your investments” into various asset types in order to find the right balance between potential returns and safety. When investing, there are 3 main asset types to consider: stocks, bonds and cash (or cash equivalents). Depending on your tolerance for risk, you may decide to hold more or less of a particular asset type. For the purpose of this guide, we will assume that you are only holding stocks and bonds because you are trying to build wealth. That being said, it is not uncommon for some investors to hold cash as an “emergency” fund or as an extra safe (though unprofitable) asset.

When determining your asset allocation, a common rule of thumb is to hold your age in bonds and the rest in stocks. For example, if you are 40 years old, your portfolio should comprise a 40% weighting in bonds and 60% weighting in stocks under this rule of thumb. Once you’ve determined your stock allocation, you can refine this further by selecting ETFs that give you exposure to a variety of markets such as Canadian, US, and International equities.

For example, your 60% stock allocation could be further split up into:

  • 5% Canadian Equities
  • 35% US Equities
  • 20% International Equities

When it comes to bonds, the Canadian Couch Potato blog recommends holding Canadian bonds as opposed to International bonds because of the currency risks. In keeping with our scenario above, the remaining 40% of your portfolio’s allocation could be held in indexes or ETFs that track the entire Canadian bond market. When determining your asset allocation, always remember to stay diversified. There is an online questionnaire from Vanguard may also be helpful to determine your asset allocation. If you’re still not sure or do not feel comfortable determining your allocation, speak with a registered fee-only independent financial advisor and let them know that you’re interested in DIY investing using low-cost ETFs.

Step 3: Open an account with a discount brokerage and build your portfolio

According to Young and Thrifty’s comparison of online brokers in Canada there are a few factors that you should consider when selecting a discount brokerage, these are:

  1. Free ETFs trades
  2. Low account fees
  3. Low trading fees
  4. Low account minimums
  5. Good customer service
  6. Reimbursed transfer fees
  7. Safety
  8. Compatibility with Cell Phones

For any passive investor, using a discount brokerage is a must! Why you ask? Because you want to minimize fees as much as possible. I opted to go with Questrade because of their free-ETF purchases, low account fees and they offered to pay the transfer fee when I moved the money in my bank’s mutual funds over to them.

Step 4: Stay the course and avoid speculation

So you’ve built a diversified ETF portfolio, now here comes the hard part: staying the course and avoiding speculation! It’s easy to be tempted to sell your investments when the markets are doing poorly. Keep in mind that, even if the market is doing poorly, it does not mean that you have lost money. The losses are only incurred if you sell a security for less than what you have paid for it.

Always remember that over the long term the market has always gone up. If you were to Google search the market indexes of the New York Stock Exchange, NASDAQ, S&P 500 (which is an index that tracks the 500 largest corporations in America) and Morgan Stanley Capital International (MSCI) world index you will observe one thing. That is, these indexes historically trend upward over a long period of time, even after global recessions. But don’t take my word for it, according to Investopedia:

Between 1928 and 2013, a broad index of U.S. stocks increased 2,000-fold. However, 20 times they actually lost at least 20% of their value in that period.

With this knowledge in mind, I’d like to share two rules that Warren Buffet — the world’s most successful investor — lives by:

Rule #1: Don’t Lose Money.

Rule #2: Never Forget Rule #1.

Another aspect of staying the course is contributing regularly. The best way to do this is to set up automatic payments to your brokerage account and make regular purchases. This reduces the likelihood of you spending the money before having the opportunity to invest it. Consider this as “paying yourself first”, which can go a long way towards establishing a comfortable nest egg.

Step 5: Rebalance your portfolio when needed

As time passes, your portfolio will drift from its initial asset allocation because of the variance in performance between the assets in your portfolio. Because of this, rebalancing will need to be done in order to bring your portfolio back into alignment with the target allocation. There is no set rule of thumb as to how often you should rebalance. Some investors rebalance based on a calendar schedule (monthly, quarterly, annually), whereas others opt to rebalance whenever their assets have grown in value beyond a certain threshold (for example, 5% or 10% out of target). Because you’re focusing on building wealth and contributing on a regular basis, you could rebalance by simply purchasing the underweight asset(s) in your portfolio. If you’ve signed up with a discount brokerage that offers free ETF purchases, this method would not incur any fees and would help to keep your portfolio balanced.

Most importantly, be sure to remember the rule of thumb in step #2. You never want to be bearing too much risk as you approach retirement. It is important to maintain an asset allocation that’s in keeping with your tolerance for risk and time horizon.

1 comment on “How to Buy Stocks: A Beginner’s Guide to Buying Stocks in 2019”

How to Buy Stocks: A Beginner’s Guide to Buying Stocks in 2019

How_to_buy_Stocks

Last Updated: 24th January, 2019

Have you always wanted to invest in the Canadian stock market, but had no idea where to start? You’ve come to the right place. In this article, I’ll show you everything you need to know about the basics of stock market investing in 2019.

Are you ready? Let’s dive in!

Unlocking The Mysteries Of Stock Market Investing

Too many people make stock market investing more complicated than it needs to be. It’s as though investing is a great mystery, one that can only be solved by those with special insight and knowledge.

Thankfully, buying stocks doesn’t have to be a complex process. In fact, just about anyone can learn how to buy stocks with a little time and effort.

Getting Started in 2019

The first step is to open a brokerage account. Yes, it’s true that you need a broker in order to buy stocks.

The good news is that in 2019, you don’t need to visit a stock broker in person, call someone on the phone, or become engaged in a complicated transaction.

You can buy and sell stocks from the comfort of your living room, through an online discount broker. You don’t need very much money, either.

In many cases, it’s possible to open a brokerage account and start investing with as little as $50. Look for a reputable account online, and then open your account. Once you do that, you will be able to start buying stocks.

Online brokerage accounts are fairly easy to find. In Canada, there are no fewer than 12 leading discount brokerages vying for your investment dollar.

While you can check all of them out in this recent review of Canadian Online Brokerages, my top choice for online brokerage in 2018 is Questrade.

How Do Stocks Work?

If you’re new to the world of stock market investing, you may be wondering what a stock is in the first place.

Stocks, also referred to as shares, represent ownership in a corporation. They give the owner of the stock, also known as the shareholder, a claim on company assets and earnings. They can also grant the shareholder other benefits, such as voting rights.

To use a basic example, if a company issued 1000 shares, and you purchased 100, you would hold a 10% ownership of that company.

Of course, large corporations such as Google, or Royal Bank, are worth billions of dollars, with outstanding shares numbered in the hundreds of millions, so 100 shares would be a drop in the bucket when it comes to your claim on ownership.

But 100 shares is significant inside an individual portfolio, and can provide an investor with an opportunity for strong growth over the long term.

Types Of Stock

Corporations issue two main types of stock: common and preferred. Each type can be divided into several different classes, but these are the main categories.

Common shares provide the owner with voting rights at shareholder meetings, while preferred shareholders have a preferred claim on earnings, such as dividends. Preferred shareholders also have priority if the corporation were to go bankrupt.

Common shares are, exactly as they sound, more common.

What Is An ETF?

Exchange Traded Funds (ETFs) have become incredibly popular in recent years, and just might be the best way to get started with stock investing.

ETFs are groups of stocks that track the performance of a particular stock market index. With ETFs, Instead of trying to pick individual stocks, you receive the benefit of several stocks.

The benefit to a novice investor is that you don’t have to try and learn how to buy stocks before you get started. A solid ETF, can be a great way to get started.

ETFs vs. Index Mutual Funds

At first glance, an ETF might seem similar to a mutual fund, in particular an index mutual fund, but there are some key differences.

While ETFs and index mutual funds both offer an indexable basket of securities, ETFs are more flexible than an index mutual fund, in that they can be traded just like an individual stock.

They also lack the management fees (MER’s) of a mutual fund, although most brokers do charge a trading fee on ETFs. Depending on your strategy, ETFs can be advantageous to index mutual funds.

Because of their simplicity, ETFs may also be the best way to get started with stock investing. Once you are more comfortable, you can move forward and learn how to buy individual stocks.

How To Choose Stocks

Choosing individual stocks for your portfolio begins with research, and lots of it.

To start, get as much information as you can on the companies you are interested in, learning about how they are run, as well as the potential they have for future growth.

Also, consider whether or not the stocks you choose are a good value. There are many different ways to evaluate stocks, and you can learn them and then apply them.

The important thing is to get started. An ETF can help you get started with investing, and start earning compounding returns, while you learn the ins and outs of how to buy individual stocks.

Make It Automatic

No matter how you choose to invest, or where you put your money, one of the best things you can do is to make it automatic.

You want to make sure that you invest regularly, since that is a good way to make sure that you are earning better returns over time.

Decide how much money you can invest each month, and have the money automatically withdrawn from your bank account and used to invest in shares of an ETF or a particular stock.

This investing technique is known as dollar cost averaging, and it’s used by investors of all experience levels not only for convenience, but to enhance investment returns over the long term. Here’s how it works.

What Is Dollar Cost Averaging?

Dollar Cost Averaging (DCA) involves the purchase of investments in smaller amounts on a regular schedule, ie. monthly, bi-weekly, rather than in lump sums, less frequently.

Automating the purchase of investments removes the need for an investor to try timing the market, as over the long term the investments will be purchased at a lower average price. This is where the true value of dollar cost averaging lies.

Example Of Dollar Cost Averaging

Let’s assume an investor decides to purchase $1,000 worth of XYZ Corp. at the same time every month for four months. In this example, we’ll also assume that the stock first declines in value, but then rallies strongly.

As you can see in the table above, using a dollar cost averaging strategy the investor would have purchased 272.22 shares for a total of $4,000. His/her average price per share for this period would have been just $14.69 (calculated as follows: $4000 / 272.22 = $14.69). With the stock ending at $18 at the end of this period, the investor’s total position would now be worth $4,900 (calculated as follows: 272.22 shares * $18 = $4,900). As a result, the investor would actually show a profit of $900 on his/her overall position despite the fact that the stock declined in value over the full four-month time period (dropping from $20 to $18).

By comparison, if the investor had decided to invest $4,000 in shares of XYZ Corp. all at once at the beginning of this period, then he/she would have purchased 200 shares at a price of $20 per share. With the stock finishing at $18 at the end of the four months, the investor would have shown a net loss of -$400 on the stock.

This example clearly illustrates the benefits of dollar cost averaging, especially during periods of volatile share prices.


With dollar cost averaging, you can start small. As you earn more money, and learn more about investing in stocks, you can increase your contributions, as well as start finding other stock investments that will help you reach your financial goals.

 

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Mortgages in Canada – 2019

mortgage-in-canada

Last Updated: 10th Februaury, 2019

Mortgage Calculator

Mortgages in Canada

This article lists the many variations of Mortgages in Canada. You will see a lot of talk on here and everywhere about CMHC or mortgage insurance. This is the insurance that you pay if you purchase a home with less than 20% down. This is known as mortgage default insurance and is mandatory as per the government if you purchase a home with less than 20%. Mortgage insurance is not available on rental properties or purchases of homes worth over $1 million. The mortgage insurance premium is on the total amount of the mortgage and is tiered. With 5% down you will pay a 4% fee for the mortgage. With 10% down you will pay a 3.1% fee and with 15% down you will pay a 2.8% fee. These fees are included in the mortgage, raising the total mortgage amount you pay. You will have to pay the HST (or applicable tax) at the time of closing. The benefit of the insurance is that you can purchase with less money down and you will get better rates from your lender as they have less risk, which they pass along to you. The down side of this is that you do have to pay the insurance premium which increases your loan amount and payment. Insured mortgages in Canada can have a maximum of 25 year amortization and are subject to passing the current B20 guidelines for stress testing. This is outlined below.

Mortgage Qualifying

In Canada mortgage qualifying criteria is based off of two main ratios your GDS and TDS. GDS (Gross Debt Service) is the amount of your monthly income that can go towards your housing costs. These costs consist of (PITH) Principle, Interest, Taxes and Heating) . The amount that you are allowed to borrow will be based off of your credit score. A credit score of 680 or higher and you can have a GDS of 39%. A credit score below 680 and your maximum GDS is 35%. To calculate your PITH you will need to add up the principle and interest of the mortgage along with the monthly property tax and heating. (Half of your condo fees will also be included is you live in a condo) If this number is less than 35% of your GDS you qualify! The other number used is your TDS (Total Debt Service). This is the total debt that you have, including lines of credit, credit card payments and car loans, but not insurance. This number can be 42% of your gross income with a credit score under 680 and 44% if your credit score is above.

As of January 1st 2018, all mortgage transactions must comply with a stress test guideline, often referred to as B20 guidelines. In order to calculate your GDS and TDS ratios, you would need to ensure that you are calculating these percentages using these guidelines. The end result to a consumer seeking a mortgage is that your GDS and TDS must be calculated at the Bank of Canada Qualifying Rate (as of Oct 16 2018, this is 5.34%) or the contract rate being offered plus 2%, whichever of these is higher.

Fixed vs Variable

Fixed mortgages offer you the same rate over the duration of the contract. If you have a 5 year fixed mortgage at 3.00% interest your payment will remain the same over the duration of the 5 years. Variable rate mortgages are based off of the lenders Prime rate. This was the same across all lenders until in 2016 some banks have increased their mortgage prime rate. This rate will fluctuate based off of the Bank of Canada’s overnight lending rate. A variable rate will go up and down based on the overnight lending rate. The Bank of Canada meets and decides movement 8 times annually. If you have a variable rate mortgage your payment amount can increase or decrease based off of the overnight lending rate. Adjustable rate mortgage is much the same as a variable rate mortgage, but instead of the payment going up or down the amortization will get shorter or longer. Most Canadians call adjustable rate mortgages variable, but it is important to know the difference. Amortization is the duration in which you intend to pay back your loan.

Amortization

In Canada with have mortgage terms, which are how long you are locked in at a particular rate, but the amortization is the total duration of all loans in order to pay back your mortgage. Payment frequencies will vary by lender, but most will offer some or all of the following: monthly (once a month), Semi-Monthly (Twice a month), bi-weekly (26 times a year) accelerated bi-weekly (26 times a year at bi-monthly amount), weekly (once a week). When getting a mortgage you have several options. You can go to your bank, a credit union or a mortgage broker. All have different benefits and are worth exploring to see what is the best fit for you.

Resources

Using TFSA to pay your Down Payment

http://homeownership.ca

1 comment on “TFSA Contribution Limit Withdrawals – 2019”

TFSA Contribution Limit Withdrawals – 2019

tfsa-limit

Last Updated: 5th March, 2019

TFSA Contribution Limit Withdrawals

What is a TFSA?

It is funded using tax-paid money. This means that you do not get any rebate on tax when you contribute to your TFSA. The primary benefit is tax free profits, with no future taxation on withdrawals. This is unlike an RRSP where tax paid is effectively refunded when you contribute, and then tax is later assessed when you withdraw, ideally at a lower rate of tax. The benefit of a TFSA is much more straight-forward – paying no tax on growth is better than paying tax. Extracting and maximizing benefits from an RRSP can be a bit more challenging to manage due to the fact that your tax rate in the future is effectively unknown. This makes contributing to your TFSA an easy choice when you have the room available and aren’t sure if you should be using your RRSP at the time.

The benefit to be obtained from a TFSA is capped by what is known as the “contribution limit”. You may only contribute a certain amount to your TFSA. This means the amount of investments/savings that you can shield from tax is limited by the contribution limit. It is best to maximize your use of this benefit by contributing as much as possible to your TFSA before saving/investing in any taxable accounts.

Who can open a TFSA?

Per the CRA: “Any individual who is 18 years of age or older and who has a valid social insurance number (SIN) is eligible to open a TFSA.”

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/who-open-a-tfsa.html

Note that non-residents or those who were previously/will be a non-resident have special rules regarding the calculation of contribution room – refer to this link: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1116

TFSA Limit / Withdrawals

Generally the calculation of a particular years contribution limit is as follows:

  • your TFSA dollar limit plus indexation;
  • any unused TFSA contribution room from the previous year; and
  • any withdrawals made from the TFSA in the previous year.

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html

In effect this means unused room is carried forward, and withdrawals are added back to the next years contribution room. Therefore you’re always free to use the TFSA since if you need the money for some other purpose you can withdraw the funds, use the money, and get the room back for later re-use.

“The TFSA dollar limit plus indexation” is not calculated by you. It is a prescribed number each year (Currently $5,500). You only accumulate TFSA room so long as you are resident, and are older than or will turned 18 during the year. You accumulate this room regardless of whether you have filed an income tax return (unlike the RRSP which requires a tax return filed to calculate the room). Non-residents should look to guidance on the linked TFSA guide above.

Your contribution room is calculated across all accounts – not per TFSA account. You may have multiple TFSA accounts at different institutions, but you must ensure that your total contributions across all accounts is not beyond the limit.

Here are some examples of the TFSA room calculation: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/examples-tfsa-contribution-room.html#xmpl2

Investment Types

A TFSA account is any account with the designation as a TFSA account. This means a TFSA goes beyond just “savings accounts”. You can have a TFSA account at a variety of institutions and it can hold cash, mutual funds, stocks (except in some circumstances), bonds, GIC’s, and even (in limited circumstances) small business corporation shares.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1121

Gains/Losses in the TFSA

Gains earned in a TFSA are not subject to taxation. On the other side, losses in your TFSA are denied from being offset against any taxable gains.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#losses_incurred

Slips, and reporting your TFSA on your tax return

So long as you have not over-contributed to your TFSA you are not required to report your TFSA contributions, withdrawals, or incomes. You do not need to fill out anything when filing your taxes. Your TFSA information (summary of activity during the year) is submitted by the institution who created the account to the CRA.

How to find your contribution limit

You can find your contribution limit for a particular year at: * CRA My Account; * MyCRA at Mobile apps; * Represent a Client if you have an authorized representative; or * Tax Information Phone Service (TIPS) at 1-800-267-6999.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1120

Your Contribution Limit is updated after each year, but it may take a while after year-end for your contribution limit to be properly updated at the CRA. The CRA needs to wait for all of your institutions to file your information, and then it takes a while for the CRA to update their systems to reflect the new limits.

Generally speaking it is a good idea to track what you would expect your TFSA limit to be to ensure that all institutions have properly filed the activity for the year. Any errors by your institutions are your own responsibility to resolve in order to avoid penalties. You can call the CRA for an activity summary if you need the detail of activity filed with them in order to reconcile your TFSA limit. If you believe there is an issue with what one of your institutions filed then contact that institution – and then contact the CRA if they are unable to help.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#p3021_26370

Day Trading in the TFSA

This is nearly impossible to comment on in a wiki article, however it needs to be at least mentioned. The issue with day-trading in your TFSA stems from the following rule – you are prohibited from using the TFSA to shield the incomes of a business activity (as a business is not an eligible investment for a TFSA). In taxation the term “business” has a specific definition that alludes to some general factors to determine what is business activity. Generally speaking passive investing, or investing through a normal adviser, or long-term buy and hold investing, would not be considered a “business activity”. However, frequent (day) trading or highly speculative trading (and the research and other activities that come along with this) ends up being seen by the CRA (and our taxation laws) as a business activity. The CRA is increasingly targeting individuals with high profits/high activity for audits of their TFSA accounts. It is NOT recommended to day trade or keep highly speculative investments in your TFSA. AGAIN, this is FAR from a detailed explanation of the issue.

Effects on Credits

As withdrawals from a TFSA are not considered to be income you can freely withdraw funds from your TFSA without concern for losing certain income based credits such as the WITB/HST/CCB or other amounts.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1117

Foreign funds

Foreign funds be held in a TFSA account (such as US dollars and US dollar denominated investments), but for the purpose of reporting the usage of contribution room/withdrawals the amounts will be converted to Canadian dollars.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#p3021_26419

Death of a TFSA Holder

I can only provide a link in this wiki article for this issue: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1119

 

4 comments on “Exclusive Guide – TFSA versus RRSP in 2019”

Exclusive Guide – TFSA versus RRSP in 2019

Last Updated: 30th January, 2019

TFSA versus RRSP

Even without the long acronyms, these two money saving products have a lot on common. Both investment vehicles offer tax incentives for savers and encourage you to plan for the future.

Here’s how these 2 options measure up against each other.

TFSA RRSP
Tax deductible? TFSA contributions are not tax-deductible.  So your contribution will not affect your taxable income in the year that you make a deposit. The contribution and investment earnings are exempt from taxation upon withdrawal. Money that you put towards your RRSP is tax deductible. It therefore reduces your taxable income in the year that you contribute.When you withdraw from your RRSP this money is added to your income and taxed at current rates.
Contribution limit You can invest up to $10,000 per calendar year in a TFSA. However, this may change as the new Federal Liberal government implements its new budget strategy. It’s a bit more complicated trying to figure out the maximum contribution limit for an RRSP without tax implications – It is dependent upon your previous year’s income and pension adjustments.  For more information, visit the Canada Revenue Agency.
Access You can access your money at any time. There are different types of RRSPs.  Locked-in RRSPs will not allow you to access your money until you hit a certain retirement age.  If your RRSP is not locked-in you can withdraw the funds at any time.Money that you withdraw from an RRSP will then be taxed in that year.
Taxes on withdrawal All of the money that you earn from your investment (i.e. interest, capital gains, etc) is tax free.
This means that your money can grow in the fund tax free and when you want to withdraw it, that income will also be tax free.
RRSPs are tax deductible and your portfolio grows tax sheltered.This means that you get the tax benefit when you put your money in.  When it comes time to withdrawing the funds, you will be taxed then.
Investment vehicles accepted A number of different investment vehicles qualify, including high interest savings accounts, GICs, bonds, mutual funds and stocks It can contain a variety of investments such as: RRSP savings deposits, treasury bills, GICs, mutual funds, bonds, and equities.
Beneficial for People who expect to be in a high tax bracket during retirement years. People who expect to be in a lower tax bracket during retirement years.
Minimum age limit You need to be 18 years of age and a Canadian resident to qualify No age restriction necessarily, but you do need to have generated RRSP contribution room by claiming earned income – which can be done by filing a tax return.
Maximum age limit There is no age limit. You are not eligible to contribute after the age of 71.
Benefits The money in your TFSA can be put towards whatever you’d like – there are no restrictions as to how or when you can use the money.
Also, unused contribution can be carried forward and accumulates in future years.
The tax benefits are immediate.  Also, come retirement age, you’ll be glad you put some extra money away

KEY TAKEAWAY

The main difference between an RRSP and TFSA is the timing of taxes:

  • An RRSP lets you defer taxes – an advantage if your marginal tax rate is lower in retirement.
  • With a TFSA, you’ve already paid tax on the money you contribute – an advantage if your marginal tax rate is higher when you withdraw the money.
3 comments on “Investment Guide – How to invest money for Beginners in 2019”

Investment Guide – How to invest money for Beginners in 2019

Last Updated: 13th January, 2019

  1. Personal Investment: Introduction
  2. Personal Investment: Investing For Beginners – Know Your Savings Goals
  3. Personal Investment: RRSPs vs. TFSAs
  4. Personal Investment: Retirement Planning – CPP And Beyond
  5. Personal Investment: Bonds – The Safe Bet
  6. Personal Investment: Playing The Stock Market
  7. Personal Investment: Conclusion

1. Introduction

The article “Canada Beginners Guide to Personal Investment” covers simple “tips” for dummies or beginners on how to start your personal investments without hiring a financial consultant. This is the best article to learn how to Invest in Canada in 2019.

I assume you have a steady job and ready for investments. Big or small amount doesn’t matter. The important thing is that you need to start investing. Now, keep at it for the next four decades or so and you’ll be able to retire. Successful money management goes beyond just saving a portion of what you make. To really get the most out of your earnings, you’ll need to put it to work in a few choice investments.

2. Investing For Beginners – Know Your Savings Goals

Not sure where to start? Whether you’re already planning for retirement, or saving up for another life milestone such as your first home, here are the basics for beginning investors.

3. RRSPs vs. TFSAs

Most Canadians are more familiar with Registered Retirement Savings Plans (RRSPs) than they are with Tax-Free Savings Accounts (TFSAs). This is in part because RRSPs have been around as a retirement savings’ vehicle for Canadians since 1957, and TFSAs only came into effect at the beginning of 2009.

Participating in both programs is similar in that you invest in a suite of options through your financial institution. But RRSPs get a boost from the fact that you get immediate tax savings (in the form of a deduction from your taxable income for the year in which they’re purchased). The tax-savings with TFSAs is that any money you earn on investments is non-taxable. (Down the road, when you do withdraw money from RRSPs, you’ll have to claim that as income at the time.)

While the upfront income tax savings from RRSPs may seem enticing, the fact is that if you’re just early in your career, and therefore making a relatively low income, you’re better off investing in TFSAs. Here’s why:

Let’s say you’re making a fairly low salary – the current national median income is $27,800 – and, you still manage to set aside $1,000 to invest. At the current minimum tax rate of 15 per cent, your tax-savings may only amount to a few dollars. But if you invest that $1,000 in a TFSA, it could grow significantly larger over time. A $1,000 investment that grew at five per cent a year would be worth $4,322 after 30 years.

If your career blossoms and you find yourself earning six-figures one day, you’ll be taxed at a rate of 26–29 per cent, making RRSP deductions a more-valuable consideration.

TFSAs also have another advantage over RRSPs in that you’re able to withdraw the funds whenever you want, without penalty. This makes them a useful savings vehicle for other big expenditures, such as the down payment on a house.

Keep in mind that both RRSPs and TFSAs offer the option of keeping your savings in cash, or investing them further in a GIC or stocks for further interest earning.

Check out this handy graph to learn more about RRSPs vs. TFSAs

4. Retirement Planning – CPP And Beyond

Current Canadian retirees benefit from two government-run pension programs: the Canada Pension Plan (CPP) and Old Age Security (OAS). The maximum monthly CPP payment in 2013 is $1,012.50. The current maximum monthly payment for the OAS is $550.99. Add that up, and you’re looking at $1,563.49. That works out to $18,761.88 a year.

It’s save to say that most of us wouldn’t be able to survive on that alone.
And even that may not be available when you’re ready to retire; in the 2012 budget, the age of eligibility for receiving the OAS was moved from 65 to 67 years of age. This is the first of many anticipated changes to the federal pension programs to deal with the fact that Canadians are living longer, and there may not be enough younger ones in the workforce to support all the baby boomers through a lengthy retirement period. In short, the onus is on young people to plan on financing their own retirement funds.

5. Bonds – The Safe Bet

The downside with investments held within both RRSPs and TFSAs is that they’re tied to stock markets and the overall health of the economy. The general trend has been for these types of investments to grow over time, but major market crashes – such as occurred in 2008 – can have devastating effects on people’s investments. In fact, many Canadians had to modify their retirement plans when the economy tanked and took a good chunk of their nest egg with it.

The principal invested in a savings bond is guaranteed by the government, making them as close to you can get to a sure thing. But that safety comes at a price: the current series of federal savings bonds pay a mere one per cent interest on the first year of the investment. And you don’t get any interest if you cash them in before the year is up.

6. Playing The Stock Market

Investing directly in individual stocks is the area where you can make the biggest gains, or take the biggest losses. But for every seemingly never-ending stock rise (Google’s $85 initial IPO price in 2004 has soared to approximately $1,010 in November 2013) there’s a reminder such as one-time stock market darling Research in Motion of how quickly things can change for the worse. RIM reached a high of more than $140 a share in 2008, but had dipped to less than $14 a share in 2013. You’ll also have to factor in brokerage fees for every transaction you make.

7. Conclusion

Different strategies work for different investors and different situations. An investor might employ more than one strategy, or choose a variety of investment vehicles depending upon their goals.

So, have a plan and a strategy.

Just like going on trip in your car, it is important that investors have a plan and a destination in mind before investing their money. Your goals—whether planning for retirement or buying a home—dictate your time horizon, which dictates your tolerance for risk. Additionally, you want to make sure that you diversify your investments so that some do well when the rest of your portfolio might not. This approach allows an investor to construct a portfolio that is in line with their risk tolerance and that balances potential return with some downside risk protection.

Hopefully this article has provided some insights and good ideas as you invest for your future.

Your journey is just beginning, however, your challenge is to keep learning and stay informed.

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Majority of Canadians haunted by Financial Stress

Are you stressed about your personal finances? I’m sure you are, and that’s the reason you are reading this article. According to the Financial Planning Standards Council – Financial Stress Survey, 41% Canadians cite “money” as the greatest reason of stress.

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Here are top 3 Simple and Easy steps which will ensure that you regain some confidence about your personal finances.

  1. Weigh in financially

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Where are you now, how much do you earn, your spending habits, and how much you owe.

2. Create a Goal Plan

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What are your goals (short term & long term)? Saving for a home, buying an SUV, saving for children’s education, paying off debt?

3. Action Plan

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The next question is how are you going to get there? Are you going to earn more, spend less, automate your savings, or all 3?

Here is the solution:

Taking charge of your personal finances is the best way to reduce money related stress. 

  • Find & Cancel Unwanted Subscriptions

If you analyze your transactions to find all your recurring subscriptions, you will at-least find 1-2 subscriptions which you no longer use. So, why not cancel them?

  • Get out off credit card debt

A technique lot of people like to use to get out off debt is to pay off small credit card balances first. This can have a powerful psychological effect on many people because it can feel like they are making progress sooner. This can be very encouraging and provides a lot of people with motivation to keep paying down their debt.

  • Remove your payment information from Online shopping carts to cut down on Impulse purchases.

  • Consider a cooling period of 24 hours before buying a “want” as compared to a “need”.

  • Consider opening a TFSA or RSP

If you don’t have one, consider opening a TFSA or RSP. Start to save, even as little as $50 a month and it will increase your feeling of financial confidence.