Should I Save For My Kids’ Education or My Retirement?

A burger needs ketchup and mustard.  Coffee tastes better with cream and sugar.  We should be saving for retirement and our kids’ education.  But which one is more important?

There are two camps to the RRSP vs. RESP* question.

The first puts the parents’ needs first – we need to help ourselves before we can help someone else.  Kids can borrow to go to school, but we can’t borrow to fund our retirement.  (Reverse mortgages being the exception, which most people consider a last-resort option).

The other is to save for whatever is coming first.  In most cases, our kids will be heading to post-secondary before we retire.  By saving for education first, we can get really serious about saving for retirement after the kids are through school.

Complicating factors:

1. Values.  Some parents are passionate about paying for every penny of their child’s education.  Others think their kids should do it on their own just like they did.  And many fall in the middle.  Your values will play an important part in your savings decisions.

2. Matching contributions.  Here’s something to consider – a guaranteed 20% rate of return on RESP investments.  Or to put it more correctly, the Canadian Government matches 20% of your RESP contributions.  The matching is capped at $500 per year and $7500 per lifetime, per child.  In it’s simplest form, if you contribute $2500 per year per child, or $208.33 per month, you will receive an extra $500 per year.

So, what’s the right decision?

Saving for both is the best option – betcha didn’t see that coming.  A really good scenario is if you are saving at least 10% of your income for retirement, plus at least $2500 per child into the RESP.

But if you are planning to help pay for your child’s education, think about making the RESP a priority.  Turning down free money for something you plan to pay for anyway doesn’t make sense.  And remember this: You get to choose what happens with the RESP money.  Should your child not use it, or if you decide you want it to fund your retirement after all, then you can make that happen.  You can even deny your child the money if they enrol in a course you don’t agree with (talk about family feud)!  RESP money is still your money. 

Ignore saving for both retirement and education at your peril – at that rate, your kids will end up over their head in loans and you’ll still be working at 80.  So be sure to save, but also to not be paralyzed by choice.  Make your decision, implement it, and change course as needed.

* There are many features, maximums and regulations on RESPs that aren’t discussed in this article.  See the Government of Canada’s RESP literature, look at these Money Sense articles, or ask your financial institution.  Careful out there, some “Group RESP providers” have significant restrictions and fees.

Do It Yourself Investing – Where To Get Help

A series featuring my personal leap into DIY Investing. 

Last month we decided to move our money from our Financial Advisor and invest on our own.  Specifically, we are trading in our high-fee mutual funds for low-fee exchange traded funds.  In the simplest terms, ETFs are securities that track an index.

ETFs are often and understandably confused with index funds. If you are curious about the differences, read this enlightening article by Bruce Sellery.  In short, index funds are better for investors with less than $10,000 and/or who want to invest smaller monthly amounts.

The average Canadian mutual fund charges 2.42% annually.  You can build your own ETF portfolio for less than 0.25%.  Index funds will run you about 1%.  Of course, cost isn’t all that matters.  Perhaps you think your advisor gives you valuable service.  Perhaps you wouldn’t be willing to accept that owning the index means you’ll never beat the index.  Maybe you like an idea of a professional money manager calling the shots.  And you might just not have the time, interest or energy to invest on your own.

Or maybe you’re mostly just scared.  Like we were.

There’s good news: Leaving an advisor doesn’t necessarily mean you’re alone in navigating the world of index investing.

Lately some hybrid index-based models of “do it yourself with help” have emerged.  The advantage is that you receive investment advice and rebalancing for a lower cost.  The disadvantage is that the cost is higher than if you went completely on your own.

Here are three reputable ones that have been getting some attention:

1. PWL Do-It-Yourself Service (associated with Dan Bortolotti of the beloved Canadian Couch Potato website).  Update: Since this article was originally published, the PWL service has temporarily stopped taking on new clients due to overwhelming demand.

2.  National Bank’s InvestCube

3. NestWealth

If you are even curious about moving into the arena of DIY, spend 45 minutes to read through these sites.

In the end, we’ve decided to go the step further and do this on our own.  More on that later.  As a great man said: “You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose. You’re on your own. And you know what you know. And YOU are the one who’ll decide where to go…”

Hopefully ‘up’ is where we’ll go, Dr. Seuss.  Keep following the journey to find out.

Rich regards,

Morgan

 

 

Do It Yourself Investing – Getting Ready

A series featuring my personal leap into DIY Investing. 

In December 2013, we were ready to “fire” our financial advisor and jump into DIY investing.  And then we didn’t do it.  We had many reasons – his good service, a negotiated drop in fees and lack of time to name a few.

Fast forward to December 2014.  We are really ready this time.  We are inspired and sure (?) we can do it.  Why?

1.  We have relatively uncomplicated financial planning needs

2.  We are disciplined investors

3.  I am interested and excited to manage our investments

4.  We want lower investment management fees

Making big changes doesn’t happen unless you’ve been mulling it over quite a bit, consciously or not.  But there’s usually the tipping factor; some big or small thing that gives you permission or strength to just do it.  For me, there were two:

1. Seeing Bruce Sellery in person.  (Bruce is an engaging personal finance speaker).  At the end of his irreverent and inspirational talk, he begged us to commit to making one change in the next 24 hours.  The change could be anything financial.

2.  Having an accountability buddy.  The woman beside me, whom I happened to know, had her own plans for change.  While we didn’t formally agree to report to one another, I couldn’t wait to message her when I completed my first step the next day.

It’s easy to say to oneself, “Tomorrow I will do my own investing”.  But the truth is there are a million (okay, maybe a dozen) steps in total that need to be taken.  Making changes and reaching goals requires small, concrete steps.  And while calling my advisor didn’t have to be the first thing I did, I knew it was going to be the hardest.  So the next morning, I gave him my reasons for moving our money.  As gentlemanly and supportive as ever, he wished us well.

(Note: Telling your advisor that you are moving your money is a courtesy, but not a necessity.  They’ll learn soon enough once they’ve received all the transfer papers from your new institution.)

It wasn’t until a few days later that I actually got around to starting the long process of opening up some brokerage accounts.  I also have done enough research to know which investments we will be purchasing (more on that in future posts).

But with the most difficult step done, the road is suddenly and freshly paved.  It’s not quite like finishing college or starting a new job, but it feels darn close.  A little bit scary, but mostly just ready to make things happen.

Stay tuned!

Want to Update or Renovate? Read This First.

A family we know recently purchased a beautiful home which is in mint condition – for the 70’s.  They plan to take advantage of this decor by throwing a retro housewarming party, bell bottoms and all.  On the other hand our house is quintessential 90’s:  brass and oak, outdated ceiling fans and dark green paint with paisley curtains.  I’d prefer a 70’s home any day; at least it has the cool factor.  But we’re learning to embrace the 90’s.  Here’s why:

1.  What’s good for your home is bad for your line of credit.  When you first buy a home, you may think:  that bathroom has to go.  Then you think, our furniture does not match this space.  We’ve all seen it happen.  One update not only becomes more expensive than anticipated, but it leads to other updates too.

2.  Is it really something you care about?  Of course everyone would love a beautiful home, but what do you really want over the next five years?  A modern home?  Or to pay for your kids’ activities, the odd vacation and freedom from debt?

3.  Explore why you want the update.  Are you updating because you truly want to or because you think you should?  Think: will modernizing the light fixtures make your everyday life happier?

There is nothing wrong with surrounding yourself with beauty.  It’s a worthy goal.  Before you spend money on updating your home, be able to answer “Yes” to these two questions:

1.  Can you afford it right now?

2.  Is it truly important to you?

If you can’t afford it but it is important to you, start saving up.  Your growing bank account will be the proof that you are willing to sacrifice in other areas to make this priority a reality.

In the meantime, embrace your home’s decade whatever it is.  We stare up at our unattractive bedroom ceiling fan and think, “wouldn’t it only cost about $75 to update that?”  But instead we’ll sleep peacefully (and without financial worry) under it.

Rich regards,

Morgan

Why It Makes More Sense Than Ever To Pay Down Your Mortgage

Nowadays, you can find a 5 year mortgage rate for less than 3%.  At rates this low, why would anyone decide to make extra payments on their mortgage?  After all, investing your money elsewhere will most likely earn you more than 3% over the long term.

Things might not be that simple.

Mortgage rates will probably increase over the next five years.  You’d be surprised how even a small increase in interest will affect your mortgage payments.  Are you prepared in 5 years to have your monthly mortgage go up by hundreds or thousands of dollars? Putting extra money on your mortgage now gives you an insurance policy against higher rates in the future. Here’s an example.

Mary and Carey have a 25 year mortgage of $450,000 at a 5-year rate of 3%.  Their mortgage payments are $2,130.  In 5 years, their monthly payments could increase significantly if rates increase.

Mortgage Rate New Payment This is a monthly increase of
4% $2,324 $194
5% $2,527 $397
6% $2,739 $609

(BMO has a great mortgage calculator if you want to figure out your own numbers.)

You could deal with higher future rates by re-extending the length of your mortgage at that time (this would bring your payments down).  But is extending your mortgage desirable?  Isn’t the point to pay our mortgages off someday?  A better, more savvy way to deal with higher future mortgage rates is to pay more on your mortgage now.

You may not be able to squeeze any more money from your monthly cash flow to put onto your mortgage.  If not, consider using some or all of the lump sums you receive such as tax refunds or bonuses.

Paying down a 3% mortgage might not seem to make sense on the outside.  But these low rates give us an unprecedented opportunity to make big dents in our principal while saving ourselves from higher mortgage rates in the future.

Rich regards,
Morgan

Buying a Home? The Credit Secret You Never Knew

424px-Dollhouse_hand-builtWhen you are selling one home and buying another, you hope that you do not have to carry both mortgages.  And if you do have to carry both, you hope it’s not for very long!

But here’s the thing.  You have a much better shot at your dream home if you qualify for carrying both mortgages – even if it never comes to that.  Let me explain.

The fewer conditions you put on an offer to purchase, the more attractive it is to the seller.  Having a condition of selling your own home can be a turn off for sellers because it’s a big IF.

With this strategy, there is no guarantee that you will sell your home by the time you take possession of your new one.  So, you must be approved to carry both mortgages.

Don’t confuse this with bridge financing.  Bridge financing is when you have a confirmed sale on your own home, but your purchase and sale overlap for a short time.  You cannot get bridge financing without this confirmed sale.

Instead, being approved for two mortgages means this:  You have to qualify for the total amount of the new mortgage PLUS whatever mortgage you have left on your original home.  There is no consideration of the equity you will bring to the new home, because the bank has no guarantees of if or when that will happen.

How do you qualify then to carry two mortgages?  Good income goes a long way, but it won’t go all the way.  You absolutely must have great credit.  And don’t forget you must actually be able to pay for both homes for a while if it comes to that.

It pays to have good credit regardless of your home-buying strategy.  If you know you will be looking at homes in the near future, start right now being hyper vigilant about paying your debts down.  Having a low “debt ratio” (your debt as a percent of your credit limit) is a large factor on your credit score.

May your affordable dream home someday be yours!

Rich regards,

Morgan

How to Save A Lot of Money in a Short Time

Have a big goal but not a lot of time? Enter 100% spending crackdown. This means taking temporary but drastic measures to reach a short-term goal.

We recently bought a new house. While we’ve been saving for a long time for the down payment, there are many immediate costs that require immediate cash. Not wanting to sacrifice on the down payment, how do we come up with the cash we need to help against these costs?

Your goal can be anything!  Maybe you want to go on a great vacation, buy expensive shoes, or pay off your credit card. The more specific and meaningful it is, the better. Because 100% spending crackdown is hard, so you’ll need a good reason to hold onto when things get tough.

How do you crack down? You evaluate every single spending decision. Big or small. Be ruthless.   Here are some examples of our self-imposed crackdown:

1. Not stopping for lunch: Easy one, right? Being out on the road with 3 hungry kids is just poor planning. Stopping for even a cheap meal is $40.  Instead, I have to either plan ahead or put up with the whining.

2. Not going to the theatre with our kids: We love going to plays, and go regularly. It’s a special time for us to be together, enjoying some culture. Unfortunately, we won’t be going for a while.  I remind myself:  it’s only temporary.

3. Not buying another car: We have been saving for a replacement to our worn 2000 Subaru. We’ll keep some aside for repairs (in fact it needed $200 on the weekend), but the rest is being re-allocated to the house. We’ll squeeze another two or three years out of this one yet.

4. Kid Activities:  Summer Camp?  Skiing?  Swimming lessons? On hold, hold and hold.

5. No fancy cheese: We love a good wine & cheese tray as much as the next person.  Is not buying your $8 brie going to help much?   Probably not.  But spending crackdown is an attitude.  You have to let your inner Scrooge permeate every decision so that it becomes second nature.

Do you have to give it all up while you’re saving for your goal?  Of course not, you just won’t get there as fast.  Our kids will still play soccer and basketball; I still buy my Tim Hortons; my husband still goes out for a beer with the guys after hockey.  But the sushi, new books and trip to the Science Centre will have to wait.

Savings opportunities are everywhere you look – good luck!

Rich Regards,

Morgan

Why Be Concerned About a Clothing Allowance When You’re Paying Big Investment Fees?

This is the question I was asking myself as I listened to the energetic financial journalist, author and speaker Bruce Sellery speak at an event late last year, hosted by Money Mentors.

Bruce challenged us, his audience, to find our primary financial weakness.  Secondly, what tangible and intangible consequences did this weakness have?

We can have weaknesses in 5 different financial areas, according to Bruce’s elegant “Priority Pyramid”.

priority pyramid

 

 

 

 

 

(credit: http://www.moneysense.ca/columns/the-priority-pyramid)

The base of the pyramid, cash flow, is most critical.  If you have cash flow problems, then don’t concern yourself with investment fees (not yet, anyway).  You’ve got bigger fish to fry.  Not that fees aren’t important to everyone.  But we only have so much capacity to attack our finances, so spend your energy on where it matters most.

Still not sure what your main weakness is?  Have Bruce explain his pyramid to you in this 3 minute video.

My weakness has always been evaluating (or rather, not evaluating) investment returns.  Ironic, having worked in the Banking and Investment industry for 9 years.  I justified it like this: We don’t spend too much, we are saving toward our goals, and I am “too busy” with life to deal with much else.

But Bruce made me think.  Why, for example, am I vigilant about my clothing expenses but not concerned about potentially losing big bucks in investment fees and underperformance?

Tangible downside: Missing dollars.  Intangible downside: Feeling quite embarrassed about ignoring it.  I am a personal finance specialist after all.

Evaluating these downsides immediately set me forward on an overdue journey of evaluating fees and performance.  Read about it here.  And long story short:  I am ever the wiser, and richer, for it.

As with many things, a little effort can pay off.  Don’t be nervous; start analyzing the downsides to your weaknesses – tangible and intangible.  They just might motivate you to take some action in 2014.

Rich regards,

Morgan

Check Your Spending Against These Rules of Thumb

There’s no shortage of rules about what we “should” be doing.  And it doesn’t just apply to money.  You might know the general answers to:

1.  How many calories “should” we be eating per day?

2.  How much exercise per day “should” we get?

3.  What foods “should” we buy organic versions of?

4.  How many hours per night “should” we be sleeping?

Rules of Thumb can be both motivating (humans love clarity), and slippery.  If you look at the questions above, obviously the answers could be drastically different depending on the person.

Budgeting Rules of Thumb are no different.  When I do a workshop, people love to know what they “should” be spending in various areas.

It is one of life’s ironies that their percent of spending on debt, transportation, housing and/or play money needs to be lower.

But can a family of 5 really have the same Rules as a family with double income and no kids?  The first family will need money for a bigger emergency fund, more insurance, childcare, education savings and the other endless expenses that come with kids.

It is one of life’s ironies that their percent of spending on debt, transportation, housing and/or play money needs to be lower.

So it is with caution that these Rules are presented.  Nonetheless, Rules of Thumb help make sense of complicated topics.  So, here goes.  All numbers are a percent of Gross Income, unless otherwise indicated.

1.  Consumer Debt (includes Credit Cards, Lines of Credit, Car Loans, Overdraft): Maximum 20%

2.  All Debts Plus Housing (Mortgage, Tax, Insurance, Condo Fees and Heating): Maximum 40%.  Even better, here’s a quick interactive calculator that will do the work for you.

3.  Total Transportation (Car Loan, Gasoline, Repairs, Maintenance): Maximum 15%

4.  Savings: Minimum 10% (ideally this is just for retirement savings and your other savings goals are in addition to this)

5.  Essentials (Housing, Utilities, Childcare, Transportation, Groceries): Maximum 50% of Net Income

If you find yourself out of these guidelines, you may be experiencing financial stress.  Heck, you might be experiencing financial stress even if you are in these guidelines!  First, you are not alone.  Second, you can take control by setting up a budget.  Here are four of our favourites.

If you prefer on-line or like to use apps:

Mint

GoodBudget

If you prefer spreadsheets:

Gail Vaz-Oxlade (From Til Debt Do Us Part)

Government of Canada

Oh, and while you’re at it, don’t forget to drink up your 8 glasses of water today.

Rich regards,

Morgan

 

 

Should You Break Up With Your Advisor?

Professional practicesI dislike conflict, especially with people I care about. And our financial advisor is one of those people. He has seen our family grow, witnessed times of unemployment and stress, and encouraged us in our goals.

But for a while now, we’ve been thinking of handling our investments on our own using the passive, index-based Couch Potato strategy.  Here are some reasons why:

1.  Our financial planning needs are really basic right now.

2.  Our MERs are about 2.4%.  ETFs are much cheaper.

3.  We don’t mind the potential higher volatility involved in index investing – i.e. we don’t need the “protection” of a conservative money manager.

There’s always the chance that your mutual fund will outperform the index.  But studies show that over 10 years, less than 10% of mutual funds will do this.  If you want to see how your mutual funds compare, www.globefund.com is an easy way to do it.  Just go to the site and type your mutual fund in the search box at the top.  On the left side you will see your fund compared to the appropriate index.  Quick, easy and enlightening!  Here are our results:

– Fund 1 beat the index over 5 and 10 years.

– Fund 2 beat the index over 10 and 15 years, and underperformed over 5 years by almost 1% per year.

(Yep, we own just two mutual funds!)

So these results were a fairly pleasant surprise.  Still, we went into a December meeting with our advisor intent on going it alone. Once there, we enjoyed catching up with him.  To make it worse, he gave us a beautiful bottle of wine. I took a deep breath. “We think we are going to go on our own.” I said, and waited.

“Well,” he said, “I don’t want to lose you as clients but you need to do what’s right for you.”  And the conversation went from there.

We left the meeting feeling pensive.  In the end, we have decided to stay on with our advisor because:

1.  We truly feel he has our best interests at heart.

2.  He’s a good financial planner and our needs may become more complex in the future.

3,  The performance of our funds vs. the index was strong.

Even better is that our accounts are finally at a size where we can get versions of our mutual funds with lower MERs.  Have you built up a decent sized nest egg?  Ask your advisor if there are lower-fee options for you to explore.

Building your own portfolio isn’t rocket science.  But if you prefer having someone you trust at your side, then breaking up is hard to do.

Rich regards,

Morgan