Emergency fund primer

The need for an emergency fund is essential and cannot be overemphasized.

This fund should be in very liquid form and can be readily accessible.

So how much should be set aside for emergency living expenses?   Financial experts all agree it needs to be a minimum of 3 months’ worth, increasing to as many as 9 months’ worth of living expenses.  That is because the last thing you want is to borrow at a high rate (like credit card charges) for living expenses, or draw from long term investments at the wrong time.

Depending on your circumstance and lifestyle, here are some factors to take into consideration when determining how much and for how long the fund should support you –
1)  size of your household you are supporting and dependent on you;
2)  other cash that’s readily accessible, like money saved in your TFSA (tax free savings account);
3)  how much of other sourced income will be coming in, like EI (employment insurance) and short term disability benefits.

Ask yourself –
1)  am I in a high risk, vulnerable area of employment where replacement work may be difficult to come by?
2)  do I lack other sources of income during this period?
3)  do I lack other savings to access during this period?
If the answer is yes to these questions, you will need to consider a larger emergency fund.

My suggestion on how to estimate the fund amount:
– determine your basic monthly living expenses;
– multiply by the number of months you will likely need to access this fund;
– add 10% contingency to the total;
– less any liquid savings you can access;
– this will equal to the fund size you should consider setting aside for your rainy day account.

 

TFSA accumulated savings – an update

Here’s an update of my post from January 2015 on TFSA (Tax Free Savings Account) accumulation.
Since 2009, one can contribute to a TFSA and any investment income earned is tax free.

Assuming a 4% annual return, and the maximum is contributed each year at the beginning of each year, one can expect to have almost $63,000 by the end of 2017!   The magic of compounding and accumulation.

 

Year Maximum allowed Year-start balance Contribution on Jan 1st Interest    rate Interest earned Year-end balance saved
2009 5,000.00 0.00 5,000.00 4.0% 200.00 5,200.00
2010 5,000.00 5,200.00 5,000.00 4.0% 408.00 10,608.00
2011 5,000.00 10,608.00 5,000.00 4.0% 624.32 16,232.32
2012 5,000.00 16,232.32 5,000.00 4.0% 849.29 22,081.61
2013 5,500.00 22,081.61 5,500.00 4.0% 1,103.26 28,684.88
2014 5,500.00 28,684.88 5,500.00 4.0% 1,367.40 35,552.27
2015 10,000.00 35,552.27 10,000.00 4.0% 1,822.09 47,374.36
2016 5,500.00 47,374.36 5,500.00 4.0% 2,114.97 54,989.34
2017 5,500.00 54,989.34 5,500.00 4.0% 2,419.57 62,908.91

It’s almost time to go back to school, so watch your wallet to keep from overspending now

Can’t believe summer is almost over and Labour Day weekend is just around the corner.  No doubt parents are busy getting their kids ready for back to school.

It is also one of the most lucrative time of the year, aside from Christmas, for retailers.  No question we’re bombarded now with advertising to buy, buy, buy … on back to school deals!

Step back for a moment and give yourself space and time.   Do not do too much impulse buying, especially with persuasive kids.   Pause on your credit cards if there are things you can wait on buying until after mid-September.   You’re bound to save when they go on sale after the back to school rush is over.

For example: –
1)  wait for October sales on trendy back to school clothing.   They will likely be on sale then;
2)  many trendier items (like fashionable lunch bags) go out of favor very quickly.   Resist the urge from your kids to buy now;
3)  head to supermarkets to buy basic school supplies, along with your weekly grocery trips;
4)  check out consignment stores, craigslist and garage sales to buy and sell good quality 2nd hand items;
5)  stick to your shopping list;
6)  stick to your budget.

It pays to be aware and prepared.   You’ll be amazed with your saving results just by being pro-active with your back to school spending.

Canadian Tax Myths and Tips

Canadian tax filings can be daunting.   Here are a few articles to help you through the process this season that I think is worth your read.  The first two from CBC News and the 3rd from a recent blog post from the Women’s Financial Learning Centre. –

  1. www.cbc.ca/news/business/taxes/10-tax-filing-myths-that-could-cost-you-money-1.1266240
  2. www.cbc.ca/news/business/taxes/tax-season-2015-10-ways-to-attract-a-cra-auditor-s-attention-1.2969196
  3. www.womensfinanciallearning.ca/2016/03/09/5-tax-filing-tips-to-save-you-time-and-money/#more-1802

 

 

It’s RRSP Time Again!

ReviewYrInvests (640x471)

Needless to say, it’s that time of the year again when some of us are scrounging for money and time to invest to our Registered Retirement Savings Plan (RRSP).

If you’re a procrastinator and haven’t got around to contributing yet, here are a few things to keep in mind.

• Deadline for this year is 11:59pm Monday, February 29, 2016.

• If you have high income in 2015 and projected low income for 2016, you may want to use RRSP contributions (2015)/withdrawals (2016) to equalize your income of both years to save on the overall income taxes for the combined two years.

• Contribute to a spousal RRSP if you’re the high income earner in the household. This will enable you the tax deductions and equalize both your retirement income down the road on retirement.

• If you have no or low income in 2015, you probably want to skip the contribution altogether for this year. This is especially applicable if you anticipate higher income years in the near future which can benefit more from your contributions then.

• Do not exceed your RRSP contribution limit. Check your Notice of Assessment for the maximum amount you’re allowed. There’s a maximum over-contribution limit of $2,000 and going over will end up attracting a steep penalty.

Other considerations

• Don’t rush into the wrong investments when you make your RRSP contributions. Temporarily park your contributions into a cash account within your plan. Take your time and make your investment decision later when you’ve done your due diligence.

• Consider appointing a beneficiary.

• Keep in mind any RRSP withdrawals are taxable in the year of withdrawal.

• Keep in mind any spousal RRSP withdrawals may be taxable by the higher income earner if the rules are not followed. Consult with your advisor before making this move.

• You can still make contributions to a spousal RRSP after you turned 71 if you have the room, providing your spouse is not yet 71.

• And remember your RRSP is, first and foremost, savings for your retirement. Do not use it as a short term savings vehicle.

2015 year-end tax saving tips

cutting taxes

 

 

 

Tax rules are getting more complex and cumbersome. That’s why it is important to spend time and make an effort to legally maximize your personal tax deductions and minimize your taxes.

Prior to year-end is a good time to do just that. It’s your opportunity to take advantage of available deductions before they expire or become unavailable for the current year.
For 2015, here are some common tax saving reminders …
1) Paying tax deductible expenses
these deductions are only available when they are paid. Tax deductible alimony payments, child care expenses, investment counsel fees and interest on borrowings for investing or business purpose are common deductible expenses.

2) Paying for items that qualify for tax credits
these payments may give rise to refundable/non-refundable tax credits but only if they are paid within the calendar year. Items include dental and medical expenses, charitable donations, political contributions, children’s fitness and arts program fees, tuition fees, student loan interest and monthly transit passes.

3) Review non registered investment portfolios to crystallize your losses
here’s an opportunity to rid your unwanted losing investments and lock in their losses to offset your other capital gains. These losses can be applied against 2015 as well as available for carry back to any or all of the previous 3 years. All trades must be settled by Dec 24, 2015 for Canadian exchanges and Dec 28, 2015 for the US exchanges. Check for potentially different trade dates for mutual fund dispositions. (Caution – watch out for superficial loss rule which will nullify your losses for tax purpose.)

4) RRSP contributions
you have until February 29, 2016 to contribute to your RRSP or spousal RRSP to qualify for 2015 deductions. If you are turning (or have turned) 71 this year, December 31, 2015 is your deadline for one final contribution to your RRSP.

 

Some 2015 changes in tax rules:
– Indexing of adoption tax credit of $15,000.
– Child care deduction increases to $8,000 for children under 7, $5,000 for children 7 to 16, and $11,000 for children eligible for the disability tax credit
– Child fitness tax credit will be a refundable tax credit starting in 2015.
– A non-refundable Home Accessibility Tax Credit of up to $10,000 will be available in 2016 for expenditures made in 2015. This is available to seniors and persons eligible for the disability tax credit.
– Enhancement of the Universal Childcare Benefit program. The amount has been increased by $60 a month and is taxable to the lower income spouse. At the same time, the children’s credit of $2,255 a year, has been eliminated.

Back From the Future – Savings Basics

 2015Oct-PiggyBank-300px

I came across a recent ad with ex-dragon Arlene Dickinson espousing her goal-oriented strategy for saving money and restoring financial well-being.  Immediately, the book The Millionaire Next Door came to my mind.  This New York Times bestseller was published a number of years ago sharing with readers the surprisingly simple, yet effective secrets to amassing a million dollars or more.  Those strategies then still apply today, as they did for many generations before us.

Both messages are literally the same.  Slow and steady win the day when it comes to responsible saving and budgeting.

For example, you can save as little as $2.75 a day; and that can add up to $1,000 a year.  Think 20 years into the future, that’s $20,000 from just saving the price of a cup of coffee at Starbucks today!  This doesn’t even take into account the compounding effect of investing, which can potentially double (*) this total!

So by giving up a coffee at your favourite Tim Horton’s, walking or taking public transit instead of driving to your local store, and packing your lunch instead of fast food out, they can all add up.

There are many ideas to save.  Just google budgeting, saving tips, etc. and you will be bombarded with thousands of useful websites and ideas.   My book ‘The Personal Budgeting Kit‘ also has many smart saving ideas to help you on your way.

Here are some other strategies to keep in mind. They are simple, basic and logical.

Systematically:
– live below your means
– save your money
– pay down your debt

Always:
– have a plan/goal
– seek advice
– read up on saving ideas

As quoted from the Millionaire Next Door – “Whatever your income, always live below your means.”
And as quoted from Arlene Dickinson in the ad – “Keep at it when you can and it will add up.”

 

(*)  assuming a 6% or higher compounding annual return.

Save your money $$$

Here are some concrete saving ideas to help you keep more of your money.   Read my recent posts on how to save over $42,500 in just 7 years, even with only a 4% rate of return!

1)   Do not impulse buy, only shop for what’s on your prepared list;
(Studies have shown that as much as $3,700 a year is wasted on unnecessary purchases.)

 

2)   Lunch in (not out) more often;
(A average savings of at least $5 per meal when not lunching out.  Do this twice a week and you will save $520 a year.)

lunch in, save money

lunch in, save money

 

3)   Stop food waste, be creative with leftovers;
(Studies have shown that as much as 35% of our food ends up being wasted, or $2,200 year.)

 

4)   Pay your credit card bills on time;
(It’s obvious, many dollars can be saved when you stop those 18% to 20% interest charges levied by your credit card companies.)

no more credit card late payments!

no more credit card late payments!

 

5)   Look for cheaper phone plans;
(Even a savings of $20 a month in your phone plan will save you $240 a year.)

 

Add up all your savings and you are well on your way to top up your TFSA for a more secured future!

see your money grow!

see your money grow!

Save up to $15 a day for your TFSA

My yesterday’s blog shows that you can amass $42,600 in tax free savings with only a 4% return and in just 7 years.

The difficult part for most of us is coming up with the money to contribute to our TFSA (tax free savings account).  For 2015, the yearly maximum is $5,500 or about $15 a day.

$5,500 is a lot of money for most people.  But $15 is more attainable.   So focus on what you can save each day, instead of the huge end sum of $5,500.  If you can’t possibly save $15, try $10 or even $5 a day.   Any amount will work and get you started.

Put real cash saved each day into a glass jar so you can actually see it before depositing the money into your TFSA account at the end of the month.   Start all over for each month.   I’m certain you’ll be surprised how your TFSA will build over time.

Save $15 a day = $5,475 yearly!

Save $10 a day = $3,650 yearly!

Even just save $5 a day = $1,825 yearly!

Now isn’t this worth pursuing?   And what a great way to start a January.

TFSA tax free $ accumulation – how cool is that!

I can’t think of a better way than the chart below to illustrate the power of tax free savings accumulation.

If the maximum contribution to a TFSA (Tax Free Savings Account) has been saved since its inception in 2009, one can expect to have almost $42,700 by the end of 2015!   This is assuming only a 4% rate of return.   If the investments in the TFSA yield a higher return, the accumulation would be even higher.

Brilliant!!!