Keep in mind that a lot of content written in this post were taken from various sources. Please click into the links to dive deeper into each topic.
Introduction
I’ve been really into personal financing lately, especially after I started using WealthSimple investing in ETFs. Learning where I should be allocating my money and setting my financial goals has been a very eye-opening experience. Personal financing should be common knowledge since it affects all of us. Sadly it is not the most exciting topic. In this post, I try my best to simplify it.
Table Of Contents
Money Is A Tool
Like with any tool you need to learn how to use it. Define why money matters to you and what are your spending priorities. Using money correctly can allow us to be safe, to improve ourselves, give our family a better life, and to give back to our community.
Source
Financial Goal
How To Set Financial Goals
What Are Financial Goals?
Financial goals are savings, investment or spending targets you hope to achieve over a set period of time.
Why You Should Set Financial Goals
Without a goal it is like you are planning to fail. Who knows what’s ahead in 30 years? For that matter, who knows what’s ahead next week? So, the smartest, best-prepared people make the best guesses possible. It’s establishing good habits. If you adhere to consistent saving patterns, you’ve set yourself up for success.
How To Achieve Your Financial Goal
The best way to reach your financial goals is by making a plan that prioritizes your goals.
When you examine your own goals, you’ll discover that some are broad and far-reaching, while others are narrow in scope. Your goals can be separated into three categories of time:
- Short-term financial goals take under one year to achieve. Examples may include taking a vacation, buying a new refrigerator or paying off a specific debt.
- Mid-term financial goals can’t be achieved right away but shouldn’t take too many years to accomplish. Examples may include purchasing a car, finishing a degree or certification, or paying off your debts.
- Long-term financial goals (over five years) may take several years to accomplish and, as a result, require longer commitments and often more money. Examples might include buying a home, saving for a child’s college education, or a comfortable retirement.
Develop A Goal Chart
Developing a financial goals chart is a good way to begin this process. Here are the five steps you should follow to set up your goal chart:
- Write down one personal financial goal. It should be specific, measurable, action-oriented, realistic and have a timeline.
- Decide if your goal is short-term, mid-term, or long-term, and create a timeline for that goal. This may change at any time based on your situation.
- Determine how much money you need to save to reach your goal and separate that amount by the month and/or year.
- Think of all ways you can reach that goal. Include saving, cutting expenses, earning extra money, or finding additional resources.
- Decide which is the best combination of ways to reach your goal and write them down.
- All of that might sound daunting, but it’s best to set incremental goals. Prioritize, then achieve. After accomplishing some of the easier goals, you gain confidence in your decision making That provides motivation to achieve the more difficult targets that require more time and discipline.
Budgeting
Reddit Budgeting Wiki
What is Budgeting?
The term “Budgeting” usually encompasses two separate actions:
- Setting goals for the short-term (typically month) and for the future
- Tracking your progress towards these goals
Why Budget?
You’d think I just explained that already - it’s to set goals and achieve them. Achieve your dreams! But honestly, it’s not all about just achieving goals. It’s about avoiding financial traps, avoiding living paycheque-to-paycheque, getting the best value out of your money, and feeling comfortable with your financial situation.
The question of “Should I buy that?” and “Can I afford this?” can be a source of stress and worry, and more often - regret.
- Identify your current goals.
- Sketch out your financial picture.
- Determine what level of tracking you’d like to achieve.
Tracking “every penny” isn’t as hard as many might think - apps like YNAB (You-Need-A-Budget) or mint (by Intuit) can make the process of importing, tracking, and comparing to a budget very easy to do. However, the tedium of categorizing these transactions is not exciting and it requires a continuous attention (at least monthly, and every month)
Budgeting Apps
- Fortune City App - Fortune City is a game that combines accounting with city simulation.
- YNAB - You Need a Budget combines easy software with Four Simple Rules to help you quickly gain control of your money, get out of debt, and save more money faster.
- Mint - Helps you effortlessly manage your finances in one place.
Be Cautious of These Hidden Costs
- Driving Costs (Insurance, Maintenance, Gas)
- Eating Habits
- Gambling and Lottery
Emergency Fund
What’s An Emergency Fund - WealthSimple
What’s An Emergency Fund?
An emergency fund is an easily available pool of funds that you can use if things go south in your life.
When Should You Start an Emergency Fund?
Now.
What Is the Best Way to Start An Emergency Fund?
Decrease your expenses by spending less and put that money into savings.
How Much Do You Need in An Emergency Fund?
3-6 months of your household income. However 8-12 months would be even better.
Where Do You Keep An Emergency Fund?
Savings account or GIC (Guaranteed Investment Certificate).
Investing
Advice For Canadian First Time Investors
Pick the right type of account
As a first time investor, you should determine what type of account to open, even before figuring out what to invest in. Since making money is the point, you should absolutely take advantage of any kind of account that allows you tax advantages. Money not spent on taxes is basically a gift from the government.
Tax-Free Savings Account (TFSA)
Is an account in which contributions, interest earned, dividends, and capital gains are not taxed, and can be withdrawn tax-free.
As an example, let’s take two savers, Joe and Jane. At the beginning of the year, Joe puts $6,000 in an investment account earning 7% per year; Jane does the same but within a TFSA. They will each have $6,420 at the end of the year, but Jane will be able to withdraw all $6,420 with no tax penalty, whereas Joe would be taxed on the $420 he earned in capital gain.
TFSA Contributions
The amount that you’re allowed to deposit into a TFSA is called your “contribution room.” Even if you didn’t have a TFSA at the time, you accumulated contribution room for every year since 2009 that you were age 18 or older and were a resident of Canada
TFSA Withdrawals
Any withdrawal amount is added back to your contribution room at the beginning of the following year.
For example, if Jane contributes $5,500 for the tax year 2020 (with the contribution limit being $6,000) and withdraws $2,000, she cannot replace the entire withdrawal amount within the same year because her available contribution room is only $500. In this case, Jane can replace $500 and wait until the beginning of 2021, when her withdrawal amount is added to her contribution room, to re-contribute the remaining $1,500.
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate.
- Contributors may deduct contributions against their income. For example, if a contributor’s tax rate is 40%, every $100 they invest in an RRSP will save that person $40 in taxes, up to their contribution limit.
- The growth of RRSP investments is tax-deferred. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax. This means that investments under RRSPs compound on a pre-deferred basis.
RRSP Contribution and Withdrawal The RRSP contribution limit for 2020 is 18% of the earned income an individual has reported on their 2019 tax return, up to a maximum of $27,230, according to the Canada Revenue Agency.
Choose the right investment provider
Discount brokerages Tend to be online outfits that offer little or no personal guidance to customers, and because they’re so bare-bones, are generally the cheapest option.
Banks You have to hand it to the old-brick-and-mortar banks.
All banks work differently, educate yourself before you bring your investing business to your local bank branch
Financial advisors Good financial advisors offer a valuable service to high net worth clients who have to deal with complicated rich person stuff like setting up trusts, making sure that future generations never fall out of the 1%. Their service is, of course, pricey.
Automated investing services These businesses, often referred to as robo-advisors, barely existed a decade ago, but have in a lot of ways revolutionized the way Canadians invest. Many automated investing services offer their clients very low-fee Exchange Traded Funds (ETFs).
Choose the right investment
Stock Market
Of course, there’s no guarantee with any investment, but for those that can tolerate the risk, investing in the stock market is another option.
Mutual funds
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
ETFs (Index Fund)
ETFs are a collection of stocks, bonds or other investments that you can buy and sell as a unit. They are similar to mutual funds, but with a key difference: they track the performance of a specific market or index.
Bonds
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments.
Guaranteed Investment Certificate (GIC)
A guaranteed investment certificate (GIC) is a deposit investment sold by Canadian banks and trust companies. People often purchase them for retirement plans because they provide a low-risk fixed rate of return and are insured, to a degree, by the Canadian government.
Advice For New Investors
- Start Investing as soon as you can
- Invest regularly
- Be careful when stock picking
- Enroll in your company’s RRSP
- Invest regardless of recent returns
- Consider Automated Investing (Robo Advisors)
Renting vs Buying a Home
Rent Vs Buy Property Canada
I found this very informative video that gives a perfect explanation of the “5% rule” to help aid you when considering renting vs buying.
Most commonly we think like this. If we can purchase a home with a mortgage payment that is equal to or less than what we would pay in rent, then we should buy. However, this type of thinking excludes some factors that we need to consider.
Determine the Unrecoverable Costs
This step allows us to get a more concrete comparison between renting and buying.
Renting: It is simply equal to the rent you pay.
Buying it is more complex. It is the percentage of:
- Property Tax. Generally 1% of the value of the home.
- Maintenance Cost. Estimated by taking 1% of the property value per year.
- Cost of Capital. Which is the cost of debt (interest on the home) plus the cost of equity. Usually around 3%.
Therefore the unrecoverable cost of buying is 1%(Property Tax) + 1%(Maintenance Cost) + 3%(Cost of Capital)
The 5% Rule
Take the value of the home we want to buy, multiply by 5% and divide by 12. If we can rent for less than that, then renting is good.
OR
Take the value of the home we want to rent, multiply by 12 and divide by 5%. This cost is equivalent to the cost as if we were to purchase the cost of a home with the same worth.
Keep in mind, this is under the assumption that if we rent, we will be putting what we would have paid in our down payment, as investments instead.
Credit Score
Improve Credit Score - Canada.ca
What is a Credit Score?
A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors
Why is a Credit Score important?
Lenders (such as credit card issuers and mortgage lenders) want to know how you have handled credit in the past to determine how well you are likely to handle it in the future.
They will check your credit score before deciding how much they are willing to lend you and at what interest rate. Insurance companies, landlords and employers may also look at your credit report to see how financially responsible you are before issuing an insurance policy, renting out an apartment or giving you a job.
What affects my Credit Score?
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Types of Credit in Use (10%)
How do I find my Credit Score?
You can do it online through these websites: TransUnion CreditKarma
You can also get it using certain online banks.
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Income Tax
Doing Your Taxes - Canada.ca
Remember The Deadline
Personal income tax returns, except for those of individuals with self-employment income, are normally due by April 30th
Gather Tax Information
Get The Means To Do Your Income Tax
For most people, online tax software is perfectly capable of doing your tax return correctly, quickly, and cheaply (sometimes even free!). As long as you have a simple return, which is usually defined as only having one T4 slip, you’ll likely be good to go. That being said, if you have complex investments or business income, it may be a better idea to get some professional help.
Tax Deductions
What Is Deducted From Your Pay - Canada.ca
EI
Employment Insurance (EI) provides regular benefits to individuals who lose their jobs through no fault of their own (for example, due to shortage of work, seasonal or mass lay-offs) and are available for and able to work, but can’t find a job.
Always apply for EI benefits as soon as you stop working. You can apply for benefits even if you have not yet received your Record of Employment (ROE). If you delay filing your claim for benefits for more than four weeks after your last day of work, you may lose benefits.
Note: You can also apply for EI if you are self-employed
CPP
The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. If you qualify, you’ll receive the CPP retirement pension for the rest of your life
Self Employed Deductions
Financial Advisors
Choosing A Financial Advisor - Canada.ca
Why Do I Need A Financial Advisor
Managing your investments can be complicated. You may not be comfortable investing on your own. A professional financial advisor or planner can help.
An advisor can create a detailed financial plan, which involves:
- Assessing your current situation
- Determining your present and future goals and needs
- Giving advice on the financial products that are right for you
- Reviewing and updating your investments periodically
How to find a financial advisor
When speaking with a prospective advisor, don’t discount the importance of personality. You probably intend to work with this person over a long period of time, so ensure you like their style of communication.
Prepare your questions
- Ask if they are a fiduciary. Being a fiduciary requires being bound both legally and ethically to act in the other’s best interests.
- How do you get paid? Advisors can use a variety of fee structures. To keep it simple and avoid conflicts of interest, focus on fee-only advisors.
- What are my all-in costs? In addition to paying the advisor, you’ll face other fees — and you’ll want to know what they are.
- How will our relationship work? You want to know how often you’ll meet and whether she’s available for phone calls or emails outside of scheduled appointments.
Be Cautious
- They are paid to sell you products
- They may not be living off their investments themselves
- They may not invest their own money the way they advise you to
- They may not have the same goals as you
- They may not understand your end goals
- Their investment passion may not align with yours
- At the end of the day, it is your money, not theirs