Category: personal finances

Stay The Course or Sell?

FeaturedStay The Course or Sell?

Keep Calm and Carry On: is a popular slogan calling for persistence in the face of challenge. It was first used on a British propaganda poster during World War II but now enjoys general currency as an expression of resilience. It seems fitting at this time for the Stock Market

As of October 30, 2023, there is no specific information available on what is happening in the stock market today. However, it’s important to note that market volatility is due to a variety of factors, which is subject to fluctuations, including economic conditions, geopolitical events, and investor sentiment. Interest rates have been rising, which can have an impact on the stock market. Historically, specific sectors of the economy tend to perform well in a rising interest rate environment. For example, financial institutions can charge higher rates on loans, which can mean billions of dollars in interest income. The market has been recently been reacting to treasury yields and inflation which have moved sharply higher putting downward pressure on stock and bond returns. Whereas parts of the market, including technology and the growth sectors, have underperformed till now in the stock market. Market corrections are not uncommon, and they have historically been followed by rebounds. Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later.

While market downturns can be unsettling and cause investors to panic, history has shown that the market has always eventually recovered from downturns and continued to climb to new highs in the long run. For example, after the Wall Street Crash of 1929, which was the most significant stock market crash in U.S. history, the market eventually rebounded and continued to climb to new highs in the following years. Similarly, after the COVID-19 Crash of 2020, the stock market rebounded to its pre-pandemic peak by May 2020. Although past performance is not indicative of future results, and market downturns are an inherent risk of investing. However, staying invested through volatile episodes and maintaining a long-term investment strategy can help investors benefit from a rebound.

Here is a list of the last 10 stock market downturns and how the following rebound prevailed:

  1. 2020 COVID-19 Crash: The Dow Jones and S&P 500 tumbled 11% and 12%, respectively, during the week of Feb. 24, marking the biggest weekly declines since the financial crisis of 2008. The Dow would go on to decline by 9.99% on March 12, followed by an even deeper plunge of 12.9% on March 16. However, unlike previous crashes whose recoveries required years, the stock market rebounded to its pre-pandemic peak by May 2020.
  2. 2018 Stock Market Correction: The Dow Jones Industrial Average and S&P 500 both fell by more than 10% from their all-time highs in January 2018. However, the market rebounded and continued to climb to new highs in the following years.
  3. 2015-2016 China Stock Market Crash: The Shanghai Composite Index fell by 32% from its peak in June 2015 to its low in January 2016. However, the Chinese government intervened and implemented measures to stabilize the market, and it eventually recovered.
  4. 2011 European Debt Crisis: The Dow Jones Industrial Average fell by 16% from its high in April 2011 to its low in October 2011. However, the market rebounded and continued to climb to new highs in the following years.
  5. 2008 Financial Crisis: The stock market fell dramatically in 2008 due to the subprime mortgage crisis and the failure of several large financial institutions. The Dow Jones Industrial Average fell by 33.8% in 2008, but it rebounded in the following years.
  6. 2002 Stock Market Downturn: Beginning in March of 2002, a downturn in stock prices was observed across the U.S., Canada, Asia, and Europe. Indices started steadily sliding downward, leading to dramatic declines in July and September, with the latter month experiencing values below those reached in the immediate aftermath of 9/11. However, the market eventually recovered.
  7. 1998 Russian Financial Crisis: The Dow Jones Industrial Average fell by 19% from its high in July 1998 to its low in October 1998. However, the market rebounded and continued to climb to new highs in the following years.
  8. 1997 Asian Financial Crisis: The Dow Jones Industrial Average fell by 7.2% in October 1997 due to the Asian financial crisis. However, the market rebounded and continued to climb to new highs in the following years.
  9. 1987 Black Monday: On October 19, 1987, the Dow Jones Industrial Average fell by 22.6%, the largest one-day percentage drop in history. However, the market rebounded and continued to climb to new highs in the following years.
  10. 1973-1974 Stock Market Crash: The Dow Jones Industrial Average fell by 45% from its high in January 1973 to its low in December 1974. However, the market eventually recovered and continued to climb to new highs in the following years.

It’s important to note that past performance is not indicative of future results, and market downturns are an inherent risk of investing. However, history has shown that the market has always eventually recovered from downturns and continued to climb to new highs in the long run.

What You Need to Know About Bonds

What You Need to Know About Bonds

Bonds can create a more balanced portfolio by adding diversification and calming volatility. But the bond market may seem unfamiliar even to the most experienced investors.

Many investors make only passing ventures into bonds because they are confused by the apparent complexity of the bond market and the terminology. In reality, bonds are very simple debt instruments. 

Key Takeaways

  • The bond market can help investors diversify beyond stocks.
  • Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability.
  • Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk.
  • Most bonds come with ratings that describe their investment grade.

Basic Bond Characteristics 

A bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. The company pays the interest at predetermined intervals (usually annually or semi-annually) and returns the principal on the maturity date, ending the loan.

Unlike stocks, bonds can vary significantly based on the terms of their indenture, a legal document outlining the characteristics of the bond. Because each bond issue is different, it is important to understand the precise terms before investing. In particular, there are six important features to look for when considering a bond. Bonds are a form of IOU between the lender and the borrower.

There Are Three Types of Bonds: 

Corporate Bonds 

Corporate bonds refer to the debt securities that companies issue to pay their expenses and raise capital. The yield of these bonds depends on the creditworthiness of the company that issues them. The riskiest bonds are known as “junk bonds,” but they also offer the highest returns. Interest from corporate bonds is subject to both federal and local income taxes.

Sovereign Bonds 

Sovereign bonds, or sovereign debt, are debt securities issued by national governments to defray their expenses. Because the issuing governments are very unlikely to default, these bonds typically have a very high credit rating and a relatively low yield.

Municipal Bonds 

Municipal bonds, are bonds issued by local governments. Contrary to what the name suggests, this can refer to state and county debt, not just municipal debt. Municipal bond income is not subject to most taxes, making them an attractive investment for investors in higher tax brackets.

Key Terms:

Maturity 

This is the date when the principal of the bond is paid to investors and the company’s bond obligation ends. Therefore, it defines the lifetime of the bond. A bond’s maturity is one of the primary considerations an investor weighs against their investment goals and horizon.

Maturity is often classified in three ways:

  • Short-term: Bonds that fall into this category tend to mature within one to three years
  • Medium-term: Maturity dates for these types of bonds are normally over 10 years
  • Long-term: These bonds generally mature over longer periods of time

Secured/Unsecured 

A bond can be secured or unsecured. A secured bond pledges specific assets to bondholders if the company cannot repay the obligation. This asset is also called collateral on the loan. So, if the bond issuer defaults, the asset is then transferred to the investor. A mortgage-backed security (you may remember 2008 housing crisis – these were packaged as good investments on bad loans/mortgages by the big banks) is a type of secured bond backed by titles to the homes of the borrowers.

Unsecured bonds, on the other hand, are not backed by any collateral. That means the interest and principal are only guaranteed by the issuing company. Also called debentures, these bonds return little of your investment if the company fails. As such, they are much riskier than secured bonds.

Liquidation Preference 

When a firm goes bankrupt, it repays investors in a particular order as it liquidates. After a firm sells off all its assets, it begins to pay out its investors. Senior debt is debt that must be paid first, followed by junior (subordinated) debt. Stockholders get whatever is left.

Tax Status 

While the majority of corporate bonds are taxable investments, some government and municipal bonds are tax-exempt, so income and capital gains are not subject to taxation. Tax-exempt bonds normally have lower interest than equivalent taxable bonds. An investor must calculate the tax-equivalent yield to compare the return with that of taxable instruments.

Risks of Bonds 

Bonds are a great way to earn income because they tend to be relatively safe investments. But, just like any other investment, they do come with certain risks. Here are some of the most common risks with these investments.

Interest Rate Risk 

Interest rates share an inverse relationship with bonds, so when rates rise, bonds tend to fall and vice versa. Interest rate risk comes when rates change significantly from what the investor expected. If interest rates decline significantly, the investor faces the possibility of prepayment. If interest rates rise, the investor will be stuck with an instrument yielding below market rates. The greater the time to maturity, the greater the interest rate risk an investor bears, because it is harder to predict market developments farther out into the future.

Credit/Default Risk 

Credit or default risk is the risk that interest and principal payments due on the obligation will not be made as required. When an investor buys a bond, they expect that the issuer will make good on the interest and principal payments—just like any other creditor.

When an investor looks into corporate bonds, they should weigh out the possibility that the company may default on the debt. Safety usually means the company has greater operating income and cash flow compared to its debt. If the inverse is true and the debt outweighs available cash, the investor may want to stay away.

So, Are Bonds Risky Investments?

Bonds have historically been more conservative and less volatile than stocks, but there are still risks. For instance, there is a credit risk that the bond issuer will default. There is also interest rate fluctuations. 

Changes in the bond market can have significant impacts on the economy:

  • Bond prices and interest rates have an inverse relationship when bond prices fall, interest rates rise, and vice versa. This relationship affects borrowing costs for businesses and individuals. When bond yields rise, it becomes more expensive for companies to borrow money, which can slow down business expansion and economic growth. Conversely, when bond yields fall, borrowing costs decrease, which can stimulate economic activity.
  • Inflation expectations: Bond prices are sensitive to changes in inflation and inflation forecasts. If market participants believe that there is higher inflation on the horizon, interest rates and bond yields will rise to compensate for the loss of the purchasing power of future cash flow. This can impact the economy by affecting consumer spending, business investment, and overall economic growth.
  • Investor confidence and risk appetite: Bond yields can be an indicator of investor confidence and risk appetite. During “boom” times, investors require less incentive to hold risky assets, so the spread between the yields of risky bonds and Treasuries declines. Conversely, when investors’ confidence level is low, the demand for Treasuries will increase, hiking up Treasuries’ prices and lowering their yields. These changes in investor sentiment can impact the availability of credit and the overall functioning of the financial system.
  • Wealth effect: Changes in bond prices can also impact consumer wealth and spending. When bond prices rise, the value of existing bonds held by investors increases, which can lead to a wealth effect and increased consumer spending. Conversely, when bond prices fall, the value of existing bonds decreases, which can reduce consumer wealth and spending.
  • Impact on financial institutions: Changes in bond prices can have a significant impact on financial institutions, particularly those that hold a large amount of bonds in their trading books. A rise in government bond yields can lead to unrealized losses for banks, which can affect their balance sheets and lending capacity. This, in turn, can impact the availability of credit and the overall functioning of the economy.

In summary, changes in the bond market can have far-reaching effects on the economy, including interest rates, borrowing costs, inflation expectations, investor confidence, consumer spending, and the financial health of institutions. Which is what we have experienced in the last couple of months with the markets. 

So, what does it mean?

Only Time Will Tell… Some believe this is where we begin a run others predict doom and gloom… Which ever way you look at it there is always something else on the horizon.

Time Tested Strategies for Long Term Success In Todays Market!

Time Tested Strategies for Long Term Success In Todays Market!

At any stage of your life, a well-constructed financial plan can help you enjoy today, while also preparing for tomorrow. Use these time-tested investment strategies as part of your financial plan to make the most of your investments and reach your long-term goals.

Time-tested strategy 1 Keep emotions in check, stay the course:

How do you handle market volatility? Like many Canadians, you might feel a little anxious. But reining in emotions and making decisions calmly helps your portfolio weather market turbulence. It’s easy for emotions t

  • The largest equity inflows happened during the first quarter of 2000, the time
    when the market peaked. This caused a trend for investors to “buy high.
  • One of the largest equity outflows happened between December 2002 and February 2003, a period when the market bottomed. This caused a trend for investors to “sell low.”
  • In the second half of 2008, the largest equity outflows happened just before the market reached a low in March 2009. This caused a trend for investors to “sell low.”

Time-tested strategy 2 Invest for the long term:

Market fluctuations are a normal part of investing. Investments don’t perform in a straight line—they will have periods of gains and losses. Historically, markets tend to rebound from short-term losses, offering gains from rallies when they recover and move higher. By staying fully invested, you can take advantage of all periods of positive market performance.
Resist impulses to “buy high” and “sell low”

Time-tested strategy 3 Diversify and consider asset allocation:

As an asset class, you can expect that equities will sometimes experience short-term fluctuations. However, equities can provide great growth opportunities over the long term.The saying “don’t put all your eggs in one basket” is appropriate when thinking about investing. By diversifying your investments, you benefit from periods when different asset classes are performing better than others. Also, by choosing the right asset mix for your portfolio, you can make sure your investments meet your risk tolerance, goals and investment timelines. Diversify, Historically, asset classes have performed differently from year to year. For example, the emerging market investments underperformed in 2011, 2013 and 2019 but were top performers in 2012 and 2017. The markets lost three years with Covid-19 but agin the markets jumped back across all asset classes, unfortunately we are still in the hangover from that period. As we start to see the light at the end if the tunnel and the market correcting itself diversifying across asset classes frees you from trying to invest in the right asset class, at the right time.

And Finally… Offset inflation:

Inflation is the impact of rising prices, which cuts into people’s buying power. If inflation catches up with your investments, it can significantly impact your long-term life goals.
Different asset classes from 1925 to 2023 have outpaced inflation. If you had stayed invested, particularly in equities, your assets would have grown, helping you to offset inflation. Inflation has impacted the long-term growth of non-equity assets, such as GICs and bonds, and risk-free investments, like T-bills. Ensuring an asset mix that protects against the effects of inflation is an important consideration for long-term investing success.

So what should you do – Keep Calm and Carry On! We shall see many more fluctuations in our lifetime.

HOW MUCH MONEY SHOULD YOU BE SAVING?

HOW MUCH MONEY SHOULD YOU BE SAVING?

If you ask yourself that question your answer should have been as much as possible, of course. But with so many debits coming out of your bank account saving up for your future is a daunting task. How can you prioritize your options, without knowing the importance of saving and investing your pay check or any extra cash, as you work towards reaching your financial goals.

As we have discussed in previous articles the answer to the question above is only a simple one if you implement and follow a strategic plan… Here is a look at things you should be doing when you start thinking about saving.

Pay down your credit card and other high-interest debt first

The average Canadian household carries a credit card balance of nearly $8,600 with interest rates that can be as high as 21 percent. Be sure to make minimum payments on all accounts to avoid accumulating more fees. The next step is to work on paying down your consumer debt from the highest-interest accounts to the lowest. Use any extra cash to pay down your credit card balances or any other loans, prioritizing those with high interest rates. Paying down high interest consumer debt will allow you to start saving for the future as the interest on this debt is lost potential.

Employer matching on your RRSP

When it comes to finances, there is nothing worse than leaving free money on the table. That’s why getting the most out of your employer’s RRSP match program is one of the most important “must do” strategies for your financial planning. Many employers will match your contributions up to a certain pre determined percentage of your gross pay dollar-for-dollar. Therefore you should be contributing up to the amount your employer matches because this is easy money and a winning strategy you will never regret.

Did you know that 85% of Canadians do not max their RRSP contribution…

Contribute to your RRSP

We’ve already covered how important it is to make the most of your employer’s RRSP matching program, but it’s also important to max out your tax-deferred RRSP contributions. For the tax year 2020, you can contribute up to $27, 230 in pre-tax dollars which will defer paying taxes on that money until you withdraw funds during retirement. That means you’ll pay less in taxes today, and depending on when you plan to retire, allow the money you invested in yourself this year time to grow. The advantages of paying yourself first have been covered in previous articles.

Contribute to your TFSA

Maxing your TFSA yearly can help save you money from taxation in the future. Your 2021 max limit is now $75,500 the benefits of a TFSA can be substantial: Your contributions grow as they would in an RRSP but the withdrawals you make in the future are tax-free. You have the same flexibility to invest in a range of investments, such as individual stocks or active management. Be careful not become a day trader on the stock market with a TFSA account as the government can change the status of your TFSA if they deem it to be a trading account. This account was set in place to be a buy and hold type of stock account – buy stocks that pay dividends and have the dividends reinvested into your portfolio. That is free money that will help you grow your portfolio.

Build up an emergency fund

2020 was a strange year that no one saw coming years earlier. You never know if or when you’ll experience a job loss, a major medical procedure, a housing emergency or other challenging life event. That’s why you should be establishing a “rainy day” fund to get you through until your next pay check. No amount of money could have been saved for what happened in 2020, but keeping cash for three months’ worth of expenses would go along way if needed.

The most efficient way to meet your long-term financial goals – retirement, university/college for your kids, or emergency fund. – is to take the short-term view of paying yourself first. Automatically funding your financial goals before your other expenses will help you adjust daily and monthly spending habits.

  • Setting up RRSP or TFSA auto deposits
  • Monthly RESP auto deposits
  • Setting up a regular monthly transfer from your checking account, to a high interest savings account

After paying yourself first, you may find that you don’t notice the difference in income, but your investments and nest egg will be steadily growing all the while. All of which means you’ll be saving for the long term, and seeing your financial security become more stable.

A smart approach is to think of your savings plan as consisting of two separate figures: one for things you must have, the other for things it would be nice to have. The first and most important part of financial savings is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital during your retirement years.

So how much should you be saving? As much as you can afford!

WHAT DO YOU HAVE TO DO TO BECOME WEALTHY?

WHAT DO YOU HAVE TO DO TO BECOME WEALTHY?


We often find ourselves lured by the thought that there are shortcuts to living a wealthy lifestyle. We may dream about winning the lottery, investing in the next enormous stock tip, or having that one business idea that becomes the latest hit. If only you had jumped on that stock tip that was guaranteed to make you rich. We have all been given the stock tips that will make us rich – but the only people getting rich on the tips are the people who truly know what they are doing. If getting rich is so easy, why are only 4% of the Canadian population considered rich?


What can you do right to accumulate wealth in Canada?


Wealth is not built overnight and since only one percent of our population’s wealth has been inherited. Most wealthy Canadians have built their wealth one step at a time. One of the key habits of wealthy people is their ability to create a systematic disciplined savings plan. If you want to succeed then develop a plan that pays yourself first. Put a percentage of your paycheck into a savings portfolio before any other expenses or deductions are incurred. Just think if you could save 5% – 10% of your income before expenses how much money would you have saved in a year? Continue that over a few years with the added value of compounding interest you would have created a savings portfolio with incredible growth potential.


Keep debt in check

Ever wonder what a wealthy person looks like. The typical wealthy person might not be the one that drives the nice new Mercedes, lives in the biggest house, or wears the top designer clothes. Rather, the millionaire next door is the person that has lived in the same bungalow they have lived in for the past 20 – 30 years, they may drive a nice car but it is an older well-taken care car with lower mileage. They live within their means.


Know where your money is going

Most wealthy people not only live below their means but also are very conscious of where they spend their money. If you want to become wealthy, you should develop a habit of tracking where you are spending your money every month. Budgeting can be a very intimidating word but the fact remains, it is an essential habit for wealth accumulation.


Avoid debt

Wealthy Canadians make a very conscious effort to avoid, minimize and pay off debts. It is so easy in our society to access debt. But if don’t spend money you don’t have. You will be able to build wealth with the money you do have.

Maximize income

There is a correlation between wealth and income. While this makes sense, it may not always be easy to just go out and increase your income so you can increase your wealth. Building wealth will take some effort and your wealth will be directly correlated to your situation. Wealth has a different value for everyone, for instance, if you earn $50,000 a year and you managed to put $5,000 into your savings portfolio that would be incredible. Now, what if you could earn a 6% return on investment compounding interest per year on that investment (strictly stated for illustration purposes) – that would mean over the next 8 years you would have saved just over one year’s salary. Given the same time frame and math, the same can be said for someone earning double the amount and saving $10,000 a year. It’s all relative when it comes to maximizing your savings.


Own things that appreciate

A majority of wealthy people are on their way to owning their own home. Owning your residence creates a positive net worth on your balance sheet. This intern creates a positive asset that is used when discussing wealth. Besides, having equity in your home, your newly found saving plan is also considered an appreciating asset. The next time you put your money into something, ask yourself if it is an appreciating asset or a depreciating asset.

Get professional advice

Wealthy people typically work with professionals to help them accumulate, manage and protect their wealth. This might include accountants, lawyers, and financial advisors. Although they use professional advisors, they ultimately make the final decisions themselves. If you want to become wealthy, you must seek help but understand that you are always the one to decide on when to move forward on the recommendations given.

DEBT?

DEBT?

Growing up watching my parents navigate their power of spending and living within their means is now a distant thought based on today’s immediate gratification of purchase within our society. Having debt was not something that had meaning to them 50 years ago there was only one thing that they were in debt for – that was our house everything else was paid by cash. If you did not have the money then you saved until you did. My mother would put stuff on “layaway” and make weekly payments until paid in full or if she used the Sears Roebuck credit card it was paid in full at the end of the month. 50 years ago, a mortgage was and still is today considered ‘good debt’, because your home is considered the biggest increasing asset that you own. A car was something of a necessity only and not a want. A Black and White television was the norm and if you could afford a Color Television you would have been considered rich. Fast forward 50 years and you will find the banks and credit card companies are big business empires now, the consumer is now encouraged to use credit cards, lines of credit and, a myriad of financing options because it has become increasingly acceptable and very easy to carry large amounts of consumer debt. The new generation of consumers requires immediate self-gratification and this has helped to shift the public’s perception about carrying debt which has been extremely profitable for lenders. Yes, society has changed drastically in 50 years. The reality is still the same you cannot continue to spend if you do not have the means to afford your need to spend so you can be accepted in society.

Acceptable or not, when talking about finances, people who are carrying large amounts of debt understand their reality but unfortunately without the understanding of basic budgeting this is a cycle that cannot be broken. Until we as a society accept and understand that we need to live within our means if we are to succeed in our future – If not we will continue down a path of certain self-destruction.  

What can you do to reduce your debt?

How much debt do you have?

To pay down your debt and create a plan to reduce or eliminate debt you must first understand how much debt you have. To build a plan to get out of debt you should create a budget plan which lists each of your debts on a spreadsheet this will show you who you owe, what you owe, and your total debt, the minimum payment is the interest rate you’re being charged. You will need to get past the minimum payments to get out of the debt cycle.

Once you can see it on paper you will start to understand the process and value of this exercise. When you have all your debts written down, you’ll know exactly what you’re dealing with. The next part of the exercise and this is the most important step, is to implement change. It’s important to remember the only thing you can change is what happens from this point forward what you have done in the past is in the past it cannot be taken away. There must be a change in spending habits, there is no point putting energy into starting a plan to move forward if you plan on making the same mistakes from your past. Take positive action to better your situation.

How much debt is too much?

If you’re not paying your balances in full then where will you find the additional money to pay down your debt? This is where your budgeting skills start to come into play. You have to determine exactly how much you have coming in and going out each month. The simple math will show you either a positive or negative number. Either way, change has to come if want to remove your debt. There are only two ways to change your balance sheet at the end of the month: either you have to figure out a way to earn more or you have to find a way to spend less. Take a close look at your monthly cash flow; if you can capture money from other expenses and repurpose it to attack your debt, you’ll be able to get out of debts a lot faster. The simple answer for how much is too much? When you can’t pay your monthly bills comfortably, you have hit your threshold and you now need to put a plan in place which allows you to spend less and repurpose funds to pay down your debt. 

Understand how you got here… 

Debt is not a problem. It’s a symptom of a problem. If you focus on fixing the symptom rather than the root cause of your financial situation there’s a good chance that you’ll end up facing the same issues down the road. It’s not uncommon for people to consolidate credit card debt with a loan or line of credit and then to run their credit card balances up again. Effective money management isn’t grounded in strong math skills; it’s grounded in our psychology. Understanding the psychology of money and how spending habits are created will help you create new patterns and new habits that will not only help you get out of bad debt but will also help you stay somewhat debt-free from the credit card companies in the future.

The plan moving forward…

Without a plan, you will never achieve success. Without a budget in place, you will find yourself back where you started in no time. Once you know how much you have each month to pay down your debt, then you can create a plan that will allow you to pay down each debt systematically, starting with the smallest balance of your highest interest debt. Keep your expectations realistic. Once you have successfully started to pay down your debt, removing any temptation to spend which is the cause of that debt in the first place is required. If it’s a credit card try removing the card from use until the debt is gone. One solution is to freeze the card in a zip lock bag full of water. When you want to use that credit card you will have to defrost it first giving you time to decide if you need what you are buying.

Implement your plan…

You have to start somewhere change will not just happen. Change involves stepping out of your comfort zone and into the unknown. Taking the first step to getting out of debt is usually the hardest. Be prepared for the fact that you’ll feel like giving up more than once. Don’t give up if you falter or get off track in the beginning; just remind yourself of what you’re moving away from and all the great things that lie ahead and then make the choice to get back on course. Always revaluate your plan make changes and refine your plan if necessary. Celebrate every step of your progress towards your end goal of being debt-free and by learning the power of self-discipline where spending is concerned.

It’s almost that time again! Taxes will be due soon enough…

It’s almost that time again! Taxes will be due soon enough…

A new year means new limits. Here’s a list of new financial planning data for 2021 (In case you want to compare this to past years, that data is included). Pensions, RRSP, TFSA, CPP, OSA, New Federal Tax Brackets.

Pension and RRSP contribution limits

  • The new limit for RRSPs for 2021 is 18% of the previous year’s earned income or $27,830 whichever is lower less the Pension Adjustment (PA).
  • The limit for Deferred Profit Sharing Plans is $14,605
  • The limit for Defined Contribution Pensions is $29,210

Remember that contributions made in January and February of 2021 can be used as a tax deduction for the 2020 tax year.

Tax YearIncome fromRRSP Maximum Limit
20212020$27,830
20202019$27,230
20192018$26,500
20182017$26,230
20172016$26,010
20162015$25,370
20152014$24,930
20142013$24,270
20132012$23,820
20122011$22,970
20112010$22,450
20102009$22,000
20092008$21,000

TFSA limits

  • The annual TFSA limit for 2021 is the same at $6,000.
  • The cumulative limit since 2009 is $75,500 (assuming you were over the age of 18 in 2009)

TFSA Limits for past years

YearAnnual LimitCumulative Limit
2021$6000$75,500
2020$6,000$69,500
2019$6,000$63,500
2018$5,500$57,500
2017$5,500$52,000
2016$5,500$46,500
2015$10,000$41,000
2014$5,500$31,000
2013$5,500$25,500
2012$5,000$20,000
2011$5,000$15,000
2010$5,000$10,000
2009$5,000$5,000

Contribution amounts for 2021

  • Employee contribution = 5.45% (up from 5.25% in 2020)
  • Employer contribution = 5.45% (up from 5.25% in 2020)
  • Self employment = 10.9% (up from 10.5% in 2020)
  • The maximum employer and employee contribution to the plan for 2021 will be $3,166.45 each and the maximum self-employed contribution will be $6,332.90. The maximums in 2020 were $2,898.00 and $5,796.00.
  • CPP Benefits
    • Yearly Maximum Pensionable Earning (YMPE) – $61,600
    • Maximum CPP Retirement Benefit – $1203.75 per month
    • Maximum CPP Disability benefit – $1413.66 per month
    • Maximum CPP Survivors Benefit
      • Under age 65 – $650.72
      • Over age 65 – $722.25

Reduction of CPP for early benefit – 0.6% for every month prior to age 65. At age 60, the reduction is 36%.

YearMonthlyAnnual
2021$1203.75$14,445.00
2020$1175.83$14,109.96
2019$1154.58$13,854.96
2018$1134.17$13,610.04
2017$1114.17$13,370.04
2016$1092.50$13,110.00
2015$1065.00$12,780.00
2014$1038.33$12,459.96
2013$1012.50$12,150.00
2012$986.67$11,840.04
2011$960.00$11,520.00
2010$934.17$11,210.04
2009$908.75$10,905.00

Old Age Security (OAS)

  • Maximum OAS – $615.37 per month
  • The OAS Clawback (recovery) starts at $79,845 of income. At $129,075 of income OAS will be fully clawed back.

OAS rates for past years:

YearMaximum Monthly BenefitMaximum Annual Benefit
2021$615.37$7,384.44
2020$613.53$7,362.36
2019$601.45$7,217.40
2018$586.66$7,039.92
2017$578.53$6,942.36
2016$570.52$6,846.24
2015$563.74$6,764.88
2014$551.54$6,618.48
2013$546.07$6,552.84
2012$540.12$6,481.44
2011$524.23$6,290.76

New federal tax brackets

For 2021, the tax rates have changed.

Lower Income limitUpper Income limitMarginal Rate Rate
$0.00$13,808.000.00%
$13,808.00$49,020.0015.00%
$49,020.00$98,040.0020.50%
$98,040.00$151,978.0026.00%
$151,978.00$216,511.0029.00%
$216,511.00

What is a Tax-Free Saving Account (TFSA)?

What is a Tax-Free Saving Account (TFSA)?

The Tax-Free Savings Account (TFSA) was introduced in 2009. The account can let anyone above the age of 18 enjoy tax benefits that can help accumulate significant wealth without paying the Canada Revenue Agency (CRA) a single penny on the income gained in the account.

However, the CRA will keeps a close watch on these accounts to catch you if you make any mistakes. While the TFSA can let you enjoy tax-free wealth growth, it comes with certain rules and regulations you need to comply with to enjoy the tax-free status. Failing to comply will allow the CRA a chance to collect tax, which they will gladly do.

How can they do that you ask ?

  • Over-contributing

Canadians that make the mistake of disregarding the maximum contribution limit in their TFSAs. The government introduced a limit to which you can contribute to your TFSA each year. The government increases the contribution limit annually, and with the 2020 update, the maximum contribution limit for your TFSA is now $69,500. That means if you have never invested in a TFSA since its inception, you can contribute $69,500 in cash or equivalent assets to the account in one lump sum.

Unfortunately, there are some Canadians that have made the mistake of contributing a lot more to their TFSAs than they should. The CRA charges you a penalty of 1% on the excess amount you hold in your TFSA each month. You can effectively lose the tax-free status of your account by making this mistake.

  • Trading too much in the account

Another more common mistake you never want to make with your TFSA is using it as a day-trading account. Yes, you can use the TFSA to hold assets equivalent to $69,500. However, you can’t use the tax-free status of your TFSA to make trades for the short-term gains. If you plan on using the account for day trading, you can expect the CRA to take action as it was never intended as a tax-free way to trading stocks. If considerable money is made by day trading The CRA can consider any account used frequently in trading stocks to have taxable income, and will subsequently consider this a trading account and not a TFSA.

There is no definitive limit to how many trades you can make in your TFSA in a year, but you should not act as a day trader with the account. Ideally, you should use the account to buy and hold long-term investments. If you were to buy a stock which pays an annual divided and keep it in your portfolio for the long term then this is seen as a tax-free investment as you are allowed to investment in the stock market. 

What is the advantage of the TFSA?

Think about this you have $69,500 that you are able to investment in any funds or stock that you would like and under the Umbrella of a TFSA that can grow to a value much greater than your original investment. Let’s assume that this money grows by 6% on average during the next 15 years… plus with the additional moneys the government lets you deposit annually without penalty. You could have in excess of $382,251 of tax-free savings depending on the type of investment you choose. This is tax-free money and can be withdrawn without taxation which would make this another piece of the puzzle to consider in your retirement planning portfolio.

How did we get here?

Start with $69,500

Added.      $90,000 = $6,000/year for 15 years

Total Inv.  $159,500 x 6% (on average over 15 years) 

Total Value $382,251

The numbers are based on a continued estimate of what the government will do moving forward, the government has the ability to raise or lower the TFSA deposits allowed moving forward so we have estimated the present-day value moving forward for 15 years. If we take into account the compounding interested on money invested through deposits over 15 years our simple calculations @ 6% on a yearly average for a moderate investment you could grow this account to $382,251 of Tax-free Savings. 

Note:

We made this very general in the nature of simple math so we could show the effects of compounding interest. There will be years above and below 6% growth on your investment but we chose to look at an average rate of return throughout the 15 years of investment for the simplicity of explanation.

Financial Security, What is it?

Financial Security, What is it?

Financial security refers to the peace of mind you feel when you aren’t worried about your income being enough to cover your expenses. It also means that you have enough money saved to cover emergencies and your future financial goals. When you are financially secure, your stress levels goes down, leaving you free to focus on other issues.

Budgeting for Success

Feeling financially secure requires knowing what your assets and liabilities are, as well as how your income compares to your expenses. If you aren’t tracking these, you might not know you’re struggling, but that’s like an ostrich sticking its head in the sand and hoping for the best. For true financial security, create a budget that addresses both your current needs, like food, clothing and shelter, and your long-term goals, like paying down debt and saving. You should also include insurance to cover the what-ifs in life.

Prioritizing Long-Term Goals

Pay yourself first, when it comes to making your budget. No, that doesn’t mean take the first fruits of your paycheck and go out to eat. Instead, it means make sure you’re setting aside money for long-range goals, like an education fund for your kids, a down payment for a future home or a retirement account for your golden years. If you’re struggling to find enough remaining money to pay down debt, look for discretionary expenses that you can cut.

Building an Emergency Fund

Whether you call it an emergency account, your safe money or a rainy day fund, setting aside several months worth of living expenses is critical for your financial security. That way, when something unexpected like a job loss, refrigerator breaking down, or a child having to go to the hospital pops up, you have the funds to deal with it rather than having to go into debt, especially high interest debt like a payday loan or a balance on your credit card.

Tracking Long-Term Goals

You can’t just set it and forget it when it comes to your budget. Instead, your budget requires maintenance and fine tuning over time to make sure you’re adhering to your goals. For example, if you haven’t been tracking your spending in the past, you might think you’re only spending $100 a month eating out, but could be spending two or three times that amount if you’re not tracking it. If you need help staying on top of your money, contact us at info@henleyfinancial.ca for your free budgeting template. Let us help you achieve your financial goals.

Get started on your Estate Planning

Get started on your Estate Planning

 

By Henley Financial and Wealth Management

As we journey through the various stages of life, we spend considerable time building relationships and accumulating assets. Passing on a legacy to family and friends and avoiding unnecessary taxes and administrative delays takes good planning. Your estate plan is as individual as you are, and taking the time to complete your arrangements now will give you control over how you provide for those closest to you.

We would like to send you a free booklet on Estate Planning including a step by step checklist.  Please contact us at info@henleyfinancial.ca for your copy.

Estate planning

Estate planning is about life – in the present and in the future. Most importantly, estate planning is about the life of your family and loved ones – and the peace of mind you get from helping to preserve their financial security. By its very nature, estate planning is a difficult subject to discuss – even more so to plan for because it forces us to come to terms with our own mortality. Yet it’s something you need to talk about openly with your loved ones today because you can’t do so after you’re gone – or after they’re gone.

Each person will approach estate planning differently, with personal motivations and expectations. No estate plan will be exactly like another. Estate planning should be reflection of your personal priorities and choices.

Estate planning is generally guided by three rational motivations

  1. Provide adequately for family members and/or other loved ones
  2. Ensure that your estate is distributed in the timeliest manner possible after your death
  3. Minimize taxes – during your lifetime and, equally important, for the beneficiaries of your estate

…and three emotional motivations

  1. Gain comfort from knowing your loved ones are well looked after
  2. Feel secure knowing that settling your affairs will not add more stress to those grieving for you
  3. Rest assured that your estate will be distributed the way you wish

Why you need an estate plan and the Benefits of estate planning

  • Distributes your assets as you intended; provides funds to cover funeral expenses, as well as immediate and/or long-term family living costs
  • Keeps more of your money in the hands of your heirs
  • Minimizes income tax and probate fees (no probate fees in Quebec); designates charitable gifts; declares your personal care preferences, including terminal medical treatment and organ donation intentions
  • Provides for the tax advantages of income splitting
  • Ensures business continuity for business owners
  • Identifies the people chosen to carry out your last wishes and care for your children

Taking action now 

Too often, advisors and estate planning professionals hear, “I wish I’d known about this sooner” from distressed family members. Whatever your status – male, female, married, widowed, divorced, single, young, old, middle class or wealthy – everyone can benefit from estate planning. Unfortunately, too few people follow this advice. Planning your estate and communicating your wishes as appropriate can protect your estate and, as importantly, allow your heirs the opportunity to prepare themselves for their changed circumstances. The “do nothing” option is not in the best interests of your family, your business or other relationships. As the world we live in becomes increasingly characterized by legal action and government intervention, estate planning is something everyone should do.

Creating your estate plan – step by step 

Step 1: Consult and retain appropriate professionals. The complexity of your situation will determine the assistance you will require from professionals to create your estate plan. Your team should include an advisor, lawyer and tax planner

Step 2: Draw up a household balance sheet. A household balance sheet is a summary of your financial situation that ultimately determines your overall net worth. Your net worth is the value of your assets (what you own) minus your liabilities (what you owe). If you don’t already have one, work with your advisor to develop your household balance sheet.

Step 3: Understand your life insurance needs. It’s important to work with your advisor or insurance expert to match your long-term financial objectives with your insurance needs.

Step 4: Draw up your Will.

Contact us at Henley Financial and Wealth Management  if you would like us to provide you with a Will Kit.

Step 5: Establish power of attorney for property. At some point in the future you may be unable to make your own financial or personal care decisions. But you can prearrange for someone to make these decisions according to your wishes by having a lawyer draft a separate power of attorney for property and personal care.

Step 6: Establish power of personal care. Medical and lifestyle decisions must often be made quickly when someone is seriously ill; hence, one or more family members are often granted this power of attorney to make decisions for you.

Step 7: Minimize taxes and administration fees. Your estate may encounter certain obligations for income tax and probate taxes on your death, which may reduce the proceeds intended for the beneficiaries of your estate. If any part of your estate must go through probate to validate the Will before transferring ownership of assets, the entire estate value may be subject to probate taxes.

Step 8: Keep track of accounts and important information. One of the most difficult roles for an executor and family members is gathering the information required to settle the estate. Eliminate this concern by centralizing all household information from birth certificates, passports and other legal documents, to bank accounts and insurance policy numbers, to phone company and hydro account details. Once you have documented your important information, store a copy in a safe place and let someone close to you know where it is.

Step 9: Let someone know.  After you have gone through all the steps of developing an estate plan, the final piece of the puzzle is communication. It’s really important to communicate your plans to a family member or close friend whom you can trust, and who is capable of working with your advisor to execute your estate plan. There’s nothing more disturbing than for someone to have to deal with incomplete information or requests. As such, not only is it important to share your plans with someone, but it can also be very helpful to document your plans to help eliminate any potential misunderstandings. As difficult as it may be, making sure that those affected by your plans know what is expected of them and where critical information is kept is essential to the smooth execution of your estate plan.

Step 10: Review and update regularly. Review and, if necessary, update all information at least once a year. By updating your estate plan, you’ll get a snap shot of where you are on an annual basis.