Where Did All My Money Go? – Part 1

paper showing finance, saving,  and computer

How many of you have eagerly looked forward to payday, only to discover three days later that you’re already broke again?  Probably a lot of you!  This can be a common theme for people struggling with their finances – you always get to the end of the money before the end of the month.  And you can’t seem to figure out what you spent the money on!  Why does this keep happening?

It’s likely because you aren’t paying attention to what you’re spending.  Debit and credit cards make it really easy to thoughtlessly spend money. But using cash is often not any better, as it’s harder to track. So regardless of your preference, you need a good way to track your spending closely.  You need to record everything that you spend your money on, whether it’s $200 on groceries, or $3 on a coffee from Tims.  EVERYTHING.  You can do this different ways – you can write it down in a spending journal, carry a little notebook with you to record everything, or you can make a list on your phone. 

However, my favorite way is to use an app that keeps track of your spending.  There are a lot out there, but the one I use is called Expense Tracker.  It lets you enter your income and your expenses into different categories. Then it uses this information to create charts so you can see what you’re spending each month.  For example, you can create a specific category and then assign it a color.  Do this for all of your spending categories – groceries, cable, gas, etc.  Once your information is entered, the app will then create a colored pie chart or bar graph incorporating all the different categories, so you can see easily how much of your money is going to each category.  It will also give you a bar graph if you rotate your phone, so you can do it either way.  It’s a really handy app, and it lets you add additional categories so that you can tailor it to your needs.  And because it keeps a running tab of what you’re spending on each category each month, it really helps you see where your money is going.  There is also an upgraded version that you can buy for a few extra dollars which lets you input recurring expenses, like your mortgage payment.

So you need to track all of your expenses for a month or two (two is better).  Once you’ve done this, then you’ll have a better idea of what you’re spending on different things.  Now you can start figuring out how to make the best use of your money – do you really need to go to Timmy’s every morning and spend $3 on a coffee?  Wow, am I really spending $50 a month on lottery tickets?  Or you’ll notice that you’re not actually putting as much money into savings as you thought you were, or you’re spending way too much money at the App store.  All those little purchases for $6.99 or $2.99 can really add up! 

Another feature I like is this:  because you can also put in dates for each expense, you can tell if there are days where you spend more money than other days.  You can even sort your expenses by date.  I discovered that we typically spend the most money on Fridays and Saturdays after a payday, so I am now consciously making an effort to watch my spending on those days.  Instead of going out Friday and Saturday, maybe we’ll just go out one day and not both.  I also try to have days (during the week is easier) where I will not spend any money at all, which means no stops at the grocery store, no buying gas, no spending money at the App store, that kind of thing.  If you can string together a few days where you don’t spend any money at all, that’s even better!

So go ahead and start tracking your spending whichever way you chose.  In my next article, I will tell you how to take the information that you’ve gathered and use it to create a spending plan for the two weeks after payday, so that you don’t always end up broke by Monday.

This article is by Sharon Skwarchuk, freelance writer. 

Meena’s Note:
I like to use tracking methods that are cheap, easy, and electronic. I’ve experimented with Mint and used You Need a Budget for a while. But this year I noticed that banks are getting into the tracking game. I bank with ATB and they include a great tracking option. You can create categories, budgets, and use your phone app to see where you are at for the month. 

Should I Get Life Insurance on My Mortgage?

Medium size brown house with sold sign

When you get a mortgage, the bank will often ask you if you want to get mortgage life insurance as well.

What exactly is mortgage life insurance? 

Simply put, it’s a life insurance policy that will pay off your mortgage if you were to pass away before your mortgage is paid off in full.  For an extra cost each month (the amount varies based on a number of factors, including your age and health), you can rest assured that your dependents wouldn’t be stuck with mortgage payments should you die unexpectedly.  The bank adds the cost of the insurance to your regular monthly payment, and you’re off to the races.  How much more convenient can it get?  Sounds like a good idea, right?

Not so fast.  There’s always has a catch, as you should know by now.  In this case, it can be a fairly expensive catch.  Yes, life insurance is a good idea.  However, my personal opinion is that you shouldn’t buy it from the bank.  Why not?  This is why:

  • the mortgage insurance only pays out the balance of the mortgage owing
  • the cost of the mortgage insurance remains the same
  • you have no choice in what happens to the money
  • you are protecting the bank more than your family

What does this mean exactly?  Let’s say, for example, that you are paying $75 per month for $250,000 worth of life insurance on your mortgage.  As you pay down your mortgage, the balance owing is less and less each year.  After five years, maybe now you only owe $200,000.  Yet you’re still paying $75 per month.  After ten years, now you may only owe $150,000, but still your payment is $75 per month.  And so on.  Each month, you are getting less value for your $75 monthly payment.  For the purposes of this example, let’s say that you owe $150,000 at the time of your death.  Your life insurance will pay out that $150,000, but that’s it.  Yes, your mortgage is now paid out, but there is no extra money for your estate or your beneficiaries.  You have basically paid for $250,000 worth of life insurance, but you only utilized $150,000 of that insurance.  Is this really the best use of your insurance dollar?

So does this mean that you shouldn’t get a life insurance policy to pay out your mortgage if you die?  Absolutely not.

My suggestion to you is that rather than purchasing this insurance through a bank, you buy regular life insurance from an insurance broker.

Get a policy for $250,000 which is specifically earmarked to pay out your mortgage.  Your monthly payment will probably be very much the same as with the bank, but the benefit is that you will always have $250,000 in life insurance as long as you make your monthly payment (or until you reach a certain age, depending on the type of life insurance you get).  Plus you can designate a beneficiary for this policy.  So if you were to die and you owed $150,000 on your mortgage, your beneficiary can pay out the $150,000 owing on your mortgage and still have $100,000 left over. Or they can use the money to just pay a portion of the mortgage, or continue making the regular mortgage payments This is a much better scenario than the one I outlined above.

So when it comes to life insurance, make sure you ask questions and do your research. Talk to an insurance broker before you make your final decision.

Meena’s Note: Occasionally people won’t qualify for an individual life insurance policy that is large enough to cover your mortgage. And there is a bit of delay to get a life insurance policy set up. So I recommend taking the insurance provided by the bank, then talk to me right away about your other options. You can always cancel the bank’s policy later on, once your new policy is all confirmed.

RRSP Loans

Hour glass with pink sand and clock in the background

As you know, the deadline for RRSP contributions for the previous tax year is usually March 1. That means you have time to think about your taxes and still purchase more RRSPs.

If you are a procrastinator and didn’t contribute to your RRSPs throughout the year, or you start working on your tax return and realize you are going to owe money, you may want to make a lump sum RRSP contribution ASAP.

Banks will take advantage of this urgency by advertising RRSP loans. How it is supposed to work is that:

  • you borrow money with a known interest and payment plan
  • make a larger RRSP contribution
  • get your tax refund
  • partially pay back your loan
  • continue to make payments for the rest of the year or until the loan is paid off
Occasionally an RRSP loan is a decent idea, but usually there are some SIGNIFICANT downsides to this plan:
  • You must have enough discipline to actually use the refund to pay back the loan. Unfortunately a lot of people get that money and use it as fun bonus money, figuring they can just pay down the loan every month as planned.
  • Taking on debt can be risky. You never know what the future holds, and you or your spouse could lose your job tomorrow.  Then you might need your tax refund for living expenses.  And even worse, you’d still be stuck with your RRSP loan payments.
Plus, the math often doesn’t work in your favour. 

The amount of money you will save when using an RRSP loan relies on three factors, only one of which is a guarantee amount.

  1. The difference between your tax rate when you invest the money and when you withdraw it. 
    We can make some assumptions, but your retirement income and the tax rates then are out of our control. If you end up having to pay more tax during retirement, then the RRSP was pointless, from a pure math standpoint.
  2. The rate of return you will earn on your investment. 
    Only GICs give you a guaranteed investment return, and the rate on an RRSP loan is going to be higher than on a GIC so this is something you are unlikely to ever do.
  3. The interest rate on the loan. This factor at least is known, as RRSP loans are typically at a fixed interest rate.

So this strategy can be beneficial to you IF:

  • You earn more on your investment than you pay for your loan, AND
  • You tax rate at retirement is the same or less as you are paying now

Instead, a much better strategy is to make automatic monthly or biweekly deposits into your RRSP account. Then you are earning every month, instead of paying the bank every month. 

What’s your opinion on RRSP loans?

RRSP or TFSA?

A road sign that shows 4 different "right ways"

This article is by freelance writer, Sharon Skwarchuk. Ironically, due to my busyness and procrastination I didn’t get this posted before the 2017 RRSP deadline. So don’t be me – don’t wait until the last minute. Start your investing ASAP using automatic contributions so you don’t miss next year’s deadline – Meena

RRSP Basics

So it’s RRSP season once again.  What exactly is RRSP season?  It’s the time of year when people start thinking about filing their tax returns, and whether or not they need to buy RRSPs in order to create or increase a tax refund.  The RRSP deadline for 2017 is March 1, 2018.  This means that if you want to contribute to your RRSP for the 2017 tax year, you must do so by March 1, 2018.

Many people, including me, wonder if the RRSP is still the best solution for our retirement savings.  Not so long ago, it was really the only option for reducing your potential taxes while saving for retirement.

There are a number of rules that must be followed with respect to RRSP contributions and withdrawals.  But in a nutshell, the reasoning behind an RRSP is this: 

You put money into it now while your income is higher.  The money you deposit does not get taxed until you withdraw it, hopefully at retirement.  And when you retire, your income will be lower (and you may have more tax credits), so the amount of the tax that you pay at withdrawal will be less than you would have paid when you earned the money. 

That’s the logic, which makes sense if you can actually go the distance and not withdraw the money before retirement.  But how realistic is that? 

Withdrawing RRSPs

Speaking for myself, I had managed to save up about $25,000 in an RRSP over about 15 or 20 years.  Then the oil recession hit Alberta, and my boyfriend‘s hours started getting cut.  His annual income dropped from $110,000 to less than $30,000 over a three year period.  When he got laid off, he was out of work for almost 15 months.  And when you’re trying to make it on about less than half of what you were bringing in, you can’t get ahead – especially when you’re buying groceries and gas with your credit card.  So our bills started piling up.  I made the very difficult decision to cash in my RRSP. 

But as some of you probably know, when you cash in an RRSP, the financial institution withholds a certain percentage immediately, (just like your employer does on your paycheques) and then the actual tax owing is calculated when you do your tax return.  Needless to say, I ended up paying about 30% of that $25,000 to the government in taxes at a time when I really could have used that extra cash.  So this was a definite downside to RRSPs.

Something else people often do in February is take out an RRSP loan. There’s a separate article about them here. To summarize, I don’t usually recommend an RRSP loan.  An automatic savings plan throughout the year is a much better option.

TFSA Basics

So what about a Tax Free Savings Account instead of an RRSP?  With a TFSA, you are currently allowed to contribute up to $5,500 per year into the TFSA (plus unused amounts from prior years), and you don’t have to pay income tax on the interest that you earn within that account. 

Normally, you have to pay tax on any interest that you earn from an investment, but with this account, you don’t have to pay the tax.  So if you earn $300 in interest, you don’t pay tax on that amount.  That’s the great thing about this investment.  You can also withdraw money from this TFSA without having to pay taxes on your withdrawal, because the taxes were paid on the money before you put it into the TFSA. 

However, there are also certain restrictions with respect to this account, including how much you can deposit, so you need to make sure that you follow the rules. 

So which is better – an RRSP or a TFSA? 

Personally, I prefer a TFSA.  I want to be able to take out the money when I need it without having to pay tax on it.  Plus all the interest that I earn within the TFSA is tax-free.  And for some reason, I find it easier to contribute to a TFSA than I do an RRSP.  Don’t ask me why – I think it’s psychological.  I think I feel better knowing that I’ve already paid the taxes on this money, and when I withdraw it, I can have it all because the government has already taken their share. 

I also think that I prefer to contribute to a TFSA because it feels more like a choice than an obligation.   To me, an RRSP feels like an obligation- it’s like something you have to do because you’re a responsible adult.  And I hate it when people tell me that I have to do something.  

Finally, I want to say that I am not a financial advisor in any sense of the word. All I am giving you is my own personal opinion from my own research and my own experiences and observations.  As always, the final choice is up to you.

Meena’s Note:

As a financial planner, I can discuss with you the reasons why a TFSA or an RRSP is preferable in your situation. A case can usually be made for some of both. But on a strictly mathematical sense there is a rule of thumb to follow. (Unfortunately, it requires some guess work.)

   Your Situation                                                             Best Option

  • Current income is lower than planned retirement income             TFSA
  • Current income is higher than planned retirement income           RRSP
  • Current income is the same as planned retirement income          Either

I think the suggestion to contribute automatically monthly or bi-weekly is an excellent one. You earn more money by contributing throughout the year, and it’s easier on your budget, than doing the lump sum contribution next February. So start today! I’m working with the robo-advisor WealthBar, and they are an excellent tool for low cost, super easy investing – in TFSAs, RRSPs, and RESPs.