Household Debt; HE SAYS–SHE SAYS

You and your spouse may share the same values and dreams, but when it comes to finances and managing household debt do you ever questions some of his or her actions or decisions? 

A recent consumer debt survey found that Canadian homeowners disagree about who manages their household debt.  In fact; 56% of men and 36% of women stated that the household debt is managed by “mostly me” or “only me”.  Conversely, only 10% of women and 4% of men indicated that household debt is managed by “mostly my partner” or “only my partner”.  Differing perceptions about who is responsible for debt management within the relationship could reflect a lack of communication, which could make it more difficult for homeowners to become debt-free.  If this sounds familiar, the good news is; that with a few simple effective changes you and your partner will become better communicators regarding your debt.

First, Start Talking

When we are in our 30s the most common goals are to pay down debt quickly, save for retirement and have enough money to pay the bills at the end of the month.  Overall the survey tells us that Canadians want to be debt-free, but that we are not actually talking to our partners about how to become debt-free.  To achieve your goals, it is important to work together and put a cash flow management plan in place.  Once you have a plan in place; review it regularly and track your progress.

Address Discretionary Spending

One of you may love to splurge on an extravagant evening out once a month, while the other would prefer to buy the latest and greatest tech gadget.  Both are fine, however if you’re looking to trim your monthly expenses you may disagree on what to cut back on.  Identifying and then agreeing; which non-essential expenses can be reduced is a great first step towards tackling your debt.

Streamline Your Finances

Another good strategy is to make your money work harder by organizing your finances more efficiently.    The survey found that nearly 31% of homeowners listed the interest they pay to carry their debt is a major factor that makes it difficult for them to become debt-free.  Given our current low interest rate environment, an easy way for homeowners to reduce their interest costs might be to consolidate their debt at a lower rate.  An all-in-one account is an example of a debt consolidation product that may help you achieve this goal.

Be Honest About Priorities and Concerns

In general, women appear to be more concerned about debt than men.  Women are less confident about being able to reduce or eliminate their debt, and even though men and women place relatively the same importance on being debt-free at retirement; women are less confident they will achieve their goal. 

In many households there is a discrepancy between couples in attitudes, perceptions and expectations with regards to debt, likely because each partner is managing personal debt separately or they just aren’t talking enough to one another about finances.  The key is to work together and discuss the emotional side of money as well as the actual numbers.

Work With a Financial Professional

Research shows that nearly three in four people who get debt and cash flow advice from their advisor have a plan for becoming debt free.   Developing a cash management system will allow you to focus on what you can spend; while managing your debt, and ultimately help you achieve success in your overall financial plan.

As always, if you need help getting started, give me a call.

Have a Great Weekend,

Tracey

 

Source:  Original article published in Solutions, spring/summer edition 2013, Manulife Financial.

 

Keeping the Cottage in the Family

Summers at the cottage – boating, fishing, late-night bonfires and family dinners are important reasons to keep the cottage in the family.  So, take some time this summer to learn how to protect your treasured asset from taxes. 

Succession planning for the family cottage can be complex, especially when it will be shared by multiple family members who all have an emotional attachment to it.  Cottage values have increased significantly over the past decade and some beneficiaries may be forced to sell it just to pay the capital gain tax and probate fees.  The first thing you will need to determine is how much taxes and fees your estate will be required to pay when you transfer ownership onto the next generation.

Calculating Capital Gains Tax

This will occur when you sell, gift or pass on the cottage to your children upon death.  To calculate the capital gains tax you first determine the difference between the current selling price (fair market value) and what you paid for the cottage; including the costs of any upgrades (cost base).  This difference is then divided by two, that figure is the amount that is added to your income; and taxed in the year of death.  (e.g. your purchase price was $100,000, current selling price $300,000, taxable capital gain = $100,000 or  $300,000 - $100,000 = $200,000 / 2 = $100,000) Therefore if you are in a 50% tax bracket, your tax bill will be approximately $50,000.

Calculate Probate Fees

If you hold onto the cottage until death and leave it to anyone other than your spouse, some provinces (including Ontario) will impose a probate fee based on the fair market value of the cottage.  Probate fees can be as high as 1.5% of the value of the cottage at the time of your death.  Using the above example; $300,000 x 1.5% = $4500.

What to do?

Life insurance can be a very cost-effective method of funding the looming tax bill.  This type of funding can be an ideal solution for people with modest estates and/or want to guarantee that funds are available to pay the tax and ultimately avoid the sale of the cottage to upon their death. 

If you have a larger capital gain on your cottage than your home in the city, consider designating the cottage as your principal residence.  Once you determine which residence (home or cottage) should be deemed principal residence, your executor should be instructed to report the disposition on your final tax return.

You may also want to consider transferring your cottage into a trust.  This vehicle may be used for tax efficiency, creditor protection, and maintaining control of the cottage during your lifetime, or all three.

Finally, if you sell the cottage prior to death, you will avoid probate fees and can pay the capital gains tax that would otherwise be payable upon your death.  Furthermore, these proceeds can then be used to help fund your retirement income. 

Since tax rules change frequently and everyone’s circumstances are different, it is important to discuss your particular situation with your financial advisor, lawyer and accountant.  If you need help getting started give me a call.

Have a great weekend at the cottage,

Tracey

 

 

 

 

Source:  Original article by Mike George and Staff at Advisor.ca published 10-01-11 and 05-17-13.

 

Reading, Writing, Financial Literacy

Financial literacy is critical to the prosperity and well-being of Canadians.  And, just like reading and writing, financial literacy can start early in a child’s life.

While most of us (78%) have made an effort to teach our children financial management skills, the majority of us (60%) do not think we have been very successful. Here are five tips that can help you enhance your children’s and grandchildren’s understanding of money.

Counting coins

As soon as children can count, help them identify coins and bills and then have them add up different combinations.  Make it a game by piling similar coins into piles and ask which pile is worth the most, emphasize that it is not always the biggest pile that has the most value.   When you go shopping; point out price tags on different items and when purchasing something small; pay cash and count out the change together.  Explain how money is a tool that makes other things possible.

The Three S’s

Encourage children to divide their allowance into three categories: spending, saving and sharing.  “Spending” money is available for them to use for whatever they want.  “Saving” money goes into a piggy bank, while “sharing” money goes towards a charity that your family supports.  Of course in the real world “savings” would grow with interest; so consider topping up their savings by a set percentage at the end of the month.  It is never too early to learn the power of compounding.

Do you Need it or Want it?

Talk to your kids about the difference between needing something and wanting something.  Use everyday examples like nutritious meals, school supplies and comfortable clothes and shoes vs. cookies, candy and the latest video game.  Explain that needs and wants are different for different people and will change throughout their lifetime.

Goal Setting

When children ask for a new toy, talk about its value – in dollars and what it means to them – then help them create a plan to buy it.  Offer older children the opportunity to earn more money towards their goal by taking on chores beyond the ordinary – say folding laundry, raking leaves or shoveling snow. 

Share your Values

Finally, take the time to explain in simple terms why you save, invest and protect your assets with insurance and pay off debt as quickly as possible.  Your reasons may include: wanting to build wealth, retire at a certain age, buy a cottage or make your family’s lifestyle more secure.

Keep in mind that helping children understand the basics of financial planning equips them to make smarter financial decisions as they grow up and get more control over their own money – and that may be just as important to their future success as learning to read, write and count.

Have a great weekend,

Tracey

 

Source:  Original article published in Solutions, Manulife Financial, spring/summer edition 2013

No Will? What Happens…

Every wonder what happens if you die without a valid Will in place?  Your assets will be distributed according to the formula set out in the legislation of the province in which you live.  In Ontario, we have The Ontario Succession Law Reform Act (SDA).  Without a valid will, your assets will be distributed as follows:

Spouse Only:  Your entire estate will go to your spouse.

Spouse + One Child:  The first $200,000 of your estate will go to your spouse; the balance will be split equally between your spouse and your child.
Spouse + Children:  The first $200,000 goes to your spouse, the balance is split one-third to spouse; and two thirds are split equally between the children.
Children, but No Spouse:  Children share estate equally.
No Spouse or Children:  the entire estate goes to your parents or surviving parent.  If your parents have predeceased you, your siblings will share it equally.  Children of deceased siblings will share their parents’ share equally.  If only nieces and nephews are alive, they will share it equally.
No Lawful Heirs:  Your entire estate becomes property of the province.

It is important to review and/or update your Will under the following circumstances:

Marital Status Changes:  In Ontario; marriage revokes an existing will, in the case of divorce; the will is read as if the former spouse has predecease you, whereas a separation will have no effect on the will.

Nature or quantum of assets change – e.g. sell your house and invest the money in mutual funds.
Residence change
Loss or addition of beneficiaries
A change in your health
 

Many people have opted to save the money and purchase Do It Yourself (DIY) kits, however there are several problems associated with DIY wills, some of these include:

 
·        Failure to name an executor or alternative executor
·        Failure to dispose of all assets, thereby creating a partial intestacy
·        Gifting more than you have
·        Failure to appreciate the rights of spouses and dependants
·        Improper wording
·        Invalid provisions

I always recommend you have your will prepared by an experienced lawyer or notary.  If you don’t have one, give me a call I know a few that can help you.

Have a great weekend,

Tracey

 

Source:  Elaine Blades, Advisor.ca published 02-25-13

 

What to do with Your Tax Refund

Well, with April 30^th in the rear-view mirror, it’s time to turn our attention from receipts and filing compliance to what to do with our refunds. 

Eight in ten Canadians (79%) expect to receive a refund this year.  To date, the average individual tax refund has been $1,585, amounting to almost $14 billion CRA has paid out as of April 18, 2013.  More than half of those getting a refund expect to use it to pay down household debt, or simply invest it.

According to a study done by BMO Nesbitt Burns, those anticipating a refund intend to:

·        Pay household bills, credit card balances, mortgages and other debt (37%)

·        Save the money or invest it in a RRSP, RESP or TFSA (20%)

·        Spend it on travel, leisure or luxury goods (10%)

·        Conduct home renovations (7%)

 Here are a few more financially friendly suggestions:

·        Registered Disability Savings Plan (RDSP) Significant government support and tax benefits are available through these plans for families with disability issues. 

·        Non-registered investments Whether investing directly or using leverage, tax efficiency is a key issue when managing non-registered investments.  Make sure to have a plan and dovetail it with other savings.

·        Save for a rainy day You may be financially stable today, but by establishing an emergency fund you can create a safety net in case of an unexpected change in your employment status or income.

·        Live it up… a bit   After all, saving is just spending-in-waiting – but try and maintain balance.

 Tax planning should be a year round activity for all of us.  It is important to always stay abreast of all the eligible tax credits and deductions available, including charitable donations, disability credits and pension income splitting opportunities. 

If you are holding a refund cheque and not quite sure what to do, give me a call I can suggest a few ideas depending on your individual situation.

Have a great sunny weekend!

Tracey

  

Sources:  Advisor.ca and Invesco Trimark