Helping Students Avoid Debt

Being accepted into university, college or grad school is a major milestone and your kids should be advised on how to attend post-secondary without racking up debt.

A study by TD Canada Trust found that more than one-third (38%) of undergraduate students wish they had stuck to a budget while they were in school, and 43% wish they would have spent less on nights out with their friends, electronic gadgets and coffee.

Here are a few pointers to share with your kids as they head back to class on Tuesday;

1.      Make a plan.  Help your student create a budge where he lists out what he needs versus what he wants for school.  If your kids are living away from home for the first time help them figure out how much they can afford to spend each month.

2.      Pay bills on time.  It can be challenging to juggle studies, extracurricular activities and social engagements while keeping track of financial obligations, but it is important to pay their bills on time.  A missed payment could have a negative impact on their credit rating, affecting their ability to borrow after graduation; for something substantial like a car or a home.

3.      Don’t treat a credit card like a debt card.  Nearly one-third of students (31%) wished they had used their credit cards more wisely while they were in school.  Remind your kids to only use their credit cards if they can pay off the balance in full at the end of the month.  Furthermore, taking cash advances from their card is not advisable as the interest starts accumulating the moment the transaction is complete.

4.      Apply for scholarships, grants and bursaries.  Most post-secondary institutions offer a range of scholarships and bursaries to students with financial needs; not just academic or athletic achievements.

5.      Consider loan options.  It is important to consider how long it will take your student to pay back their student loan, and in what increments.  Make sure they consider the interest rate, any repayment grace periods and the loan terms and conditions.

 “University is full of tempting opportunities to spend money, which is why it is so important for students to create a budget and learn when and how to say ‘no’ to things they cannot afford,” says Raymond Chun, of TD Canada Trust.  He adds “With the average cost of undergraduate degree currently estimated at $84,000, it is imperative that students do their homework on how to manage everyday finances, stretch their student dollars and avoid excessive debt.”

It is important to teach our kids to use credit wisely, and build a positive credit history.   Lead by example; show them your own cash flow management plan, if you don’t have one; give me a call.

Have a great long weekend!

Tracey

 

 

 

 

Sources:  Advisor.ca, articles by staff on 08-13-13 and 08-16-13

 

 

Segregated Funds; Key Features and Benefits

Segregated funds combine the growth potential of regular investment funds with the added protection against long-term losses through the addition of an insurance policy.  Segregated funds are only available through insurance companies and provide you with maturity and death benefit guarantees.

Protection from market downturns.  When investing in segregated funds, your money is protected from long-term market downturns with the maturity and death benefit guarantees.

You can choose between a 75% or 100% guarantee on your money, however you must hold the segregated fund for a minimum of 10 years to receive the 75% guarantee; or 15 years if you want the 100% guarantee. When your policy matures you are guaranteed to receive a minimum of 75% (or 100%) of the amount you invested; or the current market value whichever the greater.   You can redeem your funds sooner if desired, however you will only get the market value of your funds and your guaranteed amount will be reduced by the amount you withdrew.

In either case, if you were to die, your beneficiaries will receive 100% of the original amount invested or the current market value whichever the greater (minus any withdrawals).  Many seniors choose segregated funds for this estate preservation feature; they can invest in the market to achieve growth potential, without putting their family’s inheritance at undue risk.

Ability to reset benefit guarantees.  With many segregated funds you can reset your benefit guarantees twice each year. So, if the market value of your segregated fund is higher than what you invested; you can reset your maturity and death benefit guarantees based on the higher value.  However, in so doing so you will reset your 10 or 15 year holding period for your maturity guarantee.

Potential creditor protection.  As part of an insurance policy, your segregated fund investments may be protected from creditors if you name your spouse, child, parent or grandchild as the beneficiary of your policy or if you name an irrevocable beneficiary (a beneficiary that cannot be changed).  This is a great feature for business owners who have a greater potential of being sued or going bankrupt.

Opportunity to bypass probate.  With non-registered segregated funds, the death benefit is paid directly to your named beneficiary rather than to your estate.  This means that the value of your segregated fund investments may bypass probate, a costly and lengthy process, allowing your named beneficiary to receive the proceeds faster. 

All of this protection sounds great; but it does come at a cost, seg-funds generally have a higher MER (3-6%) because of the built in insurance policy.  Furthermore, very few mutual funds are sitting in a -25% position after ten years if properly managed.

If you think segregated funds should be a part of your investment portfolio or just want more information, give me a call.

Have a great weekend,

Tracey

All insurance and segregated fund transactions are provided through Hub Financial.  Any information in the enclosed note is provided by Tracey Marshall who is a registered insurance agent under the Financial Services Commission of Ontario.  Hub Financial is not affiliated or related to Security Financial Services.

 

Source: Empire Life

 

 

Fixed or Variable Rate Mortgage?

Many people don’t know what to look for when choosing their mortgage.  Do you need a fixed or variable rate mortgage?  The answer is not always straight forward, here are a few key issues regarding the two most popular types of mortgage rate options:

Fixed Rate Option

The most common repayment option in Canada today is the Fixed Rate option, this simply means the rate is fixed and will not change throughout the term of the mortgage.  The main benefit of the fixed rate option centers around security.  As a borrower; you know exactly what your payment will be for entire term of the mortgage; allowing you to budget accordingly.  This type of security can be especially important for first time home buyers; who may be renting and used to paying a fixed amount for shelter every month.  Home ownership brings many new and unexpected expenses; many of which first time home owners are not aware of.

The fixed rate mortgage payment is a combination of interest and principal, and it remains constant throughout the term.  However, over the term (normally 5 years) the portion of interest and principal will change every month as the amount of interest owing decreases.  If you have this type of payment; have a look at your statement and see the declining amount of interest paid each month.

As a borrower, there are no basic risks attached to this type of mortgage repayment plan other than the fact you may not save as much interest when comparing it to the variable rate option.

 

Variable Rate Option

While there are different types of variable rate mortgages available, the main feature is that a variable rate mortgage has an interest rate that will fluctuate.  This type of rate transfers the interest rate risk from the lender to the borrower; and therefore the borrower will receive a lower rate than on a fixed rate mortgage.

You can choose to have a variable rate mortgage with a constant payment or a fluctuating payment.  If you choose a constant payment and the rate goes up, more of your payment goes to interest and less to principal, vice versa if the rate goes down.  If you choose a fluctuating payment, your mortgage payment will rise and fall with interest rate fluctuations.

For borrowers who are not risk sensitive, this type of payment plan can save you a lot of money.  Most lenders will also allow you to switch to a fixed rate mortgage without penalty if the interest rates start to rise.  You should calculate in advance the maximum mortgage payment you can afford and keep an eye on the rates to know when you should switch to the fixed rate option.

When considering different mortgage payment options it is important to access your individual needs; including your risk tolerance, intentions on moving, debt expectations and saving habits.  If you need help finding the right lender with the right rate option give me a call, I would be happy to help.

Have a great weekend,

Tracey

 

 

Note:  All mortgages are sold through Centum One Financial Group.

Source:  Mortgage Brokering in Ontario Agent edition, Sixth Edition, Joseph J. White.

 

Making Interest Tax Deductable

 

Just because you borrow to invest doesn’t mean the interest will be tax deductable.  For the interest to be deductible you must take out a loan and invest the proceeds into something that will earn you income; either from a business or property.

Other Conditions Include:

·        You must have paid the interest (or accrued it) in the year you deduct it.

·        There must be a legal obligation to pay the loan back, and

·        The interest rate must be reasonable, based on current rates for loans with similar terms and conditions

Remember your borrowed funds must be invested into something that would reasonably be expected to generate income, this could include; interest, dividends, rents, royalties or business profits.  Capital gains don’t count, they are not considered income.

Two Strategies that make loan interest tax deductable:

1.      Borrow to Earn - Take out a loan and purchase an income-producing asset; like machinery for a business, or a rental property.

2.      Rearrange Existing Debts – Convert your non-deductable mortgage by paying it off and then re-borrowing the money and investing the proceeds.  For example, if you have a $200,000 mortgage and a $500,000 investment portfolio, you can sell the portfolio and pay off the mortgage, then borrow $200,000 and reinvest it into your portfolio.

Points to be aware of when deducting interest:

·        You must be able to trace the direct use of the money.  Keep meticulous records and make sure you don’t combine borrowed funds with personal funds.

·        Be wary of investments that only produce capital gains – as this may not qualify for deduction

·        Compound interest – must be paid in the same year or it does not qualify

·        If your investment loses money – you may still be able to deduct the interest.

·        Selling your eligible investment and spending the money – for personal use will make the interest ineligible

·        Interest to earn tax exempt income – like in a TFSA or RRSP the interest will not be deductible

At the end of the year; remember the qualified interest can be deducted against all income sources, not just the property or business income that was generated from the loan.

As always we should discuss these strategies in detail to ensure they are right for your personal situation before you apply for the loan.  If you want more information or want to discuss further, give me a call.

Have a great weekend,

Tracey

Source:  original article by Stella Gasparro published on Advisor.ca 08-08-13

Should You Defer Your OAS?

 

The 2012 Federal Budget introduced provisions that allow you to defer your Old Age Security (OAS) benefits for up to five years.  Starting this month, July 2013, you need not take your OAS immediately upon reaching age 65, but can defer it up to age 70.  For each month you defer you will receive a 0.6% premium that will be added to your monthly pension, this works out to be a 36% increase if you defer for the full five years.

So when it the ideal age to begin?  The key is to determine the crossover point whereby depending upon the start age, what age you would have to be to receive the exact same benefit in nominal dollars.  So, assume you start taking your OAS at 65, rather than waiting to age 70 (where you would get 136%) at what age would you have to live past to receive the exact same amount of money?

For simplicity sake the table shows in calendar years, for a full comparison there would have to be 61 possible start months.

                                             Alternate Start Age

Start Age	66	67	68	69	70
65	80	81	82	83	84
66	-	82	83	84	85
67	-	-	84	85	86
68	-	-	-	86	87
69	-	-	-	-	88

 Comparing age 65 to age 70, you would have to reach age 84 to receive the same total benefits.  Predictably, as the start age moves up a year, the indifference age moves forward by one year.

This is a simple calculation.  A true measure of economic trade-off would require you to include some or all of the following factors:

·        An inflation factor to estimate time value of money, alternatively, an assumed rate of return on the amounts received

·        Household circumstances including your spouse’s RRSP/RRIF savings and other income sources, their OAS entitlement, current age and life expectancy

·        Your marginal tax rate, including the effect additional income will have on provincial and federal tax credits, and potential clawback of OAS itself

No matter when you decide to start receiving your benefits, remember you have to apply six months before your intended start date to allow for processing.  As always, if you have any questions, or need help figuring it out, give me a call.

Have a great weekend,

Tracey

 

Source:  original article written by Doug Carroll, VP Tax & Estate Planning, Invesco Canada.  Originally published in Advisor’s Edge Report. Advisor.ca 06-26-13