In my last blog, I discussed strategies for preparing to meet a financial goal. This consisted of first clearly defining SMART features for your goal, then smoothing cash flow and automating the saving process to ensure the maximum likelihood of success.
Once your goal of Renting or Buying has been set, your budget and cash flow understood, then it is time to look at the mechanics. Below, I will discuss some of the advantageous tax or governmental arrangements you can utilize. As well, there are certain account types which are more efficient or have unique qualities you may be able to benefit from, so I will outline some appropriate matches in terms of investment vehicles and account types.
When it comes to Moving:
If you are moving greater than 40 km closer to your place of work, or where you are studying, then you can recoup some of the costs by including those expenses in your taxes for that year. Some of the things that you can claim as an expense from the move include:
- Transportation and storage costs(such as packing, hauling, movers, in-transit storage, and insurance) for household effects
- Travel expenses, including vehicle expenses, meals, and accommodation, to move you and members of your household to your new residence
- Temporary living expensesfor up to a maximum of 15 days for meals and temporary accommodation near the old and the new residence for you and members of your household
- Cost of cancelling a leasefor your old residence, except any rental payment for the period during which you occupied the residence
- utility hook-ups and disconnections, legal changes to documents that contain your address
When you are seeking to rent you should be able to accumulate first and last month’s rent within less than two months. Any longer than two months to accumulate the larger first payment, then cash flow could become a problem in the near future. Much of your income would be directed toward accommodation and little would remain for quality-of-life expenses, making the scenario unhappy and unlikely to work beyond a few months.
When accumulating the money for the first payment, efficiency and time horizon are what we need to think about. The most effective way to save money for goals, other than retirement, is to use the TFSA (Tax Free Savings Account). The TFSA is offered by banks, credit unions, investment firms, and others. Its purpose is to allow you to save money and avoid paying tax on any of the interest/dividends/growth you earn. For more on the TFSA, please see http://www.cra-arc.gc.ca/tfsa/
To keep the math light, I’ll use a straight forward example. In your account at the bank, if you have $100 and it earns $1 for the year, you may need to pay as much as 26% or 26 cents in taxes, depending on your tax bracket. In a TFSA, you keep the whole $1. Looking at fees as well, there are a variety of ways to get free TFSA’s and avoid the service or account fees that can eat away at your funds.
A benefit, and a drawback, of the TFSA is that it is highly accessible. Saving this way allows you to have access to the savings in the event of an emergency, but it also leaves more room for your goal to be sidelined by undisciplined withdrawals. Depending on the institution, there can be time delays (up to one week) receiving funds from the TFSA, so that can help reduce impulsive purchases. Some TFSA accounts are accessible through a debit card at institutions like banks, but investment brokers and others limit such access, meaning the funds are more likely to remain patiently to be directed towards your goal.
Because you should be saving for two months at most, it is important to save in something that is very steady. While the TFSA can hold GICs (Guaranteed Investment Certificates), stocks, bonds, mutual funds and more, for saving in this scenario it would be best to hold a simple high interest account in the TFSA. It will receive some interest, increasing without the risk of a sudden drop, and tax-free at that.
When buying a home, the two most efficient account types are the RRSP (Registered Retirement Savings Plan) and the TFSA (Tax Free Savings Account).
You may be wondering “Why would I use the RRSP, isn’t it for retirement?” While that is the main purpose of the RRSP, the government recognizes that people may need access to their money for big expenditures, namely buying a house (Home Buyer’s Plan) or returning to school (Lifelong Learning Plan). For home buyers, if you are purchasing a home and you have not lived in a house you or your spouse owned in the last 4 years, you are allowed to access up to $25,000 (each) from your RRSP tax free. You will need to repay any money withdrawn back into your RRSP before the end of 15 years. To see more specifics about the RRSP and the Home Buyer’s Plan, please refer to http://www.cra-arc.gc.ca/hbp/
The TFSA has no limitations on withdrawing and does not require any repayment. Because the money grows tax-free, you will be able to achieve your goal that much more easily. For more information on the TFSA, please see the section in Renting that discusses that account type or reference http://www.cra-arc.gc.ca/tfsa/
Investment choices for an RRSP and TFSA are nearly identical, and an important guideline to follow with investing is to keep an eye on your time horizon (the amount of time you will remain invested before needing the money.)
If you are aiming to purchase a home in 1 to 2 years, then that is considered a short horizon and investments that are less risky should be top considerations. These would include GICs (Guaranteed Investment Certificates), conservative mutual funds, bonds in stable governments and companies. Stocks are an option, but should be limited to low risk and/or well established companies.
If you are aiming to purchase a home beyond 3 years, that is a medium time horizon and allows for a moderate level of risk to enter the picture. A conservative or balanced mutual fund, and a broad selection of stocks and bonds now become a consideration.
Regardless of which account type seems to be most appropriate, it is important to speak with a financial professional. There are many considerations when it comes to effective saving and only a few are able to be shared here. One of the most common questions, RRSP vs TFSA, requires a look at your specific situation to receive the proper advice. The selection of an experienced and caring professional to work with will allow you to feel more confident, apply more knowledge and efficiency to your efforts and will ideally result in a more successful completion of your goal.
All my best, and reach out of you have any questions.
Insurance Advisor, HollisWealth Insurance Agency Ltd.
Licensed Assistant, HollisWealth Advisory Services Inc.
613-634-3191 Ext 4
This Blog Post was prepared solely by Sean Cassidy who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this blog post are those of Sean Cassidy alone and they are not those of HollisWealth Advisory Services Inc. ® Registered trademark of The Bank of Nova Scotia, used under licence.
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