TIAA CREF – Financial Help For Young People

TIAA CREF – Financial Help For Young People

If you are a young adult, it’s very likely that finances are becoming a part of your daily thinking, more than ever before. Managing your money is tough. TIAA CREF is there to help you figure it all out, whatever your needs. If you can do it with money, TIAA CREF can help you learn about it.

Do you need to figure out how to stretch your paycheck and save? Are you stressed out under the weight of student loans? Maybe you need a hand developing your emergency savings, or maybe you are preparing to embark on your first investment. The grown up financial life is pretty complex, but it’s something you can learn to handle. Let TIAA CREF answer all your questions and offer the best advice you’ll find.

Many young people are on their own for the first time in their lives. This time can be especially challenging financially. Lots of these adults are living on their own for the first time, paying bills and managing budgets. These are skills that typically aren’t taught in schools. Some young people are embarrassed to ask for help, but this is what we specialize in. TIAA CREF has no expectation of your financial expertise. They are happy to answer any questions you might have, help you understand the details of your financial life, and set a good course for the future. Sit down with one of our advisors. When you stand up again, you’ll have a much better understanding of how to approach the next week, the next month, and the next decade. The decisions you make now will make a big difference in the way your life proceeds. Luckily, they have the knowledge and experience to set you off in the right direction, and they’ll always be there during the rest of your financial life, whatever you need.

Your TFSA is For Saving For Retirement

The Tax-Free Savings Account is the best saving and investment vehicle available to Canadians. To date, you can contribute up to $31,000 (with an additional $5,500 of room coming available for 2015), and all the interest, dividends, and capital gains you realize in the TFSA are totally tax-free. You can hold any investment vehicle within the TFSA, from a savings account to common stocks, and you can withdraw your funds without penalty at any time. The only thing you have to watch is over-contributing to the accounts, for which there are steep penalties.

Under the TFSA umbrella, I hold cash in a savings account, GICs, and a brokerage account in which I buy common stocks and ETFs. My balance between these vehicles essentially represents my risk profile, which means most of my money is in stocks rather than cash.

As I’m making my financial plan for next year and years going forward, I’m changing my investment strategy to match a changing perspective of my wealth-building plan. Since I’ve decided I’d rather get rich than simply stay afloat, the way I manage my accounts is paramount to my plan.

One of the first ways I’ve decided to maximize my net worth is to

stop using my TFSA as a catch-all account,

and start treating it like the tax-advantaged wealth-building tool it actually is.

In the past, I’ve never managed to max out my TFSA because I always needed the money for other things. I came close in 2013, but then used a ton of my savings for my MBA tuition, and then the contribution limit when up $5,500 and I fell even further behind.

I have the opportunity to regain all lost ground and max out my TFSA in 2015. 

It’s not an easy task, but since I’ve committed to increasing my net worth by $36,500 in 2015 – coincidentally, exactly the amount the TFSA contribution limit will be in 2015. Because I already have money in my TFSA, only part of my net worth goal will be going into this account, and the rest will be going into my RRSP. (Otherwise I would have loved to simply call 2015 “project max out the TFSA” but alas, it is not an empty account).

Once the TFSA is maxed out, I’m doubtful I’ll have any reason to take money out of it in the near future.

Goodbye, TFSA. You're not spending money any more.

Goodbye, TFSA. You’re not spending money any more.

Instead, I’ll simply focus on continuing to increase if/as new contribution room is added each calendar year, and redirect my cash-flow to my RRSP until that is maxed out too. I realized I don’t want to miss out on any gains by making withdrawals from my TFSA. Any at all. Because of the tax protection of this account, I want it to grow, and keep growing, without me sabotaging the compounding of my investments.

Previously I used my TFSA for any kind of savings: vacations, tuition, and my emergency fund. But every time I build those savings up, I took them out to spend on whatever I planned, and missed out on that money compounding further.

It has since occurred to me that I don’t really care if I’m taxed on the $15 my vacation savings earns in interest over the course of a year,

I would much rather simply pay that and keep my long-term savings in the TFSA.

I have unregistered savings accounts that I’m starting use for planned spending. For example, the joint savings account my fiancé and I set up to pay for vacations and our wedding next year. I also opened a margin account with my brokerage, so I can invest in stocks outside my RRSP and TFSA. This provides a lot of flexibility in how I manage my money, and lets me leverage all the available tax exemptions and deferrals while maximizing the bottom line of my net worth.

Thinking about my TFSA as retirement savings will take some getting used to. One of the reasons I always sung the praises of RRSPs is because there was such a tax penalty for taking money out of these accounts, I would never be inclined to make an early withdrawal. However, with the TFSA the government of Canada isn’t going to care if I liquidate my investments to go to Mexico, and as a result I have to be self-disciplined enough not to make early withdrawals. Like most things, I expect this to be easier said than done.

But the reasons to treat your TFSA as retirement savings are easy to see.

Unlike RRSPs, you’ll never pay taxes when you withdraw money from your TFSA, which means if you build up a mountain of cash over your working lifetime, you’re not going to lose as much of it to the tax man when you’re old and grey. One of the most annoying things about saving in an RRSP is knowing that some of what you’re saving is just to pay taxes. Think about that next time you pat yourself on the back for saving whatever percentage of your income! Kind of takes the wind out of your sails, but that annoyance is non-existent with the TFSA.

The second reason is if you change your thinking about what the money is used for, that will also deter you from making a withdrawal. In other words, you don’t necessarily need a real tax penalty to keep your fingers out of your bank account, knowing that money is for something other than spending will probably be enough to keep you from spending it. After all, if you have the discipline to save up for a vacation or another major purchase, you definitely have the discipline to not touch your money for a few years.

So now I’m counting the contents of my TFSA as retirement funds, and saving for things like vacations in unregistered accounts. I think I’ll be a lot richer because of it!

How We’re Saving $100,000 For A Down-Payment (P.S. I’m engaged!)

Greetings readers! I have some big news: My boyfriend proposed on September 21 and we’re engaged! He proposed after a 4km hike in the rocky mountains — and I used the car ride home to snapchat shots of the ring to all my cousins and call my parents.

me & my husband-to-be at my cousin's wedding this past July

me & my husband-to-be at my cousin’s wedding this past July

I’m still not used to saying “fiancé” but “my betrothed” confuses people and takes up too many characters on twitter.

We’re still deciding what kind of wedding we want — both of us have the same financial values, so it’s hard to think of spending tens of thousands of dollars on a single day. On the other hand, it’s hard for me to turn down the opportunity to throw a really big party ;) We haven’t set a date, but we’re thinking Fall 2015. Right now I’m in a rush to find a decent venue for that time. Many I’ve called area already booked for Sept/Oct next year, and I’m hesitant to go later because there will be snow on the ground.

I don’t know how much I’ll be blogging about wedding planning.

Firstly, because I know enough about the wedding industry to be an unwilling participant in much of the nonsense beyond a decent dinner and an open bar. I don’t care. I just don’t freaking care about bridesmaids and wedding colors and centrepieces and having a Say-Yes-To-The-Dress moment. This isn’t new: I’ve been singing this tune since 2011.

Secondly, because I’m so sick of reading “frugal wedding” posts (sorry recently married PF blog friends!) that I can’t justify contributing to the collection. There are hundreds, possibly thousands, of personal finance blogs that have done excellent posts on how to save money on your wedding. You don’t need me here, kids.

That said, I do have a lot to say about getting married, so I’ll be blogging about that soon.

We’ve been sharing finances since we moved in together, but now that we’ve committed to sharing a life together, we’re now sharing major financial goals. The first?

We’re saving six-figures for a down-payment on a home.

If you think that number is totally ridic, I don’t blame you. But I recently blogged about real estate prices where we live, and $100,000 is an appropriate sum to ensure we’re putting over 20% down. It’s important to pay for at least 20% of your home’s value in the down-payment to avoid insurance fees. By putting 20% down (or more, depending on the final purchase price), we’re ensuring a lower monthly payment, a more affordable mortgage, and starting with a strong equity stake in our first property.

How are we going to save such a large sum in 2-3 years?

The most obvious way is there’s two of us contributing, which means we each need to save $50,000. $50,000 is still a big number, but it’s not nearly as intimidating as $100K. Both my fiancé (god, still so weird to say that) and I are savers, so we’re not starting from scratch, and there are some tools to help us:

Each of us can withdraw up to $25,000 from our RRSPs under the first-time homebuyers plan to be used as a down-payment, giving us $50,000 together. I’ve set a personal goal to get my RRSPs to $100,000 by age 33, which means withdrawing $25,000 (that I have to pay back within 15 years) will not eviscerate my retirement accounts. Options like this are available all over the world, such as the Homestart first home buyers grant Perth, so it’s worthwhile to see what’s available where you live. It is very important to me NOT to have all my funds in one place, and that includes a home. Since I’ve already saved a significant amount of money in my RRSPs, my goal right now is rebalancing so I don’t have to sell more profitable investments, such as stocks, when I make the withdrawal under the first-time homebuyers plan. I’m hoping my RRSP withdrawal under the HBP will be primarily cash and a low-cost mutual fund, with the bulk of my retirement savings remaining in stocks and ETFs. I recently bought a 2-year GIC RRSP to plan for this.

This leaves only $25,000 each to save up outside of our RRSPs. Now, don’t get me wrong, $25,000 is not petty change, but with a 2 or 3 year timeframe it’s very manageable — mostly, again, because we’re not starting from zero. The TFSA contribution limit is currently at $31,000 with another $5,500 to be added for 2016. Since I withdrew a ton of money out of my TFSA over the past 1.5 years to go back to school for my MBA, I’m actually not sure if I’ll be able to max out my TFSA in the next 2-3 years since now I have to catch up and save up to the new contribution limits, but at least I can get over $25,000. Again, I am hesitant to sell profitable investments like stocks and ETFs or wipe out my Emergency Fund which I also keep in my TFSA, but it’s still the best account tax-wise for saving, so it’s better to put my down-payment fund money here than anywhere else.

When we buy a house and how much we put down will depend on a lot more than just saving up $100,000 — such as market fluctuations, interest rate changes, and even what city we live in (I think we’ll stay in Calgary, but I’d be open to moving to another major Canadian city if our jobs took us there). In the meantime, saving now means being prepared to take advantage of opportunities later.

What are your thoughts on our $100,000 down-payment? How much did you save for your first home? What are your strategies for putting money away?

Creating a GIC money mill in my Emergency Fund

I’ve developed a somewhat bizarre, somewhat creative, I think effective savings strategy for my Emergency Fund.

When I finally managed to find a summer MBA internship, the full-time income let me catch up on my finances. Combined with income from freelance writing and this blog, I started to inch ever closer to the income I enjoyed before returning to school to pursue my MBA. When the summer ended, my employer extended my contract for another month, and now as September closes, it’s been renewed again for October (I’ve asked not to continue past October though, so this gravy train is slowing down… but only so another one can get on its tracks, more on that later).

One of the first things I did with the extra cash was dump it into my TFSA, where I normally keep my emergency fund. Once the balanced tipped over $5,000 (my goal for this year), I started to wonder what the heck I was doing keeping that much cash on hand.

I hate leaving the $5,000 in cash of my emergency fund just sitting there earning 1.3% interest BUT I don’t want to invest money I might need to access immediately. I wondered:

is there a better place to save this money that leaves it accessible while earning a higher interest rate?

Sure is, kids. There sure is. I masterly contrived a bizarre and elaborate strategy I submitted to Mikhaila for approval (always good to have best friends that are also personal finance nerds) before implementing on September 1. Here’s what I’m doing:

1. Maintaining a “float” of $2,000 of cash in a tax-free savings account

 

2. Staggering a series of $1,000 3-year term GICs to mature quarterly beginning in 2017.

Why GICs? GIC stands for Guaranteed Investment Certificate which is an investment vehicle that traditionally pays higher interest than a savings account, but only if you don’t withdraw the money before the end of the term. The terms vary — anywhere from months to years — and the interest rates very with the term, with higher interests typically being offered for longer terms.

Tangerine offers some of the best interest rates on GICs available. You can sign up for an account using my Orange Key 32251507S1 and receive a $50 referral bonus. 

The GIC I bought pays an interest rate of 1.9%, which over its 3 year term, pays more interest than the same amount of money would earn in a savings account:

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comparison of how much interest $1,000 will earn in a 1.9% GIC vs. a 1.3% savings account over a period of 3 years

I plan to purchase my next $1,000 3-year GIC on December 1st, and then another on March 1, 2015, and so on every 3 months for 2 years. The first one will mature on September 1, 2017 and the rest will come to term on a quarterly schedule after that for the following two years.

What’s the point of this nonsense?

Well, first of all, 32 year old me will probably not be vehemently opposed to getting $1,000 + interest deposited into her TFSA every quarter.

I already have more than 3/4’s of my financial assets invested in stocks and ETFs, which means I’m not locking up any significant portion of my savings. If you’re trying to aggressively grow wealth, I would not recommend GICs, but if you already have a good chunk of change working hard for you in the stock market, a super secure investment might be just the balance you’re looking for.

Breaking a GIC and forfeiting the interest is just painful enough to deter someone like me who loves to raid her TFSA for this, that, and whatever. Money in GICs is less accessible, which means I can’t borrow from myself to cover an expense or a splurge then pay it back later. The money is locked up, and it’s gotta stay there!

The 3-year term is short enough that if interest rates do go up (they’ll go up someday right?), I’ll be investing regularly enough to catch it. If interest rates drop even further, I’ll have caught rates where they are now with some of my funds, ensuring a higher return than what the rest of my money is earning.

The $2,000 cash float in the savings account is a decent amount for quick fixes: a plane ticket to Salt Lake City to see my parents, a replacement phone if I smash mine or lose it, or almost 2 months of essential expenses (as you know, I contribute $1,250 per month to the joint chequing account I share with my boyfriend to cover my half of our shared expenses).

If I need more than $2,000 to cover an emergency, I can break one of the GICs. Because the GICs will be split in $1,000 increments, I can opt to break one (or two, as needed) of the GICs. This is a better option than had I dumped all my funds into a single GIC — if I only need $700 it’s a real shame to break a $5,000+ GIC for it!

*Note: When you break a GIC, you get back your money but you lose the higher interest rate. Sometimes you get zero interest, or you get interest at an even lower rate than a typical savings account.

Interested in trying this yourself? You only need to save $83 per week

Simply transfer $83 every Friday to a savings account and let it build up. Every 3 months, use the money (which has been earning interest too!) to buy a GIC. 

It will take two full years of quarterly investing to tie $8,000 up in $1,000 GICs — which means the first one will mature only 12 months after I put the last one away. I bought the first one at an interest rate of 1.9%, which means it will pay out $58 in interest at its maturity, but Tangerine updates your interest every day so you can see its current value anytime you log on:

Screen Shot 2014-09-26 at 2.10.51 PM

snapshot from September 26th

The Result In Tabular Form

Screen Shot 2014-09-26 at 3.02.59 PM

click to embiggen

The best perk of this strategy? I can change my mind! Because I’m buying GICs every 3 months, I can stop anytime and switch gears.

Lastly, the money doesn’t have to be for emergencies. I like to think that 3 years from now, I’ll be riding on 3 more years of improving my finances and I’ll need $1,000 (or $8,000) even less than I do now, but you never know. In any case, I’ll be able to keep the money as emergency savings OR use it towards…

If there’s anything I’ve learned from being a personal finance blogger, it’s that there will be no shortage of things I want to do with my money.

If you looked closely at the table, you may have noticed this savings strategy will save me nearly $750 above my $10,000 EF goal. This number could change depending how interest rates change over the next 2 years, but in any case it looks like I’m over-saving. If I’m adamant of sticking as close to $10,000 as possibly, I can simply opt to only deposit $320 in my last GIC.

$9,000 + $320 = $10,000 

No, really. Here’s how:

Screen Shot 2014-09-26 at 3.24.24 PM

I don’t think I will buy a $320 GIC, but I might opt for two $700 GICs in March and June 2015. After my convoluted internship hunt, I know finding a job after graduation might take some time, so I might want to tone down aggressive savings plans at this time:

Screen Shot 2014-09-26 at 3.43.04 PM

Having some flexibility in any plan makes it easier to stick to, and saving strategies are no different.

Thoughts on my bizarre EF money mill strategy? How do you maximize the interest you earn on liquid cash? What are your emergency fund goals?

Setting Financial Goals & Making a Plan (simple spreadsheet included!)

Setting reasonable goals is an important part of financial planning. However, many people struggle with determining what constitutes as “reasonable” and end up with stupid goals instead. We all have a tendency to dream big without actually planning or executing big, but there’s a way to stop setting yourself up for failure. I find shorter timelines are the answer to making and achieving goals. A short timeline necessitates a reasonable goal as well as provides a sense of urgency.

Below is a chart I regularly use in my own financial goal setting:

Screen Shot 2014-08-14 at 7.36.44 PM

 

Because I’m often managing multiple goals, I like to track them in one place so I know how much reaching for all of them will cost me — otherwise it’s so easy to think “I’m only saving $50 for this per month!” but if you’re doing it for 6 different goals you might end up feeling financially strapped.

Want the table for yourself?

I made the table using NUMBERS for Mac, but wordpress is currently not letting me upload the document. However…

Click here to download the EXCEL version!

Now I’ll walk you through it. The first thing you want to do is put in what you’re saving for, the interest/return rate on that account, what you currently have saved (it’s ok to set to $0!), and how much you plan to contribute per month.

Screen Shot 2014-08-14 at 7.37.48 PM

 

From my example you can see I’m starting with $6,000 and plan to save $604 per month (note: not real numbers!). The table will auto-populate with the data changes based on your inputs, but we’ll revisit that in a sec. The next step is to set your goals for each account by inputing them at the bottom of the table:

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Now the table might be doing wonky things based on how I’ve manipulated the formulas in each cell. Here’s what’s happening:

If you’re not saving enough each month for one of your goals, the “gap” cell will turn red and display the amount you’re short of this goal. In this example, I set the monthly saving of the Emergency fund to $80 a month, and now there’s a $25 gap between my goal and the amount I will actually finish with at the end of 24 months:

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$80/mo is not enough to save in order to meet my goal of having $3,000 in my emergency fund at the end of two years, so let’s say I increase my savings rate to $82/mo by changing the monthly contribution at the top of the table:

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Two things happen as a result: the number in the Gap row is now green, indicating that I’ve over-saved by $23 and some of the cells in that column have turned green:

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From the green-colored cells I can see that I’ll have met my goal. Always nice to be ahead of schedule instead of behind!

If I want to use this table for tracking my savings as well as planning, I edit the values in the appropriate cell at the end of each month. For example, when I click on the cell for January, the formula is as follows:

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But if I actually had $1,100 in that account instead of the $1,083 the table predicted, I will change that and enter my value:

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The rest of the table will auto-populate with the new calculated values:

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This way, you can go in to the table at the end of every month and enter in your new value and it will update the rest of the cells accordingly, and you’ll be able to see right away if you’re on track, behind or ahead of schedule — and you can adjust your monthly contribution accordingly.

Happy Saving!