Why I still love boring old GICs

GIC stands for “Guaranteed Investment Certificate”. They’re fixed term deposits that you make, for which your money is locked up for the term of the GIC (usually 90 days to 5 years, depending on what you choose). They typically earn a slightly higher interest rate than your average savings account, which is the tradeoff for the illiquidity of your investment. Cash out a GIC early, and you forfeit the interest earned. It’s for this reason you should not buy GICs unless you’re absolutely certain you will not need to withdraw the money before the end of its term.

Many people are surprised to learn I use GICs, let alone like them, since I’m such an advocate of riskier, high-return investments like stocks. With interest rates as low as they are, there doesn’t seem to be any real tradeoff to keeping your money in a GIC vs. a simple savings account — if you dare opt for a low-interest investment vehicle at all.

But I think GICs are useful simply because they’re such a pain in the ass to get your money out of.

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Comparison of interest earned on a $3,000 3-year GIC vs. $3,000 in a savings account at Tangerine

 

I use GICs within both my TFSA and RRSP. It’s where I park money that I know I won’t need to spend for a few years, and in these tax-advantaged accounts, I love the interest boost a GIC gives over a savings account, even if it comes at a price of reduced access to my cash.

I also like the security a GIC offers. Every day that I check my balance, it’s higher than the last time I checked it. Contrast this to my stock portfolio where the bulk of my money is parked. In times like the past few weeks/months with the price of oil dropping and the stock market trying to figure it’s shit out, my portfolio is now large enough to see up to four-figure swings in a single day. Sometimes I log in and I’m hundreds of dollars down on just one stock. Yeah, I tolerate it, but it still sucks.

GICs on the other hand are placidly predictable — they never go down. I’m not risk averse enough to park my whole portfolio in GICs, but I will always, always, always hold 5-10% of it in cash, and the bulk of that is in GICs. It protects my bottom line and helps me sleep better at night.

But the real reason I lock money up in GICs is so I don’t do anything stupid with it.

Sometimes I get excited about an idea of what to do with my money, whether it’s a stock to invest in, or the idea that I suddenly “need” something that’s insanely expensive. I’d have no problem withdrawing this money from a savings account and promising to pay myself back later (ha! like that ever happens), but the pain point with GICs is just high enough to keep me from making a withdrawal for a needless expense on a whim. Usually by the time the GIC maturity date comes around, I’ve had a few months, or really years, to ponder how I would best like to use those funds.

GICs are perfect for savings you want to protect from losses such as:

  • your Emergency Fund
  • savings for a down-payment on a home
  • the cash portion of your investment portfolio
  • any large amount of money you will need to withdraw in less than 2 or 3 years

So yes, I have thousands of dollars tied up in GICs earning minimal interest (well, not too minimal on those GICs I bought years ago when rates were better!) and I like it just fine.

Truthfully every different savings and investment vehicle has something to offer — that’s why there’s so many options. You have to choose what’s best for you based on your risk profile and financial plan. For me, GICs will always make up a small part of my financial assets, and in my opinion, add more than their worth to my bottom line ;)

Should You Contribute To An RRSP or TFSA?

I know I’ve written about this before, but this is a topic that needs to be addressed regularly because the answer is always different depending on your age, income, and financial personality!

As of January 1, the TFSA contribution limit grew by $5,500 to a total of $36,500 for anyone over the age of 18 as of 2009. If you came of age after 2009, you have $5,000 to $5,500 less in contribution room for each year you missed. No worries though, you can contribute to a TFSA until you’re dying day, so you have a lot of time to catch up!

The RRSP limit is 18% of your gross income each year, to a maximum of $24,270 for 2014 (you would have to earn over $130,000 last year to get this). Since RRSP contribution is determined by your income, and the limit traditionally increases each year, how much contribution room you have is unique to you and your personal income history. You can begin contributing to an RRSP as soon as you get your first job, even if you are under the age of 18, but you have to stop contributions at age 71.

You can view your RRSP contribution room on your Notice of Assessment when you file your income taxes, or on the Canada Revenue Agency website. You can also check your TFSA contributions and room on the Canada Revenue Agency website, though these aren’t always up to date. It is worthwhile to keep your own records for each account to ensure accuracy.

What most people struggle with in their 20s, however, is not how much they’re allowed to contribute to each account, but which account they should contribute to in the first place.

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A ROUGH GUIDELINE of where to allocate your savings based on your income. These graphs are based on a savings rate of 15% for incomes under $50,000 or 30% for incomes greater than $50,000. As your income increases past $70,000, you will save less of a percentage in registered accounts and increasingly more in unregistered accounts.

Many Canadian personal finance websites and blogs will insist the rule is always to max out your TFSA first, before you start contributing to an RRSP. For many 20-somethings this is good advice, because their incomes are typically low and they want to have ready access to their savings. However, if your income is above $50,000, which account is best for you gets a little murkier. Below is some general guidelines for contributions to a TFSA, RRSP and unregistered accounts based on your income.

If your income is less than $50,000 per year, contribute only to a TFSA until it’s maxed out. 

There’s no point in contributing to an RRSP on a small income if you still have contribution room in your TFSA. It doesn’t do anything for your tax-wise, and you likely can’t afford to aggressively tackle RRSP contributions after you max out your TFSA. It’s in your best interest to treat your TFSA as a retirement savings vehicle rather than a revolving-door savings account, so even though you can save for items like a house downpayment or a wedding within the TFSA, there’s no point — you don’t need to avoid taxes on your procrastinated spending, you’re probably not being taxed much to begin with. This is one of the reasons I’ve opted to treat my TFSA as long-term, retirement savings rather than just general savings.

If you’re earning $50,000 or less per year, the annual TFSA contribution room essentially represents 14%+ of your net pay. I’m a big advocate of saving at least 30% to 35% of your income, but that’s hard to do if you have a lot financial obligations. Depending on how high your expenses are or if you have debt, maxing out your TFSA may be enough of a challenge itself. If you are lucky enough to have money left over for more savings after maxing out your TFSA, you can put it in an RRSP and claim the deduction in future years. Alternatively, you can save in unregistered accounts, particularly for future purchases that don’t contribute to your long-term wealth building, like a wedding or a car.

If your income is between $50,000 and $70,000 per year, contribute both to a TFSA and RRSP. 

With an annual income greater than $50,000, you can reduce your taxes by contributing to an RRSP, but the TFSA is still a great wealth-building tool. For this reason you should contribute to both of these accounts, with the intention of maxing out your TFSA and secondly building up your RRSP.

I started contributing to an RRSP when I was 25. My income was ~$50,000 and I found it was relatively painless to tackle both the RRSP and TFSA… mostly because my RSP contributions were mandatory through my employer (you can take a peek at my old paycheque here!). I continued to make small contributions to my personal RRSP throughout the 2 years I worked at my old job, but my primary focus was maxing out my TFSA (and paying off my $21,000 student debt, of course!).

How much you choose to contribute to each account is ultimately up to you, but your ultimate goal should be to max out both. If you succeed in saving 1/3 of your income at a $70,000/yr salary, this will be enough to max out both your TFSA and RRSP annually, with some leftover to catch up on missed years or begin building wealth in unregistered accounts.

If your income is greater than $70,000 per year, contribute to an RRSP before you contribute to your TFSA.

If your income is north of $70,000, savings should go towards your RRSP before your TFSA, but you definitely earn enough to tackle both. By contributing to your RRSP, you’ll reduce your income taxes and you can use that money you save to put into your TFSA. If you’re living well within your means, you probably even have money leftover after both the TFSA and RRSP to invest in unregistered accounts.

You can use the “TFSA vs. RRSP” tool on WealthBar.com to determine how to best split your savings between a TFSA and RRSP if your income is >$70,000.

For ease of bookkeeping, you might wish to max out your TFSA first in the first 1-2 months of the new year, and then spend the rest of the year focusing on your RRSP. Or you can allocate a monthly contribution to both accounts, and an unregistered account. Regardless, you’ll be able to do both. If your income is over $135,000 your RRSP and TFSA contributions will be less than 1/4 of your net income, leaving you a lot of money leftover to invest in unregistered accounts.

Individual circumstances can determine which strategy is best for you.

As a student that funded my own education, I’ve enjoyed a tuition credit for my taxes almost every year. By the time I finished off all the the tuition credits I had amassed for my undergraduate degree, I went back to school for my MBA, which earned me a whole bunch more. Tax credits like these can change which account works best for you: if you have a lot of income tax advantages, you might not need more from contributions to an RRSP. Likewise, things like running your own business or having an unpredictable income can influence where you put your savings, since the TFSA is more liquid than the RRSP.

Your ultimate goal should be to max out both the TFSA and RRSP, and you should focus on ways to increase your income in order to do so.

Right now I’m contributing over $1,000/mo to each of my RRSP and TFSA. This will let me max out my TFSA this year, at which point I’ll redirect the funds to maxing out my RRSP. Because my income is >$70,000, the RRSP is a huge focus for me, but since I can max out my TFSA in less than 1 year I want to get that done as soon as possible. I will likely claim some of the income tax deductions for my RRSP contributions, but I think I’ll carry most over to future years, as I’m expecting my income to continue to increase.

How do you split your money between the TFSA and RRSP? What is your strategy for maxing out either or both?

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?