Starting Out

If you’re among the lucky ones, your parents were able to start a bank account for you as a child. You’ve already learned about financial matters such as the benefits of savings and compound interest. But if you aren’t one of these lucky people, then now’s the time to start. The best way to start is with a monthly plan that stretches you a little, but doesn’t really impact your daily living. If you’re still in the lower tax brackets, you may want to consider first accumulating enough in a savings program: bank account, mutual fund, etc. for at least three months of living expenses. And don’t touch this money, for any reason other than in dire circumstances. It’s there as a last resort. Never use savings to pay down credit cards, no matter what you’re banker/accountant/best friend might say. When most of us use savings to pay down credit cards, we’ll end up in very short order with our credit cards back where they were and no savings left in the bank. Instead, bite the bullet and get rid of the credit card, decrease your spending and pay down the card. This pain will usually help all of us realize that this easy spending method can be painful in the long run. If you find this isn’t an option, redirect your saving payments to your credit cards until they’re paid off. Then start your savings again. You’ll still be used to making this payment.

You’ll be amazed at how soon this consistent saving will build up, without much pain.

As your income increases and with it your tax bill, you may want to start making these payments into a registered retirement fund. Registered Retirement Funds also offer some ideal options for withdrawal, without incurring income tax, when you are using the funds for home purchase. There are repayment stipulations, so you need to do some planning when considering this.

Established

You’ve now settled in your occupation with some security and are earning a steady income. Now you feel ready to make some long-term financial decisions. Where should you start?

Emergency Fund - you’ll want to make sure you have 6 months living expense put away with easy access, but not too easy! This will usually be a non-registered investment where you can earn good interest and is liquid in case of need, without a heavy penalty to cash out. Often people will need their savings if job market conditions change and they lose their job. Bad market conditions can have a double negative effect as the value of their savings drop as well. So you may want to be aware of this when picking where to invest this fun.

Tax Savings - Registered Retirement Savings plans offer the best means to accumulate money and offer tax savings. R.S.P.’s are nothing more than investment vehicles that qualify under a specific Section of the Income Tax Act. Mutual fund companies, life insurance companies and banks offer qualified investments. In many instances the investments offered are the same as those for non-registered investments.

When considering R.S.P. investment, the tax savings are the same wherever you invest, so the crucial facts to consider should be the security and performance of the investment.
This will eventually become your income when you retire and will require review on an annual basis to make sure it will meet your needs in the future and meets your tax needs today.

Education Planning - Once your emergency and retirement funding is in place, you may want to then consider how to fund your children’s educations. There are a number of Registered Education Funds available. The government does offer some funding for plans that meet their requirements and this is an option that should be thoroughly reviewed. Not all R.E.P. offer the same benefits, options and security.

Mature

I want to clarify that by “mature”, I’m implying high income years and lower expense years, not that you’re not still young in age and/or at heart.

You’re the client who is now at your peak earning years with children who have either left the home or are soon to leave. Your focus now is on planning for those retirement years. What should your objectives be?

Emergency Funds - In today’s market for the seasoned, older employee, job security has never been worse. Due to the current trends it is especially important that any emergency fund have at least one year’s living expenses available. Emergency funds should be fairly liquid, but not in a savings account.

Registered Savings Plans - Usually at this stage, people find that their income tax deductions drop as the kids leave home or start work. This is a good time to offset the decreased deductions and expenses by maximizing your RSP contributions today. You should also use any past RSP room that has not been used so as to ensure enough capital is available when you choose to retire.

Insurance Planning - This is an excellent time to also review and plan for estate insurance needs. While young, we use term insurance to provide the larger amounts of coverage needed while children are young and debts are high. Now its important to plan for not only the right amounts of insurance, but also the right type. This is necessary so that at retirement you have choices as to how to structure your retirement income to give you the highest spendable income, still look after the income needs of your spouse, provide any inheritance you want, and do this in the most advantageous tax manner. By having permanent insurance, you will have the option of planning to liquidate all your retirement capital during your lifetime and using life insurance to provide capital for your spouse’s income needs (they can do the same) and any inheritance needs. You may want to plan to have your insurance plans fully paid for before you retire, or continue payments after you retire. However, now is the time to review your options.

Critical Illness - In this planning process, one of the components has to be a review of the effect of a critical illness on your retirement plans. As you are probably aware, the Canadian medical system is not presently at its best. If you needed medical treatment that was not readily available, how would you plan to pay for these services and where would the money come from? How would this affect your retirement planning? Although not directly related to taxes and savings, I’ve mentioned this as it can have a very negative impact if not included as part of your savings plans. Obviously, there are insurance plans available to help offset this possibility, but are based on health and family history, which is not necessarily the easiest insurance to qualify for.

Long Term Care - I’m mentioning this topic because like a critical illness, it needs to be considered when planning future retirement capital needs. Again, there are insurance plans offered for exactly this purpose.