Not All Credit Cards Carry the Same Credit-Worthiness

I was pretty excited to see that I accumulated $1,800 in travel dollars on my visa card only to find out I'd been had!  Well, maybe....

Sometimes we just accept status quo for awhile thinking we have the best financial products available or maybe we tend to give our local bank all of our business but is it always the best solution for us?  Often, we do have the best product available when we first got our cards but our world is dynamic, not static, so what was the best financial product out there simply isn't any longer.  With today's competitive world we have to re-think our financial picture, at least annually.

Credit cards are a hopeless mire of confusion...obviously meant to be, to confuse the consumer. I mean why have a two tiered system...." for every dollar you spend you get 3 travel points and you need 10,000 travel points to get a $50 credit towards your travel".  Why not say "you have to spend $3,333 to get $50 travel points"?  Because it seems like a lot to spend for such a little reward, right?  Not only that but some cards offer bigger rewards for groceries and fuel as opposed to purchases made with our "disposable' income...or credit...for that matter.

If you want to do a quick comparison of what is the best deal for you, if you are interested in travel cards, check out this website http://www.rewardscanada.ca/cccompare.html

If your focus is not on travel then this website compares all the cards http://www.redflagdeals.com/deals/main.php/articles/credit6/ and it takes out the ones you want to cull, based on the service provider and some of the more classic features that credit cards tend to reward it's holders with.

In the end it appears shopping "for" a credit card can be much more difficult than shopping "with" a credit card!

House Inspections ~ Worth The Effort???

You love the house you just saw on your search for a new home.  Do you put a clause in the offer to purchase for a home inspection?  What you REALLY need to know when choosing a home inspector!!!

No, I'm not going to talk about the house inspectors credentials and everything else you have probably heard on TV.  I'm sure you know that already.  I'm going to give you a warning that you, most likely, haven't heard before.  But first, let's talk about the "Should I? or Shouldn't I?"

Your house is going to be one the single one investment that you will put most of your money into.  Even if you are a multi-millionaire your house will probably be representative of your wealth.  Those pictures of Tiger Woods home floating around the Internet come to mind.  What also comes to mind is the phrase, "A new broom sweeps well.".  When you see the house of your dreams you are not thinking about the potential mold behind the walls and water damage that has been covered up in a 'staging' effort.  That house is perfect, in your mind...but is it?

I remember the time I went to see a house that I was considering purchasing and the teenage child decided to take a shower at the time of the viewing.  I opened the closet under the bathroom and the amount of water seeping through the ceiling ensured that I wasn't coming back!

As you may have already ascertained...a home inspection is a must.  Paying a few hundred dollars can save you, potentially, thousands.  You may decide to buy the house anyways but armed with new information the seller may agree to a lesser price considering the price of the fix-ups.

OK, so here's something that no one tells you.  Do Not use the home inspector that the reals estate agent recommends.  I know you trust your real estate agent, otherwise you wouldn't be working with them to find your dream home.  Remember, that real estate agent gives many referrals to that home inspector.  The home inspector really wants to help the real estate agent sell the house or he/she may not get much more business from this steady referral base.  I'm not suggesting that home inspectors will lie on their reports but they may not delve much beyond the letter of the law when it comes to their disclosure.  House inspectors must cover a number of points to do a proper inspection but it doesn't cover Everything.  Personally, I think it's more likely that if the house inspector that you hire, that is working just for you, feels there may be issues beyond the scope of what is necessary for them to inspect they might be more willing to disclose this information than if they were referred by the professional that is trying to push through the sale.

A Legal Means to Avoid Paying the Tax Man.

Who wants to pay tax when you don't have to, right?

I know I certainly do not so as soon as the clock struck midnight on December 31 I sent a message to my administrators asking them to transfer $5,000 from my non-registered accounts to my Tax-Free Savings Account (TFSA).

I really do not like the name the government gave to this tax-free haven as it's title often misrepresents the benefits.  It's not a savings account, per se.  It can be an investment account so that you can put any stocks, bonds or mutual funds into your TFSA and any interest income, dividends and capital gains you receive are not subject to tax!  Calling it a 'savings account' has led clients to believe that you have to put the funds in a 'savings account' at the bank earning today's low rate of interest rather than use a more effective investment strategy and they tend to dismiss this strategy all together.  What a missed opportunity!!!

What's even better is that if you have come into a windfall in 2011 and have not been contributing over the past 3 years you can catch up and put in $15,000 all at once!  The rules are that you can contribute $5,000 per year from 2009.  Unlike a RRSP you will not receive a tax deduction for your contribution but when you take the money out it isn't taxable income either (which it would be if you took it out of an RRSP).  You can also replace the money you took out.  Let's look at this example.

Let's say in 2009 I put in the allowable $5,000 and then again in 2010 so now I have $10,000 in the TFSA (I'm not going to add any returns for the purpose of this example).  I decide I want to go on a vacation and take the money out so I take out the whole $10,000.  In 2011, I win the lottery and I can put in $15,000!  That would be the $5,000 amounts I am replacing for the 2009 and 2010 tax years as well as the new contribution for 2011.

Sometimes it is more important to use the TFSA for a savings vehicle rather than contributing to a RRSP!!!  It can also be used as a tool for income splitting.    If you want further information or clarification please feel free to comment or contact me @ kjankowski@tewealth.

Life should be stop and go!

When all systems are a 'go' you have to sometimes stop and look out the rear view mirror.  Often, I see clients who are so busy chasing future dollars but they don't stop to look after the wealth that they have already created.  Remember, life is dynamic not static, so once you have your financial plan in place it doesn't mean that task should be off your radar forever.  As we chug along we should stop, at intervals, to re-assess the validity of our previous financial commitments.   A few things to reflect are:

1)  Is my Will still up-to-date?  What about my Power's of Attorney, both financial and medical?
2)  Is my portfolio working for me?  If not, is it time to consider a different strategy....????
3)  Is my retirement planning in place?  Will my pension be enough?  If not how much do I have to supplement?
4)  What will happen if I die tomorrow?  Do I have enough insurance to ensure my family is not hit by financial hardship?  How much is enough?
5)  Do I want to help my kids with the cost of post-secondary education?  Are they thinking of going to school and staying home or are they planning to leave the family home to attend school?
6)  Do I have elder care issues?  What is going to happen to my aging parents/grandparents?

So how often is reflection required?  I advise my clients to reflect upon these issues on an annual basis.  Pick a birthday, end of the year, June 1st (half way through the year), anniversary or some other date that is going to trigger you to remember.  All too often these questions get ignored and then when we are faced with issues we are often ill-prepared.  After all, spending a few hours every year ensuring the wealth you have already created is  well looked after is worth putting aside the potential for a few hours worth of potential future value, isn't it?

Divorce? Remarriage?

Remarriage? Who wants to think about the legalities of anything past signing the new marriage certificate when you are getting married again?  For most, remarriage is a significant turning point of a renewed beginning with all the hopes and dreams that most of us lost during divorce or widowhood, hopefully, with the lessoned learnt from the first experience.

Who wants to think about legals issues and considerations of the impact on others when we want to be selfish and focus on our 'special day'?   Before walking down this isle or, if you prefer, standing on a beach or overlooking a volcano to say your wedding vows you may want to consider the complications that might arise which may cloud your bright, shinny future.  Ben Franklin said, "An ounce of prevention is worth a pound of cure".  In this case having your remarriage legal issues well in place before you promise the rest of your life to another may add to the relief allowing you to actually enjoy your 'special day' and save you a lot of money should the unthinkable come to fruition.

Here's the link to my story......it may save you a fortune and your family many headaches to ensure you have everything well plannned out beforehand and that your estate is actually handled in the way you had intended it to be handled.

http://www.advisor.ca/advisors/news/industrynews/article.jsp?content=20100712_093205_4840

Spousal Loans ~ Potentially saving Thousands!!!

I saved a client over $23,000 a year employing this strategy, a YEAR, in taxes!!!!!

OK, so....this is how it works.  You have to be married.  Your spouse has to be unemployed or have a big variance in income to employ this strategy.  It's a form of income splitting that is a way to avoid paying taxes that is completely legal.

Canada Revenue Agency (CRA) rules that a higher income earning wife, for example, cannot gift her husband a large sum of money to invest to take advantage of his lower marginal tax rate. Any investments made on his behalf must come from his earned income, otherwise the income (in the form of interest, dividends and capital gains) is attributable back to the wife.  If, however, the lower income spouse does the savings and the higher income spouse pays the bills then it's OK to attribute any income from investments to the lower income earner PROVIDING that he does not invest, annually, more than her makes net of taxes.

If, however, you have a spouse who has no income then you can lend that spouse money at CRA's prescribed rate (currently 1%) and then that spouse can invest and any growth attributed from the investments are taxed at their lower marginal tax rate.  Because the spouse is borrowing to invest and is earning income from the investment then the spouse can also write off the cost of borrowing (ie:  the interest charges) on their income tax return.  The lending spouse, however, must claim the interest as income but at the low rate of 1% the cost is more than offset by the spouses lower marginal tax rate.

Really want to help your kids understand how it all works?

OK, so you're getting closer and closer to retirement and maybe it's a fleeting thought or maybe it's outright panic but....have you saved enough?  Thinking that most of us do not want to be living in our children's basements at retirement perhaps we can also help our kids to have the answers earlier in life, rather than have history repeat itself.  The moment your young one comes home and says they have a job take 18% of their income from them in a form of savings.  Open a RRSP for them and make a contribution, annually or monthly if there is enought to work with.  There is no age limit to RRSP contributors.  There may be limits on what types of accounts they have in that they cannot 'trade' in the market until they reach the age of majority but they can have a deposit type RRSP at your local bank as long as they have earned income. 

Effective parenting comes from two different directions.  One, you are 'forcing' your children to take an interest in learning about investments.  Believe me, if it's their own money they will soon be asking about mutual funds, stocks, bonds and the like.  The biggest effect, however, is their savings at retirement.  OK, so what 17 year old is thinking about saving for life after 65 especially when there are so many things a young person wants to do NOW!  If you save earlier it is much better than starting later.  For example, a person age 25 saving $5,000 per year will have $1,000,000 at age 65 compared to a 45 year old saving double the amount ($10,000) which will end up with $400,000 at the same age (both based on a consistant 7% return).  That's a valuable difference.  But wait...there's more.  Because your impressionable youngster does not have a big marginal tax rate you needn't deduct the RRSP contribution amount until they start working full-time in their future careers.  You can carry-forward the contribution so that once they start working they can use all or some of all the accumulated contributions when they will receive more of a return for their money.  Also, it may motivate your youngster to contribute to their own RRSP's if they are aware that they can use those funds towards a down payment for their new house.

Now wouldn't that be kinda cool?   Down payment for their new house???? A RRSP account and a learning lesson about how to invest..........???   I think so.......

Leveraging? Debt?

Bad words, right? Most of us struggle a good portion of our working lives to pay off debt whether it be in the form of car loans or mortgages so the word tends to have an air of negativity surrounding it. Debt, however, is a great enabler of our economy. Without it most of us could not afford the nice homes we live in or the opportunity to own our own vehicle.

What about the financial planning debt consideration "borrowing to invest"? If you borrow to invest Canada Revenue Agency allows you to write-off the interest charges. Sounds great, eh? Like 'free' money almost....but wait! There are risks associated with this strategy that you must know before you put this consideration into practice. Most of the pitfalls and, conversely, the potential gains, are all based on market timing and performance. If you borrowed, let's say, $100,000 back on March 10th of last year and invested it in almost any market then you, most likely, would have seen this strategy work wonderfully for you. With the market at it's all time low (in the most recent of years) and the exact day of the turnaround you may have fared....as an example....10% and the loan was, maybe 5%. Of course, dependant on your marginal tax rate, you still would have done more than OK.

The pitfall, however, is if you borrowed to invest that $100,000 and the market drops. Even with the advantage of being able to write-off the interest on your annual tax return you would still be paying for a loan (less cash flow) to pay for an investment that was devalued considerably. Then, my guess is, you would not be too happy with this strategy.

Borrowing to invest is OK for people who understand the potential pitfalls and how are willing to take on the additional risk associated with this strategy. For those who are good at market timing it can be very rewarding...