The Debits and Credits of Divorce

The financial aspects of a divorce can play out differently for every divorcing couple.  At a time of high emotion you may want to protect yourself, financially by making some prudent choices.  Your bank ~ you want to make sure that they know about your situation.  Any money held in joint accounts likely only needs one signature to withdraw so you want to ensure you take your half out and place it in an account in your name only.  Ensure the bank also puts a hold on any credit cards that you jointly share.  Those country songs about seeking revenge and making the other spouse pay through reckless credit card spending came from somewhere.  You want to make sure that it doesn't happen to you.  Remember, you are still jointly responsible for that debt.  That means that even if your spouse is not paying the monthly payments on those credit cards...you should.  Any repayment can, hopefully, be settled through the separation agreement as part of the negotiation.  It's better to do it that way than end up alone with bad credit.  Another good exercise would be to close any credit cards you don't need. 


Remember those investment accounts, especially the registered ones?  Registered Retirement Savings Plans and Registered Pension Plans (as well as Tax-Free Savings Accounts) often ask for the account holder to determine a beneficiary.  If you chose your spouse you may want to contact the financial institution managing these accounts to change your beneficiary.  


Now that you have looked after the registered savings what about the regular savings investment s that you have?   Those assets and their distribution are covered in your Will so you will want to re-write that too. 


Your not finished yet....while you are re-writing your Will  you may want to consider re-writing your Powers of Attorney (PA).  Your PA covers both medical and financial matters should you become incapacitated. The last thing you want is your spouse to be calling the shots with the doctor as to your care, if you can't speak for yourself!!!  

The Secret of How to Negotiate the Waves of the Stock Market

Many people are already doing this, either directly or indirectly.  Maybe they're doing it but they don't know they're doing it.  The secret of how to take the nervousness out of investing is to make the conscious decision to allocate your investments in a strategic fashion. 

For example, I'm a Balanced investor.  What does that mean, for me?  That means that my asset allocation is 60% equities (or stocks) and 40% fixed income (or investments with a stated rate of return).  I stick to this asset allocation through good markets and through bad markets.  If my equities become 65% of my portfolio then I take 5% out and allocate it to the fixed income component, and vis versa.  This keeps me disciplined in my approach with my investment portfolio.  It also does something else ~ it keeps me disciplined in the 'sell high' and 'buy low' strategy that tends to bring about successful investing.

Currently earning an income, I may not be so worried about the fluctuations of the market as I will be when I am retired.  Without income replacement it is challenging to watch those dips in the market but my strategy of keeping 40% in fixed income will help me.  While equities are out of favour the less volatile fixed income component of my portfolio can become my major source of cash flow.  This way I can wait for the equity markets to return and I will not be forced to sell them while they are at their all time bottom price levels.

Having my portfolio balanced, from an asset allocation perspective, is the first step in negotiating the waves of the stock market.

Tax Strategies

Ok, so last week's bad word was debt and this week is 'taxes'!

I thought this may be a timely post considering that April 30th is fast approaching. So let's discuss a tax strategy that may save you money.

This particular strategy works if you have a large disparity of income between spouses because one spouse will have a higher marginal tax rate than the other. CRA rules dictate that if you have investable assets they must be derived from your income. In other words, a wife (assuming she is the higher income earner) cannot gift her husband monies to invest and take advantage of his lower marginal tax bracket. If she did then the interest, dividends and capital gains would be attributable back to her which defeats the purpose of changing ownership of the funds. If he is working she can pay all the bills and have her lower-income spouse do all the investing with the income that is attributable to him. This must be tracked carefully for CRA to legitimize this strategy.

If however, he is not working, she can loan her husband the money at the CRA perscibed rate of interst (currently 1%) and he can invest it and any returns would be taxable to him but she must also include the interest portion of the loan as income on her tax return. This strategy must be evidence by a loan document and the interest portion is payable to the wife by January 31 of any given year. Because the CRA perscribed rate is so low, at the moment, it would be an opportune time to utilize this income splitting strategy, if it was beneficial to do so. The question remains ~ what is the optimum amount to lend to your spouse??? Well, that question could be answered by your accountant or tax preparer by either assessing your 2009 filing or by doing a pro-forma tax calculation after the fact.

If this strategy does not affect you then stay tuned as next week's topic will also be about taxes and strategies to ensure CRA doesn't get more than it should.

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...