31 Jan

Preparing a financial back up plan

General

Posted by: Ian Vowles

We all know you are supposed to save for a rainy day.  Unfortunately not all of us do because we are not sure how to do it.  Here is a simple, step by step guide to help you prepare for the unexpected.

1.  Prepare a budget

You need to know how much you are spending before you can determine how much you can save.  First, write down all of your fixed expenses – the costs that don’t change from one month to the next and be sure to include a monthly payment for things that you pay once per year.  Also, add in some money to allow for things like home and vehicle maintenance.  Next, collect all your receipts for the next month or so and see how much you really spend on non-fixed expenses like gas, groceries, entertainment, household items etc.  Then, look at your net income and see how much is left over.  If there is nothing left over, you need to either reduce your expenses or increase your income.  If there is money left over, you need to decide what you are going to do with it.

2.  Create a short-term back up

If you currently have no savings, get yourself set up with a personal line of credit.  This line of credit is only to be used as a back up and should not be attached to your main chequing account.  Once you have a line of credit, as long as you maintain a good credit standing, your bank or credit union won’t take it away from you.  It is important to apply for it when your income situation is good so it is there when you need it.  You NEVER want to be going to your financial institution to ask for money AFTER something has gone wrong.

3.  Open an TFSA (Tax-Free Savings Account)

If you have savings or are going to set up a monthly savings plan, you need to have a TFSA.  The government allows you to contribute up to $5,500 per year where the money can accumulate tax free.  There is no tax payable when you withdraw it, your limit accumulates each year and you don’t lose your limit when you make withdrawals.  Once this is set up, this is the first place you go when you need money for an emergency.

4.  RRSP

An RRSP is a great savings vehicle for the long-term.  It provides a tax deduction when you make a contribution and any returns earned inside of the RRSP are non-taxable.  The ideal way to use an RRSP is to make contributions while your income is high and withdrawals in retirement when your income is lower.   The reason for this is that RRSPS are taxable on withdrawal. If you have no other back-up option, an RRSP could be used to get you through the short-term but only as a last resort. 

30 Jan

The squeeze on first-time home buyers

General

Posted by: Ian Vowles

Government policy has made it very difficult for first-time home buyers to get into anything other than a condo or townhouse. 

Why? 

Because recent changes to qualification rules for buyers with less than 20% down make it extremely difficult to afford a single detached home which is on average, $555,000 in the Lower Mainland.  With 5% down, you would qualify on a 25 year amortization instead of 30 or 35 years which is available to buyers with 20% down.  These first-time home buyers would require annual household income of $111,538.  According to Stats Can, the average household income in the Lower Mainland is $67,090.   In addition to this, you have to pay the full property transfer tax on any property purchased over $450,000.  So on top of your down payment, you are looking at a tax bill of $9,100 just for the privilege of buying an average home in the Lower Mainland.   Are you feeling their squeeze? 

Why force first-time home buyers into buying condos and townhouses? 

My theory is that increased demand for condos and townhouses leads to increased development which means more jobs for the construction industry.  More jobs is good for the economy and for a government trying to be re-elected.  The trouble with this approach is that when these same first-time home buyers are looking to move to a bigger place with a yard in a good neighbourhood to raise their family, they will have to sell their condo or townhouse at a time that may not be the best move from a financial and real estate perspective.  Under these circumstances, young families will likely have to learn to make do with less space and raise their families in multi-unit properties.  Only time will tell.