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The art of borrowing money

If You Have $10,000 Would You Put Them in a TFSA

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A tax-free savings account is a flexible and convenient savings solution that helps Canadians to earn tax-free income. This product can be used together with other investment vehicles such as registered education and registered retirement savings plans.

The Basics

There are multiple benefits to opening a TFSA, one being that consumers’ savings grow in a tax-free way while withdrawals and investment income are also tax-free. The fact that TFSAs allow flexible withdrawals is a further benefit for individuals. Another benefit is that there are no lifetime contribution limits to worry about provided that you are eligible. Finally, contributions to your TFSA account will have no effect on other government-provided benefits such as the Goods and Services Tax credit, Old Age Security, and others. With lifelong eligibility, this investment solution can be used at any age, whether you are a young professional or close to retirement.

What if You Are in the Middle Tax Bracket

Canadians with a high income level benefit from the new threshold or contribution limit ($10,000). Those who contribute the maximum will save about $3,800 in taxes over a 10-year period. With savings of about $5,000, those who fall in the middle tax bracket are making contributions of about 1/5 of their pre-tax income. At the same time, finance and tax experts point to the fact that the new contribution limit offers more flexibility, whether you are in the middle income bracket or have a more limited income. Even an income of $50,000 or lower makes the tax-free savings account a better alternative to the RRSP because TFSAs help save on taxes. Canadians who are about to retire may want to look into this option as well provided that they trim other investment solutions such as RRSPs and RRIFs.

In fact, the new limit is designed to benefit middle class couples. A couple in their early 40s, for example, is expected to accumulate savings of over $1 million over their lifetime, plus estate worth over $650,000. This is provided that both partners have an annual income of about $80,000 and aim to retire at the age of 58. Finance expects base estimates on a 3.5-percent real estate growth and 2.2-percent inflation. In general, a tax-free savings account is a good solution for young couples and professional in their early 30s if they are saving toward retirement or big-ticket items and other major purchases. Upper-class individuals will obviously benefit from the new limit, but the new measure is also designed for public service employees and teachers with defined benefit pensions and contributions they rely on. Young adults, on the other hand, may choose not to use RRSPs to save toward retirement altogether because of the tax issues associated with RRIF and RRSP withdrawals.

Is This Good News for Retirees?

Statements by the federal government indicate that retirees will be the major beneficiaries of the new contribution limit. To this, seniors may want to move cash from their RRSP or registered retirement income fund to a tax-free savings account. There are multiple benefits to doing this, one being that higher contributions reduce income tax. While many Canadians believe that it is not advisable to make RRIF withdrawals before the age of 71, this is not the case, especially for consumers with a registered retirement income fund. The fact is that individuals may benefit from early withdrawals by reducing their tax bill. In addition, there are estate planning benefits.

Some people are concerned that additional income will trim the benefits because they will be left with more taxes to pay. The good news is that this would be so only during the first couple of years once they retire. Then their taxable income becomes lower. The reason is that less cash in a registered retirement income fund means less money to which the minimum withdrawal applies. And while retirees pay more in taxes during the first couple of years, experts point out that there are several mitigating factors to take into account. One is that account holders pay at a 31-percent marginal tax rate which is lower compared to contributions from previous years. Thus Canadians benefit from the fact that they pay less in taxes on withdrawals.

Conclusion

There are plenty of benefits to opening a TFSA now that the contribution limit is set higher. All Canadians who are at least 18 years of age are allowed to contribute up to the limit and thus accumulate significant balances. These balances are not only conserved in a tax-free way but grow with time. Finance experts also point to the significant estate planning benefits offered by TFSAs. If one of the spouses was a RRIF holder and passed away, then the other spouse would suffer a major tax hit if they made RRIF withdrawals. With tax-free savings accounts, holders face less risk even if they make withdrawals early in retirement. And if you have $10,000, it is worth opening a TFSA and contributing up to the limit because this is a sheltered account. Some finance experts even advice customers to contribute to their grandchildren’s and children’s TFSAs in case they’ve already maxed out their own accounts. This is perfectly legal to do and yet another way to maximize your savings.

Low-Cost Alternatives Amidst Fee Hike-Ups by Major Banks

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Canadian Banks Hiking Fees for Account Holders

Major Canadian banks plan to increase their fees or have already hiked up their ATM, debit, and purchase fees and charges on other transactions to make up for profit losses due to falling interest rates. Because of profit squeezes, banks increase their rates on services such as check certifications, credit card payments, and fees on savings accounts. Charges add up while the cost of living constantly rises, from higher bank fees and insurance premiums to rising property taxes and commodity and food prices. Given the fact that Canadian household debt has already hit new high, fee hikes are a source of concern for many, especially borrowers with excessive debt load.

Fees and Accounts Affected

Banks review their services and products annually, including fees, terms, surcharges, and earn rates. The explanation they offer is that they are forced to adjust the pricing to stay in business and keep ahead of the competition. Banks also point to the fact that account fees are adjusted to reflect market conditions. At the same time, this is a sensitive topic for many Canadians, and some are already looking for alternatives to save on fees and charges. The good news is that while banks hike up their fees, pricing adjustments are negligible for some services. For example, the current fee for items deposited at RBC is $0.20 per item while the new fee is $0.22. This is not the case with other services and accounts. The current dishonored payment fee is $40 and the new fee – $45. RBC plans to tweak rates across an array of services and accounts as of June 1, including mortgage payments, debit purchases, and other transactions.

Toronto-Dominion already introduced new fees on business transactions, higher savings accounts’ transfer fees, and higher minimum balances. The new fees apply as of April 1. The Bank of Montreal also plans to adjust the pricing as of May 1 to increase debit transaction fees, bank plan fees, and charges on paper statements. The Bank of Nova Scotia also hiked up fees and charges across transactions and accounts. A report compiled for the Canadian Financial Consumer Agency concludes that fee increases on some accounts are moderate while others are more significant. Last year alone, variable fees and associated payments have increased substantially, with reported increases of up to 46 percent. The fees on checking accounts, on the other hand, increased by close to 14 percent.LOC38

Alternatives to Bank Accounts and Services

While major banks are in the process of updating and adjusting their charges and fees, there are other alternatives to consider, among which finance companies, credit unions, bank subsidiaries, and others. Credit unions, for example, offer affordable fees and rates to union members. Some unions assess no fees on ATM withdrawals and debit card purchases. Fees and charges vary from one establishment to another, however.

Meridian

While Meridian assesses monthly fees, their checking account goes with multiple features and perks and allows users to make ATM withdrawals and deposits, in-store purchases, and bill payments. There is an option to deposit paychecks as well. Meridian’s exchange network allows consumers to make transactions, and they benefit from optional overdraft protection. Telephone, in-branch, mobile, and online banking is also offered to access cash. Automatic transfers to and from accounts are free. Self-service transactions cost $9 a month while official and AMEX travelers checks cost $12 a month. Meridian offers a rebate for up to 4 interac fees for those who maintain a balance of at least $1,000.

Vancity

Vancity features basic accounts with no maintenance fees. If you are a union member, you also benefit from lower credit card rates and fees. The average interest rate on credit cards is around 15.20 percent while banks charge 18.8 percent on average. The average rate on balance transfers is about 14.5 percent for credit unions and 20.1 percent for banks. The e-package checking account is a flexible and convenient option for unlimited debit card transactions. Everyday transactions are free of charge, including debit purchases, transfers, and ATM withdrawals. In-person transactions include account transfers, bill payments, and account withdrawals. They cost $0.70 each, and there is no monthly fee provided that customers maintain a balance of at least $1,000. The monthly fee is $7 for balances lower than $1,000. Check and preauthorized payments are offered at no added cost.

Desjardins

Desjardins features free line-of-credit repayments, summary of transactions, passbook updates, deposits, and more. There are fees for other transactions through regular savings, build-up savings, and checking accounts. Payments of bills, transfers, and deposits cost $1 each. Checks, direct withdrawals, and direct payments in the U.S. and Canada cost $1. Fees apply for teller services as well – $2.25 per bill payment and $1.25 per transfer, withdrawal, or cashing.

More Options to Avoid High Rates and Fees

LOC37Tangerine

Tangerine is a good example. The bank offers a no fee checking account and free withdrawals through Scotiabank’s ATM network. In addition, customers benefit from free online statements, ATM deposits, email money transfers, and online daily banking. Debit purchases and bill payments are also offered at no added cost. The same goes for the first checkbook and Interac e-transfers. One free card replacement and stop payment are allowed. Additional checkbooks cost $12.50, and Interac e-transfers – $1. A late fee of $2.50 applies after thirty days. The current earn rate is 0.25 percent for balances up to $49,999.99 and 1 percent for balances of $100,000 and higher. Customers are paid interest on a monthly basis. Added benefits include mobile-banking for tablets and smartphones, bank drafts, 30-day protection, email alerts for deposits and payments, and more.

PC Financial

PC Financial also advertises a no fee account and offers the option to earn bonus points. They can be used toward free groceries and other purchases. The main benefit for customers of PC Financial is that they are offered no fee daily banking as well as unlimited free checks, free transactions, and no monthly fees. Transactions are free at CIBC bank machines and PC Financial, and account holders save up to $200 annually. Customers are also offered a high interest savings account with no monthly fees, no minimum balance requirements, and an attractive earn rate. Some fees apply to certain banking services. Customized account confirmation letters, for example, cost $16.50 each. Other fees include:

• $20 per inter-branch payments
• $10 per wire transfers from other banks
• $7.50 per bank draft and money order
• $50.00 per GIC, TFSA, and RRSP transfers to other establishments

Downsides and Issues to Keep in Mind

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While some banks and other financial establishments offer safe and convenient solutions with low or no monthly fees, geographic availability is one of the major problems. Some banks have a few branches across Canada while others operate locally. This means that most transactions, including transfers, bill payments, and others, are online transactions. Product availability is another issue. Major banks such as RBC and TD offer a wider range of products and services compared to credit unions and small banks and have many branches across Canada.

Is It a Good Idea To Save Money?

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There are plenty of reasons to save for a rainy day, especially if your income is low or average. If you don’t have a stable job but are paid commissions or bonuses or have a seasonal job, this is yet another reason to save to be financially independent. The unfortunate truth is that bad things and emergencies can happen to everyone.

Why Save Money

It is a good idea to have an emergency fund to meet unexpected expenses and pay for basic necessities in case of loss of income or loss of employment. At the same time, the decision to save or not also depends on the current economic situation. When rates are at historic lows, which is the current situation, savers are literally punished and pay to keep money in their checking and savings accounts. At the same time, inflation is eating away their savings and many choose to keep their money under the mattress.LOC27

Is Borrowing Better Than Saving

Again, this depends on the current economic situation and interest rates. In some cases, taking out a low rate loan is a cost effective solution and more people can afford to borrow. They have more cash to spend on everyday and big-ticket purchases and improved purchasing power results in higher inflation and economic growth. The recent drop in oil and gasoline prices is one of the main reasons for the current state of affairs. When the pace of inflation eases over a longer period and interest rates are still low, this is a good time to borrow at a low cost.

Is It Always Good to Have an Emergency Fund

This depends on your income level, whether you have additional sources of income, number of children and household members, your age and short- and long-term financial goals, retirement goals, and other factors. There are some arguments against having an emergency fund, and one is that most financial institutions which advertise savings accounts offer a low rate of return. In this case, having an emergency fund is a particularly bad idea if you hold multiple, high-interest debts. Debt balances sitting at 15, 20, or 30 percent will cost you dearly, regardless of the earn rate on your savings account. Holding cash in a savings account may make sense but this depends on the amount deposited, the earn rate, and the state of the economy. Many consumers opt for a savings account because of the fact that this is a liquid, low-risk product. There are other ways to invest free cash such as bonds, stocks, certificates of deposit, money market accounts and riskier investment strategies such as Forex trading. In general, consumers save money to meet unforeseen expenses, pay for home and car repairs, and other major repairs. It is also a good idea to have an emergency fund in case of a sudden job loss due to an accident or another unfortunate event. Many people save for retirement, but there are better ways to grow your money than opening a savings account. Some people also use their emergency fund to pay for vacations and to make a down payment for a vehicle or house but again, this depends on inflationary pressures and rates and this is not what emergency funds are meant for.

How to Make Sure Your Savings Are Not Eaten Away by Inflation

LOC26There is no straightforward answer to this question but basic investing tips can be of help. When inflation is high, your savings are menaced because interest rates are also low. Unless you are offered a high-interest savings account, the purchasing power of your money is steadily declining. One way to protect your savings against inflation is to take more risk with the goal of getting higher returns. Financial advisers recommend investment strategies that are medium-risk and bring higher returns. One option is to invest in inflation-bearing bonds and the best part is that you benefit from tax-free returns. The rate also increases over time. Another option is to invest in stock but this is a riskier solution for seasoned investors. You may want to look at alternatives, for example, stock and shares ISA which is one way to secure income from shares and stock. It is also a relatively safe investment vehicle that brings inflation-beating returns. Basically, this is a type of ISA that allows some degree of flexibility. The returns depend on the types of investments customers choose to buy. Some businesses pay regular dividends and offer the opportunity to get decent returns. There are other investment vehicles such as annuities, mutual funds, commodities, equity, and others. Other options to protect your savings against inflation include money market mutual funds, savings bonds, corporate stocks and bonds, state-sponsored tuition plans, and education IRAs. You can also look into investment vehicles such as treasury notes, bills, and other securities and exchange-traded funds.

Conclusion

Whether it is a good idea to save or borrow depends on many factors, including your personal and financial circumstances and the state of the economy and global financial trends. One way to protect your savings when inflation is high is to use different investment strategies such as dollar cost averaging, portfolio diversification, and allocation of investments. Some investment instruments are safe and low-risk but bring low returns. They are also more liquid meaning that customers are allowed to withdraw their money without penalty and at any time. Other instruments are riskier or less liquid and offer higher returns. Whether it is a good idea to save depends on your financial goals, i.e. early retirement, buying a new vehicle, a college fund for your kids, and so on. Think of your mid-term and short-term goals as well (holiday purchases, travel, paying off debt faster, etc.) Saving can also help become financial independent and live a stress-free life.