Welcome to Member Money Matters - where we talk money with our community, our Members, and advisors. Conversations like these are essential to learning about your financial wellness, prioritizing your goals, and planning for the future.
Meridian Members: A couple in their mid-30’s who are reaching the end of their 5-year mortgage term. They’re thinking about buying their next home, but they’re not sure about next steps; like what to do with their current house and how they should be investing their money.
Contact: Devon Duc, Branch Compliance Manager
Life story and goals
Age: 34
Occupation: Police Officer and Supply Teacher
Location: Thorold
Dependents: None
Income: Monthly after-tax $6,730
Financial goals: Backyard deck (short term) and a new home (long term)
Expenses
Housing expenses: $1,020 bi-weekly mortgage
Life insurance: $0
Memberships and subscriptions: $100 / month
Staying connected (phones, internet etc.): $150 / month
Transportation: $300 / month
Utilities: $210 / month
Savings
Savings and investment contributions: $1,000/ month
TFSA: $45,000
Home: house purchased for $465,000; $300,000 mortgage
Let's talk money
What are your financial goals right now?
Currently we’re nearing the end of our 5-year mortgage term, and we’d like to sell this house and buy a bigger one with more land. We want to get the most value we can for our home, so in the short term, we’d like to put a new deck in the backyard before we sell.
When did you start learning about money?
We learned about money in our early 20’s when we were away at college and university. We both had OSAP loans for school and it was definitely a shock to have this large debt to pay down. I think we both understood that budgeting was key and keeping track of our spending made it easier to know where we could save.
When did you start making a financial plan?
I think we started making concrete plans and setting goals when we moved in together; we both knew we wanted to buy a house.
What’s you plan for meeting your goals?
Currently we have $45,000 saved in a TFSA, and we’re looking at getting our house reappraised to see what the value is now compared to when we bought it almost 4 years ago.
What’s your best saving strategy?
Every month we go through our expenses. We set budgets ahead of time to keep ourselves accountable for where we’re spending our money.
What was your latest splurge?
We went out to a new, expensive restaurant in the area and had cocktails, appetizers, our entrees, and dessert. It cost about $300 for the two of us.
Latest unexpected, necessary expense?
Our furnace broke down last week. That set us back $1,000.
Any other big plans for the next five years?
We plan on having a child in the next couple of years.
Let’s Talk Advice
Devon Duc, Branch Compliance Manager, offers his advice.
Planning to buy a new home
Your advisor will start the discovery process by asking you a series of questions and doing an analysis to better understand your lending needs. There are a lot of options; everything from one to seven-year mortgages, fixed or variable, open or closed.
When purchasing a new home while still carrying a mortgage on the one being sold, there is a potential option to port your mortgage, where you transfer your existing mortgage into the new property’s mortgage.
For your short-term goal of building a deck, it might make sense to apply for a HELOC (Home Equity Line of Credit). A HELOC allows you access the equity in your home as secured line of credit, normally at a rate of Prime + 0.5%. It may be tempting to use your TFSA to fund the purchase, but the rule of thumb is, if an asset has a higher rate of return than the cost of borrowing, it is beneficial to use credit.
How to Invest your Money: Plans and Investments
You are still in the accumulation phase of the investing life cycle, so I recommend that you contribute to your investments early and often. To get your money working for you, it is important to figure out what types of investments make sense, and in what type of investment plan. I always recommend a diversified portfolio, comprised of different types of investments depending on your goal.
Investing in your RRSP has both instant and deferred benefits. Contributions lower your taxable income, and the money grows tax-free until you start making withdrawals (ideally later in life when you’re in a lower tax bracket).
The 2021 RRSP contribution limit 18% of your earned income, up to a limit of $27,830. Previous years of unused contribution room can be carried forward. It is best to consult with your accountant to determine your current contribution room limit.
A Spousal RRSP, used by married or common-law partners, functions like an individual RRSP, except it allows the higher earning spouse to contribute on behalf of the lower income earning spouse. The contributing spouse receives the tax deduction, and withdrawals are taxed at the plan holder’s marginal tax rate. It is important to note that there is a 3-year attribution rule. If contributions are withdrawn within three years, the funds will be fully taxable to the contributing spouse. Like the RRSP, the strategic long-term plan is to ensure withdrawals are made in your lower income years, which is sometimes before retirement -but we’ll elaborate on that a bit later.
A TFSA (Tax Free Savings Account) is an incredible investment option for Canadians. Your after-tax contributions grow tax free, with no tax consequences upon withdrawal. You have up to $75,000 of contribution room, so collectively, you two can contribute up to $150,000. You’re currently using just 30% of your limit ($45,000).
In your sectors of employment, pension plans are quite common. Some plans we see in Ontario are Defined Benefit pension plans, Defined Contribution pension plans, and Group RRSPs. These plans are an integral part of your financial plan, so be sure to share this information with your financial advisor.
Once you decide on the investment plan, you can start choosing your investments. The plans we’ve covered here can accommodate a variety of investments, including mutual funds, stocks, bonds, segregated funds, etc. These investments are unique in their features and all of them carry their own types of risk.
Your advisor can help you determine your risk tolerance and choose the right plans and investments.
Planning for a family
Although it may be a few years away, it’s never too early to start planning and educating yourselves on the financial implications of having a child in Canada. The federal government provides financial assistance through the CCB (Canada Child Benefit). This benefit is tax free, but the amount given is decided through income testing. The more your household makes, the less you receive. The government also provides E.I maternity and parental benefits. Places of employment could also offer some form of paid maternity leave.
For many Canadians, there is still an income shortfall during the early years of raising a child after government and workplace benefits. Since your income is lower than it was during working years, withdrawing from an RRSP’s during these years could make a lot of sense if an account was established.
What to do next
I highly suggest reaching out to your Meridian Credit Union Advisor and booking an appointment. Speaking with your advisor will help you further define your goals, allow them to gather appropriate information, and recommend solutions accordingly.
About Devon Duc
Devon is a Branch Compliance Manager at Meridian. His favorite thing about working as an advisor is educating members and guiding them toward prudent financial decisions. Devon is currently pursuing his RRC and PFP designations and in his spare time, he enjoys visiting the wineries and golf courses here in Niagara.
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