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Building wealth and smart budgeting

Jan 08, 2015

After the holidays resources are limited, so instead of advising to contribute to RRSP or pay down the mortgage Gordon Pape is focusing on ideas that will leave you financially better off by year end.

1) Create a budget.
According to the website www.practicalmoneyskills.ca, which is sponsored by Visa, only 47% Canadians have a budget.
Setting up a budget and sticking to it is the key to financial well being. If you spend more than you earn you are in trouble.
Some people think making a budget is hard work but the rewards in financial stability and peace of mind are worth it.

There are several free on-line spreadsheets you can use. www.mymoneycoach.ca www.cba.ca(Canadian Bankers website), www.fcac-acfc.gc.ca (Financial Consumer Agency of Canada website). All offer guidance in how to set up a budget that really works.

2) Review your RRSP.
See how many of these questions you can answer off the top of your head.

How much money to within $500.00 is in your RRSP (s) right now?
What was your rate of return within a 1% margin in 2014?
Within 5 percentage points, how much of your RRSP is invested in the stock market either directly or indirectly?
How much are you paying in fees and commissions for your plan each year?

The main problem with RRSP (s) is that people rush to contribute to get the tax break then forget about it until the next year.
If you didn’t get a 5-6% return last year it needs a shake up. You may have mediocre securities which are under performing.
Take a close look at your RRSP before you invest anymore money.

3) Take a look at your TFSA.
According to a survey published in November by BMO about half of Canadians have opened a TFSA. However, many of these people still don’t understand the rules governing these plans i.e. overcontribution penalties.

As of January 1,2015 you are allowed to add another $5500.00 to your TFSA but before you do take a look at your plan. Pay attention to how the money is invested. Because the word “Savings” is in the name many Canadians think the money is being invested in a high interest account or GIC. That is not the case. Like RRSP’s , TFSA assets can be invested in a wide range of eligible securities as long as you have the right type of plan. Holding money in a high interest savings account paying 1.25 % or a GIC offering 2.5% is not going to shelter much income from the tax people.

4) Know your pension plan.
If you have an employer pension plan it is probably the defined contribution type. This means there is no guarantee on how much income you will receive at retirement. It depends on how much is contributed and how well the investments you picked perform. Typically these plans offer some mutual funds choices as well as portfolios and GICs.
It takes time and commitment to study all the options, decide what works for you and put them together in a well-balanced portfolio.

It is worth the time. If you stay with the employer for many years the plan may be worth several hundred thousand dollars and likely to be your main source of retirement income.
Get it right!
Adapted by an article from Gordon Pape