Even if we have already multiplied bad financial decisions, it is possible to take control. And sometimes life gives good opportunities to improve luck. Just enter them.
Posted at 6:00 am
Nadine* didn’t have the opportunity to learn good habits for managing her personal finances when she was young. “My parents always had trouble making ends meet and saving wasn’t part of our vocabulary at home,” she says. I started working very young, but I didn’t know how to manage my income. »
From college, he went into debt by multiplying credit cards, taking out a “huge” student loan, taking out high-interest personal loans, etc. At 40, he made a consumer proposal. “I came out of that, now I am more disciplined in managing my finances and I even manage to save. »
Nadine has worked as a health professional for 22 years and contributes to the Government and Public Employees Retirement Plan (RREGOP). She had a raise this year, retroactive earnings of more than $34,000 following union negotiations in the context of the Pay Equity Actin addition to bonuses related to COVID-19.
I feel like I have a second chance to finally make good financial decisions and would like some advice. I want to avoid having to pay too many taxes this year and continue saving for my retirement, which I plan to take at age 60.
Nadine is the mother of a young adult who just moved into an apartment and a teenager who will be 16 in the fall. She would like to contribute to the Registered Education Savings Plan (RESP) for him, but she wonders if it is too late. She also plans to help her daughter pay for her master’s degree, which will start in September.
Three years from now, he wants to buy a triplex in Montreal worth about $1 million that he wants to live in so he can have access to a patio. Her daughter would own 25% and her son could also buy 25% of the building when she could afford it. “I wonder if this is a realistic project. »
Nadine, 48 years old
- Annual salary in 2022: $92,000 (previously $82,500)
- Bank account: $16,600 (payment equity)
- TFSA: $15,800 ($10,000 pay equity)
- RRSP: $11,300 ($125 automatic payments every two weeks)
- Self Paid: $2,000 Value
- Current annual cost of living: $48,000
- Expected annual cost of living at retirement: $44,000
- Cumulative fourth RRSP contribution: $36,621
After having lived through more difficult years financially, Nadine has several possibilities. “She’s gone to great lengths to get her finances back on track, and with her budgeting rigor, she’s on the right track,” says Julie Paquin, financial planner and vice president of private management at Optimum Gestion de Placements.
On the other hand, for the RESP, it’s too late for Nadine. “You should have contributed at least $2,000 in your case last year, because to receive the 30% basic government grant, the child must be 15 years old on December 31 of the contribution year,” says Julie Paquin.
Reduce your taxable income
Since Nadine’s taxable income increased this year due to her salary increase and retroactive pay equity payment of more than $34,000, her marginal tax rate will increase from 37.12% to 47.46%, according to Julie Paquin.
Contributing to your RRSP is a priority to reduce your tax bill this year. Since you haven’t used the RRSP contribution room, I advise you to take $15,000 out of your checking account and $10,000 out of your TFSA and deposit it into your RRSP.
Julie Paquin, Financial Planner and VP of Private Management at Optimum Gestion de Placements
The financial planner also suggests increasing your automatic payments to $185 in your RRSP for the next two years. “Then you can add this amount to your TFSA contributions,” he says. This will allow you to take advantage of your unused entitlements in your RRSP and continue to save for the down payment to become an owner. »
Maximize the TFSA
To achieve her goals, Nadine is also interested in setting up an automatic payment every two weeks on her TFSA.
“I advise you to transfer $200 every two weeks,” says Julie Paquin. The TFSA is attractive because returns and withdrawals are not taxed. »
She also advises Nadine to keep some of her TFSA as an emergency fund, the equivalent of about three months’ worth of expenses. “A financial cushion gives you peace of mind,” says the financial planner. However, several factors can influence the amount needed, such as the details of her disability insurance. He must also invest this sum in safe and flexible investments so that he can withdraw sums if necessary. »
Evaluate the feasibility of the triplex project
Due to the triplex issue, Nadine and her daughter will have to go to their financial institution to assess their borrowing capacity and be pre-qualified for a certain sum. “This will be a good indicator of the realism of the project,” says Julie Paquin.
For a $1 million building, a 20% down payment is required if you want to avoid paying the Canadian Housing and Mortgage Corporation (CMHC) mortgage loan insurance premium. “So, we’re talking about $200,000 in down payments and $4,652 in mortgage payments per month at a simulated 5% interest rate,” Julie Paquin assesses. Nadine could also opt for the minimum down payment for a triplex which is 10% but then she would have to pay the CMHC premium and of course a lower down payment means having to borrow more and therefore plus installments. mortgages »
According to the savings scenario proposed by the financial planner, Nadine will have about $33,000 in TFSAs in 2026 and will be able to take advantage of the Home Buyers Plan (HBP) by withdrawing the maximum allowed in her RRSP, that is, say, $35,000.
While buying an income property can be appealing, it also comes with many responsibilities to consider. “Based on the retirement analysis done, Nadine will be able to retire at age 60 without purchasing a property with a cost of living of $44,000,” says Julie Paquin. Nadine could also decide to delay the triplex purchase or pursue other options, such as buying a condo with a patio. One thing is certain, it is important that she is accompanied by experts in real estate and personal finance to make the best decisions and maintain her budgetary rigor. »
*Although the case highlighted in this section is real, the first name used is fictitious.
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