Learning how to budget & be disciplined with money may not sound exciting, but it can pay off big time in the long run. Regardless of what your priorities are for how & where you spend your money, having a plan to help you reach your goals is a great place to start. Do you want to have a vacation each year? Pay for your kids to go to college/ university? Have a retirement income? Some, or all of the above? Unfortunately that money isn’t going to grow on trees (as much as we wish it did!), so to help sort through all the financial jargon & info, I spoke to Kevin Parton, a Financial Advisor with Investor’s Group, about some of the common questions & concerns young families have about saving.
Since it isn’t getting cheaper to send your kids to post- secondary & saving once you have kids may seem more challenging, my questions focused on RESPs and how young families can learn to save & manage their finances. Read on to see the advice Kevin had to offer.
1.
What info do
you need to set up a bank account for a child? An RESP?
When opening an account for a child there are a few
options. You can open an RESP
(registered education savings plan) which is primarily for funding post
secondary education. This account requires a Social Insurance Number for your
child and your own personal information as the account will be registered to
you with your child as the beneficiary/one who receives the money.
If you would prefer to save money for your child
outside of a registered education savings plan you may set up a non-registered investment account for your child. This money can be deposited
and redeemed at any time for any purpose; however any investment income earned
on your deposits is fully taxable.
With that in mind another option is to open a TFSA
(Tax Free Savings Account). You have the same flexibility as the non-registered
account, however you will now avoid the tax on any investment income earned. A
Tax Free Savings Account only becomes available to an individual once they have
reached the age of 18, so you will have to open one up in your name and use it
as a savings vehicle for your child.
For any of the following accounts to be set up you
will need a SIN, Drivers License or other photo identification, name, birth
date and address.
The account
that is right for your situation is best explored with the help of a financial
planner. Ask your friends, family members and colleagues if you can speak to
their financial planner. Interview a couple of them to make sure they are the
right fit.
2.
What are the
benefits of setting up an RRSP? (tax related and otherwise)
There are a few benefits to setting up an RRSP. The
first benefit of setting up an RRSP lies in the fact that you are saving for
retirement. We are moving further into an age where employers and the
government are not going to be providing us with the same pension support our
parents are/were familiar with. This means that it is OUR responsibility to
find out what our retirement should look like and then determine how much we
need to save during our working lives to make it happen.
The second benefit of setting up an RRSP is the tax
deduction. I will use this example to explain the benefit of tax deductions:
Joe Client earned $60,000 before taxes in 2013. On
that $60,000 Joe Client would have paid $11,603 in taxes throughout the year
leaving him with $48,397 in his pocket. However for every dollar Joe Client
puts into his RRSP for the 2013 year he reduces his taxable earnings of $60,000
by one dollar. In 2013 Joe Client invested a total of $5,000 into his RRSP
making his taxable earnings $55,000 ($60,000 earnings – $5,000 RRSP
contribution). Joe Client has already paid taxes throughout the year on $60,000
so when he files his taxes he will get back the taxes he paid on the income her
earned between $55,000 and $60,000 which is $1,485. The more income you earn,
the more taxes you pay and the larger refund you will get by using your RRSP.
The third benefit of setting up an RRSP is the tax
sheltered growth. Much like the Tax Free Savings Account, once the money is
inside the RRSP it can grow and grow and grow without you having to pay any
taxes on the investment income. Over a period of 30-40 years this will save you
potentially tens of thousands in taxes leaving you with more money for your
retirement.
And lastly, RRSP’s can be used for purposes other
than retirement. You are able to pull money from your RRSP tax free if you are
purchasing your first home or going back to school. These exceptions are called
First Time Homebuyers Plan and Life Long Learning Plan.
Please speak with a financial planner about your
situation and determine how best to use an RRSP so it is right for your
personal situation.
3.
What advice do
you have for young families looking to save money?
” The best time to plant a tree is ten years ago,
the second best time to plant a tree is today.” I deal with young families all
the time and often times they have the attitude that if they can’t save enough
to cover all of their goals then there is no point in starting. Let me tell you
that the worst thing you can do is postpone your savings because you think a
little bit isn’t enough.
Create a budget so you can see what your household
income is and what all of your expenses are. Leave a little room for variables (because there are always variables) and then decide on an amount to save. It can
be as little as $25/month but something is always better than nothing.
In addition to that strategy you will want to have
a plan. You may have enough money to save monthly but if you don’t have a
specific goal and purpose for that money then it is as good as spent on the
next spontaneous purchase. Think hard about what you want your life to look
like financially, work with a financial planner to figure out what it will take
for you to achieve that life and then commit to working towards those goals.
You must practice good money habits before you have
money in order to become successful. Do not wait until you have money to start
trying to save. I promise you that day will never come.
4.
What are the
most common concerns for young families?
The most common concerns I find among young
families are: What happens if I or my spouse die? Who takes care of our child?
How to we prepare for the worst case scenario? These are never fun
conversations but they are necessary conversations. Making sure your family
will be financially secure in case of a premature death, disability, or serious
illness is of utmost importance. Also understanding what happens to your family
if and when you are gone is important.
Beyond the emergency planning it is often constant
planning towards real estate ownership, saving for their children’s education,
saving for their retirement, and making sure they are taking time to enjoy
today.
5.
What mistakes
do people make when it comes to saving?
The biggest mistake people make when it comes to
saving is trying to do it themselves and/or not taking the time to find a
qualified financial planner to work with. Do-it-yourself financial planning is
a bad idea for the very same reason using Google as your personal physician is
a bad idea. You can of course utilise tools like
Stocktrades to make better investment decisions, however, you should only do so if you have the perquisite knowledge. If you don’t, and that’s OK, then a financial planner would offer a better ROI.
Your life is busy with work, children, family,
life, etc… find yourself a professional that you know, like, and trust. Work
with them to tell them what you want to accomplish and let them put a plan
together for you. This plan should be specific to your situation and you should
review it as often as you would like but at least every year. A financial planner can also help you avoid the common pitfall of a bad credit score. However, if you find yourself stuck on this slipperty slope then don’t worry. Companies like
https://repair.credit/ might be able to help you before things get out of hand.
Any
other useful info/ resources you can suggest?
In my experience these are the
things I have learned about young families.
1. Life is hectic
2. Sleep is scarce
3. Money is tight
4. Most of your
attention is on the child/children
You are the parents, so work hard,
stay focused, and take care of your family. Find a reliable source of financial
help and information and work together to take your life in the direction you
want.
Often times you won’t be able to
accomplish as much as you would like in one year but I promise you will be
amazed at what you can accomplish in ten years.
Kevin Parton is a consultant with Investor’s Group & works at their Greater Vancouver South location. If you have any questions or are seeking financial advice, you can contact him via email at kevin.parton@investorsgroup.com or by phone at (604) 541- 9334 (Ext. 484).
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