Four Financial Tips – 2018

Wishing you all a great start to 2018!

I’m hoping you’re all as excited as I am to make this year the most profitable yet. In order to equip you with the tools necessary, I’ll be outlining a few very important tips and tricks below. Take a look to learn about how you can leverage, save, and grow your money over the next 12-months and hopefully create some real value for yourself.

Before diving into any of the investment related tips, I’d recommend first paying off any outstanding debts you may have. To truly profit this year, you can’t be carrying a balance on your 22% monthly-interest credit card or barely scraping through your bills. Make sure your necessities are taken care of and then worry about the rest (Tip 4 explains this in better detail).

Let’s get started.

Tip 1: Utilize Tax Deductions for Investments (Self-Leverage)

A majority of Canadians, and more particularly Canadian investors, are unaware of the tax opportunities that come from leveraging your investments with borrowed capital. Before reading the rest of this segment, I’d like you to read the article attached below — it will outline everything you need to know regarding borrowing for investment purposes and will allow you to determine whether or not the strategy is suitable for you.

Financial Post: Turbocharging Investments by Borrowing

If after reading that you’re still on board with the idea, here is where real value can be created. Not only does borrowing to invest offer you cheap leverage, but the interest paid on the loan is actually tax-deductible – any borrowed money used for investment purposes (outside of registered accounts) will offer this little gem. What this means is that you can use the interest paid on your investment loan to lower your taxable income from any source, not necessarily just investment income. As opposed to trading derivatives or using margin on your investment account, this out-of-account leverage offers increased buying power and an opportunity to save huge on personal taxes (depending on loan size).

It’s important to note that loans taken for personal expenditures (mortgages/consumer consumption) don’t allow for deductible interest, however, if you currently have a mortgage, you can use a debt-swap tactic that involves selling off current securities to pay off the mortgage, re-borrowing the same amount and then re-investing it, allowing you to carry the same mortgage size but now with tax-deductible interest. This concept is a little more complicated and I’d advise speaking with your accountant before making any decisions, it’ll allow you to smooth over the details of debt-restructuring.

Also, note that the loan-investment money can’t be put into a registered account (as mentioned above), as that will forfeit the interest from being tax deductible. If you plan on self-leveraging, you’ll need to do it outside of your TFSA/RRSP/etc.

Tip 2: Take Advantage of Your TFSA (and RRSP)

I can’t stress enough how valuable of an asset TFSA’s are for investment growth. This government lob that allows tax-free investment gains to any Canadian resident over 18 should be the tank in the savings artillery. You can use this TFSA Contribution Room Calculator to determine how you much space you have (depends on the year which you turned 18) and then you should proceed to fill it up as much as you possibly can — the contribution room for 2018 has been set at $5,500 yet again.

Set up the TFSA with a direct investing brokerage (click here to see the options) and get to work — you can decide to build a dividend income portfolio, play with small/mid-cap growth companies, or buy ETF’s, all gains which will forever remain un-taxable!

I put RRSP in brackets because unless you’re making a significant yearly income at a young age, I would recommend maxing out your TFSA contribution room first. Save the RRSP room for when you’re in a tax bracket that can actually benefit from deductions. Contributing to an RRSP when your marginal tax rate sits at 15% and your TFSA has $20k available in space wouldn’t be the wisest decision.

Tip 3: Embrace the ETF

Expanding on the point above, 2018 is the time to take advantage of the virtually fee-free ETF (Exchange Traded Fund) crop sprouting all throughout the investment world. As opposed to managed funds (mutual funds in most people’s case), ETF’s will allow you to diversify your holdings as you choose and it will save you your shirt on management fees.

ETF’s are self-directed through your online brokerage, meaning that you’ll need to do a little bit of legwork. However, when compared to the fees of managed funds (ranging anywhere between 1%-10%), the minuscule ETF fees of 0.10%-1.25% and steady diversification make up for it. Take some time to learn about ETF structures so that you have knowledge of what goes on behind the scenes – it’ll allow you to better understand where your money is going.

If you’re an active investor, an ETF can be a great way to diversify your portfolio without necessarily needing to liquidate current holdings or funnel in new money. With more than 2000+ ETF’s currently available, and the past results proving relatively stable success (a reference to Warren Buffett’s million dollar bet), you need to consider a better allocation of your capital to increase growth opportunities and decrease unnecessary costs.

Tip 4: Utilize the 90-day Calculation

The 90-day calculation will be a fun little exercise for you to break down your inflows/outflows of money and determine how sustainable your spending habits are. It will outline where you may be faltering and highlight areas needing improvement.

To complete it, first start by totaling all of your projected income for the next 3 months (primarily paycheques, maybe contract/side jobs if applicable), and come up with a total 90-day inflow. Next, calculate your total fixed/expected variable expenses for the next 3 month period, these are things such as your car/insurance payments, phone bill, utilities, gym memberships, weekly coffee/food spending, etc. Try and get this number as accurate as possible — the closer it is to the truth the better of an understanding you’ll have regarding your financial position.

Once both of these are done, simply subtract your 90-day outflows from your 90-day inflows, the difference being the number we’re looking for. This number will tell you how sustainable your current spending habits are (if you have a negative number, you’re literally spending more than you even make). Determine how the number fits into your projected savings plan and if it will be enough to support your goals. If not, there are two ways to make a change — the first being to find an additional source of income (easier said than done), the second being to fix your spending habits (this is where 99% of people can solve their issue).

Be honest with yourself and use the results to better your spending and fix your 90-day number, this little trick will reinvent the way you see your money.

 

 

 

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