The cost of making predictions is low, the cost of making money management decisions based on predictions and being wrong is high. Investors want certainty which is likely why predictions delivered with conviction are attractive. However, investing is more about probabilities than certainty.
The following are seven key areas of basic money management skills every individual needs to strive to have a basic understanding in order to develop money confidence. Encourage you to review each of these areas with respect to your own situation. If you need clarification specific to your situation, please give me a call.
Cash Management – How is a cash flow plan prepared for your household?
Cash Management is about knowing what comes in and what goes out. This simple budget planning worksheet is a great way to get a handle on your income and expenses.
Tax Planning – What is your tax bracket and how does it impact your financial decisions? Bonus question – What are the three types of income and how are they taxed?
Our tax system is based on brackets of “bands” of income that is taxed at a higher rate. The best way to understand your tax brackets and how you pay tax is to go to your full tax return and to schedule XX for your Federal tax and Schedule XX for your Provincial tax. These schedules will tell you your marginal tax rate (MTR) which is the highest rate of tax you pay on the last dollar you earned. The reason knowing your MTR is important is any additional income you earn (by triggering a capital gain or earning a bonus or severance etc.) will be taxed at this rate.
The three types of income and how they are taxed are: 1 – salary and interest @100% 2 – dividends @ 0 to 23% depending on other taxable income and type of dividend and 3 – Capital Gains are taxed at 50%
Risk Mgt – What’s the difference between T10 and permanent life insurance?
Term insurance is provided at a flat rate for the period of the term (i.e. 10 years) then renewed at a higher rate. It’s ideal for periods when a lot of insurance is needed (i.e. young and with dependents) Permanent life insurance remains in place for life and is provided at a flat rate for life. When a legacy gift is desired or for final tax to be paid on assets.
Credit Mgt – What’s a FICO score and what impacts this number?
FICO stands for “Fair, Isaac, and Company” and is one of the ways a creditor (bank, mobile phone company etc.) uses to decide the “credit worthy ness of a candidate.” There are two companies (Equifax and TransUnion that provide Canadians with their scores and to any creditor that has authority from an individual. The kinds of things you would expect go into this score, loans paid or not paid, late bill payment etc.
Investment Planning – What are dividends and how would you get them?
Dividends are the excess profits businesses pay out to shareholders based on the number and type of shared owned. Canadian Dividends can be received from both public and private companies and attract a lower tax rate then interest income and close to capital gains – depending on the type of dividend. If you own shares of a company that pays dividends outside your RSP, you may receive them. If you own dividend paying companies within your investment funds, these dividends may not be paid out but re-invested – but you still pay tax on those dividends!
Estate Planning – What happens if you die without a valid Will?
Dying without a Will means you die intestate. Provincial laws then take over as does the Public Guardian’s office to manage your estate and decide how to distribute. In Ontario, for example, assets owned individually go to surviving spouse and children and then parents and siblings and then extended family based on a specific percentage.
Retirement Income Planning – How much income will you need when you stop working and where will it come from?
Typically, a retiree will spend about the same amount of fixed living costs in retirement as was paid while working – which is why know your fixed costs is so important. Beyond that, it depends on the activities planned for retirement. As to sources of retirement income, we typically have a combination of private pensions, govt pensions, Canada Pension, Old Age Security, investment income and part time earnings. Investment income can have very different tax impact which will impact marginal tax rates.
So, how did you do? Were you comfortable with the questions and answers? If not, let’s chat and help you get comfortable.
Richard WR Yasinski CFP
With a liberal government majority we will see some tax changes. These are the tax benefits are what we can expect.
- For those that earn more than $200,000 per year the Liberals will introduce a new 33% tax bracket, up from 29%, Expect this to happen almost immediately.
- Middle-class clients will have a few more dollars to invest once the Liberals drop the tax rate for those earning between $44,700 and $89,401 from 22.5% to 20%, a nice round number.
- The Universal Child Care Benefit is gone to be replaced by the non-taxable Canada Child Benefit. The most-needy benefiting to the tune of $533 per month per child. Those earning over $300,000 get nothing.
- Also gone is one of the most controversial pieces of the Conservative’s tax plan – income splitting for families. Unless couples have a wide spread in incomes with the top earner less than $75K this will not impact you.
- The $10,000 TFSA contribution limit for 2015 will likely be rolled back to $5,500 in 2016, exactly where it was prior to the change in June from the Conservatives.
- Starting in 2017, EI premiums will be reduced by 23 cents per $100 earned to $1.65. While a smaller cut than the Conservatives were promising, it still puts more money in the hands of your clients.
- Ontario Premier Kathleen Wynne suggested during the federal election campaign that if Justin Trudeau was elected as prime minister the expansion of the CPP might result in the scaling back or elimination of ORPP.