Financial Advice for the young couple

July 30, 2019

I enjoy meeting with the 20 something children of my clients and helping them get started on a good financial path – those that take the trouble to call and meet with me are already motivated so I feel my time is well spent. I thought I would put together a summary of the things I usually discuss with a young couple just beginning of their careers and financial lives. Feel free to distribute this to your kids – you never know what might stick!

The first thing I ask a young couple (actually any one that comes to me for financial advice) is if they have a Will in place. In reality, if they have few assets, no dependants, joint bank accounts (or signing authority on their individual accounts) and are named as beneficiaries on their individual RSP’s or successor annuitants on their TFSA’s then paying for a Will when money is tight may not be the best use of cash because their affaires are arranged for easy distribution in the event of death (and probate avoidance)

Preparing a Will has other benefits – it reminds you that life can be fleeting and may help you appreciate the time you have. If you don’t have any dependants, and want to insure the easiest distribution of your assets, then check out completing a holographic Will or use a service like Will.ca.

However, when a baby (or other dependant) arrives – forget what I just said, a Will is needed without question – and one prepared by a lawyer. This is where you name the guardians of your child (or dependant) and if not named in a Will, you leave it up to the courts to name their guardian and deal with the estate distribution– not recommended.

Most couples maintain their individual bank accounts and have a way of dividing living expenses. I always recommend they consider setting up a joint account for all joint or “fixed” expenses. They each deposit a pro-rated portion of their income into this account – which must be done as this account is for fixed expenses. This helps them understand and track exactly what their costs are for rent, mortgage, groceries, or anything they feel is a joint (and fixed) expense that must be covered vs a personal expenses which is typically discretionary. They get to spend only what’s left in their personal account and makes sure the necessary expenses are covered.

Assuming there is cash left over after covering fixed expenses, there is no better way to insure a secure financial future then having a budget or spending plan which reminds us where we said we wanted our money to go!. Looking out over the year and listing the income to be earned, the fixed expenses that must be paid and then what we want to spend our money on with what’s left over avoids the risk of emotional or impulsive purchases. How money is spent with what is left over will determine the level of financial security one has.  I have a simple spreadsheet available to help.

When a couple first buys a home or has expenses that must be paid, it’s important to have life and disability coverage. Having this coverage from work is always the least expensive – the costs for group coverage is significantly below that of personal coverage. An entire article could be devoted to discussing the types of personal coverage available and how to get it – but in reality, most couples don’t get it if they have to pay for it and just take the risk. Life insurance however is typically very inexpensive for a young couple and easy to get. I recommend a 20 year term plan for at least $500K as a minimum. This would cover a mortgage for the survivor. I don’t recommend the coverage provided by lenders because they typically use the proceeds to pay the loan – which may be the last thing you should do – the proceeds of a life policy may need to be used for income for the survivor. Disability coverage needs to be considered as this is a greater risk than death – and if disabled and no income – now you are paying for the same expenses as a couple but only with one income. A less expensive option is critical illness coverage. Discussing options with an insurance agent is recommended in this case. Lastly – when a child is added to the family, more life insurance and a solution for disability coverage is definitely needed and meeting with an insurance advisor is recommended.

The strategy for saving for the down payment on a home can make and save couples a bit of money when implemented early and used effectively. Tax Free Savings Accounts are ideal as the initial savings vehicle. It’s important to name each other as successor annuitants when opening a TFSA and while you’re at it, parents or siblings as contingent beneficiaries. Investments should be strictly fixed income – a guaranteed interest account, short term bond fund or floating rate income fund – if you expect to be saving for a few years. The closer you get to using the funds, the more that should be invested in guaranteed savings. These TFSA savings grow tax free which means more will be available when you contribute to an RSP. At least 4 months before closing on a new home, the entire savings should be contributed to an RSP (or split between the couple up to each allowable room) Now you have an RSP contribution receipt which can be used to lower tax on income – depending on the taxable income, this contribution may be spread over a few years to obtain the maximum refund. Up to $35,000 can be withdrawn from the RSP for the down payment of a home –and I typically recommend using all of the room available – borrow what you don’t have and pay it back when you withdraw for the down payment – the contribution receipt will net a greater refund. Although there are a few finer points to this strategy – these are the basics and can be quite helpful.

Young couples typically need more guidance regarding buying a home, having proper insurance coverage, setting up a spending plan then discussing investments and long term retirement planning. As in most things, get the basics right first.

Either way, if tariffs nick our economy, China’s gets hammered. Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP. Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy. We have enormous economic leverage that they simply can’t match.

An extended US-China trade battle means US companies will shift supply chains out of China and toward places like Singapore, Vietnam, Mexico, or “Made in the USA.” If that happens, the Chinese economy is hurt for decades.

Anyone can invent a scenario where some sort of Smoot-Hawley-like global trade war happens. Realistically, though, that appears very unlikely. We’re not the only advanced country China’s piracy has victimized, and China may realize it’s more isolated than it thought. In the end, China wants to trade with the West, not North Korea, Russia, and Venezuela. China needs the West. And all these trade war hysterics just aren’t warranted.

Brian Wesbury, “Trade War Hysterics,” May 13