Starting a family is probably one of the most complex periods in a person’s financial life. There are changes to income, expenses, insurance, investments (RESPs) etc.
Anticipating and managing all these changes can be overwhelming. It’s good to have a framework to help understand what changes you can expect and how large they may be.
It’s also a good idea to prepare yourself financially for all these big changes. There are a few things you can do to prepare your finances for a decrease in income and an increase in expenses.
Generally you can separate the financial changes when starting a family into six different areas.
There are changes to…
– One-time expenses
– On-going expenses
– Taxes and Gov. Benefits
In each of these areas there are different financial impacts that come with starting a family. Some of these impacts are positive and some are negative.
For example when it comes to Income, most new parents can expect to receive the Canada Child Benefit, one of the most generous benefits in Canada. This government benefit could add thousands to a new parents annual income (plus its non-taxable!) But at the same time a new parent may take 12-18 months off work which has a very negative impact on Income.
There are also many new expenses a new parent will face. There are one-time expenses, on-going expenses and then short lived but high cost expenses like daycare.
To help a new parent plan all these changes we need to look at each area separately to understand what changes we might expect.
With investments values moving up and down 5% to 10% per day this investment volatility can feel like a roller coaster both financially and emotionally. If you’ve been watching your investment portfolio day-to-day you may be feeling a bit nauseated by now.
Thankfully there is a fool proof way to manage this investment volatility, just don’t look.
Not looking at your investment portfolio is simpler said then done of course, but it’s the best way to manage investment volatility.
It’s been proven that we put more weight on negative experiences than positive experiences. We feel the impact of negatives more than we feel positives.
Even when they’re the same size, a loss feels worse than a gain. Losing $50 feels worse than gaining $50.
So with markets jumping up and down 5-10% per day this can lead to some VERY negative emotions. The positives just don’t out weight the negatives and we end up feeling worse and worse with each rise and fall.
But not looking at your investment portfolio can be surprisingly hard to do. So what can the average investor do to help themselves feel better during a market correction? What strategies can they use to avoid looking at their investment portfolio? What routines can they implement?
This post looks at a few different ways to help you manage the emotional impact of investment volatility.
At some point every retiree with an RRSP is going to need to make a decision about converting their RRSP to a RRIF. The Registered Retirement Income Fund (RRIF) works very similarly to the RRSP with a couple notable exceptions.
One of those exceptions is that there is a minimum RRIF withdrawal. Retirees need to make this minimum withdrawal from their RRIF each year. This minimum withdrawal escalates each year as the retiree gets older. By the time a retiree reaches their mid-90s they are forced to withdrawal 20% of their RRIF each year!
Because the withdrawal is a minimum, and conversion from a RRSP to a RRIF is mandatory, this often leads retirees to believe that keeping money in a RRIF is a good idea. After all, if they’re being forced to take money out, wouldn’t that suggest that keeping money in is a good idea?
For many retirees, taking out only the minimum RRIF withdrawal each year is actually a bad idea. Many retirees would benefit from a different RRIF withdrawal strategy. Many retirees would benefit from taking out more than the minimum each year. They would increase their financial flexibility, they would decrease the tax on their estate, and they could even qualify for certain benefits late in retirement.
RRIF withdrawal strategy is especially important now. The federal government just announced that the minimum RRIF withdrawal for 2020 will be reduced by 25%. This may lead many retirees to “take advantage” of this opportunity when it’s not necessarily in their best interest.
In this post we’ll look at RRIF withdrawal rules, the minimum RRIF withdrawal percentage by age, and we’ll explore two scenarios where we show how a retiree can benefit from RRIF withdrawals that are larger than the minimum.
We’ll also explore how this strategy is even more impactful now, after a large stock market correction.
They say the best time to plant a tree was 20-years ago but the second best time is now.
The same goes for financial planning. The best time to build a plan is before a crisis/recession/depression but the second best time is today. A good financial plan will help ensure that you’re prepared for a recession or financial emergency.
Having a financial plan provides an incredible amount of peace of mind. A good financial plan will already have anticipated a scenario like this and will ensure you’re still successful. It will highlight how to prepare for a recession and what changes you need to make to ensure you are successful over the long-term.
There are a few best practices that can help improve the ‘robustness’ of a financial plan. These are practices you can start using right away, even if they weren’t previously part of your plan.
Some of these best practices focus on behavior. They help manage your financial routine during emotional periods like this. Some focus on flexibility. They ensure that you have room in your plan to absorb the unexpected, whether that be changes in income, changes in expenses, or changes in investment returns.
It doesn’t matter if you’re in retirement, starting a family, or just starting to save and invest, there are a number of ways that you can prepare for a recession that will help you feel better about your finances and your long-term plan.
This post will touch on many of these best practices. These are best practices that we’ve covered in previous posts, so we’ll cover the basics here and link to past posts for more detail.
Congratulations! You’re starting a family or have already started a family and through all the craziness of raising children you’re also thinking about setting up an RESP. That’s fantastic!
As a new parent you now get access to a special tax advantaged account called the RESP and it comes with some special features that all parents should take advantage of.
As the name implies, the Registered Education Savings Plan (RESP) is meant to help parents (or relatives) save for a child’s post-secondary education.
There are a few benefits to the RESP that make it attractive to parents. One is that investments inside the RESP are able to grow tax free. The second is that contributions receive a matching grant of up to 20% or $500 per year, whichever is lower. Plus there are even extra grants and learning bonds available for lower income families.
But with all the attractive features of an RESP there are also some restrictions. These restrictions can sometimes be worrisome for parents and cause them to avoid setting up an RESP for their children. In this post we’ll explain what an RESP is, what you’ll need to set one up, some of the terminology you’ll encounter, and finally how to withdraw from your RESP in the future.
When planning to reach a financial goal, one very important aspect is the timeline. How much time do you have until you want to meet your goal? Is it 1-year, 3-years, 5-years, 10-years or maybe it’s a long-term goal like 25+ years.
Your timeline is a very important factor to consider. Your timeline is going to help inform decisions about how much risk you should be taking and the best way to invest.
One common mistake people make is that they make investment decisions without thinking about their timeline. They’re mostly focused on getting the highest return, making the most of their money, and not leaving anything on the table. But they don’t fully appreciate the short-term risk associated with a decision to “maximize returns”.
Over the long-term, taking on more risk can be a smart decision, but over the short-term that extra risk can cause some wild swings.
If you need access to money within a few years then you need to choose a good way to invest short-term.
Maybe it’s for a down payment, or maybe it’s to pay for post-secondary education, maybe it’s to pay for an expensive once-in-a-lifetime trip in retirement, or perhaps it’s a wedding gift for your daughter and soon to be son-in-law. Whatever the reason, if you need access to a large amount of cash within the next 3-5 years then you need a good short-term investment.