4 Ways to Maximize Your Income Today

4 WAYS TO MAXIMIZE INCOME TODAY

Tracy Piercy / February 13, 2014

The problem with the typical retirement plan is that it focuses on long term savings. This approach emphasizes getting high returns on investments, and cutting back on expenses to create a bigger pool of savings. Instead, the key to creating sustainable income is to use current income to create more money today and in the future.

Of course, market and interest rate risks are still a consideration. But the following concepts are about cash flow, not growth. So investment returns are minimal, and the overall concepts are less volatile. Flexibility and access to cash is the objective.

1. Leverage existing assets. If you can borrow money at a rate that’s slightly less than what you can earn on an income producing investment, then you create a cash flowing investment. This can be used to build an income producing asset. The spread between borrowing and investing can be as little as 1%. The key is that the investments are not invested for growth. They’re strictly for cash flow. If you do get a bit of growth, that’s a bonus.

Aim for long term returns in the range of 5%. So if the cost of your investment loan is $100 per month on interest only, and you can earn $125 to $140 per month from income, then the extra $25 can be applied towards the principal on the loan or towards reducing non-deductible debt.

A client recently used this strategy. He had home equity but minimal cash, so he set up a line of credit for 50% of the value of his home and then invested 75% of that into an income producing segregated fund. This income covered the interest,  plus some principal, on the line of credit. The client had access to cash to fund his lifestyle, and the line of credit paid for itself in 15 years with minimal tax implications.

2. Use savings to reinvest. A 60-year-old single, self-employed entrepreneur had $60,000 inside an RRSP. There was no way she could save enough to provide her with the $40,000 she currently needed for her lifestyle expenses. But, she could do this:

• Withdraw from her RRSP over five years for a net, after-tax monthly income of $792;
• Direct $500 per month of the net RRSP income towards an investment loan at 3.5%, and invest the $170,000 proceeds at 5% into a segregated fund; and then
• The net after-tax income on the investment is $500 per month, leaving a total monthly income of $792 per month. Finally, she can use these funds for lifestyle expenses, and to develop a product for her business so she can create additional income.

Her alternative to accumulate savings to provide $792 in passive income is to direct $1,589 per month at 5% towards her RRSP for five years. She’d end up with $170,000 that could be withdrawn over 45 years and would be fully taxable. But she’d have to sacrifice income today, and would not be able to invest in her business.

3. Insured retirement. This concept is one I learned over 20 years ago. It’s not relevant for everyone, but it can provide a cash flow solution. The concept is to direct the money a client is currently spending on life insurance towards a whole life or universal life policy. For example, if the insurance cost was $100 per month for $100,000 of life insurance, the cash value inside the policy over a 25-year period could amount to $50,000, or more.

This is the amortization many people have for their mortgages. So include the insurance/savings discussion when you’re talking to your client about a mortgage. Suggest buying term insurance, and investing the difference. Or create a complete package that builds an asset inside a policy, which can be used as collateral for a loan. This would provide your client tax-free income from the loan, as well as death benefits that would pay off any outstanding balance during the life of the mortgage.

4. Bank on yourself. This is another insurance concept involving whole life insurance. Funds are directed into the insurance policy for a short period of time. Then they’re used as collateral for a loan that doesn’t require conventional bank credit qualifications, and has flexibility on how and when it’s paid back, as well as what it’s used for. Plus, the money that remains inside the policy continues to grow.

Remember, this is a cash flow strategy. Say your client creates an asset inside the policy for $10,000. Then that asset can provide borrowing power for, perhaps, a car, an education or a holiday.

These are just a few approaches that reduce the emphasis on growth, and decrease expenses to plan for financial independence.

Tracy Piercy, CFP is the founder of MoneyMinding. She is an author, speaker and financial educator providing books, training, courses and materials for both advisors and clients to help create sustainable income and increase financial capacity.

Originally published on Advisor.ca

Pay Yourself First!

When I say 'pay yourself first' I am not talking about buying that new pair of shoes, or the latest gadget. The way I like to think of paying yourself is through a me tax; and think of that me tax as being paid to The Government of YOU!

What do you do after you get that money deposited into your bank? Go to the mall? The grocery store? Gas station? You are not alone. 98-99% of Canadians today get their paycheque and immediately go and spend their money on their needs and their wants. Then if there is any money left over, they put their money into some sort of a savings plan. You may remember from my prior post on the first cornerstone of financial planning we talked about two separate people; Person A and Person B. Let's look at these two people again.



Like I just discussed, we can see that Person A receives their paycheque and immediately spends their money on their needs and wants, then if there is any money leftover they then save.

However, Person B is who I strive to get all of my clients to become, it doesn't happen overnight, but through taking baby steps we will be able to move you more and more towards the financially independent Person B.

Every paycheque we are all used to seeing a certain percentage of our income deducted by the wonderful government, after all the other deductions we may have (CPP, EI, benefits etc.) we are finally left with our take home pay. Person B receives their paycheque and immediately takes a percentage off the top (like to government) and deposits it into some sort of a savings plan; this is why we refer to it as a me tax; think of that account as 'The Federal Reserve of You!'. 

The most effective way to set this up is so it is virtually automatic; the timing should be perfect here. What I like to do is set up your withdrawls so that they happen the same day you get paid. That way, the money is deposited, then withdrawn, and you barely even realize it was every there!

So I challenge you, set up a plan to pay yourself first! Better yet, call me and we can set up a rock solid plan! If you are already doing this, great! You one of very few people who are doing this! But where is your money going? Is it truly the best option for you?

If you would like to contact me, please send me a message in the box to the right. You can also reach me at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122, ext. 411.

"The Costly TFSA Blunder that People Keep Making"

Cornerstone Two: Retirement

Retirement is something most of us dream of and everyone looks forward to. From stopping or scaling down your work and travelling, to just relaxing at the cottage, everyone has different retirement dreams. However, what you do now determines how your retirement looks in the future. The plan you put in place will ultimately determine whether you are golfing on the beach in Florida, or mini putting at a miniature scale putting green.

If you are in your twenties and are reading this PERFECT! You are going to learn what you can do now to set yourself up for your dream retirement. If you are well into your working career and are reading this thinking about how much you procrastinated, it may not be too late, we just have a lot of catching up to do.

The first huge impact on how we save for retirement is inflation and the effects of inflation on not only the goods we purchase, but also how inflation erodes your money. To illustrate the effect of inflation I will use arguably the most debated topic of gasoline.

In August of 2000, the average price of fuel across Ontario was 70.3¢ per litre.

In August of 2014, the average price of fuel across Ontario is 139.2¢ per litre.

*http://www.energy.gov.on.ca/en/fuel-prices/fuel-price-data/?fuel=REG&yr=2000

Using these two numbers, we can see that in 14 years, the average price of fuel has risen 198% and almost doubled in price! Think if everything rose that much, what we would be paying for everything!? Now think how much of an impact that would have on your savings you are putting away today.

Through inflation alone, in the next 20 years your expenses are expected to double. So if we look at a 25 year old today with expenses of about $1500 per month, their expenses by the time they are 45 (due to inflation alone) are expected to double to $3000. Then if we look at their expenses by the time they are at retirement age of 65, they are expected to double again (again due to inflation alone). We all know that your expenses fluctuate over time however, this illustrates what consequence inflation will have on your overall cost of living!

Now that I have scared you away talking about inflation, I am now going to talk about how we can use compounding to battle inflation.

Compounding is the ability for your money to make money. How does this happen? Well the way I like to describe it is to think about a snowball. You can start out with a small little snowball and roll it down a hill. That little snowball is still there, however as it rolls down the hill it is gathering more and more snow and growing larger and larger.

How does this relate to money? Think of a small amount of money, say $100. Now lets say that money is put into a fixed investment that earns 4% over 5 years. The chart below illustrates how that $100 grows.

Beginning of Year	End of Year
$100	$105
$105	$110.25
$110.25	$115.76
$115.76	$121.55
$121.55	$127.63

As you can see, not only is the interest applied to the original $100, but it is also applied to the end of year balance from the previous year. This is a small scale example, now lets look at the procrastinator who delays their retirement until they are well into their working career, for this we will look again at Person A and Person B.

Person A is 25 years old today and starts to put away $2500 per year into some sort of a savings plan. Over the course of their working career, assuming they retire at age 65, they will be putting $100,000 into a savings plan. Now, assuming a conservative 4% interest rate, we can say that their $100,000 investment is expected to grow to approximately $250,000. Thats $150,000 of unearned money. Meaning you didn't have to put any effort in to make that $150,000!

On the flip side, lets look at Person B. This person procrastinates and procrastinates their retirement then realizes by age 45 they have nothing in place for their retirement. So at this point, instead of putting away $2500 they start putting away $5000 per year. They are still putting away the same $100,000, however assuming the same 4% interest rate, their money is only expected to grow to $150,000. Thats a difference of $100,000 and about 60% more!

You might still be wondering and asking, well Scott, how does that work? To explain this let me go back to the snowball example.

Person A is young today and since they are young chipper and in shape, they can climb all the way to the top of the hill. They make a small snowball and roll it from the top. Since they have the whole distance of the hill to roll their snowball down, their snowball grows quite large.

Person B however is 20 years older. Since they are older and not quite as in shape as they once were, they can only climb half way up the hill. They make the same size snowball as Person A started with, however their snowball is rolling for a shorter distance and doesn't grow to nearly the same size as Person A's snowball does. 

Now that I have illustrated both the nasty effects of inflation and how you can use compounding to battle this, I have now concluded my talk about retirement. I hope that you have started your retirement savings, and if you have congratulations! If you have not, get something going. Every little bit helps. Maybe instead of buying all your coffee's at Starbucks, you can start to make them at home!

Start early and put time on your side. As I talked about in liquidity the government and our employers are giving us less and less so you are the largest part to contributing to your retirement.

If you would like to start your retirement savings now call me. We can work through your exact situation and create a retirement plan that will help you retire in Florida or at your new cottage, rather than in your backyard.

If you have started your retirement savings great! Let's still sit down and evaluate what you have. Let's have a look at what you are putting away and if that truly is enough to retire comfortably with. 

And finally, if you are retired, congratulations! Do you know if your money will last you for your whole retirement? What if I told you I can predict if and/or when that money will run out. Let's sit down and look at your current situation.

I can be contacted be email at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122 Ext. 411.

Thank you and stay tuned!

What are TFSAs and how do they work?

I have met with a number of clients and at almost every meeting the topic of a Tax Free Savings Account (TFSA) arises. Almost every single client has heard of TFSAs however nine times out of ten they do not know how TFSAs work, so that led me to write this breakdown of the governments (fairly) new great tool called the Tax Free Savings Account.

TFSA Eligibility

TFSAs were introduced by the government to the Canadian public on January 1, 2009. In order to be eligible to open and contribute to a TFSA you must be a resident of Canada and must be over 18 years of age. Unlike registered retirement savings plans (RRSPs) however, there is no maximum age for TFSAs (RRSPs have a cut off age of 71, at which point the money must be transferred out of your RRSP).

Contributions

Each year, everyone entitled to a TFSA in Canada accumulates ‘room’ in their TFSA meaning your contribution limit accumulates year over year. The following shows an example of someone’s contribution limit assuming they were 18 when TFSAs were introduced in 2009.

Year	Contribution Room	Cumulative Contribution Room*
2009	$5,000	$5000
2010	$5,000	$10,000
2011	$5,000	$15,000
2012	$5,000	$20,000
2013	$5,500	$25,500
2014	$5,500	$31,000

            *Cumulative room assuming no contributions since TFSA inception

As noted in the chart above, if someone had not opened a TFSA to their name since the inception of the savings vehicle in 2009, they would have $31,000 of contribution room that they could put money in, to shelter from taxes as all contribution room is carried forward. As you can also see in the chart above, the government has promised to rise the contribution room by $500 as needed to keep up with the rate of inflation (the first rise being in 2011).

Investments

What can you do within your TFSA? Some people will settle with the 0-2% the bank may pay them for just holding the account, however you can actually hold almost any type of investment inside your TFSA. The following are some types of investments you can hold within your TFSA:

• Mutual funds
•  Segregated funds
• Stocks
•  Bonds
•  GICs
•  Gold
•  Cash

The nice thing about a TFSA is that since these investments are held inside your account, all the growth that happens inside that account is 100% tax-free! That means no reporting your gains and no government dipping their hands into your return on investment.

What are you waiting for?

Some experts have matched TFSAs with RRSPs in terms of the overall benefits to the consumer, and some have even ranks TFSAs well above RRSPs. I believe everyone’s situation is different however I am a firm believer in TFSAs and if the client’s situation permits, I incorporate it into all of my client’s plans.

Keep in touch for my post where I will discuss RRSPs vs TFSAs and which one you should consider first.

http://boysfin.ca/wp-content/uploads/TFSA-vs-RRSP.jpg

Let’s sit down today and assess your plan. Let’s look at your current TFSA and see if you are getting the biggest bang for your buck; and if you don’t have a TFSA lets meet and go over your personalized plan.