Savings vs. Investing…What’s the difference?

In my last blog I referenced the terms Savings and Investing and asked if you knew what the difference between the two are. Each have very different meanings, uses and maintaining a balance between the two, will help you reach your financial goals.

Before we get into looking at the differences between saving and investing, let’s agree that daily expenses like groceries and that cell phone bill are separate from savings, and should be treated that way.

Okay, now that we have that cleared up let have that chat savings!

Simply put……Saving is for today

Putting aside a percentage of your income each month into a separate savings is a great habit to develop and will help you achieve your short-term financial needs. These regular savings will help you manage your Cash Flow Plan, pay for vacations, deal with unexpected expenses, and use less credit.

You know the saying “save for a rainy day”. Rainy days in these instances refer to times of trouble, which is why we are always told to save for a rainy day. Rainy day funds are the same thing as emergency funds, so it doesn’t matter what you call your savings, it matters how you use them.

What would happen if your furnace needed replacing or the roof started leaking? Would you have enough in your rainy day account to cover the repairs, or would you have to turn to your credit card or line of credit putting you into debt? If your answer is to put it on the line of credit or credit card, you don’t have enough saved. Another way to tell if your savings are in good shape; is to watch your spending, and if you’re regularly dipping into your long-term savings to pay for short-term needs, you don’t have enough money in savings.

We have all heard that the general rule of thumb is to have between 6 and 12 months of living expenses in your savings……so how much do you have in savings?

Investing is for tomorrow

We can’t rely on our savings to fund long-term goals, like our children’s education and your own retirement. Why? Because money in our rainy-day account is held inside a savings account or even a high yield savings account which earns minimal interest, therefore produces minimal growth.

Investments, however, can grow over time.

A common belief about investing is that it’s risky, and while it is true that investing does involve taking on some degree of risk, putting too much in your savings leaves you at risk of not achieving your long-term financial goals. Even those high yield savings account may not be keeping up with inflation, which means you’re not saving as much as you think.

Over the long-term your investments will most likely produce better returns, giving you a better chance of achieving your long-term financial goals.

Let’s look at a comparison!

Using an example to demonstrate the difference between saving and investing, and how each can affect your bottom line.

Suppose you have a savings account with $5,000 and contribute $300 each month into a savings account that pays 2% interest. After 25 years your savings account will have accumulated to $124,757.51.

Now let’s say you have the same $5,000, but instead decide to contribute $300 per month towards a diversified investment portfolio that earns an average of 6% a year. After 25 years, you will have accumulated $225,333.60.

As you can see, Saving and Investing have very different outcomes. While saving helps you to achieve short-term financial goals like buying a new car or going on annual beach vacations, investments will be used for long-term financial goals such as your children’s or spending 6 months in a tropical or dessert city.

Having savings to cover those rainy days expenses means you are prepared for the curveball’s life loves to throw at us. Investments, on the other hand, are there for your long-term goals and the question isn’t if you should save or invest, it’s how much money should I save? and how much should I put towards investments?

Not on track….no worries, we can help you set up a savings and investment plan that will help you achieve your financial goals and give you financial peace of mind. Give us a call for a complimentary no obligation meeting.

Please email information@zakuskowalchuk.com or call 778-215-7230.

The information contained in this post is of general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed, and Zakus Kowalchuk LLP assumes no responsibility or liability.

Let’s talk Investment Fee’s

This seems to be a hot topic within our professional associations, investor groups and the media. And its something that we should all understand and be aware of.

There is one issue that comes up with several colleagues and that is the advertisements we seen on TV. In particular, the Questrade ads which claim you could retire 30% richer. These ads could be confusing, because the first thing that comes to mind is; can they generate that much more of a return? After all, we are all largely programed to think Rate of Return.

However, this is not what they are referring to, and in fact they are referring to Investment Fee’s. The impact that Investment Fee’s play on your portfolio can be significant over time. Let’s look at an example of how Investment fee’s can impact your portfolio:

If you have a starting portfolio with a value of $50,000.00, with an average rate of return of 5% over 20 years

Data: BC Securities Commission

Paying a 2.5% fee rather than a 1.33% fee on your $50,000 investment could reduce total returns by more than $20,878 over 20 years, assuming a 5% annual return.

Even a 1% difference in the fees you pay can have a big impact on your investment returns.

Understanding Investment Fee’s is important as I have demonstrated, but we cannot discount the value that a Professional Financial Advisor provides. Studies have shown that households that engage the services of a Professional Financial Advisor have 4.2 times the median assets verses households that do not use a Financial Advisor.

Professional Financial Advisors do more than help Canadians save for their future. They help protect the savings their clients have accumulated through comprehensive planning and deploying strategies using a wide range of life and health insurance and investment strategies. Employing the services of a Financial Advisor, clients are better protected today, and are better prepared for retirement than people who do not receive advice.

Understanding your Investment Fees is important, and once you do, you can evaluate the true cost of the investments in your portfolio and the services you are receiving from your advisor.

Remember, lower fee options shouldn’t reduce the value of services provided by your Advisor. Make it a habit to ask questions about Investment Fees, after all it is your money.

Would you like to see if you could be receiving more value and advice while lowering your fees? Email information@zakuskowalchuk.com or call 778-215-7230 for a chat.

Want more Insurance and retirement savings tips? Sign up for our free newsletter on our home page. www.zakuskowalchuk.com

The information contained in this post is of general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed, and Zakus Kowalchuk LLP assumes no responsibility or liability.

The ABC’s of RRSP

We are twenty-one days into what some advisors call “RSP season”, so we wanted to take a step back and help you better understand RRSPs and the benefits, here are the ABCs of RRSPs:

A: Automatic RRSP Contributions

Setting up an automated RRSP contribution plan (PAC) can substantially increase the value of your portfolio. Benefits include less stress as to when to invest, helps remove emotions from investing decisions, you avoid missing contribution deadlines, and you’re giving your money more time to work.

B: Behavioral Cash Flow Planning

With the holidays now over, you are probably avoiding your credit card statement and your bank account balances. The holidays can be an expensive time of year and even if you vowed not to over spend, there was probably that one gift you couldn’t resist. No worries we can help identify areas that can help pay out your debit and save you money that you can invest in your RRSP.

C: Contribution Limits

Yes, there are limits on what you can contribute to your RRSP. Contributions are either 18% of your pre-tax earned income, or to a maximum of $26,230.00. Contributions made in 2018 and the first sixty days of the new year can be used on your tax return to reduce taxable income.

The deadline for contribution for 2018 is March 1, 2019.

D: Diversification

Diversification is a risk management strategy that mixes a variety of investments within a portfolio. If a portfolio is properly diversified and constructed with different kinds of investments it’s more likely to generate higher returns and minimize risk for you, the investor*.

E: Exchange-Traded Fund (ETF)

What is an ETF? An exchange-traded fund (ETF) is an investment fund similar to a Mutual Fund, but it tracks an index like the S&P500 and is traded on stock exchanges. ETFs typically have lower fees than mutual funds and can hold assets like stocks, commodities, or bonds just like a mutual fund. Our Investment Partners use them to construct your portfolio – contact us to find out more.

F: Freedom

Having professional portfolio managers manage your investments can help free up your time, so you can enjoy spending more time on the things that matter.

G: Goals of the Retirement Kind

Having enough money for a comfortable and secure retirement is a great financial goal that everyone should have. Maxing out the contribution limit in your RRSP is one way to help you get there faster. However, you need to understand all your Investment vehicles including what pension income you will have before you maximize your RRSP account. You might have other financial goals including things like saving for your child’s or grandchild’s education or saving up for that dream vacation!

H: Holdings

Holdings are what your portfolio is made up of (like ETFs, options, bonds…etc.) The kind of holdings, and how many you have in your portfolio, can contribute to how diversified your portfolio is*.

I: Income

Having an income is necessary to building wealth and living! Income can be defined as money a person receives in exchange for providing goods or services. Income in Retirement is the amount you earn from savings to fund the things you want to do.

J: Justifying Fees

Can you justify paying high fees on your investments that eat up your returns? The value that your advisor provides is important, and they can help guide you towards all of your goals. This doesn’t mean you need to pay high fees for professional advice! It could be time to look at working with a firm like ours where we offer an investment platform without the high fees and without sacrificing sound financial advice and investment returns.

K: Know Your Client (KYC)

The Know Your Client (KYC) is a standard form in the investment industry that ensures advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial situation*. In other words, it’s how we get to know you at first!

L: Low Fees

Paying lower fees on your investments means more money for your bottom line in retirement.

M: Money

Money makes the word go around and making regular contributions to your RRSP can ensure you have enough money for a comfortable and secure retirement.

N: New Investment Platforms – you have choice!

Our Partners at Nest Wealth are Canada’s first “robo-advisor”, offering a simple and easy way to investing. Using smart technology and proven investment principles, they can monitor and manage your custom portfolio at a fraction of the cost.

They take a passive approach to investing and build your portfolio to “be the market”, not “beat the market”, because history has proven time and time again that you’re likely to accumulate more wealth by investing passively. So, while you’re busy with life, your Nest Wealth Portfolio Manager is busy monitoring and rebalancing your portfolio, and ensuring your assets are properly diversified, in order to help you achieve your financial goals.

Does this mean you don’t have an advisor? Not at all. We have Partnered with Nest Wealth to offer clients discretionary portfolio management, while we define, create and manage your financial plan and all the details that go into working with you to reach your unique and personalized goals.

O: Opportunities

Opportunities are the things you want to do! What do you want to do in five years, or fifteen years from today? We can help you plan and achieve these opportunities.

P: Passive Management

Passive management is an investing strategy and is the opposite of active management. Passive managers track the market and know successful investing is about time in the market, whereas active managers aim to time the market in order to beat it. Research has shown passive investing outperforms those that are trying to beat the stock market. Using this as a foundation, your portfolio will be designed to “be the market”, not try to “beat the market”, meaning our clients have constructed portfolios at a lower cost and are also likely to outperform most traditional portfolios over the long run.

Q: Questions

We know that you have questions about your financial planning activities, and we are always available to answer them for you. Be it over messenger, email, a phone call, or in person, we’re here when you need us.

R: Retirement

According to a study by Statistics Canada, 31% of those surveyed between ages 45 and 60 said their financial preparations for retirement were insufficient. Further, a study by RBC revealed 56% of non-retired Canadians were worried they wouldn’t be able to enjoy the life in which they are currently accustomed to. Are you worried? Will you be able to enjoy the lifestyle you want for you and your family?

S: Savings

Savings will typically be a savings account, and will be used to pay for kid’s activities, vacations or even those unexpected expenses. Savings allows us to use less credit, and ultimately ease our financial stress. We can’t rely on savings to fund our long-term goals, like retirement. Why? Because money in a savings account earns minimal interest and produces minimal growth.

Investing, on the other hand, can help grow your investments for long term goals like retirement. The question isn’t if you should save or invest, it’s how much money you should put towards your savings and how much should you put towards your investments. Working with an advisor can help you determine the best allocations.

T: Tax-Free

RRSPs have many benefits, two of which are not to be ignored: the tax refund you receive when you contribute to your RRSP, and tax-deferred growth. Money in your RRSP will eventually be taxed when you withdraw it, but because most people earn less income in retirement, the withdrawals should end up being taxed at a lower rate!

U: Unique

Each client is unique, so we work with you to identify your opportunities and then work with our Portfolio Manager to construct a custom portfolio for you.

V: Value

Investment fees in Canada are way too high. As I mentioned earlier, the value of using a Professional Financial Advisor is paramount. There are studies that show clients who work with an advisor are more likely to achieve their retirement goals than those who don’t. But quality advice shouldn’t be mistaken for high investment fees. As a client you need to ask yourself, is the advice I am receiving worth the thousands of dollars in fees that I am paying each year.

W: Wealth

What does Wealth mean to you? At Zakus Kowalchuk LLP, wealth means having more time, freedom, and choice. More time for our clients to spend on the things that matter most to them, more freedom for our clients to spend their time as they wish, and more choice as to how our clients spend their time and freedom on what brings them the most happiness.

Looking at it another way, to the young professional, wealth may mean being able to afford rent, food, and some after work drinks with coworkers. To the athlete, wealth may mean being able to afford equipment and training. To the cancer survivor, wealth may mean having a clean bill of health. And to the grandmother with five grandchildren and three great grandchildren, family may be the greatest form of wealth.

Have you ever heard the saying – you can always make more money, but you can’t make more time!

X: X Marks the Spot

X marks your target, whether it is a short-term opportunity or longer-term objective, meeting with an advisor can help you start mapping out your financial future.

Y: Yield

Yield is the income return on an investment (like interest or dividends) *.

Z: Zzz

I could have talked about having a “Zero Balance Credit Card” but to me the letter “Z” is the sound of you sleeping peacefully knowing you have a Financial Plan and that your portfolio is in good hands.

Final Thoughts

Regardless of your view of the market, contributing to an RRSP is a smart money move and is one strategy in the journey to creating opportunities for you and your family!

*Definitions sourced from www.investopedia.com

Want to discuss your RRSP Strategy? Please email info@zakuskowalchuk.com or call 778-215-7230 for a chat.

Want more Insurance and retirement savings tips? Sign up for our free newsletter on our home page.

The information contained in this post is of general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed, and Zakus Kowalchuk LLP assumes no responsibility or liability

What’s Your Number?

It’s the million-dollar question….no pun intended, but it’s a number you should have some clear direction around.

What if you were sitting with a travel agent, planning that dream vacation you want to take twenty or thirty years from now. Seems crazy right? You don’t know where it will be, how much it will cost or how long, but you are putting aside money every month for the trip. You’re not even sure how much to save or when you have saved enough. Crazy, huh? Well welcome to Financial Planning.

So, do you know your number?

When I meet with new clients and I ask them what their number is, some aren’t sure what to say, some kind-of have an idea and some have a clear number in mind.

Is your number one million dollars, two million dollars or something less? For everyone that is still in their working years, you are expected to anticipate your future expenses, the amount that you need to cover those expenses, so you can enjoy your golden years. Seems daunting?

As Financial Advisors, we can help you determine what your number is by using multiples of final salary to percentages pegged to your pre-retirement income. But no one formula fits every person or life stage, and there are a few other factors and questions that need to be talked about.

Here are a few questions that you’ve probably been asked:

– At what age would you like to retire?

– What do you want to do when you retire?

– Will you want to travel every year?

These are important questions, and the answers will help map out your number to fund your golden years. However, we also need to keep six planning factors in mind and how they relate to you in determining your number.

Pension Incomes: Will you have an employer sponsored Pension Plan?

There are still Canadians who have Defined Benefit Pensions. These pensions guarantee a monthly income in retirement for life. However, not all Defined Benefit Pension plans are as secure as others. One of the most notable examples is Nortel, where pensioners are not receiving their full benefits they thought would be there.

According to Statistics Canada, there are approximately 4.2 million workers with defined benefit pension plans. Of these, 1.3 million are privately funded putting them at risk if the company declares insolvency or becomes bankrupt.

The other pension plan that is more widely offered today is a Defined Contribution Plan. Defined contribution plans are pretty much like an RSP where both the employer and employee make contributions. The amount available for retirement income is linked to total contributions and market growth.

We also have the Canada Pension Plan (CPP) which pays a monthly benefit and is based on your earnings and how much you contributed during your working years. The maximum monthly amount in 2018 is $1,134.17 with the average being $673.10 a month.

The second Federal pension is the Old Age Security. OAS yields a lower basic monthly benefit of $596.67 in 2018 and is subject to claw back rules.

From “Your Number” standpoint, the more reliable pension income you have, the less you potentially need to save…..maybe.

How long is your retirement going to be? One of the questions commonly asked is “when do you want to retire?” The earlier you retire, the more money you are going to need to draw from for the rest of your life. Will your number cover your retirement period for twenty years, thirty years or longer?

This seems to be basic right? but now you need to determine your Savings Rate.

The growth of your savings matters. We can all agree that the higher the rate of return on your investments, the better, and it could mean less you need to save. The opposite is true, the lower your investment return, the more you are going to have to beef up that retirement nest egg. If only it was possible to know in advance what your returns are going to be, planning would be some much easier. Future returns are unknowable. So be careful to use conservative return assumptions in your planning. Over-estimating future returns will result in under saving and increase the risk of outliving your money while in retirement.

Investment vehicles also play an important role in structuring retirement income. Investments such as Annuities are often overlooked for the potential of higher investment returns, but they could provide a steady known stream of income.

Retirement spending. Retirement means different things to different people. If your life style in Retirement will cost $100,000 dollars a year, you’re going to need to save more than someone who is comfortable living on $40,000 dollars a year. Knowing what your Retirement lifestyle looks likes is going to be is an important thing to consider. Remember that question I asked earlier? What do you want to do in retirement?

Are you a homeowner? If so, you have another asset that can potentially support you in retirement, perhaps in your later years. Real-estate can make up a significant asset for homeowners and if this asset doesn’t exist you will need to create a larger nest egg.

Legacy. Are you planning on leaving money or a specific asset to your children or even a grandchild? How about a favorite charity? Your number will need to represent the legacy that you want to leave.

No matter what your age, you should have at least some idea of what your number will need to be in retirement to live your desired lifestyle. As I already shared, you can use a multiple of final salary or a percentage pegged to your pre-retirement income. Most Financial Advisors set this number at 70% to 85% of pre-retirement household income.

Case Study

Let’s look at a savings rate of 5%

Meet Kara, a 30-year-old who earns $40,000 per year, and expects 1.5% raises each year until her retirement at age 67. Investing in a diversified portfolio with an expected annual rate of return of 6%, Kara will have accumulated $316,592.07 at age 67.

If Kara needs 75% of her pre-retirement income to fund her desired lifestyle, she will need $4,272.84 each month.

Based on her current savings she could withdraw $1,054.02 per month, include Canada Pension and Old Age Security, the savings rate of 5% is significantly short of her desired goal.

So, what is Kara’s number?

Using the same assumptions, Kara’s number is $902,000.00 which is a 14.25% savings rate. Adding in Canada Pension and OAS her retirement would be funded.

The bottom line is you need to know what your number is and what factors can have an impact on it. Planning is not something that you do shortly before you stop working. Rather it is a life long process that will go through several changes as your personal circumstances change.

Want to discuss what your number is? Please email info@zakuskowalchuk.com or call 778-215-7230 for a chat.

Want more Insurance and retirement savings tips? Sign up for our free newsletter on our home page.

The information contained in this post is of general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed, and Zakus Kowalchuk LLP assumes no responsibility or liability

RRSP vs. Mortgage Contributions?

I have an extra $1,200.00…what should I do?

This might be one of the most asked personal finance question in Canada. Most people would lean towards putting money into an RRSP because of the tax credit and the possibility of a higher return. However, some people don’t realize the tax savings related to reducing their mortgage principle.

So what is the right answer? To help you make the right decision we must first look at both options.

First let’s look at the pros and cons of each strategy:

Mortgage Prepayment

· Putting extra money against your mortgage will certainly help you become mortgage free and debt free sooner.

· Your mortgage payment is a combination of interest and capital, but in the early years of your mortgage more of your payment goes to interest.

· Any “pay-down contribution” goes entirely against the capital and cuts the length of time and total interest paid dramatically.

As an example, if we have a $120,000 mortgage with a 25 year amortization period, paid monthly, adding that extra $1,200.00 per year for five years would reduce the repayment schedule by 1yr 8 months and could save $8,033.04 in interest.

Sounds good doesn’t it? And most people would elect to put this into action, but we still need to look at the effects of putting those funds into the RRSP.

RRSP Investing

If you take this amount and invest it into your RRSP, not only will that money grow tax deferred each year, but you also receive a tax credit for the annual contribution. This can result in a tax refund that we have all received at some point in our working years. The key is to make sure we use the refund to reinvest verses using it as a cash windfall for a holiday or simply spending it.

Let’s look at the numbers:

If we invest that same $1,200.00 in each of the next five years, with an annual rate of return of 5% you would have $6,962.00 in your RSP. Now let’s assume you take your annual refund and invest it back into your RSP. Assuming a marginal tax rate of 22.70%, your RSP could now be worth $8,605.00 in year five.

Saving for your retirement is always a good idea and taking advantage of compounding growth and tax deferral will see you build a sizable nest egg for your retirement.

Looking back at our example, with an interest rate of 3.89% on the mortgage, and if you can realize a rate of return of 5% each year in your RRSP, then on paper investing the extra funds seems like the right choice. However there are no guarantees that the markets will produce a 5% rate of return year after year.

The rates we pay and the returns we earn are not guaranteed. So what is the right choice? Like most things, there is no right answer and it will depend on your personal situation. However both options or a hybrid approach should be evaluated to determine the impact on your financial plan.

Kevin J. Zakus, is the Managing Partner at Zakus Kowalchuk LLP in Kelowna, British Columbia. You can email him at kevin@zakuskowalchuk.com.

Kevin’s opinions and comments expressed are his own and may not accurately reflect those of the firm. The information contained in this post is not intended as investment, tax or legal advice and is provided as information only.