Money Questions

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    credit score
    credit score
    Shannon from Peterborough Asked:

    I’m trying to raise my credit score, is getting a loan for an RRSP (retirement contribution) a good idea?

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    Credit score questions are best addressed by our Mortgage Agent, Shawna Thompson:

    The real question is, how do you raise your credit score?

    We received the following question:

    “I’m trying to raise my credit score, is getting a loan for an RRSP (retirement contribution) a good idea?”

    This is a loaded question.

    You see your credit score is calculated using 5 major criteria balanced against each other.

    1. You payment history. This is inclusive of: Bankruptcies, late payments, past due accounts and wage attachments, collections and judgements. Basically… what payment patterns have you demonstrated in the last 2-7 years?

    2. Amounts Owed. Note this means the amount you owe or use vs the amount available to you. Are you showing restraint? You show restrain by keeping your balance below 75%, paying on time and making more than the minimum payment.

    3. Length of credit history: The amount of time you have had your credit products. The key word here is history. This is a great way for lenders to have an indication of your character as a borrower. The best indicator of future behaviour… is past behaviour.

    4. New Credit: The number of credit inquiries you have had within the last year. Are you desperately looking for new credit or are you keeping inquires below 6 per year?

    5. Types of credit accounts (Credit Cards, Retail Cards, mortgage lines of credit, Loans and etc.) Technically speaking… and to make things confusing, there are 2 types of credit accounts: Fixed and revolving.

    A fixed account would be a loan with a fixed payment schedule. This is like a car loan. It has a fixed payment set by the bank that you pay over time. Also you don’t gain to access to credit as you make your payments.

    Revolving accounts are like credit cards. These accounts have a standing limit that becomes available to you to use again, as the payments are made.

    Revolving accounts can have a faster positive effect on your credit. They give you the chance to show “fiduciary responsibility”. This means you show restraint, by not using all the credit available to you. You also build character by making sure your payments are made on time. It’s also good to exceeding the minimum balance owed as a demonstration of good character.

    You are caring for your credit and repayment, instead of following a payment plan.

    The five elements above are used in a equation that calculates your FICO score. This is also known as your Credit score.

    So in answer to your question: “…is getting a loan for an RRSP (retirement contribution) a good idea?…” the long and the short is… it depends. It depends on the current state of all of the outlying elements on your personal credit report.

    Unfortunately savings and contributions to your savings accounts don’t have any effect on your credit score. And while it is advisable to contribute to your RRSP for the financial security of your future, the act alone will not affect your credit today.

    However, taking out a loan may have a positive effect on your credit depending on the existing state of your report.

    I would suggest that you have a credit specialist look over your existing credit report. They can highlight any problems you need to address. They can also let you know if taking out the RRSP loan is likely to help you improve your credit.

    Finally, it is important to remember that a credit score is like a bolder on a hill… it’s not a problem if it’s at the top as it’s easy to keep it there…

    But, if it starts to fall it can gain momentum and it takes a lot to stop it and more to push it back up.

    That said credit care is an important practice. So take an active interest in your financial education and keep a watchful eye on your score.

    Answered on October 2, 2016 Ask Another Question
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    mortgage insurance
    mortgage insurance
    Daisy from Brampton Asked:

    I just bought my first home. My mortgage provider offered me mortgage insurance…should I take it?

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    Mortgage insurance can be tricky, let’s hear what our Living Benefits Insurance Specialist, Adam Gordon has to say:

    For Most Canadians, a mortgage on their home is their single biggest investment; maybe their biggest liability.

    Most mortgage providers, such as banks and trust companies, will offer their borrowers a product called either mortgage insurance or mortgage life insurance.

    The product is sold on the concept that if an untimely death were to happen to the borrower, the mortgage insurance provider would pay off the remaining mortgage balance. This would allow the surviving family to have a home without any money owing on it.

    While this concept sounds great in theory, the challenge is that most people do not understand how mortgage insurance works, or how it compares to individually owned life insurance. 

    Here are a few key points for you to consider:

    Mortgage insurance is a product that is owned by your lender. Each time you either renew or change your mortgage provider, you have to re-apply for the mortgage insurance. If your health has changed at all, you may have a more difficult time getting approved for the new coverage.

    Individually owned Life insurance is a product that you own, not your lender. Life insurance can offer a contract that remains under your control for your whole life. Once your policy is approved, you do not have to re-apply for new coverage if you change your mortgage provider.

    Mortgage insurance charges the borrower the same amount of money every month, however the amount of coverage that it provides decreases every month. This is because each mortgage payment you make reduces the amount of “principal” that you owe your lender.

    Life insurance on the other hand does not reduce the amount of coverage you have, even as you pay down your mortgage. This can be important as we tend to have more financial responsibilities as we get older, not less.

    Lastly, Mortgage insurance providers often investigate a person’s health records after they pass away. This allows them to potentially find minor health information that can allow them to decline paying out a death claim.

    Life insurance providers do their health investigations up-front, before they even offer a policy. This is important as you do not want to pay for a product that will not be there for you at a time you and your family need it most.

    There are many more reasons to consider Life insurance versus Mortgage insurance, so make sure you choose the one that is truly best for you. Contact a licensed advisor to learn about the benefits and flexibility of Life insurance.

    Answered on April 11, 2016 Ask Another Question
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    Jess from Vaughan Asked:

    What is asset allocation and what should mine be?

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    Asset allocation is definitely best explained by our Financial Planner &  Money Coach, Trevor Van Nest:

    You may have heard that, when it comes to investing, your asset allocation is the most important factor.

    Generally the process starts by completing a risk profile questionnaire that poses questions about your level of sophistication and knowledge when it comes to investing, your investment timelines, and how you would feel under certain circumstances.

    Example question:  “How would you feel if your portfolio dropped by 25% tomorrow?”

    Example answer:  “Ahhhhhhh!!!!!!”

    This might indicate that a portfolio comprised of a single equity sector (that’s one stock / industry) is not right for you.

    The objective of the risk profiling exercise is to understand what your asset allocation should be.  Asset allocation refers to the percentage of your portfolio that should be held in stocks, bonds and cash (generally).  You might also hear it referenced as equities, fixed income and cash. They each have different risk levels so you’ll want to have the mix that meets your risk and growth needs.

    Someone with long investment timelines, more knowledge, and a comfort level with risk will likely be directed to a portfolio more heavily weighted towards stocks/equities (meaning an ownership stake in a number of companies).  Someone with shorter investment timelines, less knowledge and a desire to retain capital (so more risk-averse) will likely be directed to a portfolio with more bonds, GICs and cash (lower return and lower risk products).

    Once an investor’s risk profile is determined, asset allocation is a relatively simple exercise.  And the experts don’t argue much about the percentage weightings for an aggressive vs. a conservative investor.

    When you hear the term ‘balanced portfolio’, this generally means a portfolio equally weighted between equities and fixed income investments and usually has only moderate risk.  It is typically recommended for those with medium to long term timelines, some knowledge and a balanced view on growth. This mix takes into account that some capital may need to be at risk in the short-medium term in order to achieve better average long-term returns.

    It’s important to keep in mind though that one investor may have multiple objectives.  If they have a retirement account for themselves, and a savings account for their next car purchase, each of these portfolios requires a different assessment of risk, and a different portfolio asset allocation.

    It should also be noted that ‘geographic’ diversification is also critical as Canada only represents about 4% of the global equity opportunities available.  Most balanced portfolios have about twice the weighting in International equities as Canadian.

    Remember, understanding your own personal investment risk profile is important.  There are as many opinions as there are products, so the more you improve your own financial literacy, the more likely you’ll know what is best for you.

    Answered on April 8, 2016 Ask Another Question
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    Nassim from Toronto Asked:

    How much on average should I be saving a year relative to my salary?

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    How much should you be saving a year… this is a great question although there isn’t a one-size fits all answer, but here are my thoughts.

    No matter who you are, what age or how much money you make you should be saving at least 10% of your after tax income.

    Even if you don’t make a lot of money and your budget is tight, you need to be saving. It is inevitable that eventually you’ll want or need to spend money on something that is not part of your monthly expenses.

    What should your savings be allocated towards?

     1. Emergency Fund

    The first thing everyone should save for is an emergency fund! Despite all planning, unexpected expenses and decrease or loss of income occur more often than you might think. You need to be prepared for the unexpected. The great thing with saving an emergency fund is once you’ve saved enough, you can stop contributing to it and allocate your savings elsewhere

    2. Retirement Planning

    Retirement saving is critical! I can’t express enough how important it is to put money into your retirement fund on a regular basis. It often feels unnecessary or premature to take your distant future into consideration, however, you will be so grateful down the road when your retirement will be adequately provided for. In order to properly fund your retirement years, you should start putting money aside regularly as soon as you can, even if it is just a small amount. Don’t forget when you start saving early, you have the benefit of compound interest.

    3. Large Ticket Items & Life Style Changes

    Any large ticket items, such as a vacation, a special gift, a car, a wedding or some other large expense should be planned and saved for. If you’re someone who enjoys indulging in high price items or experiences, you need to save for them. Also, if you’re thinking of making a significant lifestyle change like going back to school or taking a year off work for maternity leave, you have to plan in advance in order to cover the cost of living during that time.

    One way to increase your savings is to save a portion of every raise you receive. An example would be, if you get a promotion with a 4% increase you could save at least 2%. You were hopefully doing just fine before, so you won’t miss the extra income.

    Be careful to avoid lifestyle creep. This is when you get a promotion with a raise and you buy a new wardrobe to match your new fancy title.  Sometimes those “matching accessories” can cost you even more than the increase in pay you received.

    To sum it up, life can be expensive which is why is pays to save in advance. 10% is the minimum you should save, but if you can save more, good for you… definitely go for it!

    Limor Markman
    Answered on March 22, 2016 Ask Another Question
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    Shawna from Brampton Asked:

    Should I take advantage of my employer matching my investment contribution?

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    Taking advantage of employer matching is like free money!

    As long as you don’t have to go into debt to cover your monthly expenses, my opinion is YES you should!  When you have an employer matching program it is like having  100% guaranteed return on your investment, what could be better than that?!?

    I’m continuously boggled by the staggering high number of employees who don’t take advantage of free money. I know sometimes the enrolment process for these programs can be a little cumbersome, but really? I would fill out piles of paperwork to get free money, but hey, that’s me!

    Employer matching on your investment also creates a bit of forced saving for you. Every month or pay cheque you’ll be putting money aside, whether it is for short term or long term savings. You probably won’t even notice that those few extra dollars aren’t making it into your checking account.

    With the current volatility of the stock markets and low rate of return on low risk investments, 100% return is as good as it gets. So I urge you to sign up for matching, whether is RRSP, stock purchases or any other program… and tell your colleagues to sign up too, while you’re at it!

    Enjoy the free money.

    Limor Markman
    Answered on February 6, 2016 Ask Another Question
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    Rebecca from Winnipeg Asked:

    I only save a small amount every month, what should I invest in?

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    Only save a small amount of money… that’s ok!

    First of all good for you for making investing a priority even if you are only able to save  a small amount of money each month for investing.  We all have to start somewhere and developing the discipline of investing early and understanding how it works is great!

    As you know, I’m not a financial planner and even if I was, I wouldn’t be able to give you specific investment advice without understanding your broader financial picture and your goals.

    Questions you should be able to answer about this investment should include:

    • What is the purpose of this investment? Short term, emergency fund, buy property, retirement etc.
    • When do you expect to need these funds?
    • What kind of risk are you willing to take on? (how much are you willing to lose in a worst case scenario)
    • Have you maxed out your tax-free savings account (TFSA)?

    Depending on how you answer these questions, how you invest your funds will vary greatly.

    You should speak to a financial advisor or financial planner to be able to determine what is the best investment for you. Make sure you find out the fees upfront, as fees can really eat into the upside of your investments. You can also use online investment management companies that typically have lower fees and can also help you meet your objectives, but make sure you do your research as not all online investment management companies are created equal.

    Regardless of which way you decide to go, make sure you understand how your money is invested and what the risk is even if you are investing a small amount. Don’t ever let anyone make you feel obligated to invest in something that you are not comfortable with.

    I advise you to keep setting aside money every month for your future and over time, do your best to increase the amount you are saving and investing! Down the road you will be grateful for all the efforts that you made.

    Hope you find this journey a rewarding one.

    Limor Markman
    Answered on February 4, 2016 Ask Another Question