Saving For Major Purchases
When it comes to major purchases such as a house or major expenses such as providing for your children’s education, major savings goals can seem overwhelming at first glance. That’s okay; if it was easy, everyone would own a nice home and have a Ph.D. It’s not easy, but it’s nowhere near impossible either.
Break It Down
First, break the goal down into smaller components and give yourself a reasonable timeline. Often, people will tell me that “saving that much is just impossible,” or “How do you expect me to come up with that much money by the time I want to do this?” Despite the real estate industry’s incessant warnings, there’s no rush to jump right into the real estate market. Not if you aren’t ready to handle the responsibilities of home ownership. This includes property taxes, maintenance and replacement costs (e.g., the leaky roof, bad windows and broken down furnace that you wanted to pretend would last forever).
At the risk of insulting my friends in the real estate and mortgage industry, I don’t believe in using high-ratio mortgages. It’s not just a matter of numbers but of the effect that mortgage debt has on emotions. When a person buys a home with a substantial down payment, eliminating the mortgage tends to become their top priority. On the other hand, when you buy a house with 5% or 10% down, it’s not your house; it’s the bank’s. You just don’t have enough skin in the game.
Of course, there are exceptions. If the home buyer is very savvy and has a solid short-term plan of action for reducing the debt substantially, there’s nothing wrong with that. For the vast majority, however, once the housewarming party is over and reality comes creeping back, having a high-ratio mortgage can be a crushing weight on the psyche. Heaven forbid a job is lost or an unexpected illness comes up.
If you need to save 20% down and you’re planning on looking at homes in the $250,000 range, you need a $50,000 down payment. Sounds huge, but it doesn’t have to be. If you give yourself a reasonable timeline, such as 5 years, that’s $833 per month. Still sounds huge, but consider two things:
Any income over and above normal pay (overtime hours, bonuses, tax refunds, etc.) should be deposited directly into the home-buying fund.
In Canada, you can withdraw up to $25,000 from an RRSP account to fund the purchase of your first home. For a couple buying their first home, that’s $50,000 combined – in the above example, that’s the entire amount needed to put down enough for a traditional mortgage (20% or more equity in the home). There are no tax penalties for making the RRSP withdrawal, but the amount withdrawn does have to be repaid into an RRSP account within 15 tax years. Since you should be making regular RRSP contributions anyway, this shouldn’t be too much of a burden.
(Note: Any contributions that will be used for the Home Buyers’ Plan must have been in the RRSP account for at least 90 days. Any less time than that and the contributions will not be considered deductible).
My suggestion is to set up an RRSP high interest savings account as well as a high-interest Tax Free Savings Account (TFSA). Then set up an automatic withdrawal plan from your bank account that will deposit at least 10% of your take-home pay into these accounts. (Make sure that the withdrawals happen the same day your salary is deposited to your bank account or you will be tempted to spend it).
If you’re wondering how you’ll manage to get by with a lower income, consider using CRA Form T-1213(04): Request to Reduce Tax Deductions At Source. If you already know how much you will pay into your RRSP monthly, as well as other deductions/credits you normally claim each year (e.g., tuition expenses, deductible interest), you can indicate the expenses/payments/contributions on the form.
The taxes deducted from your pay will decrease and the subsequent increase in take-home pay should be directed toward additional savings, reducing debt or covering fixed expenses. Do NOT use any increase in take-home pay for lifestyle expenses. This is not money for shopping or dining. And, of course, have an accountant review the form before submitting it.
But I digress. Contribute to the registered savings accounts first, claiming eligible tax deductions along the way. If those deductions generate tax refunds, stash those refunds into the accounts as well. Once the amount of money in the RRSP account has reached the withdrawal limit for the Home Buyers’ Plan, cut off the automatic withdrawal from your bank account and set up another withdrawal plan to deposit your contributions into a Tax-Free Savings Account.
Using an automatic savings program, people often find money in unexpected places to put toward their home purchase. I’ve seen 5-year timelines cut down to 3 years and 3-year timelines cut down to the following year. Just take the first step and have faith that you will make it.
For education savings, the same strategy applies, since RESPs offer government incentives to save for education costs. Break the anticipated future cost of education into monthly savings goals and start making the contributions automatically. And while your child is in high school, you should be scouring the internet for available scholarships and bursaries. Education expenses should never come as a surprise because you’ve had at least 17 years to prepare for them.
As always, the information provided in this post is general in nature. I have provided it with the understanding that it is not to be relied upon as professional advice in any capacity. Before making any changes, you should should consult with your own professional advisors for specific advice before taking action.
Many Blessings,
Andray Domise
Independent Financial Advisor
Change your life one dollar at a time, with REAL help for building wealth and reducing debt:
http://www.andraydomise.com
Financial Planning FAQ:
Question: What’s the best financial planning software?
I need to do a financial plan for my family including retirement savings, accounting for various estimates of inflation. My accountant says Quicken financial planner v2 was good, but it can’t be found anymore. He also says that the financial planning capabilities of Quicken aren’t adequate.
Answer: You can do modular planning using web sites from Vanguard, T Rowe Price or fidelity. They all have retirement planners that are decent. There is no nonprofessional (“inexpensive”) softwares that do it all. You do not need a big, integrated package. What you need is:
1. A budget, which can be found online or using an Excel spreadsheet you create.
2. A tax planner, which can be Turbotax or TaxCut.
3. Retirement planner, which can be as above.
4. Life insurance planning.
5. Estate planning: You need a will, financial power of attorney, health care power of attorney and living will.
Question: Salespeople in the financial planning industry?
What publications do you read about financial planning? I am thinking HBR, National Underwriting Magazine? Are they any others? Please let me know.
Answer: Read anything by Warren Buffet or Charles Givens. Also Money Magazine and Forbes are pretty good too.
Question: What are the financial planning requirements for a funeral?
Answer: Call a funeral home and see how much it will cost to hold a service (if that’s what you would like to do), buy a coffin, get a plot of land, stone, etc. Once you have a dollar figure, you can usually buy insurance for this or you can save the old-fashioned way. Put a specific amount aside each month. Or make sure the person plans this expense with their own money/estate.
Question: I need a financial planning company?
I just got married a few months ago and my husband and I wanted to find a financial planner. We are both 24 but we want to save up for our retirement, college for future children, investments, buying a home, etc…. We don’t have much money to start with because we just cleared all of our debt. Does anyone know what’s the best place for us to start?
Answer: Good job by clearing all debt. First make sure to maintain positive cash flow and if your employer offers a retirement plan then make sure to contribute into it. Aside from that get a local financial planner who can understand your needs, make sure to get some references.
Question: What is a Financial Planning Company? What are they doing?
Answer: A company that offers Financial planning services offers licensed financial advisors to assist customers who are looking to create a financial plan. Financial planning helps individuals prepare for their future goals, typically these goals would be planning for retirement, planning to pay for college, and planning for other major life events. A financial advisor will help you develop a financial plan to help ensure that you have the money you need saved to meet your long term financial goals.
Question: Looking for a good E-book for financial planning?
I’m coming off a bankruptcy this year and I vow to get my finances in order. Is there any good E-books out there for financial planning?
Answer: Yahoo Finance has pretty good articles, as does MarketWatch. Head to your local library and see if you can get a copy of “Rules About Money” and “Rich Dad, Poor Dad”.
Question: 7 elements of financial planning?
I have heard mentioned on financial radio shows “The 7 elements of financial planning”. Does anyone know what these are?
Answer: They are: Budgeting, Saving and Investing, Insurance, Debt, Tax, Estate and Retirement.
Question: Financial planning suggestions?
I manage my college expenses with 3 credit cards and pay my credit bills with them. This is cumbersome and I can’t remember if there’s enough cash to pay the bills at that point of time. I badly need to do some financial planning. Any idea/suggestions?
Answer: Managing multiple credit cards is tough, especially if you are still in college. It’s better if you cut it down to only one because it can help you save in the long run. Track all of your purchases and the amount of money you have in the bank either by hand, with a spreadsheet on your computer, or through an online tracking program.