So much to learn...need some short-term savings advice
Wow, Iím glad I stumbled across CMF, itís a great resource! Iíll start by admitting that my wife and I are pretty naÔve when it comes to investing and managing our personal finances. Thatís not to say that we havenít saved anything and we arenít in debt, but we could definitely be doing better with what we have which is why I am here.
Hereís our situation. We worked in the non-profit sector for many years and then returned to school in our early thirties. We managed to get scholarships and work and graduated without student loans. We are 35 years old and both employed ($50K him and $55K her). We currently live on my wifeís income and my entire income is being saved. We have ~$55k in RRSPs (in GICs) and $30k in cash. We are debt free and in good shape financially, but we need to plan for the future. Now that we are no longer students and working for free, we have some income that we want to makes some wise decisions with.
As far as goals are concerned, short-term we are considering buying a house depending on how our employment situation shapes up (itís complicated), probably in the next 2-3 years. Obviously we will need a down payment. Based on what Iíve read here over the past few days, it sounds like we should move as much of our cash as possible into TFSAs, probably into GICs to minimize risk over that short time frame and use this for our down payment. Weíve never contributed to a TFSA before, so we have lots of room. Does this sound reasonable? Would a HISA be better than GICs?
Now what to do with my monthly income of about $3300 net? I would like to save for a down payment, but also save for retirement. I have no idea what kind of balance to strike or what to do with the money for each track. I'm thinking 1/3 for retirement savings and 2/3 for a down payment. Does this sound reasonable? Or am I way off base. Should I be consulting a financial planner? It's weird to suddenly be in such a comfortable financial situation after 14 years of marriage and not a lot of savings before hand.
Iíve seen the Eight with Weight post and Iím going to try and get my hands on as many of those as possible and do some reading, but I would love to hear some advice or confirmation in the short-term!
Sounds like you are pretty level-headed. To answer your question about HISA vs. GIC, they both pay virtually the same rates. If you do your banking online, you could probably setup a web based HISA which pays around 1% interest and protects your capital. That is also easier than GICs. I know some people around here are going to suggest shopping around for 2-3% at lesser known places, but I prefer to keep as many of my accounts with one place as possible. Time is money and it takes time to shop around, research and setup other options.
As for your DP, I think most here agree that 20% is a good goal to save on CMHC ripoff fees. But don't be in a rush to buy a house. Save for a rainy day first, then for the house after. That's what I'm doing right now. It will take a few years as we have to live in the meantime.
Here's my advice, for what it's worth. Forgive me if I'm writing anything you already know.
Having read many of the "eight with weight" list, I recommend you first read: "The Four Pillars of Investing."
Hold off on buying a house. The real-estate market is likely overdue for a "correction." (read: overall drop in value by 25%+)
If that coincides with saving for a few years, great. If the market hasn't correct by the time you're "ready", consider waiting until it does.
To answer what percentage to put to house saving and retirement, work backwards. Figure out how much you want to have saved and your time window.
A TFSA is just a "bucket" and there are different types of TFSA buckets. Broadly: there are "cash" TFSAs (basically, bank accounts blessed with the TFSA stamp) and investment grade TFSAs which can house investments.
Two cash accounts to seriously look at (I have both)...
Canadian Direct Financial "KeyRate" Savings account - pays 2% interest
Canadian Direct Financial "KeyReach" TFSA savings account - pays 3% interest
Both are accessible online and via ATMs (as long as you have the latter, which they'll send you a card for) across the exchange network and would be a good place for your emergency fund. (6 months+ of living expenses) The rates are a hedge against inflation for cash that you want to keep liquid.
As for the investment grade TFSAs, my personal suggestion is TD Waterhouse.
Excellent support via TD branches and 24 hour phone service
Link to a free TD Daily Savings account (for moving cash in/out)
Access to the TD e-Series mutual funds, which are the best, lowest cost start for a diversified, index fund portfolio.
I don't have a lot to say about the mortgage saving as it's not on my radar. You're thinking along the right lines though - with retirement investments, your horizon is far away, say, 25 years. You can place that money somewhere with more volatility and ride out the bumps.
With savings like a house down payment, your time window is closer so you want something more stable that won't fluctuate. I'm sure others will chime in on this but I wouldn't be surprised if they suggested things like Real-Return-Bonds or GICs.
For time windows under 3-5 years, GIC rates seem awfully low; that 2% CDF savings account or 3% TFSA (if the $20k + $5/year ceiling isn't an issue ... x2 since there are two of you) is quite appealing.
I think you'll find a lot of information useful. Keep in mind that everyone can post their ideas so how well the suggestions match what you are comfortable with may vary.
As the for the TFSA - this is a good think to make use of first as it is tax-free and flexible.
Depending on what investments the TFSA you open allows (or "bucket" as CJOttawa referred to it) and how many you open, the savings for the near term and investing can be handled. For example, I've got a HISA TFSA for emergency fund plus money I'll need shortly and a investment TFSA for the longer term that allows buying stocks, bonds, ETFs, MFs, GICs etc.
Just make sure you understand the TFSA rules as quickly as possible to avoid penalties. The most common issues I've seen posted are that:
a) the TFSA limit is per person, not per account (i.e. if say the individual has $20K available, $20K contributed to one TFSA is the same as $4K contributed to five separate TFSAs).
b) the TFSA contribution limit should be tracked on a transaction basis, similar to balancing a chequing account, IMO. With the reporting deadlines the financial institutions have, it can be as much as 12+ months before CRA flags an over-contribution, which makes for an expensive penalty. Then too, mistakes happen so tracking on your part to check for errors is always a good idea.
c) TFSA withdrawals in *this* year are added to the available TFSA contribution room *next* year (ex. withdraw $8K in 2012 from a TFSA and when the 2013 TFSA $5K contribution room is added, the $8K withdrawal should also be added so that the total growth is $13K).
If you are familiar with the RRSP rules, figuring out the TFSA rules should be relatively easy.
I would suggest you hash out your goals in more detail.
1) You want to buy a house in the near-medium future.
- what kind of house, how much would it cost? This will determine how much money you need to save into your house fund given a fixed time frame and consistent savings rate.
e.g. you want to buy a $400,000 house - 20% is $80k. Saving $3300/net, you need to wait at least 2 full years saving 100% of free cash flow to meet this goal. Now if you intend to buy in 4 years, you can obviously save half of your $3300, and direct the rest towards retirement, or other goals.
2) when do you want to retire and with what kind of lifestyle (i.e. how much money do you need to save to fund this retirement)?
- you should have some estimated savings rate that will get you to this goal. Will saving 25% of net income (imagine maxing RRSPs plus adding and almost maxing TFSAs) get you to that objective?
You are in a very good spot since your expenses are low, and you have nearly 1 full years of savings in cash. Keep this as your e-fund, and as you save more for you house, you could consider using some of this as a down payment.
Now you also have to plan for future cash flow since obviously carrying a $320,000 mortgage would cost you close to $1500-$1600 at current interest rates, add to that property taxes, and some savings for repair fund etc.. Is this significantly more than the cost of you housing currently? If so, you need to consider that your overall savings rate will go down after you have the house.
I've plugged in some hypothetical numbers, but you could easily adjust to your own situation. Also, don't forget medium term/other goals like buying vehicles, vacations, savings for children, or any other significant life events.
Thanks for the warm welcome and all the helpful responses!
Sampson, you are definitely right when you advise us to hash out our goals in more detail. We definitely need to work on this. I think this is our next step after I sort out what to do with our emergency fund/short-term savings.
Thanks for the book recommendation CJOttawa and suggestions on where to park some of our money.
the-royal-mail, while we would like to get into a house sooner than later, your and Sampson's advice of setting aside our current savings as an e-fund seems like a wise idea and falls in line with the reading I have been doing in these forums.
Eclectic12, thanks for the insights and warnings about TFSAs.
A complicating factor for us is that we are living in the US due to my wife's job, while my employment is Canadian based. There is a good chance we will remain the in the US for a number of years. So I also need to figure out a strategy for saving in Canada and the US that will minimize our tax burden now and at retirement. In my first post I stated that we are living on my wife's income, that's true, but we also manage to save $800-1000 of that per month.
I think I'm on the right track, but obviously have a lot read and learn. Thanks for the confirmation everyone!