# Lots of Cash on the bank but no plan



## Kalergie (Jan 7, 2011)

Hi everyone,

I have been reading this forum a lot over the last 8 months and I am amazed by the intelligent and honest opinions expressed here. I guess if it wasn't for you, a lot of people reading here would have made very regrettable decisions. Some of us have made great Financial Master Plans based on your input. Here is my case. Let's make some good decisions together  : 

I give you as much details as possible as I think it all matters when making investment decisions.

Personal
Age: 27
Location: Toronto, ON
Work: Analyst at a large consulting firm (just started at this company)
Outlook: Steady growth potential at minimum 5% p.a. pay increase.
Experience: 3 years in a similar role in an industry I love to bits
Education: Bachelor in Management
Immigrant status: Permanent Resident since April 2011
Marital status: Single - girlfriend lives in Montreal

Finances
Income:
Gross Salary: 65,000CAD
Potential bonus: 5,000CAD
Employer`s RRSP: 5% of gross salary (up to 10% within 5 years of employment)

Expenses: 
Living expenses (food, rent, communication, entertainment etc.): 28,000CAD
Vacation and unusual expenses: 2,000CAD

Balances:

TFSA: 15,100CAD (maxed out on 1.75% interest account)
Savings account: 12,500CAD (1.35% interest account)
Non-registered saving plan: 2,500CAD (contributions on hold as it was with my previous employer)
Debit: 1,000CAD 
USD Savings account: 26,000USD (0.35% interest account) 

As you can see, I am not really into investing *yet*. Frankly because I have not made myself knowledgeable enough to make an educated decision. Also because for the last 3 years, I was eager to pay off my student loan of 30,000CAD which was at 8.9%. Subsequently, I have saved cash to adopt the 3 tiers of savings which I learned here. 

Here are my questions and suggestions:

1) I do not have a Registered RSP yet. I am guessing the #1 priority is to set up an RRSP to make use of the 5% contribution.

2) I have been reading a lot on the Couch Potatoe investment style which suits my style a lot. Any book suggestions?

3) I have been reading about the Home Buyers Plan. I am interested in buying a home. Do I have to decide for a HBP before setting up an RRSP?

4) I am thinking of consolidating the RSP with the RRSP that I will open.

5) Any suggestions what I should do with the USD? Converting does not really help me right now as the exchange rate is very low and I do not NEED Canadian cash right now. My brainstorming yielded to the following:
-invest in US property
-invest in very safe US stocks suitable for long term investors (i.e. BRK.B)
-leave it as a safety net and hope for a favorable exchange rate
-go to Vegas with my girl friend and hope for the best 

Any advise is well appreciated. Thanks guys and girls.


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## DanFo (Apr 9, 2011)

Before you open a separate RRSP I'd check with your company first. When I worked for a company that matched RRSP's I had to go through their designated plan to get the match.


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## Kalergie (Jan 7, 2011)

DanFo: Thanks. I completely forgot to mention that my employer does NOT have their own designated plan. I can chose what I want to do with it.


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## DanFo (Apr 9, 2011)

that's good because it'll give you more freedom on what to invest in and a chance to reduce some fees.....Living in Toronto your not too far from the US border I imagine between vacations and shopping trips you'll be able to enjoy that US cash over time.


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## financialnoob (Feb 26, 2011)

On item 3, you don't need to worry about the HBP before opening your RRSP. You just have to fill out some extra paperwork when making the withdrawal (so long as you follow the conditions of the HBP with RRSP money being there for 3 months prior).

I'd open the RRSP and start contributing to that. Even if you're not ready to invest, you'll at least be reducing your taxes. A contribution of say $12K could get you around $3.5 - $4K back in taxes. 

The high USD savings account balance as well as the high interest rate on your student loan makes me wonder if you studied in the US? Or is there another reason you have so much tied up in USD?


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## the-royal-mail (Dec 11, 2009)

Thanks for your post. You have done exceptionally well for yourself.

To me, that US account seems like an unnecessary wrinke. So the exchange rate fluctuates. Fine. But look at the lost opportunity of having that money in that low interest account when you could do better by having it in CDN dollars and in a HISA (high interest savings account). For example, your TFSA is paying you 1.75%. That's a lot of money with these types of balances. Every day you leave that cash in USD is a day you are losing easy growth. I see no advantage to playing around with this. Try to keep things as simple and straightforward as possible. You are making enough money that when you fly down somewhere, you'll be paying with your CDN credit cards and paying off those balances when you get back home, all in CDN. If you need US cash you can get it from the same bank before you go, at whatever the rate is. I'm simply saying you are losing more growth opportunity in that $ by taking a low interest rate, than you would be by simply paying whatever the prevailing rate is. Besides, how much physical US cash does the average CDN really use these days?

As a friend recently pointed out, US stocks are TFSA are subject to withholding taxes. And US property is a minefield also. We discussed that here in the past. The foreign ownership rules are complicated and then you are responsible for the property and always have it in the back of your mind. Again, that's not a clean slate.

I'm glad to read you are familiar with the 3 tiers. Could you express your assets in these terms for us? If you want to buy a house, perhaps saving for that could be a 4th tier since it's something you are anticipating. I would prefer for you to do it this way than to mess with HBP (which is more complicated and is basically just a shell game).

If you want to set up RRSP (tier 3) now would be an excellent time to start. There's endless advice available in the investing section but you've got a lot on your plate right now! I suggest a more general cleanup and organization of your assets, determine your priorities and put in place savings plans or tier to achieve those goals. When that's underway, THEN think about investing and portfolios and what not. That's a whole other area which requires study and a clear mind. And remember there is no rush. You're safe for now because you have cash!


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## Kalergie (Jan 7, 2011)

Hello everyone. 

First of all, thank you for your replies and sorry for the late response. I did not study in the US; I am from Europe originally and moved to Canada 3 years ago. When I got my student loan, I was in need of cash quickly since my dad lost his job during my first semester of studies. I had to organize a huge loan within a week without anybody backing the loan or any confirmed source of income. My education was worth it but I learned my lesson when it comes to banks.

I have always been very cash focused which may make me sound shallow but it is true. It makes me feel content and free when I know that I have cash on hand available when I need it. When I first read about the 3 tiers of saving, I felt confirmed. Here is my interpretation:

Tier 1
12 months of cost of living:
Target: 30,000CAD
Balance:
Savings account: 12,500CAD
USD savings (converted): 17,500CAD
Total balance: 30,000CAD

Tier 2
I do not have a home, car or any depreciating assets except some furniture. I dont even have a TV. I guess the only thing I can think of here is emergency money for health issues or if I have to fly home for anything on a very short notice. 
Target: 6,500CAD
Balance: USD savings (converted): 6,500CAD

Tier 3
Short-term future. I am planning to undertake a part-time Msc in the field related to my career. Without having done thorough research yet, I guess that it would cost me about 20,000 when done part-time over 3 years. My company may pay for it in part and there is definitely a growth potential in my career path. In any way, this is something I`ll require cash for at one point. 

Target: 20,0000CAD
Balance: 
TFSA: 15,100CAD
So there you go, I am about 5,000CAD short on my Tier 3 target. 

Tier 4
Long term future
This is a great opportunity to ask you guys a question in this regard. How do you evaluate your long-term target? Short term and rainy day targets are simple as they are dependent on your current expenses and situation. The long-term target seems way more nebulous.

Other than that, I believe in steady and healthy growth of investments. I am not so keen on real estate right now (especially in Toronto) as I am not sure where I am going to live in 2-3 years. This is a main reason why I have not exchanged my USD into CAD. It may well be that at one point, I will move to the US. But you are right, at the moment it just does not make sense to keep such a load in USD. The exchange rate would have to grow massively to make it worthwhile losing growth potential for just 1-2 years. I am seriously considering exchanging it. 

Any comments on my Tier interpretation?

Thanks so far for your help.


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## the-royal-mail (Dec 11, 2009)

Wow. Can you give lessons on these tiers? That's excellent, a true inspiration and a reminder that I still have some work to do (my tiers aren't quite as full as yours yet even though the structure exists).

As for the 4th tier, you only need to do that if you have confirmed or at least suspect you'll have a large expense coming up. For instance, a young couple that might want a baby in a year. Or someone with a 10 year old car who thinks it should be replaced soon. Or a confirmed decision that you want to buy property. It is these types of things which require (IMO) a 4th tier. Again that's IMO. There may be other strategies but this is my favourite.

Otherwise I actually don't have any more suggestions for you. You have done really well for yourself. Take a bow.


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## Kalergie (Jan 7, 2011)

TRM: Thanks for complimenting my system. I have always thought in the tier terms but you were the only one actually formalizing them in detail. Thanks for that. 

As for my system. I must have misinterpreted the tiers 3 and 4. As written above, my tier 3 is saving for a short-term investment. As far as I understand you, tier 3 should be for long-term investments and retirement plans and a short-term investment should be considered in tier 4. 

Based on that, I would move my savings for education into tier 4. So how do you define your long-term goal for retirement? What questions do I ask myself when determining tier 3? 

This is a great exercise. Thanks so much for participating.


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## the-royal-mail (Dec 11, 2009)

You might be over-thinking it. The purpose of tiers 1-3 is to protect and prepare for life events. The only purpose of a 4th tier is to save for something specific. I don't think of them in terms of long and short term, but that doesn't mean it's not a good idea. I guess we could say tier 3 is long term/retirement savings and tier 4 is short term.

My own thinking on this (and this is just my own personal opinion) is that tier 4 is only to be saved for something specific when you KNOW it is coming. For instance, you want kids. Then start saving as much as you can just for that. Otherwise if you don't do so, when baby arrives you'll be raiding your other tiers.

Ask yourself this question: will your savings tiers save you if your wife gets pregnant, you lose your job after she goes on mat leave, the roof needs repair and johnny needs new teeth? If you didn't save for the new baby (as an example) then you will deplete the other tiers to pay for baby and be unable to keep the household afloat in these circumstances.

Or have I only confused things?


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## Kalergie (Jan 7, 2011)

TRM: No that was pretty clear. Thanks. I guess I am on the right track then.


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