THE 2015 BUDGET IS HERE… dun dun dunnnnn
So, like, what does that even mean and why should you care? The budget affects you in SO MANY WAYS but often people don’t even know about it!
The 2015 Federal Budget outlines your tax rates, tax breaks, changes to your savings and how much money is going back into your wallet each year. It’s a BFD.
Rob Carrick nailed it in his recent article by noting that this budget definitely favours seniors and that GenY/Millenials didn’t get much attention.
But, here are some things in the budget that will affect GenY/Millenials/GenX
1) TFSA or Tax Free Savings Account Increased Contribution Limit
The TFSA is the bomb. It’s an amazing savings account for everyone and for both long and short-term savings. The money that grows inside the TFSA is NOT taxed when you pull it out. I repeat – NOT TAXED. This is key. When you pull your money out of an RRSP account you must include it in that year’s income and be taxed on it (iccccky).
NEW BUDGET THANG: The TFSA contribution limit has been raised from $5,500 to $10,000 effective immediately. Hella yes. More room for tax-free savings? YES PLEASE!
2) Benefits for Post-Secondary Students
The budget assists university students starting in 2016. Usually, to be eligible for Canada Student Loan Programs, it’s dependent on what your parents are forking over/their incomes. i.e. if you’re parents made a certain level, you wouldn’t qualify. In addition, for every dollar YOU earned in school over $100 a week, that amount was deducted from your loans.
NEW BUDGET THANG: If the parental units are forking over for your education whether the total amount or in part, your parents aren’t expected to pony up as much as before to make you eligible for the Canada Student Loans Program. Also, you can now earn money while a student without the amount you earn effectively becoming a drag factor on your student loan. WOOT!
3) Help for Parents with the UCCB and Children’s Fitness Tax Credit
While you may be sleep-deprived, there is a small token of appreciation for your current condition in the budget. The UCCB or Universal Child Care Benefit has been increased from $100 per month up to $160 per month for each child in your family under the age of 6.
The UCCB is taxable money from the gov that parents get REGARDLESS OF THEIR INCOME.
NEW BUDGET THANG: Effective from the beginning of this year, the cheques are in the mail as of July 2015 – PARTY!! Also, the budget has doubled the children’s fitness tax credit to $1,000 starting in 2015. Kid’s activities are so friggen expensive, amirite? Now, at least you get back 15% up to $1000. Little Billy can go to swimming – hurray!
4) Tax Rate Decrease for Small Businesses
NEW BUDGET THANG: The tax rate for small businesses will be reduced from 11% to 9% in 2019. (Now why would you give someone a gift that is so far off in the future? Oh yeah – it’s election time again). Note that this is only for CORPORATIONS – not sole-props or freelancers.
If you are curious about any of the four points above or of finding out in plain language how any of this applies to you, it may be time to book a financial planning sesh to flush out how you can leverage this 2015 budget like a boss.
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4 ways for house to earn you money
Your home is a haven, but it can also be a cash cow if you know how to milk it. Today I’m going to give you the 4 best ways to make extra money from your house.
Method 1 – Use Air BnB
Who: Air bnb is a website that allows you to rent out your home like a hotel.
What you need: All you need room for someone to sleep in.
Risk: Letting someone unknown into your house.
Payout: Slightly below market rent. For a weekend in a major urban center, you could charge anywhere from $80 – $150/night! You don’t need to provide any amenities except a bathroom and a bed.
When to use: If you spend your weekends at the cottage or away, rent out your space to travelers and earn some money!
Method 2: Parking Spot
What you need: An unused parking space.
Risk: You probably have to shovel.
Payout: Glorious. Most parking spots go for $80 – $250/month in the GTA depending on location.
When to use: Year round if you are sans car.
3. Garden Rental
What you need: An unused garden space with optimal growing sunlight.
Risk: Someone comes into your backyard.
Payout: Renting garden space can go from $40 – $200/month depending on size and demand.
When to use: Spring/Summer.
4. Workshop Host
What you need: A big enough room that could seat 10 people at least.
Risk: People coming to your home for workshop.
Payout: Small businesses in the GTA are desperate for locations to host small workshops all the time. Most places in the GTA are expensive. If you’ve got a big living room/family room/kitchen, offer it up on craigslist. The average workshop would pay between $20 – $150 depending on how much they were charging guests to come. Alternatively, you could ask to take 20% of all the ticket sales for the use of your home.
When to use: Whenever you don’t need access to your space!
The Down Payment
Housing prices continue to soar in most urban-city centers. Wages are getting squeezed tighter and tighter and the cost of living keeps rising. It’s time to face facts. Many of us may not be able to afford to buy a house.
Have you heard of the 20% Rule?
To qualify for a conventional mortgage, you need to put down 20% of the market value of the house. You can put down less than 20% as a down payment, but if you do, you’ll be charged a very costly fee called mortgage insurance.
In Canada you can put down as low as 5%. The less money you put down, the more mortgage insurance you will be charged.
In Canada, if you purchase a $300,000 home and can only put down $15,000 (5%), you will be charged 2.75% of the total mortgage value, and in this case $7837. This $7837 will be rolled into your mortgage.
In addition to this, there are tons of other costs such as Home Inspection, Land Surveys, Legal Fees etc.
A good rule of thumb is to assume that you will also need to save 2.5% of the value of the home for these fees.
If you’re willing to take on the additional mortgage loan insurance, I advise to put no less than 10% to be sure you can actually afford the monthly payments.
Therefore, in a perfect world, you should have 22.5% of the value of your dream house in the bank before you can technically afford it and in a less-than-perfect world, no lower than 12.5%
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Most people have hear the rule that your monthly housing costs shouldn’t be more than 32% of your gross monthly income, but I’m a bit more hardcore than that. This rule can still lead to House Poor Tragedy.
The reason? It’s calculated on your gross income, which means before tax. Well, 32% of your gross income can translate to between 45 – 55% of your after tax income, just for your house. No food, no debt payments, no toilet paper. Your after tax income is what really matters because that’s the money that hits your bank account. So, stop thinking about your income before tax, and only plan based on what your take home pay!
GOLDEN RULE: Make sure that all of your monthly fixed costs are 50% of your household monthly AFTER TAX income. This means, all housing costs, utilities, debt payments, transportation costs and groceries are only 50% of what you actually take home every month.
If you are a first time homebuyer and this feels too tight, you can push it up, but under no circumstance should you be higher than 60% of your after tax monthly income.
This way, you’re ensuring that at least 40 – 50% of the money that hits your bank account is left over for you to actually save and spend!
Usually, when I see house poor, fixed monthly costs are as high as 80%. This is when there’s no money left over for saving and barely any for fun and consumer debt levels start to climb year after year!
WATCH MONEY AWESOMENESS HERE!
So, you’ve saved up a down payment, you know you’re not going to be house poor and now you want to start your house search. Before you begin, you should get pre-approved for a mortgage from your financial institution.
Here’s how to wow your financial institution before you buy a house.
1. A credit score of 700 or over will show your bank that you are able to handle making debt payments.
2. Your Total Debt Service Ratio should not be more than 40% of your monthly gross income to be a desirable candidate for a mortgage.
Your totally debt service ratio is your entire monthly housing costs plus all of your other debt payments divided by your monthly GROSS income.
Your monthly housing costs are (mortgage payment, property tax and heating costs). Other debt payments include car leases, credit card payments, student loans etc.
My total housing costs $2000/month and my car payment and student loan payments are $500. I make $50,000/year (gross) so my monthly gross income is $4166.
In this example, my TDSR is 40% so I’m in the clear.
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You’re in love. Nowadays there are 2 big questions to pop. 1. The age old: Will you marry me? And the newer “Want to move in together”.
Both questions have huge financial implications.
Moving In Together
So, you and your partner have decided to move in together. This is the start of a beautiful common-law relationship. This is a big deal. With new legislation, if you and your partner are legally considered a common law marriage, in the event of a break-up, you may be entitled to or have to pay spousal or child support payments. Yes, even without the vows, common law relationships have financial implications.
Keep in mind, some of these rules change depending on what province you live in, so please check with local advisors to confirm the rules.
There are a lot of misconceptions regarding common law relationships, and I’m going to debunk the 3 biggest myths today.
Myth 1: You are considered legally “common-law” after 1 year of living together.
False. In Canada, this is only true for tax purposes. After living together for a year, you should be claiming taxes together as a household, but that’s it. To be considered a legal common-law marriage and qualify to benefit from any financial support provisions if you break up, you need to be common law for 2-3 years depending on where you live. If you and your common-law partner broke up after 1 year of cohabitating, neither partner would be on the hook to pay anything to anyone.
Myth 2: You are responsible for debt if you share a bank account or move in together.
False. In Canada, married or common law, if you didn’t co-sign on a loan with your partner, it’s their debt, not yours. You are not responsible for paying back their debt.
Myth 3: Breaks ups are the same as Divorces.
False: Break-Ups may feel like a divorce, but financially and legally, they are very different. In a common law relationship, the property of each spouse is treated 100% separately. What is purchased by each partner, bank accounts, investments, even your house, belongs to the person that bought them. In a breakup, there is no legal requirement for assets to be split or shared. This is the biggest difference between a breakup and a divorce and one of the most important things to know for your own financial protection.
COMMON EXAMPLE: Let’s say you move into your partner’s house. They had the down payment and their name is on the deed. Even if you paid a portion of the mortgage and bills for 10 years, if you broke up, there is no legal requirement for your partner to pay you back or give you your fair share of that house, even though you’ve contributed. However, if you’ve lived together for over three years, you could take legal action and try to get a portion of money paid back to you as an equitable relief claim.
On the flip side, if you own the house, having someone move in with you for more than 3 years doesn’t legally bind you to pay them money if you break up, however, they are entitled to take legal action to try to get you to pay them a portion of the money they have contributed.
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There’s an old saying, what’s mine is yours, what’s yours is mine. Well, in the case of a separation, this may be the best or worst thing that ever happened to you.
The laws governing common-law break ups are not even close to being similar as divorce. The ring matters…… big time. I’m going to walk you through some of the major differences between common law and marriage in Canada if your love turns sour.
1. Division of Assets. Upon a marriage ending, there is an automatic right to equalize family property acquired during the marriage. So, the spouse with more money will have to pay the spouse with less money, no matter what. If you are in a common law relationship, however, you don’t have that right or obligation. After a break up, if you felt that you were owed assets from your partner, you have to take legal action and make an “unjust enrichment” claim. In other words, you have to hire lawyers and show that your common law partner was unjustly enriched at your financial expense over the years. This can be very costly and take a long time.
In common law, no matter how long you’ve lived together, you aren’t entitled to half the assets upon separation. In marriage, no matter how much harder you worked, you’ll have to pay out to the other partner.
2. Staying in Your House. Upon a marriage ending, there is an automatic right to stay in the matrimonial home, even if it is not in your name and the decision of who keeps the home remains with the partners. In a common law relationship, if your name is not on the deed, you could simply come home one day and find yourself locked out no matter how much you’ve financially contributed to the home.
3. Spousal Support. If you are married, you have an automatic right to receive or obligation to pay spousal support upon separation. If you are living in a common law relationship, you don’t have rights to spousal support until you have lived together for three years.
Furthermore, if you were married, you always have the right to apply for spousal support, no matter how long has passed since you separated. If you were in a common law relationship, you need to ensure that you apply for spousal support within 2 years of separation or you get nothing.
4. What happens without a Will? If you are married, and your partner passes away without a will, you automatically receive a share of your partner’s estate. If you were in a common law relationship in Canada, you have no right to get anything. Instead, you would have to go through the unjust enrichment claim against your partner’s estate.
There is one aspect where the rules of common law break ups and divorces are the same. Children.
When a couple, married or living together, has kids, the rules for child support, custody and adoption are the same.
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Did you know that couples who bicker about money once a week are 30% more likely to end in divorce?
When it comes to matters of the heart… money definitely matters.
When couples fight about money, it’s never fun for anyone involved. Most times, it’s just a simple matter of banking.
Rent. People say it like it’s a dirty word but it doesn’t have to be that way—especially in today’s economy.
There’s no doubt about it, purchasing a home gives you equity. Equity is good.
In theory, it’s great to save up a 20% down payment and buy a lovely home that your monthly cash flow can sustain. Over time, you easily pay off your mortgage as the value of your property goes up with lots of income left each month to save for your liquid retirement assets. In retirement, you’ll live mortgage-free while sitting on large investment portfolios to fund your daily needs.
Sounds brilliant, right? Well, in a perfect world it is!
But the world isn’t perfect. The cost of living is rising, wages are stagnating, and housing prices in the GTA are climbing steadily.
It’s time to face facts: most of us can’t afford to buy a home, and may never be able to.
I see many first time home buyers with only 5% for a down payment, a $300,000 mortgage, and a monthly income that cannot sustain the costs. Young couples get stuck with 80%+ of their after-tax paycheck tied up in housing costs because they bought a house they simply can’t afford.
Just because the anticipated mortgage payment is the same amount you pay in rent does not mean you can afford the house. There are mortgage payments, condo fees, property taxes, insurance, phone bills and utilities, not to mention other costs of living like transportation, weekly groceries, and any other monthly debt payments.
It adds up. Houses eat money.
The consequence? House poor young people with no money left over for any fun, regular life expenses, and long-term or emergency savings. All the money is spent before it even hits their checking accounts.
As a home owner, if something breaks – it’s on you to fix it. When the roof leaks, or the basement floods, it’s 100% your cost. No landlords. With no emergency savings fund, home repair and maintenance expenses go straight onto credit cards and home equity lines of credit and debt starts to rise. Daily living expenses such as food and entertainment go directly on credit as well—and are never paid off. Month after month. Year after year.
You might think that even though you can’t afford the house now, your income will go up over time. This is probably true – but so will the cost of living. So, unless you’re counting on major income adjustments your wages will rise with inflation, just like your utilities, property taxes and fees. If this is the case, your income may rise, but you will always be spending 80% of your income in bills.
When you buy a home that your monthly cash flow cannot sustain, you run the risk of not being able to save for retirement and worse – accumulating tens-of-thousands in consumer debt. After a lifetime of this, you could end up in retirement with a house that still isn’t paid off and no savings portfolio.
New School Advice
Buying is great, but wait until you can actually afford it. Ideally, your new home would leave all of your monthly fixed bills around 50% – 60% of your after tax income, leaving 30% for life and at least 10% – 20% for savings.
Until then, or if you don’t think that day will ever come, rent proudly – but be smart about it. Rent is actually a smart financial choice, but only if you take advantage of the fact that you don’t have to do renovations, repairs, maintenance, or taxes. SAVE THE MONEY
1. If you rent, keep your total monthly fixed costs at 50% of your after-tax income.
2. Ensure you are able to save 20% each month for your retirement.
3. DO NOT spiral into consumer debt.
ADVICE FOR HOUSING
Ideal: Buy a house with monthly fixed costs at 50% – save 20%
Middle: Rent and keep monthly fixed costs at 50% – save 20%
Not good: Buy house with fixed costs higher than 70% – unable to save
Worst: Rent over lifetime with fixed costs > than 50% and unable to save 20%
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