The Frugal Canadian

A frugal spender seeks to find new ways to save money and increase her net worth.

Sunday, January 29, 2006

Keep on Track of your Finances

I recently accepted a volunteer position in the capacity of Treasurer for a local non-profit organization. One of my first tasks was to work with the new General Manager to develop the organization's 2006 budget.

Since I'm new to the organization, I first wanted to look at the 2005 results to see what went well for the club and what needs improvement. As it turned out, the bookkeeping had not been done for the past 6 months and so results weren't available. After waiting for a few weeks I finally got the financial results this week. It turns out the club lost almost $25,000 this year when they were scheduled to break even. While the OLD general manager did a good job of growing the club and increasing revenue, he also spent a tonne of money on various expenses.

I should be clear that there was no impropriety. All of his expenditures were authorized and approved by the board of directors. What went wrong is that the board looked at all of the small expenses in isolation and had no idea what these amounts were totalling throughout the year. Their lack of review throughout the year, meant a big surprise at the end of year.

I have now implemented a monthly reporting process which should take the admin staff no more than 30 minutes to prepare each month. I've also outlined a report which is slightly more comprehensive to make sure there are no surprises under my watch. Let this be a lesson to us all. Look at where you're spending your money throughout the year. If you don't at the end of the year, you're likely to be well short of your savings target.

One Month Left for RRSP Contributions

If you haven't already contributed to your RRSP this year, you have until March 1st to get the deduction on your 2005 tax return. For those of you that are just starting out here's some info for you:

What an RRSP gets you
- A deduction on your tax return which lowers your income by the amount of your contribution
- Tax Deferred Growth on your Investments. While invested in your RRSP you do not pay tax on the income the plan generates.

Where to get one
- Banks, Credit Unions, Brokerage Services
- You can walk into your bank and tell them you want to contribute to your RRSP. Even if you’re not sure what you want to invest in at that moment, you can make the contribution in cash and decide later how to invest it. This is commonly referred to as “parking” your RRSP.

Eligible Investments
- Cash, GICs, mutual Funds, ETFs, stocks, bonds, trusts

How much Can you Contribute
- Each year you can contribute up to 18% of your prior year’s Earned Income, subject to a maximum of $16,500
- You can find this amount on your 2004 Notice of Assessment from Canada Revenue Agency(the letter CRA sends after you file your tax return)
- If you cannot find this form, you can call CRA at 1-800-959-8281 to find out your limit. You will need your SIN, date of birth and line 150 of your prior tax return before they will release information to you

- Any amount taken out of your RRSP is taxed 100% as income regardless of the type of income. Your bank will issue you a T-slip which you will need to report on your return
- Tax is withheld at source but depending on your tax bracket, you may have to make additional tax payments when you file your tax returns

Withdrawal Exceptions
- You can withdraw up to $20,000 on your RRSP under the Home Buyers Plan and Lifelong Learning Plan(annual limit of $10,000)
- You have to pay these amounts back over a number of years – HBP(15 years), LLP(10 years)

Borrowing Money to Contribute to your RRSP – Points to Consider:
- The interest incurred on your loan is NOT tax deductible
- For a $1 contribution you in almost all cases will NOT get a $1 refund. This means, if you contribute $10,000 you will not get a $10,000 refund.
- Do you have the ability to repay? What tax bracket are you in?

Profitable Hobbies

It's been awhile since my last post. What have I been up to? At the risk of losing all credibility with my readers, I'll confess. I've been playing online poker trying to play enough raked hands to earn a $50 bonus.

In the summer after watching my fiance play online and having him teach me the game, I decided to deposit $20 into an online site. If I lost it, I vowed never to deposit another cent. It was an entertainment cost when I was bored one Sunday afternoon. Three weeks later, my poker bank roll was up to $200 and I withdrew my original investment of $20. Now that I'm getting a little bit more experienced, I've started to bonus whore. This means, moving money around from site to site, in return for the site granting me a bonus for the amount I deposit once I play a certain number of raked hands. My poker bank roll is now up to $600 of which $125 is from bonuses from a couple of sites.

I'm NOT suggesting that everybody go out and start playing some online poker. Many people develop serious gambling problems and it's not a reliable source of cash flow. Poker is however a good source of entertainment for me and as it turns out profitable. Instead of going out to rent a movie when I'm bored one night and shelling out $5 at Blockbuster, I am now more likely to play some poker and hopefully earn some money. I should also note that I'm excluding my entire bankroll from all investment and net worth analysis since I could lose it at any point.

Sunday, January 15, 2006

Getting Into Good Financial Health

I had a question from a reader about getting their finances in order and where they can seek help. The individual faces many challenges which many people are struggling with: recently starting a full-time job, student loans, credit card debt, future tuition payments and struggling to meet current living expense requirements. Also, the reader recently purchased a condo where mortgage payments will start in one year.

Not sure where to start? Here are some ideas to think about.

Cash Flow and Budget Analysis

You can’t begin to come up with a plan of attack on your debt and future if you don’t have a realistic idea of how much you can dedicate to your debt repayment. You need to determine where, when and how you spend your money. I would suggest, going back through your bank and loan records for 6 months to see what your spending patterns are. You can then see over a 6 month period, how your spending patterns vary, what percentage of your income is going to each category and really give you some perspective to how you’re spending your hard earned cash. When I first started my 25K challenge I was amazed and admittedly, somewhat disgusted at the amount of money I was spending on entertainment. Having a budget gives me the motivation each month to keep on track and it’s become exciting for me each month to sit down and see where I finished up.

Debt Elimination

I would consider paying a visit to the bank to look at loan consolidation. The credit card debt is likely around 20%. Emphasis should be placed on getting rid of higher interest rate debt first. Most individuals will qualify for an unsecured line of credit from their bank. The requirements to qualify are quite low, and the interest rate are much lower than credit card rates, usually prime rate plus 1-3% depending on your credit quality. At current rates, this could mean a rate as low as 6%. You can use your line of credit to pay off higher rate debts(i.e the credit cards). Future loan repayments will make a much bigger dent in your debt with the lower interest rates.

Seek Professional Advice

If you’re not a numbers person and struggling to make sense of your finances, I would suggest seeing an accountant. They can identify areas of improvement and come up with a strategy for debt elimination. As an alternative to an accountant you could see a financial planner as well. However, in my experience financial planners are more focused on getting you to invest in their products rather than investing in yourself. An accountant can take an independent view of your financial situation and recommend a strategy rather than recommend a number of products.

Friday, January 13, 2006

2006 Personal Budget adjustments

I’m making a small adjustment to my budget based on my pay raise. I plan on saving my entire raise this year, so there is no adjustment to my expenses. My income has increased but due to tax deductions, I won’t be seeing any additional cash flows for the first 6 months of the year, while the Feds take off EI and CPP deductions. During the first six months, my new savings rate will be 49%. Starting in July when I’ve maxed out on these deductions I will jump up to 53%. These changes will be adjusted in my next monthly update.

A key initiative for me this year, will be to find a balance between RRSP contributions and my short term goal of buying a house. I would like to bump myself down to a lower tax bracket and tax advantage of tax deferred growth, but realize that since I’m currently above the home buyer withdrawal limit of $20,000, additional dollars contributed to RRSP are dollars that are truly locked in until retirement. This is a good thing, but I need to ensure that I am meeting nearer term goals as well.

Tuesday, January 03, 2006

Registered Education Savings Plans (RESPs) - What you should know

Today was my first day back to work after the holidays: the official kickoff of tax season. This means I start to get phone calls from clients that have met up with friends over the holidays and learned about the greatest tax idea...

A client of mine recently had a baby and called me up to find out how much money he was going to save on his tax return for his RESP he just set up. He was shocked when I told him there was not a deduction. If you're thinking of setting up an RESP for your kids or a relative here's what you should know:

  • Income generated on your contributions are tax deferred. This means, you do not pay tax on the income that's earned from the contributions while the funds are in the plan(up to 20+ years of untaxed growth)
  • Up to $7,200 of free money --The Feds give a 20% Canada Education Savings Grant matched up to $400/year. Additional incentives available for low income families and the Province of Alberta.
  • Payments of accumulated income are usually made to the child when they have little to no income(since they are a student) and therefore minimal taxes are due.
  • Contributions to an RESP do not result in a tax deduction on the contributors return. This is a common misconception and is NOT the case.
  • Contribution limit is $4000/year for the beneficiary(aka. the child) to a maximum of $42,000 lifetime. This means that if you have grandparents that want to contribute you as a parent, have to share the $4000 each year. Overcontributions are penalized.
How do you get your money out of the plan when needed?
  • Payments can be made to the beneficiary to finance a post-secondary education and included on the income of the beneficiary
  • Payments of inital contributions - to the contributor(parent) or the beneficiary
  • Payments of accumulated income - to parent/contributor or child and included as income for tax purposes

What if the child does not go onto post-secondary school?
  • Your original contributions can be redeemed at no tax cost
  • You lose the CESG - $400/year
  • You're taxed on the accumulated income on your initial contributions. But, if you have RRSP room available you can carry over up to $50,000 into your RRSP.
Requirements to set up
  • The child must have a Social Insurance Number(apply early!)
  • Must be a resident of Canada
For more information check out CRA's publication for more information.

Sunday, January 01, 2006

VOIP setup

I setup a VOIP account today on Skype. I looked at Vonage and Rogers but was unimpressed with both their prices and the amount of setup/equipment required to get up and running. I am jealous of my American neighbours that have enough competition to keep prices low. With only a few Canadian companies, monthly prices are currently comparable to landline services. The long distance is definitely cheaper than traditional land lines, but Skype is still from what I can tell the best deal online.

Skype charges 0.017 Euro cents (approx 2 cents Cdn)per minute for computer to non-computer call and is free from computer to computer. It works on a credit system in 10 Euro increments. It would be nice if there was the option to buy in Cdn or US dollars but it's not that big of a deal. Hopefully, I'll be able to convince most of my long distance friends to get an account so we can talk computer to computer free.

I downloaded the software in just a few minutes and am nearly up and running. I need to pickup a microphone or USB phone. I'm hoping that my cellphone headset will work. It just needs an attachment to fit my audio input on my computer and I should be able to get one of these for a couple of dollars.

I tested the calls to other friends that are set up on Skype to make sure I was connecting properly(no voice yet) and have used the chat functions. Another great feature is the ability to send computer files. Since most email servers often have MB limits, sending large files can't always be done easily. I'm currently transfering a 500MB file from my brother who lives out of town and it's much easier than clogging up my email with files sent in bits and pieces.

This should save me about $10 a month in long distance bills. Not a huge amount, but if I like the VOIP experience, I may look at cancelling my cellphone in favour of a permanent VOIP service.