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Wednesday, November 13, 2013

Dollars & Cents: Financial Planning for Families

Learning how to manage finances can be an intimidating endeavour, even to the most savvy of us. Depending on how you were taught & learned to manage money can have a huge impact on how you handle your finances as an adult. Suddenly turning that piggy bank upside down and shaking the heck out of it doesn't count as a financial plan. We're grown ups now people, and that means addressing money as an adult. Oi, when did that happen?!

Learning how to budget & be disciplined with money may not sound exciting, but it can pay off big time in the long run. Regardless of what your priorities are for how & where you spend your money, having a plan to help you reach your goals is a great place to start. Do you want to have a vacation each year? Pay for your kids to go to college/ university? Have a retirement income? Some, or all of the above? Unfortunately that money isn't going to grow on trees (as much as we wish it did!), so to help sort through all the financial jargon & info, I spoke to Kevin Parton, a Financial Advisor with Investor's Group, about some of the common questions & concerns young families have about saving.

Since it isn't getting cheaper to send your kids to post- secondary & saving once you have kids may seem more challenging, my questions focused on RESPs and how young families can learn to save & manage their finances. Read on to see the advice Kevin had to offer.

1.    What info do you need to set up a bank account for a child? An RESP?

When opening an account for a child there are a few options. You can open an  RESP (registered education savings plan) which is primarily for funding post secondary education. This account requires a Social Insurance Number for your child and your own personal information as the account will be registered to you with your child as the beneficiary/one who receives the money.

If you would prefer to save money for your child outside of a registered education savings plan you may set up a non-registered investment account for your child. This money can be deposited and redeemed at any time for any purpose; however any investment income earned on your deposits is fully taxable.

With that in mind another option is to open a TFSA (Tax Free Savings Account). You have the same flexibility as the non-registered account, however you will now avoid the tax on any investment income earned. A Tax Free Savings Account only becomes available to an individual once they have reached the age of 18, so you will have to open one up in your name and use it as a savings vehicle for your child.

For any of the following accounts to be set up you will need a SIN, Drivers License or other photo identification, name, birth date and address.

The account that is right for your situation is best explored with the help of a financial planner. Ask your friends, family members and colleagues if you can speak to their financial planner. Interview a couple of them to make sure they are the right fit.

2.    What are the benefits of setting up an RRSP? (tax related and otherwise)

There are a few benefits to setting up an RRSP. The first benefit of setting up an RRSP lies in the fact that you are saving for retirement. We are moving further into an age where employers and the government are not going to be providing us with the same pension support our parents are/were familiar with. This means that it is OUR responsibility to find out what our retirement should look like and then determine how much we need to save during our working lives to make it happen.

The second benefit of setting up an RRSP is the tax deduction. I will use this example to explain the benefit of tax deductions:
Joe Client earned $60,000 before taxes in 2013. On that $60,000 Joe Client would have paid $11,603 in taxes throughout the year leaving him with $48,397 in his pocket. However for every dollar Joe Client puts into his RRSP for the 2013 year he reduces his taxable earnings of $60,000 by one dollar. In 2013 Joe Client invested a total of $5,000 into his RRSP making his taxable earnings $55,000 ($60,000 earnings - $5,000 RRSP contribution). Joe Client has already paid taxes throughout the year on $60,000 so when he files his taxes he will get back the taxes he paid on the income her earned between $55,000 and $60,000 which is $1,485. The more income you earn, the more taxes you pay and the larger refund you will get by using your RRSP.

The third benefit of setting up an RRSP is the tax sheltered growth. Much like the Tax Free Savings Account, once the money is inside the RRSP it can grow and grow and grow without you having to pay any taxes on the investment income. Over a period of 30-40 years this will save you potentially tens of thousands in taxes leaving you with more money for your retirement.

And lastly, RRSP’s can be used for purposes other than retirement. You are able to pull money from your RRSP tax free if you are purchasing your first home or going back to school. These exceptions are called First Time Homebuyers Plan and Life Long Learning Plan.
Please speak with a financial planner about your situation and determine how best to use an RRSP so it is right for your personal situation.

3.    What advice do you have for young families looking to save money?

“ The best time to plant a tree is ten years ago, the second best time to plant a tree is today.” I deal with young families all the time and often times they have the attitude that if they can’t save enough to cover all of their goals then there is no point in starting. Let me tell you that the worst thing you can do is postpone your savings because you think a little bit isn’t enough.

Create a budget so you can see what your household income is and what all of your expenses are. Leave a little room for variables (because there are always variables) and then decide on an amount to save. It can be as little as $25/month but something is always better than nothing.

In addition to that strategy you will want to have a plan. You may have enough money to save monthly but if you don’t have a specific goal and purpose for that money then it is as good as spent on the next spontaneous purchase. Think hard about what you want your life to look like financially, work with a financial planner to figure out what it will take for you to achieve that life and then commit to working towards those goals.

You must practice good money habits before you have money in order to become successful. Do not wait until you have money to start trying to save. I promise you that day will never come.

4.    What are the most common concerns for young families?

The most common concerns I find among young families are: What happens if I or my spouse die? Who takes care of our child? How to we prepare for the worst case scenario? These are never fun conversations but they are necessary conversations. Making sure your family will be financially secure in case of a premature death, disability, or serious illness is of utmost importance. Also understanding what happens to your family if and when you are gone is important.

Beyond the emergency planning it is often constant planning towards real estate ownership, saving for their children’s education, saving for their retirement, and making sure they are taking time to enjoy today.

5.    What mistakes do people make when it comes to saving?

The biggest mistake people make when it comes to saving is trying to do it themselves and/or not taking the time to find a qualified financial planner to work with. Do-it-yourself financial planning is a bad idea for the very same reason using Google as your personal physician is a bad idea.

Your life is busy with work, children, family, life, etc… find yourself a professional that you know, like, and trust. Work with them to tell them what you want to accomplish and let them put a plan together for you. This plan should be specific to your situation and you should review it as often as you would like but at least every year.

Any other useful info/ resources you can suggest?  

In my experience these are the things I have learned about young families.

1.     Life is hectic
2.     Sleep is scarce
3.     Money is tight
4.     Most of your attention is on the child/children

     You are the parents, so work hard, stay focused, and take care of your family. Find a reliable source of financial help and information and work together to take your life in the direction you want.

Often times you won’t be able to accomplish as much as you would like in one year but I promise you will be amazed at what you can accomplish in ten years.

Kevin Parton is a consultant with Investor's Group & works at their Greater Vancouver South location. If you have any questions or are seeking financial advice, you can contact him via email at kevin.parton@investorsgroup.com or by phone at (604) 541- 9334 (Ext. 484).

Image Source: http://pages.shanti.virginia.edu/Pancakes4Parkinsons/portfolio/donate/