Banker's View : What to look for when getting a GIC - Guaranteed Investment Certificate / Term Deposit

Guaranteed Investment Certificates 

 Term Deposits 

What do GIC's / Term Deposits provide you with?

1. The rate of return is known from the investment, 100% guaranteed 
2. The length of the term is known 
3. The Principle (money you invested) is 100% protected unlike stocks or mutual funds

Opportunity Cost 

1. Some GICs are cashable while others are not, however which ever way you look at it you might not have access to your funds during some or all part of the year. The window that allows you access to your funds is very small, unlike mutual funds.
2. Simply put, low rates. That is the biggest drawback. 

Who is the biggest enemy of a GIC...Inflation...

Lets says if you bought groceries that cost you $100 dollars in 2012, same groceries will cost you $102.87 in 2014. 

That is a massive increase of 2.87% in inflation. Meaning you purchasing power went down. 

So if you invested into a long term GIC, lets say 5 years locked in, at 3.25%, you will not be able to beat inflation. (Refer to previous blog http://bankersviewpersonalfinance.blogspot.ca/2014/12/why-have-mutual-funds-as-part-of-your_28.html). Therefore, a GIC which is cashable end of every year is a better options. 

This is what I call riding GICs

Example: 

GIC #  1

3 year rising rate GIC cashable every 12 months on anniversary

1  yr 1.5%

2 yr 2.2%

3 yr 2.9%

Lets say, you got the GIC on Jan 1 2015. You have the option to cash it out after 12 months, which is Jan 1 2016. 

Lets say the rates of are getting better and there is a new GIC that your financial institution is offering at 5% 2 year locked in. It is much better than the rate you would get for leaving the money in teh gIC for the second year, which is at 2.20%. So if you keep an eye on the rates and know when your GICs are cashable you can ride on to the next GIC at the best rater. 

Bankers View: Guaranteed Investment Certificate vs Mutual Funds

Guaranteed Investment Certificates 

Term Deposits

Money you put in to the GIC is fully secure 100%
The interest rate is fully guaranteed 100%
If the interest rates go down the rate that you were given for the investment stays. 
Your own access to these funds is limited. 

Types of GICs / Term Deposits

Cashable GICs

Rates are lower than non-cashable GIC’s

Might be cashable after 30 days

The interest rate might be guaranteed for 12 months

Example: GIC # 1

Rate = 1.15%

Term = 12 months

Cashable: After the first 30 days

Semi Cashable GICs

Rates are lower than non-cashable GIC’s

Might be cashable after 6 months  

The interest rate might be guaranteed for 12 months or longer

Example: GIC # 1

Rate = 1.50%

Term 18 months

Cashable: After every 6 months

Rate Riser GICs

Sometime give better rates than non-cashable GICs

Usually Cashable every 12 months

Example: GIC # 1

Rate = 1^st Yr 1.55%

            2^nd Yr 2.20%

            3^rd Yr 3.00%

Locked In GICs

No access to your funds until the term has come due

Higher rate usually compared to rising rate GICs

Example:

Rate: 3.99%

Term: 1 to 5 Year locked in GIC

Banker's View : Dirty Thirty's Personal Finance

"The right time to start is START NOW."

So you are in your dirty 30s, what can you do regarding your personal finances...

When you are in your 30s the biggest asset that you have is years ahead of you till you stop working and claim retirement.

TIME is MONEY 

Lets assume the following:

You are age 35

You will work till age 65

Have loads of debt, lets say $60000

When you have to look at your personal finances you have to think of your self as a Company a Corporation. So as a CEO of your company you will have decision to make. Need to make sure that your company is running at a surplus not a shortage/loss. You have to make sure that your company is running on all cylinders at their max. You need to make  sure that the workers (all you) in the company are happy as well. You need to make sure that company has a good status in the world around you. 

"Most of all make sure this company is growing."

Your company will have different departments that need to be looked after. 

Here is break down of your company: 

All these departments need to be taken care of other wise your company can run into crises.

Step # 1

Get the Audit Department fired up and ready up pull up them sleeves. You need to become an investigator. Print out 3 to 6 months statements from all your bank accounts and credit cards and loans. 

Step # 2

Categorize how ever you want to categorize these transactions that your company has been performing for last three or six months. Here is an example. But make your own, because it will be more fitting to your circumstances!

This is the key step, if you mess up here while collecting data your company is defiantly going to hit rock bottom. When you have done an analysis and categorized your transactions. Compare the three or six months and see if these expenses are pretty much the same amount through out the months. 

Now that you have the numbers, calculate an average amount you spend per month. Take the total sum of three or 6 months and divide it by three or six to get an average. 

Step #3 

Now you know how much you spend on each month. You might be surprised to see some of the expenses are out of control, or you are pretty much spending the same amount of money every month on particular expenses. 

Take this monthly average expense and subtract it from your average monthly income for those 3 or 6 months. 

Income - Expenses = Surples or <Deficit> 

If you have a deficit that means you have a short fall in your income you earn or you are spending way too much on a particular expense. 

The steps you can take here are the following:

1. Reduce your expenses 

2. Get another job

I hate both of these options!

*The only one you can consider is reducing your excessive expenses that are just a bad habit. 

Here is my recommendation!

Get a raise at your current work place or upgrade to a new job! 

Simply spend money on your education, educate your self. Take courses that you need to take that can get you that raise. HOWEVER, you should also have interest in the work you do and workplace. Just taking courses to get a raise is not a good idea because you need to make sure that you have intentions to follow up further and advance in your career.  

Here your education department will come in to play. Surly you will have higher expenses and will take time, but once you are done it stays with you. 

This way your company is growing.

Back after break...

Banker's View : Bank vs Credit Union

 Both are Financial Institutions, however, they have major differences. 

Here are the major differences:

1. Safety of your money 

By safety I mean, in case a financial institution goes bankrupt, how much of your money is safe.

A Credit Union insures 100% of your money. Other than money sitting in equity markets of course.

vs 

Federal Banks are only insured up to $100000 of your money in an account. If you want another $100000 coverage you will have to make accounts joint with another person, which will then give you another $100000 coverage. This of course means you will lose ownership of your funds as well. 

In a Bank Money sitting in the following is insured up to $100000 for each of these items:

• Bank account in your name 
• Bank account in joint name 
• TFSA 
• RRIF
• RRSP
• In Trust accounts
• GICs  with a term not exceeding 5 years 

Keep in mind that you have unlimited insurance coverage for the above with a credit union, no matter how much sits in any of these accouts. 

Your US dollar account or any other currency account with the banks are not insured either.

vs

With the Credit Union they are 100% insured all of these, USD accounts with accrued interest and GICs longer than 5 years.


2. Fees 

This is a HOT topic !

All financial institutions have different ways their bank accounts and plans are setup. Banks usually have higher fees and account operating cost.

vs

With most of the credit unions, you will probably get a free chequing account with no minimum balance to keep and no restriction on how many transactions you can do on the chequing account. If you are out side the province you can still you another credit unions ATM network.

vs

A bank might charge you a fee if you go over a certain number of transactions. Or if you do not maintain a minimum balance in the account for the whole month (each and very single day, yup).

For example, if you look at Bank of Montreal "Practical Plan" you get to use the account 10 times in a month. Any time you go over the 10 transactions you get $1 fee per transaction. Plus, there is a monthly fee of $4.00. If you have $1000 in the chequing account for the whole month (every single day) you then get to wave the monthly fee of $4.00.

Now keep in mind, some banks offer free unlimited transactions and no monthly fee only if you keep lets say $5000 in the account as a minimum balance or if you have all your business with them. 

Note: $5000, I think is too much to keep in a chequing account and not get any interest on that chuck of money!!

Most banks offer a no monthly fee plan for student or youth, but they are limited to how many times they can use that account. Also, when this youth turns 18 or 19, the same fees would apply as I have talked above. 

So always know what you are getting inside and out! 

3. Guaranteed Investment Certificates (GIC) or Term Deposits 

In my experience Credit Unions offer better rates compared to Banks. I have worked in both and I can compare using my experience. Even when it comes down to Mutual funds, the Management Expense Ratio(fees) are probably lower with a credit union. 

Note: Less fees for a Mutual Funds does not mean that you make a lot of money. It depends on the quality of the mutual fund. Another session will come regarding this. 

4. Technology and Resources

One of the main advantage for the banks is that they are big and have lots of resources to spend on technology. They are much ahead of the credit unions in that way. However, now a days, there is a big push towards online banking and technology in banking. Credit Unions are also investing in the technologies. 

Banks usually have their own Wealth management departments and stock trading plat forms. Most credit unions might have out side partners that they work with. However, if you have basic banking needs a credit union will much much lighter for you when it comes down to fees. 

5. Banks have Shareholders while Credit Unions have Members 

To Join a credit union you will have to deposit a small amount of money (usually $5 or so), called the members shares. These shares allow you to vote for board of directors. 

vs

A Bank has shareholders and they can be any where in the world. So the banks main objective is to increase the share price. Therefore, they need to have those fees in place to earn revenue.

6. Credit Unions Operations 

A credit union can operate in a province only, unless they had got the license to operate in other provinces and they are regulated provincially. 

vs 

Banks are regulated Federally. 

There are other difference as well, however, its time for a coffee break...

Banker's View : Tax Free Savings Account - In Simple Terms

Tax Free Savings Account - TFSA 

From a bankers perspective, love this investment plan.

Here are my reasons why:

1. Your money grows in the account tax free and when you take money out, NO TAX.
2. Any interest or capital gains that you get are TAX FREE : D
3. You can name BENEFICIARIES on the it. 
4. You can invest in a GIC, MF, SHAREs or a BASIC SAVINGS ACCOUNT with in this plan !!

So lets put this to the test

If for example I had a TFSA and invested $5000 in lets say a GIC  sitting with in the TFSA  for 3 years earning 2.1% over all.

To keep things simple:

$5000 x .021% = $ 105 in interest income for year 1
Times this by 3 = $315 Interest Income for 3 years.

This $315 is NOT TAXABLE in or when you take it out of the TFSA!

vs

If you had the same GIC out side TFSA, your financial institution will give you a T5 slip. T5 is given to you because you earned interest income and which you will have to include in your taxes.

Note: If you earned less than $50 in interest income there is no T5 generated, because it too less of interest for the whole year. 

 : D

Here are the three investment options that you can have with in a TFSA:

Now the question is, can you put in a million dollars?   

Unfortunately you can not. This investment plan was started by the government in 2009.

It was designed to encourage Canadians to save money rather than spend it all. How much can you put in?

Here is the deal

Every year you can put in a certain amount. If you were 18 in the year 2009 you could have contributed $5000 in to this plan. Since then till 2012, you could have put in $5000 every year. 2013 to 2015 the amount was increased to $5500. Simple because of the rise in inflation.

Most importantly, you can carry forward the accumulated room!! :D

Contribution years:

2009                    $5000
2010                    $5000
2011                    $5000
2012                    $5000
2013                    $5500
2014                    $5500
                            $31000 

Jan 1st 2015 you can contribute another $5500

The only thing to keep in mind is:

What ever you take out this year from the TFSA you can not put it back in to the TFSA until the next year.

Exception: If you have contribution room you can put that money back.

Note # 1: Its better to call CRA if you do lots of withdrawals and contributions from the TFSA during the same year.

Note # 2: If you do over contribute, there is a penalty of 1% per month of the excess amount.

This is the plain and simple facts about the TFSA. If you would like more information please visit Canada Revenue Agency's web page, or email me for more details.

Banker's View : Why have Mutual Funds as part of your TFSA RRSP or RESP

What is a Mutual Funds?

I have explained what a mutual funds is in the previous blog. In a nut shell think of mutual funds as a basket of different products from different companies. Now, think of these products as shares of companies and bonds sitting in that basket. So its a mixture of different stocks and bonds (Diversified).

Why would you have mutual funds when nothing is guaranteed about them?

Why not put them in some thing like a Guaranteed Investment Certificate (GIC) where:

1. Your principle (money you invested)  is 100% secure 
2. The rate of return is 100%guaranteed. 

Here is my logic...

Lets say you go to your financial institution and open up a tax free savings account (TFSA) and through in a GIC in it. Lets say a 3 year rising rate GIC.

Year 1.             1.05%
Year 2,             2.1%
Year 3.             2.7%

On average you will get 2.1% from these three years {(1.05+2.1+2.7)/3}
Now lets say it has been 3 years since you invested and your GIC has come due(matured). With in these three year time period inflation was 2.87%.

What is inflation?
If you bought some thing for a $100 in 2012 , that same thing will cost you $102.87 in 2014 to buy. The price went up by 2.87%. In other words, in just two years time period your purchasing power went down -2.87%. Now you need that extra $2.87 to buy the same thing. Two bucks might not be a big amount but think about all the things that you buy thought out the whole year, it is MASSIVE!

Do not believe me...?

Check this out on Bank of Canada's web site...

Simple Math...

Your Return Minus Inflation

2.1% - 2.87% = -0.7% return for all those three hard working years.

Meaning, you got that same money back but it is not worth as much now. Your money actually went down in value....

Breaks my heart when every I explain this :(

What can you do?


Invest part of your money in investments that provide a higher return. You can open up a trading account with any of the brokers and start buying individual company share which could potentially provide a better return than a GIC. However, not every one has a CFA or the time to look in to a company and find out if it is a good decision to buy their stocks.

If you are some one who does not have enough time or the knowledge to do this, my recommendation is to invest in mutual funds.

Yes, as I mentioned before there is no guarantee of your principle and the return. However, some portion of you money sitting in a mutual fund is a good decision.

Just as an example of how a mutual fund portfolio looks like...

If you invested $1000 for example, 40% of that ( $ 400) will be in Fixed Income Funds (Bonds/Tbills and etc.)  24.4% sits in Canadian Equity Funds ( Canadian Companies) and the list goes on...





Will continue tomorrow...
Hit Like so I know it is worth reading :)

Banker's View : Why you should invest in RRSP TFSA & RESP

Why the Title ?

• March 2nd 2015 is the last day you can make contributions to your Registered Retirement Savings Plan a.k.a RRSP. 

Why January - February ?

• It is a great idea to contribute to Registered Education Savings Plan aka RESP, Tax Free Savings Account aka TFSA or Registered Retirement Savings Plan aka RRSP in these months. 

Why ?

• Your money will start to grow or will grow more if you invest right at the beginning of the year. So, start earning from day one of 2015.

From my experience in Banking, here is why you should invest in these plans

R.R.S.P

What can it do for you?

1. If you want to save money for the time when you stop working (Retirement Years) 

2. If you plan to buy a home and make a down payment (DPMT) for your first home

3. If you plan to study in the next couple of year

Red "R" Is when you will retire

Lets take a look at point # 1

Savings money for Retirement

Lets make a fictional character : 

Name          Laura Jones 

Age             30 Years 

Income       $42000

Works @    TD Bank 

Laura's employer will withhold a certain percentage of taxes before depositing money in to her bank account. Lets say she worked the whole year at the company and they withheld $10000 in taxes for the whole year. 

Now Laura goes to the accountants place to get her taxes done. She gives a slip to the accountant which she got from TD Bank her employer. This slip is called the T4. The T4 from her employer tells the accountant that she earned a total of $42000 for the whole year(2014) and how much TD Bank withheld in taxes ($10000, mentioned above). 

• Laura also got a bonus of $5000 from her employer. This extra $5000 on top of her income will increase her tax bracket and reduce her tax refund for the year. 

What can Laura do here?

One recommendation is that she can take $5000 bonus and make a contribution in to her RRSP. This will reduce oh which she will pay taxes. When she does make the contribution in to the RRSP this will trigger a higher tax refund or reduce taxes payable. 

Keep in mind that the government wants to tax you on every dollar you earn, therefore, the money she contributed in her RRSP, that generated a higher tax refund will eventually get taxed when you withdraw from the RRSP (because that part of your income was never taxed)

So why would you contribute in the RRSP when the money will eventually get taxed in retirement years?

The main concept of the RRSP is to let the money grow in the RRSP with out getting taxed. It is better to contribute to the RRSP when you have a higher income. This reduces the taxes payable or generates tax refund as we saw with Laura. 

• The higher you earn higher amount of taxes to be paid.
• So if you contribute money in the RRSP your income will not get taxed at the highest tax bracket. You would have reduced your income and thus the calculated income tax based on that. 
• Therefore, it is true that if you earn a higher income, lets say $45000 it is a good idea to contribute in to the RRSP and defer the current taxes. 
• When you retire you will not have as many expenses as when you are young. Lets take a look at some of the expenses you might not have to pay for when you retire: 

• Mortgage 
• Loans
• Credit Card Debts 
• Car Loan 
• Student Loan

• So if you do not have to earn as much to support those expenses in your retirement years, this means that your income will be much lower, and also the taxes you pay. That is the main concept of contributing in to the RRSP. 

Note: Always maximizing your RRSP is not a good idea. Use your TFSA with your RRSP to save money. Another season will come soon. RRSP vs TFSA.

What investment options are available for RRSP?

From my experience working in the financial institutions, client are unclear about what RRSP is and what an investment instrument is.

Here is a little break down...

RRSP TFSA RESP, all these are plans registered with the government. Think each of them as a container in which you can throw in different investments. Here is a picture worth a thousand words. 

As you can see, there are three investment options that you can have in your RRSP. You can start your own RRSP and invest in stocks and bonds your self. 

High interest savings account 

• pays about 1.05% at most financial institutes
• usually fully cashable 
• opportunity cost of having money fully cashable is the low interest rate. 
• I from experience do not recommend this option because it pay next to nothing. Unless you are going to need the money soon 

Guaranteed Investment Certificate - GIC/Term Deposit 

• usually are cashable or non cashable 

• two things are 100% guaranteed as the name suggests 
• the interest rate offered (no fluctuation in the interest rate you get the GIC at)
• principle protection 100% (means you will not lose your money, no fluctuation

• the draw back is that if your GIC is not cashable, you can not take the money out until maturity or when the terms tell you, that you can cash it ( usually every anniversary) 

• Example one, a bank offers 2% return on a 2 year locked in GIC
• 2 year locked in means i can not have the funds until the two years have passed.

• Example two, a bank offers two year Rate Riser, 1st year you get 1.5% 2nd year you get 1.6% 3rd year you get 1.8%, cashable after every anniversary. 
• cashable every anniversary means, after 12 months from the date you got the GC, you can cash it out. 

Mutual Funds/Stocks 

• unlike the GIC's, neither the principle nor the rate is guaranteed
• has fluctuation in your money 
• has management fees
• potentially provide you with a much better return

What is a Mutual Fund?

If you want to understand the concept of mutual funds you will have to use you immigration.

Think of mutual funds as a bag full of different types of candies. When I say candy, it means company stocks

Here is a description of this basket of candies(stocks)

• Imagine 100 different types of candy (stock) in the basket 
• These 100 candies (stocks) are from 50 different countries 
• These 100 candies (stocks) are from different regions from those 50 different countries 

To make these basket of candies (Stocks) there is a worker (fund managers) who find out which candy (stock) is good and which one is not good. So he/she keeps on switching these candies based on any new ones that come out or any changes in the candy (stock) market. 

Now, every one does not like a basket full of candy (stocks) so this employee decided to put in some biscuits (Bonds, TBills etc) in it as well. For example, if you only had a basket full of candies (stocks) your sales will fluctuate a lot based on which month you are in. For example, Valentines day your sales will be very high and not so much thorough most of the months. So you need to add something else in the basket so it gets bought out thought out the whole year. These Biscuits are called the Fixed Income piece in a mutual fund. What these biscuits (Bonds, TBills etc) do for the basket is that it keeps the fluctuation in the sales some what stable.

Bonds are more stable than a stocks. If you compare a chart that has a bond and a stock, you will find that stock tend to fluctuate more than the bonds.

Will carry on next time :)