Managing Your Money

Q: It seems as if our cost of living is up, but not our incomes. Our monthly expenses are getting higher and we’re having to dip into savings to cover them. What are the best strategies to get back on track? And where is the best place to take money from if we need it?

A: It’s hard not to notice it these days. Gas prices – up. Electrical costs – up. Heating bills – up. Increases like this can cripple your cash flow and figuring out how to cope with them can be stressful. So, here are some practical ways to find the extra money you need to cushion those unavoidable financial demands you face every day.

What NOT to do. If you find yourself a bit short at bill-paying time, DO NOT fund the shortfall by making a withdrawal from your RRSP or get a cash advance on a credit card. Here’s why:

You’ll pay income tax on your RRSP withdrawals – meaning that if you take out $5,000 and are in the 40% tax bracket, you’ll add $2,000 to your tax bill. You’ll also diminish the potential tax-deferred growth that the $5,000 would have contributed to your retirement lifestyle. If your retirement is 30 years away, that $5,000 withdrawal will cost you $45,313 in tax-deferred growth (assuming 8% compound annual growth).1
Use your credit card to get that $5,000 and you’ll probably pay interest at 18% or more. That adds up to $978 in yearly interest and if you don’t pay the balance all year and you’re in the 40% tax bracket, you’ll need to earn $1,630 just to pay the interest.
What to do instead.
Consider consolidating your debt through a lower-rate loan from a financial institution. Use the loan money to pay your debts – targeting credit cards and other high-cost non-deductible debt first.
Obtain a line of credit based on the equity in your home or other assets, usually available at a very favourable interest rate.
Arrange a revolving line of credit to cover overdrafts on your bill-paying chequing account.
Review your budget – if your expenses are exceeding your income on a regular basis, or there’s nothing left for savings, then it’s time to make some adjustments.
You’re coping financially right now but … What happens if you’re hit by a serious illness or a huge house or vehicle repair bill? Once again, DO NOT tap into your RRSP, and avoid dipping into your savings or borrowing by:
Setting up an emergency cash reserve, typically equal to three months’ income, or if your job is iffy or seasonal, make that five or six months’ net income.
Turning your emergency fund into an investment in a Money Market mutual fund, Guaranteed Investment Certificate (GIC), that are Tax-Free Savings Account (TFSA) eligible or government savings bond that will protect your capital, deliver a decent interest rate and let you withdraw your money quickly with little or no cost as needed.
Price and rate challenges are a fact of life but you can cushion the effects when you’re financially prepared. A financial planner can help you to establish a cash-flow plan and regularly review your budget. This will keep your spirits up and your costs down.

1 The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.

Lynn MacNeil, Pl.Fin. is a licensed Financial Planner with Investors Group Financial Services Inc., with over 16 years experience working with retirees & pre-retirees. This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide legal advice. For more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at (514) 693-3384 or [email protected]

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