Q: Every year, I earn a little more than the year before but I have nothing to show for it. Once again, Christmas has left me with greater debt than I anticipated. Where do I go from here?
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A: The New Year is here but old debts do not seem to go away. For many Canadians, Christmas and other festive occasions in December can prove to be an expensive undertaking.
Sit down and create a healthy financial diet, one with manageable debt. Have a plan and budget and stick to it. Here are training tips to shed to trim those unwanted bulges:
1. High-interest debts: Reduce these, especially if they’re not tax-deductible. Pay down high-interest rate debts first, not necessarily the largest debt. Credit cards and "No money down" programs carry outrageously high interest rates, paid with hard earned after-tax dollars. Like a box of chocolates, a new 56-inch HDTV may give immediate satisfaction but it comes at a steep price. Credit cards begin to bulge from all corners and on the verge of imploding. Most investments would require five- to seven-year returns to equal the interest paid on these cards.
2. Start an RRSP: Automated monthly contributions through your bank or deducted directly from your paycheque would solve the problem at tax time. Just imagine, now you, too, can get a larger tax refund in April.
3. Re-balance your Registered Retirement Savings Plan (RRSP) and investments outside your RRSP. Generally, interest bearing investments that attract greater taxes should be kept inside RRSPs and dividend/capital gain returns outside your RRSP.
4. Investments such as interest and rental income generate taxable income at approximately 48 per cent for taxpayers at the highest marginal tax rate. Convert non-deductible interest payments to a tax deduction that may reduce taxable income.
5. Use excess monthly cash flow: Buy RRSPs and with the tax refund, pay down the mortgage on your principal residence. It is more advantageous to purchase RRSPs in a low-interest environment. Should rates rise, it may be more prudent to pay down the mortgage.
6. Consider RESPs: With tuition continuing to soar, most families must plan for their children’s post-secondary education. Earnings in an RESP are not tax-deductible, but aren’t taxed until it is withdrawn.
Staying financially fit requires a lifestyle change. The first change starts with you!
Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304. Any questions to Money Matters should be e-mailed to email@example.com.