Didn't realize how stressful impending financial decreptitude was until this reprieve.
November 22, 2011 10:10 AM Subscribe
Received a small (huge for me) financial windfall. I have a vague plan on what to do with it. What is the title of the person at my local credit union with whom I should be seeking advice from? Bonus: is my vague plan a reasonable one?
I've been a post-secondary student since '96, with a brief stint in industry (where I was actively saving money - those savings have since been devoured from unemployment/studentship), so I've been living from paycheck to paycheck for essentially my entire "adult" life.
Received a small financial windfall ($50k CDN), which I plan to use to pay off my student loan ($20k) in a lump sum1 around September 2012. My current net worth is vastly higher than it has ever been and I feel a little intimidated/clueless.
The balance of the remaining funds I plan on using to strategically maximize my RRSP contributions, along with education credits and a 'Tax Free Savings Account'2, to maximize retirement/housing-downpayment savings while minimizing my income tax payments.
Assuming that I can find a job. Otherwise, this becomes my safety cushion until I can, so the remainder would need to be fairly liquid.
Difficulty: how best to hold onto this cash until September 2012? Is it even possible to "beat inflation" with zero/minimum risk?
I've been a member of a local credit union (Vancity) that has treated me well over the years. Not Santa Claus and the Easter Bunny rolled-into-one level of awesome, but still pretty awesome. I'm assuming that there are employees there who can assist me in handling this money. What would their title be?
As far as financial plans go, is there anything fundamentally unsound about it? Is there any better way with which to make use of these funds aside from taking it as 2500 $20 bills (or 500 of the new fancy polymer $100s) and rolling around in it naked?
1I can do that, right? Right?! There's probably a fee or penalty, but that's fine.
2There's no point in putting money in it now, right? I'm assuming that the intended use is to lower one's net income for that year to try to make a lower bracket/not pay tax on the (max) $5k contribution.
I've been a post-secondary student since '96, with a brief stint in industry (where I was actively saving money - those savings have since been devoured from unemployment/studentship), so I've been living from paycheck to paycheck for essentially my entire "adult" life.
Received a small financial windfall ($50k CDN), which I plan to use to pay off my student loan ($20k) in a lump sum1 around September 2012. My current net worth is vastly higher than it has ever been and I feel a little intimidated/clueless.
The balance of the remaining funds I plan on using to strategically maximize my RRSP contributions, along with education credits and a 'Tax Free Savings Account'2, to maximize retirement/housing-downpayment savings while minimizing my income tax payments.
Assuming that I can find a job. Otherwise, this becomes my safety cushion until I can, so the remainder would need to be fairly liquid.
Difficulty: how best to hold onto this cash until September 2012? Is it even possible to "beat inflation" with zero/minimum risk?
I've been a member of a local credit union (Vancity) that has treated me well over the years. Not Santa Claus and the Easter Bunny rolled-into-one level of awesome, but still pretty awesome. I'm assuming that there are employees there who can assist me in handling this money. What would their title be?
As far as financial plans go, is there anything fundamentally unsound about it? Is there any better way with which to make use of these funds aside from taking it as 2500 $20 bills (or 500 of the new fancy polymer $100s) and rolling around in it naked?
1I can do that, right? Right?! There's probably a fee or penalty, but that's fine.
2There's no point in putting money in it now, right? I'm assuming that the intended use is to lower one's net income for that year to try to make a lower bracket/not pay tax on the (max) $5k contribution.
Do check out the relative merits of continuing to pay off student loans at normal speed vs paying them off in one lump. If the interest rate is low, it may be more beneficial to pay them off as you have been doing than to incur a penalty. It should be a relatively simple sum to do.
posted by altolinguistic at 10:30 AM on November 22, 2011 [1 favorite]
posted by altolinguistic at 10:30 AM on November 22, 2011 [1 favorite]
Vanguard Bond Fund's yield will beat Canada's inflation rate of 2% just barely. It's not risk free but its fees are quite low and bond funds don't often go down (and sometimes they go up.) https://personal.vanguard.com/us/FundsSnapshot?FundId=0084&FundIntExt=INT
I don't think you'll find a 1-year CD that beats inflation.
posted by michaelh at 10:31 AM on November 22, 2011 [1 favorite]
I don't think you'll find a 1-year CD that beats inflation.
posted by michaelh at 10:31 AM on November 22, 2011 [1 favorite]
Put it in a few CDs with short and staggered durations so that if you need to tap into some of the money between now and September 2012, you can get it without an early withdrawal penalty. Maybe a third in a 2 month CD (that you roll over every 2 months), a third in a six month CD (that you roll over once) and a third in a nine month CD.
posted by zippy at 10:32 AM on November 22, 2011 [1 favorite]
posted by zippy at 10:32 AM on November 22, 2011 [1 favorite]
When you have a windfall the best thing to do with the money (other than wiring it me, of course) is to put it away for a while. Staggered CDs are a pretty good option. In time you will be able to digest the options better than today. You may find that the interest rate on your current debt is competitive and that having more liquid cash gives you more options to buy a home, or many other things. Take some time and get used to experience of having options so you can exercise them well because it only spends once. Don't get hung about whether you beat inflation. The bigger risk is making bad decisions and the best antidote is time.
posted by dgran at 10:44 AM on November 22, 2011
posted by dgran at 10:44 AM on November 22, 2011
Response by poster: Thanks for all the comments so far!
Two quick question: in the context of finances, what's a CD?
Also in regards to, "Do check out the relative merits of continuing to pay off student loans at normal speed vs paying them off in one lump." Where should I start looking for that information, or alternatively, who should I speak to about this particular bit of calculus?
posted by porpoise at 10:50 AM on November 22, 2011
Two quick question: in the context of finances, what's a CD?
Also in regards to, "Do check out the relative merits of continuing to pay off student loans at normal speed vs paying them off in one lump." Where should I start looking for that information, or alternatively, who should I speak to about this particular bit of calculus?
posted by porpoise at 10:50 AM on November 22, 2011
Best answer: CD = certificate of deposit
Wikipedia article on CD
and there are numerous things to consider before paying off student loans. The first thing I would consider, how is your interest set-up (variable or fixed) and do you have any other outstanding debt. The interest in student loans is generally tax deductiable and it may be in your best interest to tackle the highest interest rate first before paying off the rest. For example, my fixed interest rate is 4% while my credit card has a 17% interest rate. To me, it's better to maintain the student loan debt while paying off the credit card debt.
Also in regards to this, check the fine print to ensure that there is no penalty for paying off the debt early. If there is, do some calculations to see if the interest saved will offset the cost incurred for paying it off early. Also, do you have a security savings set-up? If not, with being in school, you may be better off doing this then paying off student loans. Yes it sucks, but not more then taking off a loan because you have an emergency that is 20K worth.
I wouldn't open a CD, if your looking to hold on to it in liquid form - check out Discover Bank's online savings account. Yes, it's the credit card company but you still have access to your savings without tying it up in a CD which forces you to hold on to it for X amount of time, otherwise you pay a penalty, generally in the form of losing any gained interest.
posted by lpcxa0 at 11:04 AM on November 22, 2011
Wikipedia article on CD
and there are numerous things to consider before paying off student loans. The first thing I would consider, how is your interest set-up (variable or fixed) and do you have any other outstanding debt. The interest in student loans is generally tax deductiable and it may be in your best interest to tackle the highest interest rate first before paying off the rest. For example, my fixed interest rate is 4% while my credit card has a 17% interest rate. To me, it's better to maintain the student loan debt while paying off the credit card debt.
Also in regards to this, check the fine print to ensure that there is no penalty for paying off the debt early. If there is, do some calculations to see if the interest saved will offset the cost incurred for paying it off early. Also, do you have a security savings set-up? If not, with being in school, you may be better off doing this then paying off student loans. Yes it sucks, but not more then taking off a loan because you have an emergency that is 20K worth.
I wouldn't open a CD, if your looking to hold on to it in liquid form - check out Discover Bank's online savings account. Yes, it's the credit card company but you still have access to your savings without tying it up in a CD which forces you to hold on to it for X amount of time, otherwise you pay a penalty, generally in the form of losing any gained interest.
posted by lpcxa0 at 11:04 AM on November 22, 2011
Best answer: CDs are an American instrument. In Canada, the GIC is the closest equivalent to the CD.
posted by bonehead at 11:26 AM on November 22, 2011 [2 favorites]
posted by bonehead at 11:26 AM on November 22, 2011 [2 favorites]
Best answer: You can use an amortization calculator to figure out how much interest you will be saving by paying off the loan at a certain date. Just Google 'amortization calculator' - they are designed for mortgages but you can use them for other debts by entering in the length of the debt and the interest rate.
I cannot tell you whether your plan is the most sensible or not without knowing the interest rate on the loans or fees for early payment. If the loan interest rate is lower than inflation than it may not strictly make the most sense to pay the loan off in a lump payment with the windfall. That being said, there is something nice psychologically about being debt free, and I wouldn't blame you if you decided to pay it off. My question is, if you're going to pay it off, why not pay it off now? Why wait a year? Won't you be paying unnecessary interest all year if you have the money now but don't use it?
I would agree with putting the money away in a safe place for a while (safe meaning probably relatively low interest, hopefully better than inflation, but no risk), and reading some personal finance books and blogs in the meantime so you can learn about what you're doing.
posted by treehorn+bunny at 11:28 AM on November 22, 2011
I cannot tell you whether your plan is the most sensible or not without knowing the interest rate on the loans or fees for early payment. If the loan interest rate is lower than inflation than it may not strictly make the most sense to pay the loan off in a lump payment with the windfall. That being said, there is something nice psychologically about being debt free, and I wouldn't blame you if you decided to pay it off. My question is, if you're going to pay it off, why not pay it off now? Why wait a year? Won't you be paying unnecessary interest all year if you have the money now but don't use it?
I would agree with putting the money away in a safe place for a while (safe meaning probably relatively low interest, hopefully better than inflation, but no risk), and reading some personal finance books and blogs in the meantime so you can learn about what you're doing.
posted by treehorn+bunny at 11:28 AM on November 22, 2011
Best answer: RRSP deposits can be deducted in years where you have a higher income. I believe they can be held indefinitely -- so you deposit, for argument's sake, 10k now (I assume you have 10k of space), and you only deduct it in 2015, when your income is higher.
TFSA is also nice, because you pay tax on the money now (when your income is lower) and then take the money + any interest later without any more taxes. It is the reverse of an RRSP.
posted by jeather at 11:34 AM on November 22, 2011 [1 favorite]
TFSA is also nice, because you pay tax on the money now (when your income is lower) and then take the money + any interest later without any more taxes. It is the reverse of an RRSP.
posted by jeather at 11:34 AM on November 22, 2011 [1 favorite]
Best answer: I don't know what rates are like at Vancity, but in the current climate and depending on your bank, it is not necessarily the case that a GIC will offer a better rate of return than a savings account (which will allow you to access your funds at any time), especially with regard to short-term GICs.
For instance, the RBC high interest esavings looks to be at 1.2 right now whereas it looks like you'd have to lock away your money for 2 years to get something competitive from RBC's own GICs. That's completely counterintuitive to me (I mean you're trading away access to your money...for what?), but anyways, something to be on the lookout for.
posted by juv3nal at 11:37 AM on November 22, 2011
For instance, the RBC high interest esavings looks to be at 1.2 right now whereas it looks like you'd have to lock away your money for 2 years to get something competitive from RBC's own GICs. That's completely counterintuitive to me (I mean you're trading away access to your money...for what?), but anyways, something to be on the lookout for.
posted by juv3nal at 11:37 AM on November 22, 2011
I mean you're trading away access to your money...for what?
I should mention...I am aware the locked in rate of a GIC will protect you in case rates continue to drop, but honestly, how much lower can they go?
posted by juv3nal at 11:39 AM on November 22, 2011
I should mention...I am aware the locked in rate of a GIC will protect you in case rates continue to drop, but honestly, how much lower can they go?
posted by juv3nal at 11:39 AM on November 22, 2011
Note that all of my advice is from a US perspective and I don't know a lot any sticky details around finance in Canada.
The value of CDs will likely be destroyed by inflation, so they're hardly "lowest risk."
I would say that a savings account or (the Canadian equivalent of) a CD are lowest risk in terms of predictably holding on to value. As of right now, the interest rates you would be able to get are most likely slightly lower than inflation, so you will lose a small amount of money. But the point is that the value is very predictable, a lot of what is meant by "risk" is that although something might be a good long term investment, in the short term it's hard to tell if you will have a 30% gain over the next year or a 20% loss. Even if the gain is more likely than the loss, it's still a risk that you'll be unlucky this year.
Put it in a few CDs with short and staggered durations so that if you need to tap into some of the money between now and September 2012, you can get it without an early withdrawal penalty. Maybe a third in a 2 month CD (that you roll over every 2 months), a third in a six month CD (that you roll over once) and a third in a nine month CD
I don't know about Canada, but in the US at least an online savings account has comparable interest rates to a CD, so CD ladders like you are describing are largely not worth the hassle.
Difficulty: how best to hold onto this cash until September 2012? Is it even possible to "beat inflation" with zero/minimum risk?
A one year investment is either going to be very risky or not have a very good return. The key to investing is making more than you spend, putting your extra money into assets that will have a good longterm return, and paying as little in fees and other expenses while doing so. In the short term with current interest rates, you are not going to do much better than you would hiding your money under a mattress. So if you need this money as a safety net, look at the money you are losing to inflation in something like a savings account as "insurance," and as long as you don't spend the money it will still be there when you need it. If you have money that you won't need for a long time, that's where making more serious investment decisions is important.
posted by burnmp3s at 11:46 AM on November 22, 2011
The value of CDs will likely be destroyed by inflation, so they're hardly "lowest risk."
I would say that a savings account or (the Canadian equivalent of) a CD are lowest risk in terms of predictably holding on to value. As of right now, the interest rates you would be able to get are most likely slightly lower than inflation, so you will lose a small amount of money. But the point is that the value is very predictable, a lot of what is meant by "risk" is that although something might be a good long term investment, in the short term it's hard to tell if you will have a 30% gain over the next year or a 20% loss. Even if the gain is more likely than the loss, it's still a risk that you'll be unlucky this year.
Put it in a few CDs with short and staggered durations so that if you need to tap into some of the money between now and September 2012, you can get it without an early withdrawal penalty. Maybe a third in a 2 month CD (that you roll over every 2 months), a third in a six month CD (that you roll over once) and a third in a nine month CD
I don't know about Canada, but in the US at least an online savings account has comparable interest rates to a CD, so CD ladders like you are describing are largely not worth the hassle.
Difficulty: how best to hold onto this cash until September 2012? Is it even possible to "beat inflation" with zero/minimum risk?
A one year investment is either going to be very risky or not have a very good return. The key to investing is making more than you spend, putting your extra money into assets that will have a good longterm return, and paying as little in fees and other expenses while doing so. In the short term with current interest rates, you are not going to do much better than you would hiding your money under a mattress. So if you need this money as a safety net, look at the money you are losing to inflation in something like a savings account as "insurance," and as long as you don't spend the money it will still be there when you need it. If you have money that you won't need for a long time, that's where making more serious investment decisions is important.
posted by burnmp3s at 11:46 AM on November 22, 2011
Response by poster: To clarify; I'm still in school. The timeline is that I defend/graduate in September 2012, give or take, which is when interest will begin to accrue. Right now I'm doing ok between my stipend and the student loan which has been paid out (and which I'm only slowly chewing through - if I graduate in 09/12, I will not have used up the entire $20k).
It's really great getting all this advice, much appreciated! But is there someone at my bank who's job responsibilities is to talk to customers about stuff like this? I'm vaguely aware that there are money manager types out there who will take a fee for consultation (and a percentage if they broker anything), but I figure my dollar amount is so small that its not worth pursuing that particular avenue.
But it sounds like I'm over-beanplating my situation. So stick it in a GIC/high(relative) interest savings account and don't worry about it?
jeather - really? I can bank RRSP credits (like tuition/education credits) for future deduction?
posted by porpoise at 12:00 PM on November 22, 2011
It's really great getting all this advice, much appreciated! But is there someone at my bank who's job responsibilities is to talk to customers about stuff like this? I'm vaguely aware that there are money manager types out there who will take a fee for consultation (and a percentage if they broker anything), but I figure my dollar amount is so small that its not worth pursuing that particular avenue.
But it sounds like I'm over-beanplating my situation. So stick it in a GIC/high(relative) interest savings account and don't worry about it?
jeather - really? I can bank RRSP credits (like tuition/education credits) for future deduction?
posted by porpoise at 12:00 PM on November 22, 2011
Best answer: I can bank RRSP credits (like tuition/education credits) for future deduction?
Yes. This is an awesome trick that very few people know about.
Yes, banks have someone whose job it is to talk about this. Ask a teller for the card. You are not obliged to take their advice, but you can listen to someone else.
posted by jeather at 12:05 PM on November 22, 2011 [1 favorite]
Yes. This is an awesome trick that very few people know about.
For 2010, you can deduct contributions you made to your RRSP from January 1, 1991, to March 1, 2011.It looks like it's a 20 year horizon. But there's no reason to think it will change back without notice.
Yes, banks have someone whose job it is to talk about this. Ask a teller for the card. You are not obliged to take their advice, but you can listen to someone else.
posted by jeather at 12:05 PM on November 22, 2011 [1 favorite]
Best answer: I belong to a credit union in Minnesota, USA, and I generally find that their loan officers are pretty decent financial advisors in general, i.e. not just specific to debt/loans (though they are quite knowledgeable about that too).
I would simply call your credit union directly and ask them the question you are asking us: is there anyone there who could help you with financial advice re your situation? If so, is it free or fee-based?
After doing that, I'd look at this organization: http://www.nfcc.org/
They are U.S.-based, but I'm wondering if there's a Canadian equivalent. They provide excellent consumer credit counseling and financial advising, for free or nearly free.
posted by Betty's Table at 12:06 PM on November 22, 2011
I would simply call your credit union directly and ask them the question you are asking us: is there anyone there who could help you with financial advice re your situation? If so, is it free or fee-based?
After doing that, I'd look at this organization: http://www.nfcc.org/
They are U.S.-based, but I'm wondering if there's a Canadian equivalent. They provide excellent consumer credit counseling and financial advising, for free or nearly free.
posted by Betty's Table at 12:06 PM on November 22, 2011
Best answer: The best you can do with zero risk (i.e. CDIC insured) is going to be a high-interest savings account. Don't bother with GICs, savings bonds, etc - you won't do any better for interest in the short term (in fact, you'll do worse). Vancity offers 1.2% on their savings account, while Ally has been offering 2% for years and Canadian Tire Financial Services is offering 2% on savings, 2.5% on TFSA right now (the 2.5% surely won't last). Ally has been offering the highest rate over the long term. I'd recommend opening an Ally savings account and TFSA, though CTFS would be fine too. Max out your TFSA and put the rest in the savings account. This is very simple and will get you the best no-risk return (though it won't beat inflation). You can open an account online today.
Alternately, just open a high interest account at Vancity (the difference from now to September 2012 is only $300, possibly less if Vancity will be paying you an end of year dividend on your interest (ask them)).
In the long term, if you find yourself making a significant income, you can use the savings to pay into your RRSP, but there is no advantage to paying into it now if you are a student.
It is a bit weird to entrust your savings to Ally, which is part of GMAC, formerly part of GM, now majority owned by the US government, but that's the world we live in.
posted by ssg at 12:13 PM on November 22, 2011
Alternately, just open a high interest account at Vancity (the difference from now to September 2012 is only $300, possibly less if Vancity will be paying you an end of year dividend on your interest (ask them)).
In the long term, if you find yourself making a significant income, you can use the savings to pay into your RRSP, but there is no advantage to paying into it now if you are a student.
It is a bit weird to entrust your savings to Ally, which is part of GMAC, formerly part of GM, now majority owned by the US government, but that's the world we live in.
posted by ssg at 12:13 PM on November 22, 2011
Best answer: I'd recommend the following:
1. Read a couple personal finance books. My standard recommendation is Andrew Tobias, The Only Investment Guide You'll Ever Need; should be readily available at local libraries. For Canadian content, check out Gordon Pape (e.g. the recent TFSA Guide).
The key thing to remember is: don't put money into anything you don't understand, even if it's supposed to be low-risk. (See: asset-backed commercial paper.) Don't rely on what financial advisors tell you--make sure you understand it yourself. (I've talked to a VanCity financial advisor, but didn't get that much out of it.)
2. Set up a TFSA high-interest savings account now, and put $15,000 into it (the current limit). There's no penalties for withdrawals, so it works exactly like any other high-interest savings account, except that you don't have to pay any tax on the interest. You can add $5,000 in January 2012, and every calendar year after that.
If you'd like to stick with VanCity (which will be simplest), their high-interest savings account is called a JumpStart account.
3. If your taxable income right now is low (since you're a student), don't set up an RRSP account yet! You want to make RRSP deposits when your tax bracket is high, and withdraw them when your income is low. If you don't have a high income, always put money into your TFSA before you even consider RRSPs.
Just put the rest of the money into a second, non-TFSA high-interest savings account. I'd suggest setting up a new account, rather than putting the $35,000 into your existing accounts, so you don't find yourself spending it.
4. Once you graduate and start working, you can look at putting some money into equities (e.g. the XIU index fund). But I wouldn't do it until then.
Good luck!
posted by russilwvong at 12:57 PM on November 22, 2011 [1 favorite]
1. Read a couple personal finance books. My standard recommendation is Andrew Tobias, The Only Investment Guide You'll Ever Need; should be readily available at local libraries. For Canadian content, check out Gordon Pape (e.g. the recent TFSA Guide).
The key thing to remember is: don't put money into anything you don't understand, even if it's supposed to be low-risk. (See: asset-backed commercial paper.) Don't rely on what financial advisors tell you--make sure you understand it yourself. (I've talked to a VanCity financial advisor, but didn't get that much out of it.)
2. Set up a TFSA high-interest savings account now, and put $15,000 into it (the current limit). There's no penalties for withdrawals, so it works exactly like any other high-interest savings account, except that you don't have to pay any tax on the interest. You can add $5,000 in January 2012, and every calendar year after that.
If you'd like to stick with VanCity (which will be simplest), their high-interest savings account is called a JumpStart account.
3. If your taxable income right now is low (since you're a student), don't set up an RRSP account yet! You want to make RRSP deposits when your tax bracket is high, and withdraw them when your income is low. If you don't have a high income, always put money into your TFSA before you even consider RRSPs.
Just put the rest of the money into a second, non-TFSA high-interest savings account. I'd suggest setting up a new account, rather than putting the $35,000 into your existing accounts, so you don't find yourself spending it.
4. Once you graduate and start working, you can look at putting some money into equities (e.g. the XIU index fund). But I wouldn't do it until then.
Good luck!
posted by russilwvong at 12:57 PM on November 22, 2011 [1 favorite]
If you don't have a high income, always put money into your TFSA before you even consider RRSPs.
Yes, maxing out the TFSA first is correct, but if you have money after that, the RRSP is not necessarily a bad idea as long as you defer your deduction. It may not be a good idea in your situation -- the loss of liquidity is probably more harmful to you than the extra year or two of compoundnig is helpful.
posted by jeather at 1:09 PM on November 22, 2011
Yes, maxing out the TFSA first is correct, but if you have money after that, the RRSP is not necessarily a bad idea as long as you defer your deduction. It may not be a good idea in your situation -- the loss of liquidity is probably more harmful to you than the extra year or two of compoundnig is helpful.
posted by jeather at 1:09 PM on November 22, 2011
People much better qualified than I are weighing in on the financial/tax side, but let me give you my experience, FWIW. When I received an inheritance, I had been paycheck-to-paycheck, or you know, welfare disbursement-to-welfare disbursement my whole life too, and I paid off my $30K in student loans in one fell swoop.
It's the best feeling. I would say orgasmic, but a person generally gets two or more orgasms in her lifetime. It is like -- you are lighter than air, you are free. No one can know how great it is who has not experienced it. After the births of my children, paying off my student loans was, no bullshit, the greatest moment of my life.
So there's that.
posted by pH Indicating Socks at 1:24 PM on November 22, 2011 [3 favorites]
It's the best feeling. I would say orgasmic, but a person generally gets two or more orgasms in her lifetime. It is like -- you are lighter than air, you are free. No one can know how great it is who has not experienced it. After the births of my children, paying off my student loans was, no bullshit, the greatest moment of my life.
So there's that.
posted by pH Indicating Socks at 1:24 PM on November 22, 2011 [3 favorites]
Debt retirement first, except perhaps mortgage debt, has always stood me well as a first thing to do with surplus. It's part of a "virtuous cycle" of financial management---less money out each month to pay interest means more money to invest or save.
Student loans, car loans, credit card balances. Zeroing those has the best rates of return for you money.
posted by bonehead at 1:36 PM on November 22, 2011 [1 favorite]
Student loans, car loans, credit card balances. Zeroing those has the best rates of return for you money.
posted by bonehead at 1:36 PM on November 22, 2011 [1 favorite]
Best answer: There are no fees or penalties in Canada for repaying Canada Student Loans. It's recommended practice on the NSLSC site:
5. Q. Can I make payments before the six month grace period is up?
A. Yes. In fact, making lump sum payments during the grace period is a great way to pay your accumulating interest and reduce your student loan principal. You can also make lump sum payments while you're still in school. These payments bring down the total interest you would otherwise have to pay on the loan in the long run.
That said I would eliminate high-interest debts first, like credit cards or lines of credit if you ended up borrowing from banks. Student loan debt is "good-debt" since the interest rates are fixed and low. In Canada it does not affect your credit rating so don't think you're "building good credit" via SL, it's best to pay it off when you can. Paying off a student loan with liquid funds can be detrimental if the principal is too high; since you seem hesitant about finding work maybe the money would serve you best if you held onto it for a while.
While you're at it you can request the annual-fee credit card to replace your student 18-21% rate card you signed up for in the Quad and switch to prime-plus or preferred fixed-rate (when you have a job this goes more smoothly. Also they have to raise your credit limit so if you foresee heavy post-post-secondary celebration coming up hold off...) If you don't use credit cards, do you have any other loans outstanding? Any car payments, Money Mart payday loans, etc? Pay them off. Outstanding telephone bills or anything that can get sent to collections (unpaid mobile, unpaid internet, etc.) will need to be taken care of. Sometimes it may be worth it to buyout your mobile contract (can be around $400) to switch to a cheaper monthly plan, and now that you have this money you can take action and cut losses more quickly.
Then start up your $15000 TFSA. You might be thinking "but I thought it was only $5000?" Well, the TFSA began on Jan. 1, 2009, so it's at 3 years now, and will be 4 in the new year. Even if you didn't contribute in the past you are still allowed to deposit up to $5000/year. From the website:
Not everyone is able to save each and every year.
Those who cannot contribute $5,000 to a TFSA in a given year are able to carry forward their unused contribution room to future years.
This may not be a "free" account, i.e. if you use debit card and stuff you'll get charged (check terms) as opposed to chequing, but you do have access at any time to the funds (vs. GIC where they are "locked" and it's a hassle to reclaim).
Since you're a student and not employed, you're in the lowest tax bracket and you'll probably have a lot of deductions available (lots of post-secondary costs, including tuition, are tax deductions) and you'll be looking at low taxes anyway, so putting your cash into TFSA and another savings account won't be drowning you in tax this year.
Then get yourself a nice grad present!
posted by Khazk at 1:38 PM on November 22, 2011
5. Q. Can I make payments before the six month grace period is up?
A. Yes. In fact, making lump sum payments during the grace period is a great way to pay your accumulating interest and reduce your student loan principal. You can also make lump sum payments while you're still in school. These payments bring down the total interest you would otherwise have to pay on the loan in the long run.
That said I would eliminate high-interest debts first, like credit cards or lines of credit if you ended up borrowing from banks. Student loan debt is "good-debt" since the interest rates are fixed and low. In Canada it does not affect your credit rating so don't think you're "building good credit" via SL, it's best to pay it off when you can. Paying off a student loan with liquid funds can be detrimental if the principal is too high; since you seem hesitant about finding work maybe the money would serve you best if you held onto it for a while.
While you're at it you can request the annual-fee credit card to replace your student 18-21% rate card you signed up for in the Quad and switch to prime-plus or preferred fixed-rate (when you have a job this goes more smoothly. Also they have to raise your credit limit so if you foresee heavy post-post-secondary celebration coming up hold off...) If you don't use credit cards, do you have any other loans outstanding? Any car payments, Money Mart payday loans, etc? Pay them off. Outstanding telephone bills or anything that can get sent to collections (unpaid mobile, unpaid internet, etc.) will need to be taken care of. Sometimes it may be worth it to buyout your mobile contract (can be around $400) to switch to a cheaper monthly plan, and now that you have this money you can take action and cut losses more quickly.
Then start up your $15000 TFSA. You might be thinking "but I thought it was only $5000?" Well, the TFSA began on Jan. 1, 2009, so it's at 3 years now, and will be 4 in the new year. Even if you didn't contribute in the past you are still allowed to deposit up to $5000/year. From the website:
Not everyone is able to save each and every year.
Those who cannot contribute $5,000 to a TFSA in a given year are able to carry forward their unused contribution room to future years.
This may not be a "free" account, i.e. if you use debit card and stuff you'll get charged (check terms) as opposed to chequing, but you do have access at any time to the funds (vs. GIC where they are "locked" and it's a hassle to reclaim).
Since you're a student and not employed, you're in the lowest tax bracket and you'll probably have a lot of deductions available (lots of post-secondary costs, including tuition, are tax deductions) and you'll be looking at low taxes anyway, so putting your cash into TFSA and another savings account won't be drowning you in tax this year.
Then get yourself a nice grad present!
posted by Khazk at 1:38 PM on November 22, 2011
I wouldn't recommend this, but BMO has an annuity that you can buy for $50k that will pay you $480/month for the rest of your life.
Practically speaking though:
1. Pay off debt
2. Establish an emergency fund (6 months living expenses)
3. Maximize your TFSA
4. Maximize your RRSP, claim it as a tax deduction in a year when your taxable income is highest.
5. Buy yourself something nice.
In that order.
posted by blue_beetle at 2:36 PM on November 22, 2011
Practically speaking though:
1. Pay off debt
2. Establish an emergency fund (6 months living expenses)
3. Maximize your TFSA
4. Maximize your RRSP, claim it as a tax deduction in a year when your taxable income is highest.
5. Buy yourself something nice.
In that order.
posted by blue_beetle at 2:36 PM on November 22, 2011
I wouldn't recommend this, but BMO has an annuity that you can buy for $50k that will pay you $480/month for the rest of your life.
Do you have a link to this product? A life-long 11.5%/yr on $50k with no age restrictions seems pretty amazing.
posted by homotopy at 2:47 PM on November 22, 2011
Do you have a link to this product? A life-long 11.5%/yr on $50k with no age restrictions seems pretty amazing.
posted by homotopy at 2:47 PM on November 22, 2011
$50k at $480/month means they think you'll live <9 years... I think you mean $500k.
posted by katrielalex at 3:27 PM on November 22, 2011
posted by katrielalex at 3:27 PM on November 22, 2011
Best answer: Hmm, I'd be cautious with your RRSP - I overcontributed a few years ago and had to pay a 1% fee for that.
posted by lulu68 at 4:05 PM on November 22, 2011
posted by lulu68 at 4:05 PM on November 22, 2011
Response by poster: Thanks everyone! You guys are all awesome.
Other than the student loan, I have no outstanding debts of any kind. I put nothing on my credit card that I don't pay off at the end of the month. No car (I *love* Vancouver partially for the no car thing, but will likely be forced to move away).
I already have a TFSA (I still don't quite understand *why* it works - from what I've gleaned here, it's a whole different bag than what I thought it does [deduction to gross income earned that year, like RRSPs]), and I think a separate JumpStart account, both of which were set up for me by the fantastic loan officer at Vancity when I went in to arrange for a line of credit before my kick-ass scholarship ran out (which ended up saving me a lot of money/stress when I ran into a department appointment [salary payment] snafu). Never spent the time to try to understand those account(s) since I didn't have anything to put into them.
So it looks like I'll dump the money into those two accounts, and since there's no penalty for paying off the student loan in a lump sum, that's what I'll likely end up doing (since the remaining balance and leftover loan payout is enough to live on for about 18+ months if I'm careful - I figure the peace of mind is worth not having backup funds for another 10-12 months of living expenses on top of that, given I have about 3 months from a line of credit).
If I'm still unemployed after 18+ months, it had better be because of a Mad Max-level apocalypse. (pst, I can make booze, distill liquor, make jerky, and make antibiotics - all from scratch. I could come up with guncotton in a pinch, too, for reloading brass. If otoh it's an Omega Man scenario, I can harvest plasma (antibodies) from resistant individuals and infuse the afflicted. Lets get together and talk about mutual survival.)
All this assuming that inflation stays around/below the 3% mark. =(
Hopefully I can score a job reasonably soon after graduation, so it will be a moot point (and a future ask.me question).
But yeah, I'll mosey down to credit union this weekend and ask the concierge if I can make an appointment to speak with someone. Was hoping someone could name a job title for me to ask for, but I guess different banks will have different personnel. No biggie.
echo 01
posted by porpoise at 8:11 PM on November 22, 2011
Other than the student loan, I have no outstanding debts of any kind. I put nothing on my credit card that I don't pay off at the end of the month. No car (I *love* Vancouver partially for the no car thing, but will likely be forced to move away).
I already have a TFSA (I still don't quite understand *why* it works - from what I've gleaned here, it's a whole different bag than what I thought it does [deduction to gross income earned that year, like RRSPs]), and I think a separate JumpStart account, both of which were set up for me by the fantastic loan officer at Vancity when I went in to arrange for a line of credit before my kick-ass scholarship ran out (which ended up saving me a lot of money/stress when I ran into a department appointment [salary payment] snafu). Never spent the time to try to understand those account(s) since I didn't have anything to put into them.
So it looks like I'll dump the money into those two accounts, and since there's no penalty for paying off the student loan in a lump sum, that's what I'll likely end up doing (since the remaining balance and leftover loan payout is enough to live on for about 18+ months if I'm careful - I figure the peace of mind is worth not having backup funds for another 10-12 months of living expenses on top of that, given I have about 3 months from a line of credit).
If I'm still unemployed after 18+ months, it had better be because of a Mad Max-level apocalypse. (pst, I can make booze, distill liquor, make jerky, and make antibiotics - all from scratch. I could come up with guncotton in a pinch, too, for reloading brass. If otoh it's an Omega Man scenario, I can harvest plasma (antibodies) from resistant individuals and infuse the afflicted. Lets get together and talk about mutual survival.)
All this assuming that inflation stays around/below the 3% mark. =(
Hopefully I can score a job reasonably soon after graduation, so it will be a moot point (and a future ask.me question).
But yeah, I'll mosey down to credit union this weekend and ask the concierge if I can make an appointment to speak with someone. Was hoping someone could name a job title for me to ask for, but I guess different banks will have different personnel. No biggie.
echo 01
posted by porpoise at 8:11 PM on November 22, 2011
Yeah, don't over-contribute to your RRSP - you'll get dinged for that - penalty, plus interest on the tax that you didn't have to pay because of the over-contribution.
The TFSA is agreat good option to save for short to mid-term goals - for example, buying a car down the road. No tax on the return on investment - but then again, your ROI over a short period won't be very good. That being said, it's better then not having it under any umbrella.
The RRSP is great for retirement... and that's about it. You can borrow from your RRSP for a down payment on your first house - but that money has to be paid back over 10 years, and the unpaid amount each year counts as RRSP income on that year's tax return.
For example, say you borrow 10,000 from your RRSP in November 2011. Starting in 2013 (the year after the year following taking out the money), you would have to pay back $1,000 into your RRSP per year. If you, say, only paid $500 back in one year, the other $500 would count as taxable income for 2013.
As far as who to ask for at the bank, the title changes from bank to bank. Some banks call them client services representatives, others financial advisors. If you tell them that you need to speak with somebody regarding financial planning, they'll direct you to the right person.
posted by PGWG at 9:00 AM on November 24, 2011 [1 favorite]
The TFSA is a
The RRSP is great for retirement... and that's about it. You can borrow from your RRSP for a down payment on your first house - but that money has to be paid back over 10 years, and the unpaid amount each year counts as RRSP income on that year's tax return.
For example, say you borrow 10,000 from your RRSP in November 2011. Starting in 2013 (the year after the year following taking out the money), you would have to pay back $1,000 into your RRSP per year. If you, say, only paid $500 back in one year, the other $500 would count as taxable income for 2013.
As far as who to ask for at the bank, the title changes from bank to bank. Some banks call them client services representatives, others financial advisors. If you tell them that you need to speak with somebody regarding financial planning, they'll direct you to the right person.
posted by PGWG at 9:00 AM on November 24, 2011 [1 favorite]
This thread is closed to new comments.
posted by dfriedman at 10:29 AM on November 22, 2011