Liam and Brittany have a whole lot of questions.
“We have been struggling with what to do with the money, and how to best save it toward a new house,” the 32-year-olds say. “Ideally we would like to move within a year.”
The couple bought their current house for approximately $500,000, which has been paid down to about $450,000, with an estimated value now of $575,000.
“We would love to consolidate our money into the best possible investments,” they say. “As it is now, only a small amount of it is in managed investment accounts earning any value.”
Liam, a software engineer, and Brittany, a teacher, have a three-month-old and they have some big questions about their growing family’s future financial plans. Brittany is on maternity leave but the couple mentions they have about $60,000 in savings.
“Is it worth starting a Registered Education Savings Plan (RESP) for our baby and should I be investing in a registered disability savings plan (RDSP)?” Liam wonders, adding that he has diabetes.
Another concern they have is how much money they should trust to different institutions. “We currently have our money split roughly 1/3 each in BMO, Simplii Financial and Wealthsimple, and we feel nervous investing for the long term outside of the major banks.”
The couple also wants to know where they should go for advice and whether they should find someone to help with investments across financial institutions.
We asked Liam and Brittany to share their monthly and weekly expenses to get a better sense of what their financial plan should look like.
The expert: Jason Heath, managing director at
Liam and Brittany are feeling overwhelmed by the number of choices for saving and investing. One question they ask is about investing with a big bank compared to an online bank or a robo-adviser. Unless you have hundreds of thousands of dollars to invest, if you invest with a bank, you will be in that bank’s mutual funds through their branch level. Fees tend to be in the 1.5 per cent to two per cent range. Branch staff may experience turnover so you may not have an ongoing relationship with one person.
If you have hundreds of thousands to invest and meet the required minimums, you may get access to the bank’s wealth management division that could offer different solutions. Fees could be slightly lower, there will be more investment choices, and there’s a greater chance of working with an adviser on an ongoing basis.
An online bank can be good for savings accounts and GICs with higher rates than the bank. But they generally will not offer investments like mutual funds that will give you access to the stock market.
Robo-advisers have fees in the 0.75 to one per cent range all-in when you consider the embedded fees in the underlying investments. Robo-advisers typically use exchange traded funds (ETFs) to build portfolios in line with your risk tolerance. You may have an annual meeting with a portfolio manager to confirm your risk tolerance but otherwise the rebalancing and day-to-day management of your investments is all “robotic,” so to speak. Can a human adviser provide one per cent more “value” to an investor? They may not be able to pick investments better than a “robo,” but for financial planning and behavioural management, some advisers may prove valuable. Others, not so much. It is hit and miss.
Liam and Brittany ask about managed versus unmanaged accounts. All the above are managed. An unmanaged account means you are picking the investments on your own. For example, by opening a self-directed brokerage account and becoming a DIY investor. An investor should ideally be relatively well-versed in investing before just venturing out on their own, and in my opinion, most DIY investors should probably stick with ETFs rather than trying to be stock pickers.
My concern with Liam and Brittany is whether they should be investing much in the first place. They are hoping to upsize their home in the next year and could end up with an incremental mortgage of $300,000 or more after transaction costs. They will have closing costs to pay, furniture to buy, fixes and renovations, moving costs and so on. They have about $60,000 saved up and some or all of that could be used for a near-term move.
I think having a decent chunk of savings in a high-interest savings account wherever they are getting the best rate is advisable. Stocks and stock funds are great long-term investments but year to year they can be up or down 20 per cent or more. Liam and Brittany have some of their savings in their TFSA accounts and some outside their TFSAs. They might as well have everything in their TFSAs so that the income is tax free.
Liam qualifies for an RDSP — a registered disability savings plan — due to his type 1 diabetes. They can contribute $1,000 per year to an RDSP based on their incomes, and the government deposits an equivalent $1,000 per year. That means a 100 per cent instant return on their investment.
I would absolutely be contributing to an RDSP for Liam and doing so for the long term, meaning stock exposure to grow that money over the decades to come.
An RESP for their newborn can be a good option. The government matches 20 per cent on up to $2,500 of annual deposits. But Liam is in a 43 per cent tax bracket, meaning 43 per cent tax savings on his RRSP contributions. I might be inclined to focus on their move first and then once they have a better sense of their mortgage and monthly budget, set up a savings plan with money going to Liam’s RRSP first and foremost due to his higher tax bracket and the fact Brittany is a pension plan member as a teacher.
If they want to put aside some money into an RESP for their little one, although an RRSP provides a better overall incentive on their deposit, an RESP can provide peace of mind for education savings.
Where should they go for advice? It can be tough to get investment or financial planning advice when you do not have a lot of money to invest. The Canadian financial industry is very investment focused and that is how most advisers get paid.
There are advice-only financial planners, although not many, who can work with clients to provide advice regardless of their net worth or income. Beyond that, personal finance articles, books and blogs are a great way to start building knowledge. Not all the advice is going to be good, but as they become more knowledgeable, they will be able to make better financial decisions for their family.
Spending in week one: $1,010. Spending in week two: $1,976.
Takeaways: Liam and Britanny say Heath’s advice surprised them but in a good way.
“What he said makes a lot of sense!” Liam says. “His suggestions will naturally take some time to implement it, but I do believe we will.”
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