15 Ways to Keep More of Your Money

"We went from thinking we couldn't buy a house for another five years to looking for one this year," Peddie says. "We learned that you have to have a good plan in place."
Like the Peddies, many people are rethinking their financial plans to make better use of their money. But it's not always easy. With the range of savings, mortgage and investment options available, people are often terrified of making a money-losing mistake. Such thinking can lead to inaction.

"It's worse to do nothing," says Debbie Ammeter, vice-president of advanced financial planning for Investors Group in Winnipeg. "Procrastinating can cost you money in the long run."

So how do you take the right action? Here's what some leading financial advisors recommend to their clients—15 steps to saving and making more money.

Saving
Basic first steps
Before making any decisions about what to do with your money, you have to make sure that you have enough of it on hand.

DO pay yourself first. "That's my most important rule," says Alison Keene, a senior vice-president and managing director of BMO Nesbitt Burns in Calgary. "Take an amount from each paycheque and set up an automatic savings or investment plan." How much to put aside? Maybe ten percent of your gross, but don't spread yourself too thin. "After a while you won't even miss it," says Keene.

DO pay off your consumer debt before investing. It's like earning a re-turn that equals the interest charged on your debt, explains Amin Mawa-
ni, a tax professor at York Universi-
ty in Toronto and a financial planner.

Let's say you're carrying a credit-card balance of $1,000 with 18 percent simple annual interest. That's $180 a year in charges. Pay off that debt and you've saved $180. That's the same as investing $1,000 in something that earns an 18 percent return after tax.

In fact, if you're in a 50-percent tax bracket, you would have to earn 36 percent to emerge with the same $180 in your pocket.

The truth about mortgages
While your home's value may have greatly increased, you may also be paying more than necessary on the mortgage.

DO refinance your mortgage if your rate is more than two percent higher than current rates, and you have less than two years until maturity, says Aileen Pollock, a Toronto financial advisor. Check with your mortgage holder to determine the penalty for getting out of your deal.

DO consider a variable or floating rate mortgage if you have built up equity in your house and are able to tolerate the risk that your monthly payments will fluctuate. Approximately 88 percent of the time, you will find that the interest rate on your variable-rate mortgage is lower than the rate on a traditional five-year fixed-rate mortgage. This is the finding in a study examining the last 50 years of mortgage rates, conducted by York University professor Moshe Arye Milevsky.

DO consider a secured line of cred-it to replace your mortgage, suggests Dale Hein, an Ottawa certified financial planner. "Banks will often waive fees or penalties, and it could save you interest if your mortgage rate is higher than prime," he says. "Besides improving your rate, you have more flexibility in your monthly payments. The minimum you have to pay is the interest, but you can also make a big payment against the line of credit without penalty."

Plan for your child's education
Most parents don't save nearly enough for their children's education. "For a child born today, if you assume that current tuition is $5,000 and educational inflation is five percent, you can expect to pay about $50,000 for four years of postsecondary education—and that's conservative," Pollock says.

DO open a registered education savings plan. The earnings aren't taxable as they grow within the plan, and there's the added incentive of the Canada Education Savings Grant—$400 from the government on the first $2,000 of contributions per child per year. "That's a guaranteed 20 percent return—it's a no-brainer," says Pollock.

Investing
Expect ups and downs
Recent years of tepid returns have changed the behaviour of many—but not all—investors. Some have shifted to lower-risk investments or have stayed on the sidelines. Others seem to have forgotten the lessons of a volatile market and are taking chances again.

While too much risk can hurt your portfolio's growth rate, so can hiding in ultrasafe investments paying one percent or less. Ideally, your portfolio should be able to keep its head above water during prolonged market downturns and be positioned to grow when the economy and market soar.

DO look at staying invested for the long haul. "Don't chase every fad," says Daniel Goodman, associate portfolio manager and director of private client group with Dundee Securities Corporation in Toronto.

He says trying to time the market is a fool's game. "Studies have shown that it's long-term discipline that provides above-average returns. Look at your asset allocation on a regular basis and rebalance it when necessary. But you have to start with a plan and stick to it."

DO diversify. "Your portfolio volatility will be reduced when one investment zigs while another zags," says John De Goey, a financial advisor with Assante Capital Management Ltd. in Toronto and author of The Professional Financial Advisor. But don't overdo it, Goodman says. To start, you need the right mix of stocks and bonds. "A general rule of thumb is that the percentage of your investment portfolio consisting of fixed-income holdings should equal your age," Goodman says. "So at 35, you should have 35 percent of your portfolio invested in fixed income and 65 percent in equities." The thinking is, you become more conservative as you get older.

As for the number of holdings to have, "I see too many portfolios with too many," says Goodman. "You end up with a portfolio that's guaranteed to perform, at best, in a mediocre fashion because any good holding is watered down." For example, you could have a holding that gains 20 percent in one year. But if it constitutes one percent of your portfolio, the effect on your overall performance is a gain of just 0.2 percent.

DO know when to sell. "The toughest thing for any investor is to sell," says Keene. "No one wants to leave that extra dollar on the table or sell at a loss. But we often become collectors of stocks."

One suggestion is that no holding should make up more than five to six percent of your portfolio. In other words, if you have a $100,000 portfolio, you can have a $5,000 to $6,000 position. If it grows beyond that, sell enough to go back to five to six percent and allow the position to continue to grow. But you're not living or dying with one investment. Says Keene: "If you're not making money, the next best course of action is not to lose too much. When a stock is down 20 percent from its 52-week high, it's usually not the bottom, and it's time to sell."

Focus on the bottom line
DO focus on your net return, which means being mindful of costs. Every dollar in investment fees could theoretically be in your account, earning returns. "Most investors pay far too little attention to costs," says De Goey. It's simple, he says. The higher your fees, the more your investment has to make to keep pace with a similar investment that charges lower fees. There are other factors in every investment choice, of course, such as your risk tolerance and return requirements. "But the bottom line," says De Goey, "is that it isn't what you're earning, it's what you're keeping."

DO arrange for the higher-earning spouse to pay for living expenses, letting the lower-earning spouse accumulate investment assets and pay taxes at a lower rate on that income. This strategy offers major tax savings, explains Mawani.

Owning investments jointly does not make sense from a tax perspective if the two spouses are in significantly different tax brackets. "Let's say the husband is in a 50-percent bracket and the wife is in a 30-percent tax bracket," says Mawani. "They earn ten percent interest on their investments. But he gets to keep only five percent after tax, while she gets to keep seven percent after tax." For anything interest-earning, from guaranteed investment certificates to mutual funds, the lower-earning spouse should hold the investments.

Retirement
Feather your nest egg
Tina Nyary, a 69-year-old manager of a private sailing club in Toronto, thought she would be set financially when she retired. Then, three years ago, her retirement savings showed signs of trouble. She had made an $80,000 profit in just one year but was invested in funds that were too risky— her portfolio started to go south shortly thereafter. She felt she had no choice but to ride out the bad times. Nyary eventually lost about $200,000. "If I had thrown the money in the mattress, I would have had more," she says. "Now, I'm just trying to make up as much as I can. But what can people do at my age?"

DO be cautious as you approach retirement age. "Tina invested far too aggressively for her risk profile," says Pollock, who has since become her planner. "She was in all kinds of volatile sectors and was just too close to retirement. She should have at least had some rebalancing in her portfolio."

DO estimate how much cash you'll need each year to sustain your standard of living when you reach retirement. With this yearly sum in mind, calculate how big your nest egg has to be to produce that income stream. For instance, Pollock says that a 65-year-old today who wants a gross annual retirement income of $50,000 up to age 90 would need a lump sum today of $660,000. (That assumes a six percent rate of return.) If they wanted a $50,000 income indexed to inflation at three percent, they would need a nest egg of $875,000 today. That's a sobering number, and if people have fallen behind in their planning, they have their work cut out for them. But it can be done.

DO save as much as possible in a Registered Retirement Savings Plan (RRSP). Your account grows tax-deferred, and you get to take full advantage of compounding. If you have no company pension plan, this becomes even more vital. One way of building your portfolio quickly is to borrow to invest, says Warren Cheng, a financial planner with RBC Investments in Vancouver. For example, if you're setting aside $250 a month towards an RRSP, put that amount towards the loan payments instead. "Your cash flow remains unaffected, and a larger lump sum can be put to work right away," says Cheng.

Do the math, but in many cases the long-term benefits of deferring taxes and earning compound interest far outweigh the interest costs of borrowing to make the contribution. You can also apply your tax refund directly to the loan, immediately reducing the payments.

DO use a spousal RRSP now to split income in retirement and reduce your overall tax-burden as a couple. By having the higher-tax-bracket spouse make roughly equal contributions in each spouse's RRSP, the higher-income spouse doesn't then have to withdraw as much and bear a larger tax burden later.

"You will save more tax," says Hein, "by having the high-income earner make as much of the RRSP contributions as his or her room will allow, and use a spousal account so that each spouse continues to build the same RRSP savings."

There you have it, 15 ways to keep more of your money. You don't need an M.B.A, special talent or tonnes of luck to pull it off. All you need is a $2 calculator—and a plan.

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