Monday, June 27, 2011

Got a summer job? Here are a few financial planning tips just for you

Learning is necessary … and expensive. But you know that. It’s why you put in so many hours hitting the books. And why your summer isn’t a vacation – it’s valuable time to make the money you need to help fund your education.

So it only makes sense that your summer job should pay off in every way possible. Here are some financial planning tips for getting the most from your summer employment cash*.

Give yourself all the credit Tax credits directly reduce the actual amount of your federal taxes and, in many cases, your provincial taxes, as well. As a student, you are eligible for these credits:
  • The Canadian Employment Credit on the first $1,000 of your employment income.
  • Tuition, Education and Textbook credits for tuition fees of more than $100 per year, for education costs of up to $400 for each month of enrolment for full-time students (or part-time students with a disability) and $120 a month for part-time students, and textbook costs to a total of $65 a month for full-time students and $20 a month for part-time students.
  • A Public Transit Pass Credit for monthly or longer transit passes. You will need receipts to make this claim.
Get a tax reduction through deduction Tax deductions like these reduce the amount of your income that’s subject to tax:
  • Moving expenses – when you move more than 40 kilometres to be closer to school or for your summer job.
  • Child care expenses – can be claimed by a higher-earning spouse or common-law partner when the lower income partner is enrolled in a qualifying secondary or post-secondary program.
Take an interest in saving You are eligible for a tax credit on interest paid for a loan that is part of a federal or provincial student loan program but has not been renegotiated with a financial institution or consolidated with other loans. If you have no tax payable in the year the interest is paid, you can carry forward the unused credit and apply it in any of the next five years.  

Save for emergencies … and your future You can contribute up to $5,000 to a Tax Free Savings Account (TFSA) each tax year. Your contribution isn’t tax deductible but money and interest inside a TFSA is tax-free and so are withdrawals, which can be made at any time for any purpose – such as providing emergency cash for unexpected education costs.

Find out about even more tax-saving strategies by talking to a professional advisor.  

* Information in this article is based on federal rules only. Provincial and territorial rules may differ.

Monday, June 6, 2011

Get equities in your equation – putting diversification to work

Stock markets around the world have been very volatile in the last few years. If your portfolio has lost some of its lustre because of this, you may be seeking ways of protecting yourself from investment losses by moving more of your money into ‘safer’ investments. It can be appealing to look for the stability of fixed-income investments like bonds, mortgages, T-bills, Guaranteed Income Certificates (GICs), or mutual funds investing in those types of securities. But seeking less volatility by loading up on fixed-income investments could cause damage to your financial future. This type of conservative investment usually offers a low rate of return, and potential for a drop in value when rates go up. Combining this with the eroding effects of inflation can virtually eliminate any longer-term benefits.

Market experts agree, and decades of investment experience has proven, that a diversified investment portfolio through effective asset allocation is the best way for investors to achieve the long term goals of their overall financial plan – and equities (including equity mutual funds) play a key role in achieving the highest returns for a given level of risk. Here’s how (and why) an appropriately diversified investment portfolio can help buffer market turbulence:
  • Asset classes tend to move in different directions. By loading your portfolio with a single asset class, you concentrate your risk and limit your sources of returns. A well-designed, adequately diversified portfolio encompasses all asset classes which can offset the downward movement of one class with the upward movement of another.
  • Nobody knows in advance which asset classes will outperform or underperform, and when. Because asset performance is constantly changing and the asset allocation process is dynamic and fluid, investors are best served by covering all the bases at any given time.
  • Studies have shown that the correct asset mix offsets selection risk – making asset allocation, not individual investment selection, the major driver in investment returns. In fact, as much as 90 per cent of portfolio variability can be attributed to the choice of asset types, with only 10 per cent coming from the choice of individual investments.
  • Since 1950, fixed income investments have generally reduced investment risk but have also lowered long-term growth. Over the same period, Canadian equities have produced the necessary asset growth to achieve long-term investment objectives1. The takeaway: Even conservative investors should allocate at least 25 per cent of their long-term investment portfolio to equities (including higher yielding equity mutual funds).
  • The amount of risk in your portfolio depends on your personal tolerance for risk and your time horizon. For example, if you’re close to retirement, you might want to reduce risk to protect a portion of your investments from inevitable periods of market volatility.
Diversification works. And knowing the basics can help you understand and take advantage of the risk that may be in your portfolio. The best way to play it safe? Get the asset allocation help you need from your professional advisor.
1S&P TSX Composite vs DEX Long Term Efficient Frontiers (1950-2010)