Category Personal Finance/ Estate Planning

Figure a Company’s Fundamentals into Its Long-Term Value

Most companies experience one or more blips along the way that can affect their stock prices, but most times the problems aren’t disastrous.

Develop a Baseline

lores_chart_graph_markers_pen_ruler_estimate_mbHow a company has handled challenges in the past is often a good indication of its potential for long-term growth and investment returns.

If you know the fundamentals of an enterprise you invest in, take a long-term view and stay apprised of changes within the company and how current events could affect the stock’s value, you are in a better position to maintain solid returns in your portfolio.

A share’s price generally depends on several factors including the:

  • Size, profitability and financial stability of the company;
  • Capability of its management;
  • State of the economy; and
  • Strength of its competition.

Developing a baseline will help you to identify if the original reasons why you and your financial adviser decided this company was a good fit for your long-term goals and risk tolerance still stand – and whether this could be an opportunity to add to your holdings.

When they are, however, do go running for the hills and join in a sell-off? Or have you invested for the long term and researched the company well enough to recognize whether the decline represents a fundamental change or is simply a temporary reaction to some external or internal force and that the price is likely to recover?

Two key places to start gauging a company’s fundamentals are the annual report and current events.

The Annual Report: You should receive a copy of the annual report of each stock you hold through the mail. The reports are also typically available in the Investor Relations section of an enterprise’s website. In addition, The Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) allows investors to research most documents and information filed by public companies.

A company’s annual report contains several key nuggets of information, including:

  • Letter to Shareholders. Scrutinize the letter from the President/CEO. Look for a discussion of why management believes the company’s future is bright and signs that the company is being forthright about the challenges it faces.
  • Management Team. You also want to examine how a company’s management responds when the going gets tough. A share’s price is often the judge of how effective leadership is.
  • Products and/or Services. The annual report will also often address how the company is keeping up with changing times as well as meeting its competition. If a competitor is responding to such customer demands as adding healthier options to a fast-food chain menu, can the same be said for the fast-food company in your portfolio?

Current Events: The news is a great source of information about corporations. It can provide insight into the steps a company takes to position itself for the future as well as alert investors to potential problems. Each nugget of information may affect whether the company’s stock price will go up or down.

When it comes to actually buying a stock, some investors opt to buy shares in a company whose stock prices have been beaten down in the short term. These investors believe that the price will eventually rebound and base that consideration on their knowledge of such fundamentals as the company’s potential for long-term growth and recovery, its products and its position in an industry.

These strategies, along with diversifying your portfolio, can help mitigate risk. They’re also an opportunity to talk to your adviser about whether it’s a good time to add to your holdings, or an indication of an ongoing problem suggesting it could be time to cut your losses and move on. (Be careful not to trigger an unexpected tax liability when selling. Consult with your tax adviser.)

Although there are no guarantees, history illustrates that over the long term, the stock market outperforms other investments. As risk tolerance and timeline vary with each individual investor, it’s important to consult your professional adviser to help determine the strategy that best suits your situation.

Start Building Your Rainy Day Fund

Every person needs a fund to tide them and their families over in the event of an emergency. Unfortunately, about 45 per cent of the country doesn’t have one.

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Where Do You Find the Money?

In theory, most people concede that a savings cushion is a great idea. In practice, however, many wonder where they are going to find the extra money to park in an account where it will simply sit waiting for a “what if” scenario to turn into reality.

The following eight suggestions can help you get a start on building a contingency fund relatively quickly and nearly painlessly:

1. Consider monthly savings as a bill that must be paid. To help, have the money automatically transferred from your chequing account or your paycheque.

2. Depending on the size of your family, skipping one meal in a restaurant each week could generate about $200 a month, or $2,400 a year. Look at your other spending habits. There are likely several “extras” you buy that you could do without for awhile.

3. Put at least half of your next pay raise, bonus or tax refund into your contingency fund. You won’t get used to the money so you won’t miss it.

4. When you pay off a car, a loan or your mortgage, redirect half the extra money to your savings.

5. Do you really need two cars? If you can live with just one, apply the monthly savings to the fund. You could also trade in your car for a smaller, less expensive model or a used vehicle and save the difference. Keep in mind, these actions can be temporary. Once you build your fund, you can regroup and reconsider your vehicle needs.

6. Round up to the nearest dollar each purchase you log into your financing software or your chequing account. If you spend $35.10, log it in as $36.00. You wind up thinking you have less to spend but in reality you are saving small amounts that add up.

7. Set a higher budget high for groceries than you actually spend. If you typically spend $350 to $375 on food, budget $400 and bank whatever you don’t spend of the amount you budgeted.

8. Save your coins and small bills. At the end of each day, dump into a jar the change in your pockets and the $1 bills in your wallet. At the end of the month you can bring a fair amount of savings to the bank.

Your adviser can help you come up with many other simple techniques to stop spending and start saving almost effortlessly.

Generally it is a smart precaution to have relatively liquid funds available that could cover from three to six months of budgetary expenses. The higher your net worth, the more you will need in your fund. Once you tap into the funds, be sure to replenish them.

So, why do you need this emergency fund? Because life is full of surprises. A contingency fund helps you to protect your most important assets during a crisis such as losing your job, becoming disabled for a time, needing a new roof, replacing your furnace when it gives out during a cold snap or being hit with a large tax bill just as your estimated quarterly payment is due.

Because contingency funds are meant for non-recurring expenses, you need to be able to access the money quickly. However, if you tend to be a spender, put the money into an account that requires a little effort to tap and don’t get a debit card attached to the account.

The challenge is how to invest the money in a way that it can be liquidated quickly without any major tax consequences. That means you shouldn’t expect to park your money in a high-yield account.

Contingency funds generally are not put into a long-term investment. You also want to ensure the money goes into a safe investment. The whole point of this fund is not to make a profit but to have it in a vehicle that can be cashed in within a day or two. So the best solution is likely to avoid any stock market or equity risk.

There are several places where you can put this money, none of which generates a high yield:

  • Savings accounts keep your money safe and generally are available the minute you need it. But they pay very little interest. Some online savings accounts do require a slight waiting period, a day or two, before you can access the money.
  • Money market mutual funds are relatively safe but also don’t offer much in the way of interest. When the money reaches a certain level, you could roll over all or some of it into a CD or Treasury bond. The money might not earn as much, but it is more difficult to access.
  • Cashable GICs and bonds can be liquidated quickly and are secure, but again, expect a low return.
  • A chequing account overdraft is a possibility, but it should be a last resort. The penalties are generally high, frequently $5 a day for each day the account is overdrawn.
  • A secure line of credit on your home is an alternative to a contingency fund. You can instantly access the cash at a relatively low cost and you don’t tie up money in a savings fund. However, you need to maintain discipline and not draw on the credit line for any other reason than a bona fide emergency. And as you soon as you can, start to pay it down to reduce the amount of interest you wind up paying.
  • Registered Retirement Savings Plans (RRSP) do not work well in emergency because if you take money out you pay taxes on it and cannot replace it.
  • Tax Free Savings Accounts (TFSA) on the other hand, do work. You earn tax-free investment money in these accounts and you could save the equivalent of three or six months’ salary within a TFSA in a secure investment such as a GIC. Then you could access the money quickly without paying tax on the interest income.

In addition, you can recontribute the money you withdraw beginning in the year after you take the money out, so you can replenish any funds you access in an emergency so they starting generating tax-free income again.

A margin account with your broker is another possibility. Many brokerage firms offer these accounts and allow you to borrow from them. There are no tax consequences as long as the money is taken simply as a loan. Taxes come into the picture only if you have a capital gain or loss from selling something to cover the loan. You still don’t incur tax until you sell assets in your portfolio.

Consult with your adviser to work out the best plan for setting up your contingency plan based on your financial situation.

Steps to Help Ease Your Debt Burden

Debt can sometimes seem like a weight that can never be lifted.

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Pull the Reins on Your Other Debt Obligations

Your mortgage is not the only debt that may be weighing you down.

To illustrate, add up your total monthly interest payments, including credit cards, lines of credit, mortgages and car loans and consider what else you could be doing with that money.

Here are some tips to help you take control of your finances:

Pay down high-cost borrowings. Apply as much as you can to high-interest, unsecured and non-tax deductible debt first. This can help double up your mortgage payments. Use any source of extra cash. If you expect a tax refund, spend it on bills. If you expect a raise, don’t increase your standard of living, lower your debts. See if you can trim household spending and use the extra cash on your credit card bills.

Pay as you go. Use your credit card like a charge card. Pay it in full monthly. You can still maximize reward points while avoiding interest. Never pay one credit card with another. If you really need to reduce your debt load quickly, consult with your adviser to see if a low-rate line of credit would make sense.

Pay yourself first. Find an online bank with a good interest rate on savings and transfer money from your chequing account each time you get paid. Just $20 a week will give you $1,040 in a year, plus the interest.

If you are one of the Canadians whose debt-to-income ratio is too high, you may find that you are not able to keep up payments on your mortgage and other debts. If this is the case for you or someone you know, here are can help control mortgage debt:

1. Stress-test your budget: You must be able to afford your mortgage. Rule of thumb: Total housing costs, including mortgage, property taxes, and heating costs, should add up to no more than one-third of your household income. Test your budget using a mortgage payment based on a higher rate.

2. Carefully weigh fixed vs. variable-rate loans: Variable-rate mortgages are touted as a winning strategy over the long term because they generally cost less in interest and become even cheaper as rates fall. But in order to pay less than those with fixed-rate home loans, you take on the risk of escalating borrowing costs. Consider what would happen if payments doubled over the next few years as interest rates inevitably start to rise.

Fixed-rate mortgage payments, in contrast, are not affected by rate increases so you always know what you will pay over the term of the loan. Typically, you can switch to a fixed-rate from a variable-rate without penalty.

3. Make a larger down payment: Before taking out a mortgage, try to pay off short-term debt. Then put as much as possible up front on your mortgage.

The larger the down payment, the less interest you will pay over the life of the loan. Aim for at least a 20 per cent down payment to avoid having to buy default insurance.

4. Choose your amortization wisely: A longer amortization may mean lower mortgage payments, but it also means more interest. Be disciplined about paying down the mortgage as quickly as you can.

Try to refinance to a shorter amortization as soon as possible. The sooner you are mortgage-free, the quicker you can build your retirement savings.

5. Maximize your payments: Your lender will let you pay more than required to service your loan. The extra amount will vary by institution, with some even allowing you to double your scheduled payments.

In addition, consider taking advantage of prepayments when possible. The extra payments are applied directly to the principal of the mortgage, reducing the loan’s balance outstanding.

6. Use equity lines of credit cautiously: If the value of your home is higher than the amount you owe, you can apply for an equity line of credit, although the government will not insure it. These and other credit lines can be useful for financial emergencies, but they add to your debt burden.

If you take one out, be sure you have a plan to pay it down as quickly as possible. In the event of a short-term cash crunch, your lender may offer alternatives, such as withdrawing funds from your extra payments or skipping a mortgage installment.

Consult with your financial adviser, who can help you decide how much you can comfortably afford when buying a first home, trading up or looking to refinance. Your adviser can also help you to identify how borrowing strategies can play a role in achieving your financial goals and offer solutions that make sense in your situation.

Use Caution When Tapping an Executor

Choosing an executor is one of the most critical parts of planning your estate.

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Setting Up a Health Care Directive

If you suffer from an accident or illness and become unable to communicate the type of medical treatment you wish to receive, your family must guess what you want. A health care directive, or living will, eliminates the guesswork by making it clear what your wishes are.

Usually, a living will contains specific directions on the course of action you would or would not like to take if you are in a terminal condition, a permanent coma or in a persistent vegetative state. It may provide instructions on whether or not you wish to receive artificial life support, artificially administered food and water or comfort and care.

Here are the answers to some common questions about health care directives:

Q. Who can make a health care directive?

A.Generally, any person who has the ability to understand information relevant to making a medical decision and appreciate the consequences of a decision may make a heath care directive. The provinces and territories also have varying age requirements.

Q. Do I need a health care directive if I already have will?

A. Yes. Health care directives and last wills are very different. Your will deals with property and the directive deals with medical treatment and care.

Q. Are health care directives legally binding?

A. Yes. Once they are properly signed and witnessed, family, friends and health care providers must follow the directions as long as they are consistent with generally accepted health care practices. Keep in mind that health care practitioners are not required to ask whether you have signed a directive or to search for one.

Make sure that your family, friends and health care representative know that you have signed one and that they know where it is. Health care providers that are unwilling to follow your directions are usually obliged to refer you to a provider who will.

In some families, that decision is based on tradition or culture, where the oldest child or male is automatically given that role. But this may not be the best choice. It can cause family resentment and the person named may not be suited to the task.

If the administration of your estate is expected to be complicated — or there is family disharmony — consider naming someone else as executor. Your surviving spouse or children can receive regular reports from the executor, keeping them advised of the process of settling the estate.

In general, you can select anyone, or a group of individuals, to serve as your executor, but it is important to consider whether the person:

  • Will outlive you;
  • Is honest, trustworthy and will carry out the wishes you put in your will; and
  • Lives close to the decedent’s home and will be able to access the local court and settle the estate without delay.

Two questions commonly come up in discussions of naming an appropriate executor. Here are those questions and the answers:

Q. What qualities and abilities should an executor have?

A. When you write a will with the help of your attorney, it’s important to choose a competent and trustworthy executor and alternate executors. Otherwise, even careful estate planning could be rendered useless.

Your executor can be any person or institution that you desire. If you feel you cannot trust a family member, consider naming your accountant, attorney or bank trust department. Whoever you choose, keep in mind that your executor should be:

  • Familiar with your family situation, including children, step children and former spouses.
  • Able to spend the time necessary and is willing to perform the duties.
  • Willing to work with the estate’s attorney and accountant.
  • Familiar with your finances, property and other assets; and
  • Experienced and competent in business matters to provide for the continuation of your business if you have one.

Q. What are the executor’s responsibilities?

A. Your executor becomes your personal representative and fiduciary after your death and must administer the estate and ensure the will is carried out. In general, the executor must:

  • Arrange the funeral and pay for it;
  • Pay any outstanding bills of the estate;
  • Collect and preserve assets;
  • Pay debts, taxes and administration expenses of the estate; and
  • Distribute estate assets according to the terms of the will.

Besides naming an executor, you should consider giving someone Power of Attorney to make decisions about and sign official documents involving your finances and assets.

There are two general types of Power of Attorney:

1. Durable Power of Attorney: An individual acts on your behalf if you are unable to make decisions. This person would control your finances and your assets, so you need to choose someone you trust to ensure that your wishes will be heard, understood and carried out to your specifications. You set up the durable power of attorney to come into effect only if you are unable to act on your own behalf.

2. Non-Durable Power of Attorney: An individual acts on your behalf if you are not available to sign legal or financial documents for one reason or another.

Common examples of what a Power of Attorney allows a person to do on your behalf are:

  • Manage your money, bank accounts, and safety deposit boxes.
  • Enter into contracts and settle claims.
  • File tax returns and handle government benefits.
  • Sell, mortgage, and manage property.
  • Plan an estate and financial gifts.
  • Maintain business interests.

Because the individual’s powers are significant, there is often a clause in a Power of Attorney to appoint a second person if the first is unwilling or unable to perform the duties. This person is called a successor agent or a successor attorney-in-fact.

Consult with your adviser. Naming an executor and giving someone power of attorney are critical decisions and your adviser can help you choose the right individuals.

Back to University: Money and Tax Lessons for Your Students

When your kids leave for university or take on some other post-secondary educational endeavor, you want to do your best that they succeed both with their grades, taxes and money as they take on more adult responsibilities.

Help them understand how to manage credit and money as well as give them a solid background on their tax obligations and the deductions and credits that are available to them and to you.

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Living at Home

Not all students head off to live on campus. In fact, as costs of education and housing rise, increasing numbers of students and their parents are deciding it’s a lot less expensive to live at home and commute when possible.

If you decide commuting is the best way to go, here are some tips.

For the student:

  • Spend lots of time on campus. It will help meet other students, make friends and become more familiar with the school.
  • Join clubs or sports teams. This involvement is crucial, particularly in your freshman year.
  • Pinch pennies. One of the main reasons you’re living at home is to save money. Don’t lose sight of this.

For the parents:

  • Be supportive. You and the student would probably prefer that he or she live on campus. Living at home may not be ideal, but it’s financially smart.
  • Treat your student like an adult. This can help maintain a stable relationship and minimize conflict.
  • Make sure your student makes an effort to meet other students and becomes involved with campus life.

Understanding Taxes

As your children assume more responsibility they may also be taking on jobs. You can help them understand their tax obligations and the credits and deductions that are available to them.

First, students — as well as their parents or other supporting adults — should have a clear understanding of what sorts of income is taxable. Of course money earned from a full-time or part-time job that exceeds the basic personal amount in a year is taxable.

Of course students may have other income sources, some of which is tax-exempt some not:

  • Scholarships, fellowships, bursaries, and achievement prizes are tax-free as long as the students are enrolled in programs eligible for the education amount. Otherwise, only the first $500 is exempt.
  • Money earned as a teaching assistant and research grants, on the other hand, are taxable. In the case of grants, students may deduct certain costs related to the research, such as travelling expenses, lodging and fees they may pay to assistants.

Reducing Tax Liability

Once you have the taxable earnings issue down, you’ll want to know how to lower those taxes. Here is a guide to the credits and deductions that can help you and your student lower your tax bills:

Tuition Credits. Full-time and part-time students can claim a federal tax credit on eligible tuition fees, which generally include all mandatory amounts charged by post-secondary institutions. The costs of room and board or student association fees are not eligible. Most territories and provinces offer similar tax credits. The textbook credit is being eliminated as ofeffective January 1, 2017. Unused  textbook credit amounts carried forward from years prior to 2017 will remain available.

Education Amount. On top of the tuition credit, students can claim an education amount of $400 a month for each month that they are enrolled full-time. Most territories and provinces also offer an education amount.

Students enrolled part-time may be entitled to an education amount of $120 a month. The program must last at least three consecutive weeks and involve a minimum of 12 hours of courses a month.

Students can claim the full $400 federal education amount if they can attend qualifying courses only part-time because of a mental or physical impairment and are eligible for the disability tax credit.

Textbook Credits. Students can claim a federal tax credit on the costs of post-secondary textbooks. The credit is based on $65 for each month the student qualifies for the full-time education amount and $20 for each month the student qualifies for the part-time education amount. Nunavut and Yukon also offer textbook credits.

Transferring Credits. Students who don’t claim tuition, education and textbook credits can either carry them forward indefinitely to use later or transfer as much as $5,000 in unused credits to a supporting person such as a spouse, parent or grandparent. Those individuals can claim the credits on their own tax returns. Transferred credits must be claimed in the year they were incurred. Provinces and territories also allow credit transfers.

Moving Expenses. Full-time students can deduct certain expenses for moving to and from school for each academic period — as well as moving to and from a summer job — if the distance is at least 40 kilometres. The deduction can be made only against employment income in the new location or against research grants. The tax break can be taken in the year of the move or the following year.

Transit Expenses. Students can claim a tax credit for the cost of transit passes with durations of a month or longer. Money spent on electronic payment cards and weekly passes are also eligible under certain conditions. Keep the receipts. Parents or spouses of students under the age of 19 can claim the credit.

Rent. Some provinces offer either refundable property tax credits for rent paid or a property tax refund. Consult with your adviser to see if your province offers property-related tax breaks.

Child-Care Costs. Students or spouses can claim a child-care deduction if at least one spouse attends school full-time or part-time.

Student Loan Interest. Credits are available for interest paid on qualifying student loans. Some provinces have eliminated interest on provincial student loans. Check with your province.

Besides taxes, your student should learn about managing credit. Here are some tips:

  • Help your children select an appropriate card. Explain how having a credit card increases the risk they will make impulse purchases and try to persuade them to get a debit card instead. Help them analyze offers and compare interest rates, annual fees, grace periods, and penalties.
  • Make sure your children, or grandchildren, understand that significant interest is charged if a balance isn’t paid in full each month. Explain late fees, “teaser” interest rates, annual fees, and credit ratings.
  • Advise your students to use credit only for essential purchases such as books and car repairs and not for entertainment, electronics, and expensive clothes.
  • Show your children how to compare receipts to credit card statements and tell them it should be done regularly.
  • Warn your children to keep their cards secure to avoid unauthorized use and identity theft.

Keep in mind that this may be the first time your children will handle money without parental supervision. Help them out by developing a budget that takes into account all expenses, such as travel, food, entertainment, clothing, cell phone, computer costs, and medical expenses.

Ask the child to keep track of spending for a couple of weeks and then go over the budget to see if there are ways to cut expenses of if you forgot to factor in certain items.