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Understanding Your Personal Debt Load

Almost every Canadian household has some form of debt or another. And while taking on debt has become a part of Canadian life, it’s important to have a thorough understanding of your debt situation, and where it is taking you. Many of us have debt products thrown at us (every month I get blank cheques in the mail from credit card companies telling me to spend, spend, spend!) and knowing what to do takes education and discipline.

I like to keep things simple, in my mind there are two broad categories of debt – Good Debt and Bad Debt.


Good Debt: Includes a reasonable mortgage, investment debt and student loan debt. Of course, there are limits; here are some notes on each one:

  • Mortgage Debt: This should be less than 3X your annual salary. So if you/your family earn $100k per year, your max mortgage should be $300k. Note there are some minor exceptions here, but this is the rule of thumb I follow myself.
  • Investment Debt: Borrowing money for stable investments, especially when invested in an RRSP, can make a lot of sense. Note that you should be paying this loan back by the end of the current year.
  • Student Loan Debt: Borrowing for your education is good, provided the program has employment potential and you can pay off the amount borrowed in roughly 5 years.

Bad Debt: We all know when we are spending above our means…if you can’t buy it with cash, should you really be buying it at all? Bad debt includes the following:

  • Consumer Debt: T.V.s, vacations, clothes, kids’ toys, and any other item that is not a necessity (i.e. food, shelter or water).
  • Too Much Mortgage Debt: Any mortgage over 3X your annual salary is leaving you very exposed to interest rate changes. I know several people with an $800k or higher mortgage… If interest rates go to 6%, it literally doubles the required monthly payment. Can you afford your mortgage to double? I will be doing a separate blog on interest rates in the coming weeks.
  • Frivolous Student Loan Debt: If you are uncertain your education will get you a job, do not borrow money to fund it. Now, I am not saying a Fine Arts Degree isn’t a good education, but I am saying don’t borrow money to do it. I have met countless 30-somethings still paying off an education they didn’t really want/didn’t really use and, of course, they now wish they never went to school. Universities and colleges are in the business of graduating students and not necessarily in the business of helping you get gainful employment.

Our current spending culture is a “now” culture — we want instant gratification to satisfy our cravings. This impulsive and unprepared spending can lead to bankruptcy, especially if you are faced with a sudden change in income. Being disciplined is hard (I struggle with it from time to time as well!).

When reviewing your debt, here are a few things to ask yourself:

  • How much do you annually spend on interest? Take a deep breath, sit down and add it up. If you pay more than $10,000 of annual interest, that is an absolute sign that you have acquired too much debt. Imagine what you could do with another $10,000 of cash?
  • Are you paying your credit card bill off entirely, every month? If not, then why are you spending more than you earn? That is a good sign that you are acquiring too much material debt.
  • Keeping track of your net worth year over year can also give you an idea of your debt. Your net worth is your assets, less liabilities — year over year. Is your net worth getting bigger or smaller?

Those are all ways to give yourself a quick and healthy self-review of your debt so that you can better take control of your debt and, ultimately, your financial future. Interests rates usually only go one way — up. A 1% change in interest rates can create a significant bump in your monthly payments, as outlined in the chart below.

$500k mortgage, 25 years at 3% = $2,366 monthly payment

$500k mortgage, 25 years at 4% = $2,630 monthly payment

$500k mortgage, 25 years at 5% = $2,908 monthly payment

Could you handle a $300 – $600 increase in your mortgage overnight? Canada is a country that has been spoiled by low interest rates for more than a decade. Many experts are predicting an interest rate bump of 2% within in the coming years. You need to have a financial plan that clearly shows what your income, expense, investment and debt horizons look like so that you can determine if your spending is taking you down a path that is unwise.

It is critically important that you gain a handle on when you will become debt free. Entering retirement age with any debt will significantly limit your ability to have a comfortable retirement. In my opinion, a healthy retirement starts with roughly $2,000,000 in an investment account and no debts at all. Of course, there are always exceptions; give me a call and we can discuss your personal situation.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Using RRSP’s and TFSA’s as Long-Term Savings Options

What opportunities do Canadians have to make their extra money go the furthest for them? Saving for the future is one of the best decisions an individual can make, but there is more than one way to make your money work for you. When investing in the stock market, there are countless ways to do this; in this article, we will discuss the three most common ways to hold stocks: Registered Retirement Savings Plan (RRSP), Tax Free Savings Account (TFSA), and an unregistered account (sometimes called an “Open” account).


At Kent Accounting, when we talk to clients about how to maximize their money, we often talk about TFSA’s and RRSP’s, as well as Open accounts.  In the opinion of Kent Accounting, the strongest tax deduction available for Canadians is through investing in an RRSP.  RRSP’s provide immediate tax relief, continued tax-free growth, as well as peace of mind and financial security for the future.  Like many Canadians, you may not realize that the largest expenditure you will make in your life is not real estate investments, but in fact, your taxes. There are a number of types of savings accounts that can help alleviate your yearly tax bill and help you save for retirement, and today we’ll be exploring two of the most popular.

One of the most common and well-known savings opportunities is a Registered Retirement Savings Plans (RRSP). For every dollar that you contribute to an RRSP, the government will credit you at the highest tax rate you are currently paying. For example, at a salary of $70,000 per year, you would receive $305 back for every $1,000 RRSP contribution you make, making RRSP contributions a great way to manage the amount of tax you will be paying. Note that the refund amount fluctuates as you contribute more/less or earn more/less, so be sure to discuss this with your small business accountant.

The Government of Canada provides you with RRSP room equal to 18% of your earned income each year.  In 2016, the maximum an individual could contribute to an RRSP was $26,010. If in years past, savings goals have lead you to put your money elsewhere, not to worry – any unused RRSP room from previous years is rolled over and accumulated, meaning you might have more opportunity to invest in your RRSP’s than you realize.

There are some drawbacks with RRSP’s that are important to consider. While you do not pay any tax on the growth of RRSP’s, you do pay tax on withdrawals, and from a tax perspective, it is far wiser to withdraw from your RRSP during your low-income years (retirement). When you withdraw from your RRSP, not only are you taxed, but you also lose any accumulated “room” in your total investment pool, meaning you cannot replace those monies in the future.

At 71, all Canadians must convert their RRSP’s to Registered Retirement Income Funds, which provide you with yearly income. Here’s an example of what your retirement plan could look like if you take advantage of your RRSP opportunities.

If at age 35, you begin to contribute $5,000 a year to your RRSP, by your 71st birthday, you would have $1,070,259 (assuming 7% rate of return and all tax refunds reinvested). If you invested in a regular investment account, on your 71st birthday, this same yearly investment would amount to $509,195 (assuming the same rate of return as the RRSP). That is $561,064 more in your RRSP account, which is more than double the return on investment.

Roughly half of Canadians do not contribute to their RRSP’s, which is a huge missed opportunity, both regarding the ability to save for a happy and fiscally healthy retirement and the opportunity for yearly tax savings over the course of your life.

RRSP’s are a great way to save, but they aren’t your only option. A Tax Free Savings Account (TFSA) is an account that has a set amount of room per year (in 2017, that set amount is $5,500, but year over year, that amount does fluctuate). While unlike an RRSP, you do not receive any tax deductions when contributing, you are not taxed on the growth of your investment, and you have the flexibility to contribute and withdraw at any time.

Using the same savings example as above, let’s look at how contributing to a TFSA as a retirement savings plan can benefit you.

If you invest $5,000 per year from your 35th birthday until your 71st birthday, you will have saved $829,752 (assuming 7% rate of return), whereas in a regular investment account on your 71st birthday you would have $509,195 (assuming the same rate of return as the TFSA). Contributing to a TFSA account allows your savings to earn you an additional $320,557.

Regarding withdrawing funds over the course of your life, you do have that flexibility, and you do not lose the accumulated room to contribute to your TFSA account – if you withdraw, you simply have a set amount of time to put the funds back.


So how can you decide which account is right for you? Determining your primary objective or goal for your savings will often point you in the right direction.

If your goal is to save on your yearly taxes and save for your retirement, then maxing out your annual RRSPs is likely the best course of action. If you have the opportunity to borrow funds to max out those dollars, it can be worth it. Contact Kent Accounting to discuss your best borrowing opportunities to maximize your RRSP’s.

If your goal is to save, but you’d still like to access your funds with plans to put the money back into the account, then opt for a TFSA. Call Kent Accounting to discuss your potential losses and gains in choosing a TFSA over an RRSP.

If you have something specific in mind that you are saving for, opting for a TFSA over an RRSP is a stronger choice, as you will not lose room in your accumulated pool of funds when you withdraw those monies and you also won’t be taxed on those withdrawals. There are two exceptions to this, as the Home Buyers Plan allows first-time home buyers to withdraw funds from their RRSP for a down payment on a property and the Life Long Learning Plan allows you to withdraw funds for educational opportunities.

At Kent Accounting, we have found that families who properly plan and save for retirement max out their RRSP savings year after year, as opposed to not planning and “hoping for the best.” Contact Kent Accounting for help devising a detailed and fruitful retirement savings plan.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.