A Dream Without a Financial Plan Is Just a Wish!
The French write Antoine de Saint-Exupéry is quoted as saying that "a dream without a plan is just a wish". We'd like to take it a step further and say that a dream without a financial plan is just a wish! One of the first steps you can take to look for the money to fund your renovations is talking to a financial planner. On our podcast, All Things Renovation, we interviewed Glen Dodd, a local financial planner, to find out what tips he could offer. Here is a summary of what we learned from him.
Where should the conversation start?
Initially we start by clearly understanding the goals and objectives that the client has. We also want to understand the cash flow. What is the amount of money that is coming into the house every month? and what are the expenses going out? Is there discretionary income available to help them reach their goals? Their financial plan will also indicate unused RRSP and tax-free savings account (TFSA) contribution room. We also want to learn what their risk tolerance is as investors. Once we have a good snapshot of where the client is now and what they want to achieve, our financial planning software will generate audit sheets that will look at their assets and liabilities, and their cash flow on an annual basis.
Goal: To do a renovation 5 years in the future.
Challenge: The clients currently don't have enough money set aside to do the renovations.
If they have enough discretionary cash flow, then it's a simple matter of allocating more money on a monthly basis to their RRSPs or TFSAs. If they're high-income earners and they have unused RRSP contribution room, there is often a good opportunity to create significant refunds for them by directing some of their disposable income into RRSPs each year. They can then put the refunds into their TFSAs for the renovations to come.
A more aggressive strategy is a leveraging strategy.
This involves using another financial institution's money to significantly increase the amount of profit that is generated each year towards creating the renovation fund. The interest on leveraged programs are tax-deductible because it's a carrying-charge expense. The client can deduct it off their personal income each year against the profits that are being created. It does have a higher level of risk associated with it so clients should make sure that they're working with a firm that is well versed in managing a leveraged strategy. This ensures that the leveraged money is making the client more money than they are paying in interest.
How can clients take advantage of the current interest rates?
Interest rates are at historically low levels right now. If a client owns a home that has appreciated significantly in value, the leveraging strategy would be to increase their mortgage at the current rates that are available. Then they would pay that mortgage over time, but use that capital right now to achieve what they want to do.If they didn't want to use the money right away, they could invest it. While they are waiting for permits or still going through the planning stage, it could earn them some money as well.
Common Misconception about Tax-Free Savings Accounts (TFSA)
A lot of clients think that a TFSA is just like a savings account at a bank that earns next to nothing in interest. But TFSAs can be invested in any type of investment vehicle, just like an RRSP, and earn the same kind of returns. However, they are growing tax free! If you have the money from re-doing your mortgage and you don't need the money immediately, put it in a TFSA. Over time it earns a good rate of return for you. Which is a beautiful thing!
"It never hurts to have a conversation with a financial planner because you never know what you can achieve".
To listen to the full interview and to see the show notes, visit www.AllThingsRenovation.com .