To get started on the path to home ownership, Courtney Miller and her husband went to their bank to speak to a financial planner.
Ms. Miller, 30, and her husband, 34, have about $50,000 in combined student and credit card debt. Their goal: Kill the debt and start saving a down payment on a home. “We are living at my parents’ house rent-free to tackle the debt as soon as possible,” Ms. Miller wrote in an e-mail. “Once this debt is paid off (our goal is by summer 2020), we will start saving for a down payment on our first home. Neither of us have owned a property before.”
The planner suggests a different approach: Start contributing money right now to a registered retirement savings plan and tax-free savings account each month. “Our goals are to pay off debt and then save for our first home,” Ms. Miller wrote. “I don’t know what to set up or what to do. I’ve met with the financial planner twice now for a total of three hours and still feel very lost!”
This is what happens when people seek personalized financial planning from a place where the prime directive is to sell products. The advice to invest in an RRSP and TFSA benefits the bank if its own mutual funds and term deposits are used. The bank makes nothing if clients pay down their debts.
For unbiased financial planning, try a fee-for-service planner who doesn’t sell products. Some of these planners insist on selling the full-meal-deal of planning at a cost of thousands of dollars, but others offer smaller-scale consultations that would be affordable to people like Ms. Miller.
Meantime, here are some thoughts on Ms. Miller’s situation. Technically speaking, investing before a debt is paid off can make sense if the rate of return on the investments beats the interest rate on the loan. But in this case, the top priority should be to pay off credit card debt, with its astronomical interest rate. Second, attack student debt. Third, direct all available funds after the debt is eliminated to the home down payment. Keep the down payment money safe and sound in a high interest savings account.
Let’s be clear about something: When you talk to a financial pro and come out feeling more confused, it’s not on you. They failed.
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Ask Rob
Q: My question concerns Canadian Deposit Insurance. My elderly father is about to receive $500,000 in proceeds from the sale of his primary residence. He won't be buying another house and will use the funds to live in a retirement home. Do I need to spread this money across five institutions in order to get the $100,000 of protection at each institution?
A: This handy calculator can help you and your dad see if CDIC will cover multiple accounts, each protected for up to $100,000, at the same bank. For example, a TFSA account holding GICs and a regular savings account would each be covered. If your dad strictly uses savings accounts or GICs in non-registered accounts, then he will need to spread the $500,000 among different banks for full coverage. Note: That’s $100,000 of combined principal and interest per bank.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
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Rob Carrick