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Where to put incremental savings in Canada
Old 01-21-2010, 08:31 AM   #1
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Where to put incremental savings in Canada

I have several items that I am saving towards with a medium time horizon in Canada. We have a combined room in our Tax Free Savings Accounts of 7500.

The first is a new vehicle in 5 years time that I put away $400 a month towards. I have $2000 already saved.

The second is college tuition for my wife which will be needed in 1.5 years. I have $2000 already saved.

I'm thinking using the room in the TFSA makes the most sense to tax shield the growth, but I'm not sure what vehicle I should use. I don't think I want to expose the money to equity market risk, but I would like a return that at least beats inflation.

What do you do for your 'savings towards' cash?

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Old 01-21-2010, 08:11 PM   #2
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Originally Posted by schmidtjas View Post
I don't think I want to expose the money to equity market risk, but I would like a return that at least beats inflation.
If you had asked about US, I would say TIPS & CDs would have been your best bet. I know Canadian GICs are generally worse than US counterparts, and I don't know if there is something analogous to TIPS. You would very unlikely beat inflation by any noticeable amount, if at all, but that might be your only reasonable choice given that you need the money within 5 years.

I quickly looked at TFSA and it sounded like you can take the money back with no penalties or anything with tax-free earnings - if I understood that correctly, I don't know why any Canadian would have first $X of savings outside of TFSA (X = max limit allowed by TFSA)... It's like too good to be true?

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Old 01-21-2010, 08:12 PM   #3
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I work up here in Alberta but I do not buy any financial instruments here (only for simplicity; it would make my US taxes crazier than they are now). I DO know that the TFSA is a GREAT deal!

If you have short-term needs (5 years is short-term; 10 years is barely short-term) and must avoid risk, it is best to buy CDs IMHO. Unfortunately, interest rates are really low today. I hear an ad on the radio for CDs at 1.2% or so. The Bank of Canada today announced that they planned to keep rates low for another 6 months or a year, so it will be that long before rates go up again. Prices are rising again up here and I do not think CDs will beat inflation, but at least you won't lose capital.

There may be an inflation-adjusted government investment vehicle. I remember some talk about it, but I don't think Harper actually got around to creating one. Could be wrong. Check out Financial Webring Forum • Index page It is by Canadians, for Canadians (mostly).
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Old 01-22-2010, 06:17 AM   #4
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we use Gifford-Rice CD broker for fixed income (second generation actually) and put it in whatever tax instrument that makes sense under their management.

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just don't let them redirect you to commission generating products - they will push you very hard - I am sure they consider us deadbeats as we only use CDs which are very competitive and generate very low fees for the firm (they are a loss leader actually)

don't go over the 100k insurance limit at any one institution, unless it is a provincially registered cooperative which has unlimited protection (dont do it anyway)

they are showing 3.575% for five years today - pick the term length that fits your planning

I assume you are nailing down debt of any kind as the first priority, then maxing your rsps, then maxing that new thing they have

I believe in debt elimination before savings as you can never earn enough after tax to beat the straightforward gain of not paying interest charges.

If you need to finance a purchase or tuition down the road, take a loan then or have a line of credit on the house. This is assuming you have the discipline to not abuse it and actually work down debt as you go along.

I had a line of credit on the house and all spare cash went to paying that down, including directly depositing my paycheck against the line of credit.
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Old 01-22-2010, 11:32 AM   #5
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Thanks for the advice. To clarify, I only have mortgage and small student loan debt remaining, and both will be gone in 5-6 years if everything stays on track.
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