How to survive a financial emergency: COVID-19 Pandemic

Updated June 16, 2020.  Small business owners at the bottom.

NOTE: This situation is rapidly evolving. We will update this every 24 hours to reflect changes to content so bookmark it. Check out our  twitter feed for more info.

Here’s how to survive through a short-term (hopefully) financial emergency like this one. These aren’t ideal financial planning strategies under normal circumstances. However, these are anything but normal circumstances. The following tips are based on a 3 month emergency savings plan.

A step-by-step EMERGENCY money guide if you’ve lost your income or worried that you will:

  1. Calculate what income will be coming into you through CERB/EI/from employer.

UPDATE JUNE 16 – CANADA EMERGENCY RESPONSE BENEFIT (CERBpays $500 per week of taxable income every 4 weeks for any 24 week period between March 15 – October 3, 2020. It is taxable but they will not be taking money off at the source so you’ll get the full amount now and you’ll pay tax on it in tax season 2021. The idea is that your income is likely low because you only qualify if you’re income is lost due to COVID. So, don’t over worry about the taxes on this while you’re in crisis. You will not get more than $12,000 over the 24 week period. (used to be 4 months. Extension came June 16, 2020).

WHO QUALIFIES?

The benefit will be available to workers living in Canada who are at least 15 years old and who:

  • For your first CERB application:
    • You have stopped or will stop working due to reasons related to COVID-19 for at least 14 days in a row for the 4 week period you are applying for.
    • Also, you for those 14 consecutive days, you cannot receive more than $1000 employment income, self-employment income (unclear what this means for people who subcontract – see below) likely including earnings from a corporation like dividends. This is not confirmed in writing. Stay tuned), or Maternity Leave/Parental Leave.
  • For your subsequent CERB applications:
    • You continue to not work due to reasons related to COVID-19 at any time for the 4 week period.
    • For the 4 week period you are applying for, you will not receive more than $1000 employment income, self-employment income, provincial or federal benefits related to maternity or paternity leave.
    • Have earned $5000 in 2019
    • Are not currently receiving EI or CERB for the same period.

These are 7 reporting periods/payment cycles.

4-week period cycle Period dates
1 March 15, 2020 to April 11, 2020
2 April 12, 2020 to May 9, 2020
3 May 10, 2020 to June 6, 2020
4 June 7, 2020 to July 4, 2020
5 July 5, 2020 to August 1, 2020
6 August 2, 2020 to August 29, 2020
7 August 30, 2020 to September 26, 2020

Can you earn income while on the CERB?

Yes! If you are a seasonal worker who has run out of IE, a student or contractors/owner-operator (I translate this to self-employed)/part-time worker who continues to earn a modest (less than $1000 a month due to reduced work hours) income from part-time work, royalties and honorariums.

CONFIRMED – If you take deposits, it is not considered income to put you over $1000.
CONFIRMED – If you invoiced for work in January, but got paid during the last few weeks,  it does not go into the $1000.
CONFIRMED – you can earn up to $3000 a month ($1000 from work and still get full $2000)

CONFIRMED – you have to pay back THE WHOLE $2000 if you earn even $1 above $1000.

Questions that still remain
1. Is it gross revenue or gross profit (after your COGS – aka, post inputs/subcontractors?) that is counted for the $1000? For example, if you bill a client $500 but pay someone $300 to carry it out on your behalf, you’ve only earned $200. So, is the $500 counted or the $200? Same for people who buy and sell goods. If you purchased something for $50 and sold for $75, you’ve only earned $25. Does that count? My gut is that your revenue after your Cost of Goods Sold (subcontractors or direct costs) would be tallied (this is my gut and not on the website) but no other overhead type of expenses. Stay tuned.
All messaging from the PM has been about helping people who have been impacted by COVID19 and keeping your business/the economy going. I think you would still qualify because you didn’t work and the income was already earned. I get the feeling that it will be about intention and integrity. Stay tuned.

 

What if you mess up and have to PAY IT BACK/Not eligible

All good. You can pay it back! You have to with a cheque and not online yet. They will be asking for proof of income next years taxes. They have been very clear that they aren’t out to penalize, but simply to recover money. They won’t hunt you down, charge you interest and send you to prison (this is a joke… a total joke.)

TBD: Will they claw back the whole amount or just the overage? Aka, you earned $1200 but collected $2000 in CERB. The max is $1000 and you have to pay back THE WHOLE $2000. (confirmed June 9). Call the CERB hotline for details. 1-833-966-2099

If you realize it now, and you’re well over and realize you’re not eligible, you can pay back ASAP. Write a cheque to the “Receiver General” and indicate that it’s for “repayment of CERB” on the memo with your SIN. Send to

Sudbury Tax Centre. 1050 Notre Dame Avenue Sudbury, ON P3A 0C1.

You should DO YOUR 2019 taxes on time but no rush. It looks like you don’t need it to apply for your first application, or to apply but you’ll likely need proof down the road.

If you were/are EI eligible in the old world (BC19-Before Covid19)

If you applied for EI after March 15, you’ll be put into this program  for 16-weeks and if you’re still unemployed after the 4 months, you go back to regular benefits. CERB  replaces all existing EI applications and benefits.

NOTE: If you’re already on EI for a mat leave or unemployment, you should not apply to CERB. Keep your thing going until October 3, 2020. Then, if you can’t go back to work because of COVID 19, apply for CERB.

Isn’t this more than regular EI?

i.e. you’re on mat leave right now, it ends in July. You’re job is not there for you to return to. Apply then. It’s taxable and monthly. I’m sure a lot of people will say “That’s more than parental leave!” But, it may not be. the $2000 is taxable and monthly. Let’s say you qualified for the max parental leave from EI. That would be $573 a week taxable. If that’s for a year, that’s 52 weeks x $573 = $29,796. If we divide this by 12 months, it’s $2483 per month before tax. So, if you were making more than $54,200 and on parental leave or EI regular benefits, your benefits are more than this.

What if I’m a student?

The government announced a new benefit called the Canada Emergency Student Benefit. $1250 a month to students. In addition, they are creating 76,000 new jobs for students and any student that is volunteering in a sector that is helping to stop COVID 19, you could get the Canada Student Service Grant (between $1000 – $5000!)

 HOW TO APPLY FOR CERB?

HERE. They hope to have money going out within 3-5 days of application if you sign up with direct deposit. You will apply through your MYCRA account. Or this number 1-800-959-2019 or 1-800-959-2041.

You cannot be receiving the 75% wage subsidy and CERB at the same time.

IF YOU ALREADY APPLIED FOR EI – DO NOT REAPPLY.

Interesting – to not overload the system, they’ve done it by birthday. See below. Also at THIS LINK. They didn’t do it by zodiac signs….. Virgos would obviously want to go first and get their sh*t in order…. so maybe that’s why.

Day to apply for the Canada Emergency Response Benefit
If you were born in the month of Apply for CERB on
January, February or March Mondays
April, May, or June Tuesdays
July, August, or September Wednesdays
October, November, or December Thursdays
Any month Fridays, Saturdays and Sundays

Also, Some people have gotten more than $2000. If you have,

TO DO: Get a MyCRA account if you don’t have one. Call 1-800-959-8281 and get one. WORTH THE HOLD MUSIC WAIT.

 

  1. Take a hard look at your current expenses. What do you need to be able to pay your bills and have enough money for groceries and basic spending? Do you have any bills that could be reduced temporarily? Try to get your monthly bills to fit within whatever income is coming in (work or Canada Emergency Response Benefit)
  • INTEREST FREE GOVERNMENT STUDENT LOANS –  If you’re paying back a government student loan, there’s a six-month, interest-free reprieve on government student loan payments.
  • The Bank of Canada has made a second unscheduled cut to its benchmark interest rate, lowering it to 0.25 per cent amid the COVID-19 crisis. If you have a mortgage, talk to your mortgage broker ASAP to see if rolling debt together and consolidating may be worth it to break your mortgage given lower rates.
  • Can you PAUSE YOUR CAR INSURANCE? If you’re not commuting…. maybe you don’t have to pay it for 2-3 months?
  • MORTGAGE DEFERRAL the big 5 banks have offered a 6 month deferral program for mortgages for people depending on their circumstance. READ THIS LINK. Check with your bank to see if that help applies to you. If you have your mortgage elsewhere, contact your lender ASAP to see if they have plans to follow suit.
  • HOW IT WORKS? Now that we see how the banks will start rolling this out, it looks like they will be lending you the money to pay your mortgage and then rolling that into your mortgage. Therefore, you will be charged interest on the interest you’d already pay….that’s compound interest. That sucks. The other thing is that your credit score may take a hit and you’ll likely have to increase the amortization of your mortgage again at refinancing so that the payment doesn’t jump. THIS ARTICLE CAN HELP EXPLAIN. Therefore, taking advantage of a mortgage deferral such as that is only beneficial for those who have lost their income, have no savings/emergency accounts and are facing down high interest debt to make ends meet (like credit card or lines of credit that have higher interest rates. So, if that’s you, this program could still be super helpful for you  (even with all of the above bummers) because you’re going to use debt to make ends meet anyways and at least this way it’s likely cheaper rate because it’s at your mortgage rate and so it should be much lower than all other sources of personal debt. Be sure to ask that question to your broker. Also be sure to run the numbers between how much extra interest you’ll pay on this mortgage deferral loan vs your own line of credit to keep making your monthly payments. This could be a customized advice thing. If you have savings or didn’t lose your income, this isn’t a program you’ll want to take advantage of as it’s borrowed money. For those who may use this program, I think there is something to be said about wellness here. If having your mortgage payments stop for 3-6 months after you’ve just shut down your business makes you feel safe, the additional interest (while a bummer) may be worth it for the mental health aspect of breathing a bit easier until we know what’s what. For the record, we don’t make any money at all from anyone whether they use savings, debt or investments to survive. This is entirely unbiased. Sometimes, a bit of extra interest is worth it’s weight in Virtual Therapy. My two cents.
  •  See if your bank is actually going to charge you the interest. Some, namely National Bank as of April 6, are starting to forgive the deferral interest. Maybe more will follow suit.
  • TO THE LANDLORDS OUT THERE – I know this is hard for many of you too. I see you. But, you can write off this interest on your mortgage. I did the math HERE. If you have an $800,000 mortgage at 2.9% for 25 years, you will pay $323,408 in interest over the life of your mortgage. If you defer your mortgage (appx $4000 a month) for 3 months to give your tenant who may have lost their job a rent break, $12,000 would be added to your mortgage. If you use this site and pop in $812,000, you now would pay $328,259 in interest over the life of your mortgage because of deferral. This is $4851. That’s it. Over 25 years to give someone a fighting chance in this economy. Plus, you can deduct this. Perhaps you seriously debate taking this deferred mortgage and maybe raise rent by only $16 a month to offset the extra interest you’ll pay over the 25 years. We are all in this together. There is no aid for renters. See if you qualify for mortgage and try to help where you can.
  • CHECK IN WITH YOUR BANK – See if your bank is lowering credit card rates. Most are. Any loan payments can be missed?
  • Do you normally pay for any subscriptions or memberships that you won’t need during social distancing that you can temporarily suspend? While it’s important to get things as pared down as possible, be sure to think about what will keep you going during this time and how much it costs. For example, you could cancel your Netflix subscription, but will that extra $15/month saved be worth it? Figure out your total – how much do you need each month to make ends meet? Write this number down.
  • Will daycare/extracurricular costs be suspended during this time?
  • Let’s say you need $2500 a month to crack the nut after paring down all expenses you can during this pandemic.
  1. MORE BENEFITS CCB AND GST to families with new stimulus package. Take a look at any income your household will have coming in over the next little while. Include everything – child tax benefit payments, GST/HST rebates, trillium benefit payments, any income that you may still see from your business. If you haven’t checked your MYCRA account for uncashed cheques definitely do that now!

If you qualify for the GSTC Goods and Services Tax credit (this is that quarterly cheque from the government) you’ll get $300 and $150 per child. It’s coming in April now, not May.

This will double the maximum annual GSTC payment amounts for the 2019-20 benefit year.

For families with children who qualify for the Canada Child Benefit (CCB) (this is the monthly tax free benefit), the Government is proposing to increase the maximum annual  payment amounts by $300 per child from 2019-2020. It comes out in May, 2020. USE THIS LINK TO APPLY for CCB if you’re not already getting it/enrolled.

THIS IS A HELPFUL CALCULATOR from Preet Banerjee.

  1. Also, DO YOUR TAXES!
  • If you are self-employed and still able to earn some money virtually, can you have clients/customers pay you ASAP (no accounts receivable) and by e-transfer or direct deposit rather than cheque? Anything that helps reduce delay on you getting paid is helpful! Tally all of those up and figure out what the shortfall is between the amount of income and the amount of expenses you calculated in step 2. This shortfall is what we’re going to need to make up with emergency sources of cash.
  • Your shortfall is $2500-2062 = $437.50. If this income crunch goes on for 3 months, your overall shortfall is $437.50 x 3 = $1312.50 You’ll need to fund that from savings or lines of credit. Hopefully the government will come up with some programs to help offset the cost of life for people during this time.
  1. If you have money saved: Start pulling money from non-invested cash, high interest savings accounts, and TFSA savings first. Don’t take money from your RRSP if you can help it. Put all of this cash into one savings account. This is like your security HOLDING TANK.
  2. You have money saved but it’s invested/no money saved: You need to decide whether accessing debt (like a line of credit) vs. selling off invested money in your TFSA or non-registered account (don’t take money from RRSP) is a better option.
  • Selling TFSA investments may mean crystallizing an investment loss.
    • For example, you invested $1000, it’s worth $800 now. If you take the $800 out, you’re locking in that $200 loss rather than waiting it out to potentially go up once the stock market recovers. Consider this carefully. If the money you have invested is part of your long-term savings plan (like retirement) and if you have access to low interest debt (like a line of credit) that could be a good SHORT-TERM SOLUTION. Just ensure it’s likely that you will have the cash flow to pay it back once this is all over.
    • If you don’t have access to a line of credit and need to pay your bills, you may need to cash in some of your investments so that you don’t have to live off a credit card. This is not ideal but if you can’t pay your rent or mortgage and you don’t have a line of credit, you need money to come from somewhere. If you have $20,000 invested in a TFSA, take 2-3 months of your shortfall ($1312.50) and move to cash so you can live off of that. Yes, it’s possible the market goes down further and you’ll be happy you took it when you did. It’s also possible the market goes up and you’ll kick yourself for taking it when you did. No one has a crystal ball. No one. All you can do is make the best decision you can with the information you have. The real strategy here is not to panic and sell everything. Take only what you need to keep your head above water.
  1. TAX DEADLINE EXTENDED If you’re self-employed you may have a cash savings account filled with money for your HST/GST and income tax bills. Treat this money the same as you would think about taking on debt from a line of credit – if you need to access these funds, you may do so to make ends meet, but you will need to pay that back later.  CRA has extended deadline to June 1 for personal taxes to be filed and payment owing to the CRA can be deferred until after Aug. 31. If you have access to debt like a line of credit, you can always use this to pay your tax bill down the road and save on interest payments now (and then pay them later).
  • 1. Personal and Corp taxes deadline to pay extended to Aug 31
    2. Gst/hst for your business is now deferred to June 30, 2020.

    • Quarterly filers have to remit amounts collected for the January 1, 2020 through March 31, 2020 reporting period; and
    • Annual filers, whose GST/HST return or installment are due in March, April or May 2020, have to remit amounts collected and owing for their previous fiscal year and installments of GST/HST in respect of the filer’s current fiscal year.

    3.As for source deductions for payroll, still due at the same times but 75% wage subsidy See bottom of post.

  1. Once you’ve identified your sources of emergency cash, you’ll do what we call a “controlled burn”. A controlled burn means that you take exactly what you need – no more – each month and move it into your chequing account to pay for your life. We limit it this way to create the illusion of a steady pay cheque and budget within that, so that we don’t fall into the trap of taking on more debt or blowing through more cash than absolutely necessary.
  • From a LOC, you’d take $437.50 a month to your chequing account
  • From your cash savings account, you’d take $437.50 a month to your chequing account
  • From your TFSA, you’d move the whole thing to a cash savings account and take $437.50 a month to your chequing account. You feel me?
  1. Make a plan to repay! If you’ve had to borrow from a form of debt, or from your tax savings, we will need to pay that back when all of this is over. It’s a good idea to try and ballpark a plan now, before you take on this debt – so that you have an idea of what you’re looking at in terms of a payback plan.
  2. If you don’t have any savings and no access to a line of credit, you’ll need to get extra creative to try to bring in money if you’re self-employed and/or ruthlessly cut back expenses to see if you can live solely off of any EI money coming in. The goal is to try to use credit cards as little as possible and avoid pay-day loans at all costs. If you need to use credit cards to make ends meet, so be it. These are unprecedented times. Extraordinary circumstances often require extraordinary measures. My tip to you is avoid if you can and if you must, as little as possible so that when things return to normal, you have a manageable debt load. This means a credit card bill that you can realistically pay back in 6-12 months. I know people will think I’m promoting debt. I’m not. I’m promoting a Debt Harm Reduction plan for those who don’t have any other option.
  3. If you need to talk this out with someone, get an UNBIASED, FEE-ONLY/ADVICE-ONLY financial planner to work out your plan. There are many of us. We are currently offering 30 minute emergency calls for anyone. You do not need to be a current client. These power-calls are $100 + HST and you can book here.

For SMALL BUSINESS – BOOKMARK THIS PAGE

If you’re Self-employed without payroll account – CERB is there for you. Read above. Also read the CEBA below

If you’re a large institution (Payroll over $1M) – check out LEEFF HERE.

Canada Emergency Business Account (CEBA). Banks will offer $40,000 interest free loans guaranteed by the government for small business (incorporated, partnerships and sole-props). If you repay it by Dec 31, 2022,  25 per cent (up to $10,000), will be forgiven.

UPDATED May 19 – For businesses whose payroll/income between $20,000 to $1.5 million of payroll in 2019.biz you qualify.

UPDATED MAY 19 – For Self-Employed (sole-props) people or people who pay themselves from a corp on a T5 (dividends)  you now qualify too with some specific rules:

  • You need to have a business operating account at a bank (personal chequing account may not cut it),
  • Registered for an HST/GST or payroll number with CRA
  • Have filed a 2018 or 2019 business tax return
  • Your expenses (eligible, non-deferralable expenses) which is rent, property taxes, sub-contractors, utilities insurance. Basically, things you can’t say “I’m not gonna buy this rn because… pandemic.” Essential bills you MUST pay are between $40,000 – $1.5M a year.

Details to follow on applications. Stay tuned. This link helpful

75% Canada Emergency Wage subsidy and will cover up to 75% of your wages up to  $58,700 per employee (Up to $847 a week – this is more than EI or CERB. See below) for 24 weeks. This money will be backdated to March 15 – August 29, 2020.

 How to qualify:

Eligible employers: individuals (self-employed sole-props with payroll accounts for employees) and corporations. It’s for employees

You must see a drop of at least 15% of their revenue in March 2020 and 30% for the following months during the Eligible Periods. In applying for the subsidy, employers would be required to attest to the decline in revenue. The PM warned that anyone trying to game the system/falsely use these emergency programs will face consequences. I assume heavy sanctions/penalties etc. So… only use this if you need it is the name of the game. Don’t be a jerk, basically.

What is considered Revenue?

  • Calculated using your normal accounting method, and would exclude revenues from extraordinary items. For example, if you had a one-time massive influx, that doesn’t necessarily disqualify you.
  • You can chose accrual method or cash method of accounting but cannot use both. You have to pick one from the start and stick with it. Accrual method is where you calculate revenue based on invoices. Cash method is where you calculate revenue based on what cash has actually dropped into your business chequing account.
Eligible Periods
Claiming period Required reduction in revenue Reference period for eligibility
Period 1 March 15
to
April 11
15% March 2020 over:

  • March 2019 or
  • Average of January and February 2020
Period 2 April 12
to
May 9
30% April 2020 over:

  • April 2019 or
  • Average of January and February 2020
Period 3 May 10
to
June 6
30% May 2020 over:

  • May 2019 or
  • Average of January and February 2020

How to apply?

You would be able to access the Canada Emergency Wage Subsidy by applying through a Canada Revenue Agency online portal. More details regarding how to apply for the program will follow. If you do not qualify for the Canada Emergency Wage Subsidy may continue to qualify for the previously announced wage subsidy of 10% of remuneration paid from March 18 to before August 29, up to a maximum subsidy of $1,375 per employee and $25,000 per employer.

How it logistically works – you will keep your employees on payroll and they will send you money (even backdated) to help pay for it. It seems like the idea is that you have access immediately to the Canadian Emergency Business Account (the $40,000 interest free loan). Use this to keep payroll going as usual and then repay the loan when the subsidy comes in.

What if you employ yourself and you’re on payroll? Can you use the subsidy?

It looks like it! There’s a special rule for employees (you) that do not deal at arms length with employer (aka you). You’re not at arms length from yourself. You are yourself. It looks like you are eligible for the subsidy for payroll between March 15 – June 6 up to the max $847 per week.

Refund of payroll remittances

There’s talk For greater certainty, employers would be required to continue to collect and remit employer and employee contributions to each program as usual. Eligible employers would apply for a refund, as described above, at the same time that they apply for the CEWS.

 

COMMERCIAL RENT RELIEF, Canada Emergency Commercial Rent Assistance program will lower rent 75% for April, May and June that have been hard hit by COVID19 if your rent is less than $50,000 a month, you have ceased operations or taken a 70% decrease in revenue from pre-COVID19 revenue. The government (CHMC) covering 50%, your landlord 25% and you 25%!  It says “small business tenants” So… that’s great.

i.e. if your commercial lease was $4000 a month. You’d pay $1000, the government would pay $2000 and your landlord would take a $1000 hit. They would collect $3000.

For April, you’ll get back 75% retroactively from your landlord once they get their loan.

UPDATED MAY 20 – THE CATCH? Your landlord has to sign an agreement. Have that convo ASAP. Loans were JUST MADE (May 20) forgiveable. So that’s a WAY better deal for your landlord. It’s only forgivable if they reduce rent.

I have had many people reporting that their landlord doesn’t want to or won’t participate. That sucks. I was so excited to hear about this program and I’m so disappointed that this has the experience of so many small business owners. Write your MP and MPP and tell them about it. We have seen again and again that the programs roll out and then are tweaked to include more people. Hopefully we see more action on this front as well. 

In Ontario – THIS IS HELPFUL

If none of these help you – GO HERE and see if you can get regional support!

CALL TO ACTION: ASK FOR HELP/OFFER HELP

Some of you may not have any available debt to pull from, or any emergency savings – if that’s the case for you, is there anyone you can ask for help? Can you offer any type of online service or gift cards for your business to bring in some income during this time? Are there family or friends who can help? If you’re someone whose income is unaffected by COVID-19, are you able to offer financial support to someone right now? We’re all in this together, and the only way we’ll get through this is by helping each other in any way we can. <3

 

 

 

 

 

 

 

Make Money From Your Home

4 ways for house to earn you money

Your home is a haven, but it can also be a cash cow if you know how to milk it. Today I’m going to give you the 4 best ways to make extra money from your house.

Method 1 – Use Air BnB

Who: Air bnb is a website that allows you to rent out your home like a hotel.

What you need: All you need room for someone to sleep in.
Risk: Letting someone unknown into your house.
Payout: Slightly below market rent. For a weekend in a major urban center, you could charge anywhere from $80 – $150/night! You don’t need to provide any amenities except a bathroom and a bed.
When to use: If you spend your weekends at the cottage or away, rent out your space to travelers and earn some money!

 

Method 2: Parking Spot

Who: You.
What you need: An unused parking space.
Risk: You probably have to shovel.
Payout: Glorious. Most parking spots go for $80 – $250/month in the GTA depending on location.
When to use: Year round if you are sans car.

 

3. Garden Rental

Who: You.
What you need: An unused garden space with optimal growing sunlight.
Risk: Someone comes into your backyard.
Payout: Renting garden space can go from $40 – $200/month depending on size and demand.
When to use: Spring/Summer.

 

4. Workshop Host

Who: You.
What you need: A big enough room that could seat 10 people at least.
Risk: People coming to your home for workshop.
Payout: Small businesses in the GTA are desperate for locations to host small workshops all the time. Most places in the GTA are expensive. If you’ve got a big living room/family room/kitchen, offer it up on craigslist. The average workshop would pay between $20 – $150 depending on how much they were charging guests to come. Alternatively, you could ask to take 20% of all the ticket sales for the use of your home.
When to use: Whenever you don’t need access to your space!

So You Want To Start A Business?

So you want to start a business? The days of sticking with the same job for 30 years and getting a cushy pension are ending. Freelancers, entrepreneurs and small businesses are the future.
The first thing you may want to do is figure out what steps you need to do to make it official, and that’s determined by your ownership structure, which is jargon for are you a sole proprietor? Partnership or a corporation.

The Downpayment – how much do you need?

The Down Payment

Housing prices continue to soar in most urban-city centers. Wages are getting squeezed tighter and tighter and the cost of living keeps rising. It’s time to face facts. Many of us may not be able to afford to buy a house.

Have you heard of the 20% Rule?

To qualify for a conventional mortgage, you need to put down 20% of the market value of the house. You can put down less than 20% as a down payment, but if you do, you’ll be charged a very costly fee called mortgage insurance.

In Canada you can put down as low as 5%. The less money you put down, the more mortgage insurance you will be charged.

In Canada, if you purchase a $300,000 home and can only put down $15,000 (5%), you will be charged 2.75% of the total mortgage value, and in this case $7837. This $7837 will be rolled into your mortgage.

In addition to this, there are tons of other costs such as Home Inspection, Land Surveys, Legal Fees etc.

A good rule of thumb is to assume that you will also need to save 2.5% of the value of the home for these fees.

If you’re willing to take on the additional mortgage loan insurance, I advise to put no less than 10% to be sure you can actually afford the monthly payments.

Therefore, in a perfect world, you should have 22.5% of the value of your dream house in the bank before you can technically afford it and in a less-than-perfect world, no lower than 12.5%

WATCH MONEY AWESOMENESS BELOW

 

Avoid Being House Poor

Most people have hear the rule that your monthly housing costs shouldn’t be more than  32% of your gross monthly income, but I’m a bit more hardcore than that. This rule can still lead to House Poor Tragedy.

The reason? It’s calculated on your gross income, which means before tax. Well, 32% of your gross income can translate to between 45 – 55% of your after tax income, just for your house. No food, no debt payments, no toilet paper. Your after tax income is what really matters because that’s the money that hits your bank account. So, stop thinking about your income before tax, and only plan based on what your take home pay!

How?

GOLDEN RULE: Make sure that all of your monthly fixed costs are 50% of your household monthly AFTER TAX income. This means, all housing costs, utilities, debt payments, transportation costs and groceries are only 50% of what you actually take home every month.

If you are a first time homebuyer and this feels too tight, you can push it up, but under no circumstance should you be higher than 60% of your after tax monthly income.

This way, you’re ensuring that at least 40 – 50% of the money that hits your bank account is left over for you to actually save and spend!

Usually, when I see house poor, fixed monthly costs are as high as 80%. This is when there’s no money left over for saving and barely any for fun and consumer debt levels start to climb year after year!

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Pre-approval for a Mortgage

So, you’ve saved up a down payment, you know you’re not going to be house poor and now you want to start your house search. Before you begin, you should get pre-approved for a mortgage from your financial institution.

Here’s how to wow your financial institution before you buy a house.

1. A credit score of 700 or over will show your bank that you are able to handle making debt payments.

2. Your Total Debt Service Ratio should not be more than 40% of your monthly gross income to be a desirable candidate for a mortgage.

Your totally debt service ratio is your entire monthly housing costs plus all of your other debt payments divided by your monthly GROSS income.

Your monthly housing costs are (mortgage payment, property tax and heating costs). Other debt payments include car leases, credit card payments, student loans etc.

Example

My total housing costs $2000/month and my car payment and student loan payments are $500. I make $50,000/year (gross) so my monthly gross income is $4166.

In this example, my TDSR is 40% so I’m in the clear.

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Break Up Vs. Divorce – Financial Implications

There’s an old saying, what’s mine is yours, what’s yours is mine. Well, in the case of a separation, this may be the best or worst thing that ever happened to you.

The laws governing common-law break ups are not even close to being similar as divorce. The ring matters…… big time.  I’m going to walk you through some of the major differences between common law and marriage in Canada if your love turns sour.

1. Division of Assets. Upon a marriage ending, there is an automatic right to equalize family property acquired during the marriage. So, the spouse with more money will have to pay the spouse with less money, no matter what. If you are in a common law relationship, however, you don’t have that right or obligation. After a break up, if you felt that you were owed assets from your partner, you have to take legal action and make an “unjust enrichment” claim. In other words, you have to hire lawyers and show that your common law partner was unjustly enriched at your financial expense over the years. This can be very costly and take a long time.

In common law, no matter how long you’ve lived together, you aren’t entitled to half the assets upon separation. In marriage, no matter how much harder you worked, you’ll have to pay out to the other partner.

2. Staying in Your House. Upon a marriage ending, there is an automatic right to stay in the matrimonial home, even if it is not in your name and the decision of who keeps the home remains with the partners. In a common law relationship, if your name is not on the deed, you could simply come home one day and find yourself locked out no matter how much you’ve financially contributed to the home.

3. Spousal Support. If you are married, you have an automatic right to receive or obligation to pay spousal support upon separation. If you are living in a common law relationship, you don’t have rights to spousal support until you have lived together for three years.

Furthermore, if you were married, you always have the right to apply for spousal support, no matter how long has passed since you separated. If you were in a common law relationship, you need to ensure that you apply for spousal support within 2 years of separation or you get nothing.

4. What happens without a Will? If you are married, and your partner passes away without a will, you automatically receive a share of your partner’s estate. If you were in a common law relationship in Canada, you have no right to get anything. Instead, you would have to go through the unjust enrichment claim against your partner’s estate.

There is one aspect where the rules of common law break ups and divorces are the same. Children.

When a couple, married or living together, has kids, the rules for child support, custody and adoption are the same.

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Prenups! When and Why

When newly in love, nobody likes having the “what if we break up” chat. But, it’s important. If you’ve got large assets, like a house or investment portfolio, or if you are planning to be a stay at home parent,  these talks are important to ensure that you and your personal finances are protected, just in case.

Domestic Contracts are popularly known as “prenups.” They are a contact that is written between two partners before entering into a common-law relationship or marriage. They allow couples to create their own financial arrangements in the event of a breakup or divorce so that each party feels protected. These contracts must be made in writing, signed by both parties and witnessed in order to make it count.

Cohabitation Agreement

A Cohabitation Agreement is a contact between two people who are living together, or thinking about living together, who aren’t married. The agreement should give instructions as to how to divvy up financial assets in the event of a break up.

Here are the two most common financially crappy things that happen in common-law break ups that could have been avoided by a cohabitation agreement.

1. One partner owns a home, with their name only on the deed and the other partner contributing financially for years by splitting the mortgage and bills. They break up. The partner whose name isn’t on the deed is left with nothing and wasn’t saving all those years because they were contributing to the house, renos etc. If this is you, or you’re thinking of going into this type of situation, get a piece of paper, a pen and a neighbour. Write down what happens financially if you guys break up. Figure it out now.

2. One partner pays down a significant loan for the other partner, then they break up. This also sucks. While this is a wonderful and smart financial decision for any household, if you pay it off and break up just after, that is less than awesome. There are no legal ramifications for getting your money back.

Protect yourself with a cohabitation agreement before you dole out the money.

Marriage Contracts

There is more legal protection for married couples than common law marriages. In a divorce, the family home and assets gathered during the marriage are legally obliged to be split – no matter what. A marriage contract allows you and your partner to decide how you want everything to be divided and opt out of the default rules of the place you live.

NOTE: The courts do have a right to over-rule a domestic contract if it is counter to legislation. For example, if one party has agreed to opt out of their ownership of the matrimonial home (say he or she owned it before the marriage and wants to hang onto that asset), the courts can order the assets be split and apportioned according to family law.  So prenups aren’t foolproof.

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Couples Banking Plan

Did you know that couples who bicker about money once a week are 30% more likely to end in divorce?
When it comes to matters of the heart… money definitely matters.

When couples fight about money, it’s never fun for anyone involved. Most times, it’s just a simple matter of banking.

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