Today I’m interviewing Shannon Lee Simmons for savewithspp.com. She is a Certified Financial Planner, Chartered Investment Manager, media personality, personal finance expert and founder of the online New School of Finance. Shannon has also won a whole slew of awards including being named one of Canada’s Top 30 under 30. She has a monthly column for the Globe and Mail as well as being a personal finance columnist for CBCs On The Money and Metro Morning.
So Shannon is a very busy lady!
I heard her speak at the 2017 Canadian Personal Finance Conference last November, where she debunked many financial myths that inhibit people from saving, investing and ultimately retiring successfully. And that’s what we’re going to talk about today.
Hi, thanks for having me Sheryl.
Q: First of all tell me what you mean by precarious work and why you think we need to revise dated financial assumptions in light of the rise of precarious work?
A: Precarious work basically means working in the gig economy, freelancing or being self-employed. You’re not entirely sure where your money’s going to come from maybe even a month from now or two months from now. And to me that’s what it means to be precariously employed from a financial planning point of view, and I think that can create stress and anxiety for a lot of people.
So if we have a whole bunch of people who don’t necessarily know where their next paycheck is going to come from, they need to have really big emergency accounts, and that may mean stepping back from investing and putting money into RRSPs until they can make sure that they’re safe and secure. That’s why the rise of precarious work has really changed the way that I give financial advice.
Q: Under normal circumstances what would the three main elements of financial advice be?
A: I think that the three things we hear a lot are:
- Don’t leave money waiting on the sidelines. Make it work for you by investing it.
- Own a property versus renting.
- You need a million dollars to retire on.
Q: Let’s start with rent versus buy. Home ownership is the Holy Grail in Canada and many people view home equity as their retirement nest egg. What percentage of income should people plan to spend on a mortgage and other housing costs?
A: I still think that buying is a wonderful way to build equity. The problem arises when you buy a home that you can’t afford. I think that the thing that you want to make sure of is that you don’t have a mortgage that’s more than five times your family’s household income. That means if you make $100,000 a year you shouldn’t be carrying a mortgage that’s more than $500,000, and you might even want to be more conservative (i.e. four times your household income) because that’s going to allow you to still make payments and have a little bit of extra money left over for life and other types of savings.
Q: Many of my readers or most of my readers are Saskatchewan residents, and the median price of a two-story home in Saskatoon is approximately $412,800 dollars. What would the qualifying income typically be for a person to buy a house of that value?
A: Oh that’s a really hard question to answer because I’m not a mortgage broker. From an affordability standpoint, I would say an income of anywhere from $70,000 to $100,000 couul support a home in that price range. However, some people have debt or they have massive car payments. It comes down getting a customized answer for yourself that will allow you to handle the other bills in your life.
Q: If an individual or family cannot qualify for a mortgage or they choose to rent how can they accumulate a comparable nest egg for their retirement?
A: What’s really exciting about the shift happening in financial planning is we’re seeing renting as sometimes the smarter financial decision. What you need to do as a renter, is just make sure that you are taking advantage of the fact that you don’t have to fix the furnace if it breaks, or if the roof is leaking it’s not your problem. And so if you don’t have to spend $25,000 over five years on home maintenance you can save the money instead.
I say to people who are renting, be proud that you’re renting, but just make sure that you’re also renting affordably because where renting becomes a silly throwaway piece of advice is if the rent is higher than 30% to 40% of your after tax income. So I would say you want to keep your rent in and around 30% to 40% of your after-tax income. Then you want to be making sure that you’re saving for your retirement portfolio at least 10% of your gross income if not more, because you’re not building that equity every single month paying off a mortgage.
Q: In view of the more precarious employment environment, how much should people keep in an emergency fund?
A: Usually we hear like three months, but if you’re precariously employed I would blow that out to five or six months. If you have a large emergency account then you have less fear on a daily basis because you know that even it’s a slow season or if your contract doesn’t get renewed that there’s money in the bank that will help you survive and pay your bills and eat for at least five to six months.
When I say five to six months I mean basics like bills and groceries and toiletries, because if you don’t have any money coming in the chances are you’re probably going to pull in your spending on discretionary items like entertainment until money comes back into the household.
Q: That’s a challenge though I guess because if you do have casual or precarious employment then the problem becomes to find the cash even to grow that emergency account.
A: One of the things that I talk about is just staying lean. If more and more of our wages are stagnating and many of us are precariously employed, we need to make sure that we don’t leverage ourselves too much or really spend outside of our comfort zone, outside of our means so to speak. That might mean kind of adjusting expectations a little bit to become more realistic.
Q: If an individual has to spend the emergency funds in a period of unemployment or other crisis, how important is it to replenish it as soon as possible?
A: Let’s say you just had an emergency or you’ve had a period of unemployment and you just about emptied everything out. The first thing you want to do when money starts coming back into the house, is to pay off any debts that you might have racked up during that period of time. That obviously means credit card debt first, followed by any unsecured lines of credit. Replenishing the emergency account is the next priority. Then and only then will you step into investing land, which is like RRSPs and TFSAs and building that bigger nest egg.
Q: The standard mantra is to invest cash and make it work for you. In your view does this also apply to emergency funds?
A: No you should never invest your emergency fund. It should be liquid, safe and accessible at all times. The money that should get invested is your longer-term dollars that have time to go up and down a little bit with market volatility.
Q: How crucial is it for Canadians looking for financial stability to stay out of debt or pay down debt?
A: Paying off debt is important not only so your net worth rises and because obviously you’re spending money on interest that could be going back into your pocket. But also, I think it gives you confidence and motivation to move forward with your finances. The fact is, when we carry debt for so long, we start giving up. And that attitude and that mindset when it comes to money is detrimental because it will continue and bleed into other areas, and then you’re never going to get back on your feet and you’re never going to move forward. Imagine making that last payment on your debt. How exciting is that to finally have the use of your money to spend or to save instead of servicing your debt?
Q: TFSA or RRSP for savings? And why?
A: TFSA all the way. Both are tax shelters you can invest in for the long term. The TFSA doesn’t have that deduction that everyone gets very excited about during RRSP season. But my view is if you can only save enough to max out your TFSA, I would say TFSA first then RRSP. And if you can only save enough to max out your TFSA every year (say $5,500), then chances are your income is probably not 80 or 90 or $100,000 a year where you’re really getting a big bang for your buck with your RRSP tax refund. If you are earning that much, then you can likely save the first $5,500 in a TFSA and then even still save an additional amount to the RRSP afterwards, and take advantage of some of the tax savings.
Money in a TFSA is also more accessible, so if your mortgage is up for renewal four years from now and interest rates have skyrocketed, you could take money from your TFSA and put it on the mortgage, but you can’t do that with an RRSP without tax consequences. And last but not least, in retirement when you take money out of the TFSA it’s tax free. Your marginal tax rate in retirement is much lower and entitlement to government benefits like OAS will not be reduced or eliminated.
It’s never been more important for all of us in Canada to qualify for as many inflation- protected guaranteed pensions as we can at the end of our working career because hardly anyone has workplace pensions anymore.
Q: If you could give us three quick pieces of financial advice what would they be?
A: Okay the first thing would be, do not overextend yourself financially. Don’t buy a house you can’t afford. If you are going to rent, rent affordably because if you have those fixed costs under control then you have a lot more flexibility over what you can do with the rest of your money. So that’s the number one thing I would do.
The second thing would be to pay off debt and build an emergency account before you do any other kind of savings. Doing those two things will put you back in control of your cash flow and it will motivate you to make changes going forward. It will also make you less afraid all the time.
And the third thing I would say and we just kind of went over this, would be once you get to that point where you want to start saving, max out your TFSA first then save the balance in your RRSP.
That’s great thank you so much for joining me today Shannon Thanks so much for having me, Sheryl.
*This is an edited transcript of a podcast recorded in January 2018.
|Written by Sheryl Smolkin|
|Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.|