Today I’m answering reader mail for a feature I call the Money Bag. I’ll answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about all the money things you’re dying to know.

To start, we’ve got a question from Robb (not me) who received an early inheritance and is looking for the best way to invest the lump sum to meet some unique objectives:

Investing a Lump Sum for Monthly Income

“Hi Robb, today my wife and I received news that my mother-in-law would like to gift us $300,000. The money is currently in a CIBC income fund paying her approximately $1,500 per month.

 

Her only request is that we continue to pay her $1,500 per month while she’s alive. She turns 85 years old this summer. It is a request we are more than happy to continue for her.

 

Our question is: What is the best way for us to invest the funds for the short-to-medium term to meet the goals of paying her $1,500 per month, manage the additional tax we will face with the additional income, and keep the funds earning a return while being able to access it in case my mother-in-law needed a lump sum for some unforeseen expense. We’d appreciate your professional opinion and insight.”

Hi Robb, thanks for this question. Very interesting. Here’s an option for you to consider.

What I’d recommend is putting $54,000 (three years’ income for your mother-in-law) into a high interest savings account such as EQ Bank Savings Plus Account. The account pays a 2.3% everyday interest rate* and acts as sort of a hybrid chequing/savings account. Funds are eligible for deposit insurance.
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

Then I’d take $90,000 and invest it into a GIC ladder – something like this:

  • 1-year GIC = $18,000
  • 2-year GIC = $18,000
  • 3-year GIC = $18,000
  • 4-year GIC = $18,000
  • 5-year GIC = $18,000

When the 1-year GIC matures, put that money into the EQ Bank savings account to replace your mother-in-law’s first year of spending. Rinse and repeat each year as those GIC’s mature.

You have lots of options with the remaining $156,000. One suggestion would be to put a lump sum onto your mortgage (you might be allowed to put down 15 percent of the original mortgage, for example. That might be $45,000 or $50,000.

You could use another $50,000 or so to accelerate some of your RRSP and TFSA contribution goals (i.e. make two years’ worth of contributions to catch up on any unused contribution room).

Finally, you could open a non-registered (taxable) account and invest the remaining $50,000 or $60,000 in something like VBAL – the one-stop balanced ETF from Vanguard.

With this balanced approach you’ll have three years worth of liquid cash, plus the GIC’s renewing every year for another five years, so essentially eight years worth of income for your mother-in-law. You’d also have the VBAL investment acting as more of a longer term hedge.

Plus, you’ll have made big contributions to both your mortgage and to your retirement savings. I’m sure your mother-in-law would feel good about helping you accelerate your retirement goals while still preserving her monthly income stream.

After two or three years you could evaluate her health and how the plan is working and make any necessary adjustments. If you feel you need to have a larger lump sum available for health reasons or an unforeseen expense you could certainly sell some VBAL (or if markets are down use some of the EQ Bank savings and replenish it when markets pick back up).

You would have to pay some taxes on the interest income and to deal with that perhaps you keep an extra few thousand of the lump sum on hand in your personal chequing/savings account to take care of that (the extra RRSP contributions should offset any taxes owing, though).

Best credit card for general spending

Here’s Andrew, who wants to know what the best credit card is for everyday spending.

“Hi Robb, I have the Capital One Aspire World Elite MasterCard (grandfathered version) with 2 percent return on spending. Do any other rewards credit cards have comparable returns to this card on general spending? The BMO World Elite and MBNA World Elite used to be comparable, but returns on both have been devalued.

 

I do also have the American Express Cobalt and Scotia Momentum Visa Infinite for spending in specific high-yield categories such as groceries and gas, but that’s not what I’m asking about.”

Hi Andrew, I’ve found that nothing beats the 2 points back on every purchase offered by the grandfathered Capital One Aspire Travel card and so that’s why, like you, I’ve hung onto it and still use it today. (Ed. Note: Capital One unfortunately closed the Aspire Travel card to new applicants some time ago but continues to keep it open for existing cardholders).

I will say that I’ve gotten more into credit card churning lately and so if I have a new rewards card that needs to reach a minimum spending requirement before the bonus points kick-in then I will funnel all of my spending onto that card until I reach the minimum spend (i.e. spend $1,500 in three months). The return on these bonus points typically far outweighs the 2 percent back I’d earn with the Capital One card.

Here’s what I have in my wallet:

Daily spending

  • Capital One Aspire Travel World Elite MasterCard – Everyday spending when not churning a card. Also useful for Costco shopping (pays 2x points on every purchase).
  • American Express Cobalt – Groceries at Safeway, Save-On), plus liquor, and dining out (pays 5x points in these categories).
  • PC World Elite MasterCard – For groceries and gas at No Frills (30 PC points per dollar spent at Loblaw stores and Shoppers Drug Mart).

Travel cards

  • Scotia Passport Visa Infinite – no foreign exchange fees
  • American Express Platinum Card – big bonus points, unlimited airport lounge visits, hotel perks
  • Marriott Bonvoy American Express Card – hotel points, perks
  • RBC WestJet MC – airline points, perks

Churning cards (I always keep an eye out for these promotional offers)

  • American Express Gold Card – when it’s first year free and 25,000 bonus points
  • Scotia Amex Gold – when it’s first year free and 15,000+ bonus points
  • RBC Avion Visa Infinite – when it’s first year free and 25,000 bonus points
  • TD Aeroplan or First Class Visa Infinite – when it’s first year free and 25,000+ bonus points
  • CIBC Aventura Visa Infinite – when it’s first year free and 25,000+ bonus points
  • BMO World Elite or World Elite Air Miles – when it’s first year free and 35,000 points or 3,000 Air Miles

And, you can check out the always up-to-date hot credit card deals (courtesy of Credit Card Genius) in the links below this post.

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17 Comments

  1. Alice on March 19, 2019 at 4:45 am

    Hello.
    In regards to the letter from Rob, “Investing a Lump Sum for Monthly Income”, why do you choose investmemts for him which pay Lower rates than What the money is already invested in?

    • Garth on March 19, 2019 at 6:30 am

      I agree with Alice. Tell us more about this CIBC income fund that is currently yielding 6%. I suspect there is either a typo here or there is more to this story…

      • Garth on March 19, 2019 at 6:32 am

        I suspect it is one of those funds that includes a ROC as part of your so called yield…

  2. Wmdm on March 19, 2019 at 6:40 am

    I have two daughters who haven’t contributed to TFSA’s as they are raising their family. I would like to max out their availability’s however am concerned that they may dip into the accounts. Is there a methodology that I could put a restriction on them to not have access to the accounts for a period of time? I would like an account that limits access for several years and compounds interest.
    Cheers!

    • Tamir on March 19, 2019 at 9:27 am

      Hey Wmdm,
      This is a wonderful idea to help your adult children and maximize the tax sheltering and growth of your money for them, however the language you use to describe them is unsettling.
      If you have two daughters that are eligible for TFSAs that means they are at least 18 years old, legally adults, and should maybe be treated as such.
      That being said, you could go to the bank with them to open said accounts, give them a cheque for the amount to contribute, and purchase a non-cashable GIC.
      Before you do that, it may be more prudent to have a mature discussion about finances with your adult children first.
      Best of luck!

  3. Robb Engen on March 19, 2019 at 6:51 am

    Hi Alice & Garth, these monthly income funds can be alluring and the CIBC fund in particular does pay an attractive yield of 6.15%. Unfortunately, as is the case with most of these bank income funds, the yield is so high because it is paying you back with your own capital (return of capital, or ROC).

    The fund also comes with a MER of 1.47%. That means this fund needs to earn more than 7.62% before the MER just to cover its distribution. That seems unlikely, given the fund’s conservative asset mix (basically a balanced fund of 50/50 equities and cash) .

    Indeed, its 5-year annual return is just 3.86% while its 10-year return is 5.89%.

    One way to combat ROC is to reinvest your own distributions back into the fund rather than take them as cash for spending. But this runs counter to what the reader asked, which is to provide $1,500 per month in income to his mother-in-law while also enjoying some fruits of an early inheritance.

  4. Bob on March 19, 2019 at 11:21 am

    Regarding credit cards…do you only keep the card one year (the free year) then end it? and subsequently how long do you have to wait to re apply for that card and the first year free offer…also do you monitor all of the cards you keep active by using a variety on online sites? seems a huge amount of time invested to pay them on time to avoid interest etc, annual fees are also a concern for your keeper cards, and finally does flipping cards affect ones credit rating?

    • Robb Engen on March 19, 2019 at 9:10 pm

      Hi Bob, with those churning cards I typically keep them for 6-9 months and then cancel well before the annual fee comes due. Reapplying can depend on the issuer, but with some cards I’m on my fourth go around and still receive the welcome bonus. I typically wait up to a year before doing that (at least I’ll wait until it has a really strong offer again). For sure you’d want to wait at least 6 months.

      Monitoring the cards can be a pain when you have a few on the go. Some people use a spreadsheet to list all their cards, when they applied, what the bonus and minimum spending requirements are, when the annual fee kicks-in, etc. I need a better system, but so far I’ve been able to manage it without much hassle.

      A new credit inquiry typically means a 10 point drop in your credit score. Probably not a good idea to churn if you’re about to apply for a mortgage or line of credit. But otherwise as long as you pay your bills on time your credit score will bounce back.

      • Bob on March 21, 2019 at 8:44 am

        Thank you, for your time and all of the wonderful advice in this blog!

  5. Dan on March 19, 2019 at 11:39 am

    Our oldest son’s financial options are becoming limited by his youthful bad financial habits which resulted in a bad credit rating. Is there anything we can do to help him improve his situation with the resources we have?

    • Robb Engen on March 19, 2019 at 9:20 pm

      Hi Dan, that’s a tough one as some people need to go through that financial pain on their own before they figure things out. I know I made bad choices in my early twenties and then spent my late twenties having to fix those mistakes (credit card debt) instead of saving for the future.

      Repairing a credit rating takes time and discipline. On one hand you need to show that you’re a responsible borrower and have some credit activity on file. On the other hand, you don’t want the temptation to abuse credit and dig a deeper hole.

      One option is to get a low limit credit card (say, $500) and put a recurring payment on it like a monthly Netflix subscription or a cell phone bill and then pay that bill off in full every month like clockwork. Don’t use it for anything else.

      Of course you could always offer to pay off his debt as a gift or with a low interest loan, but that’s always a delicate situation between family. You don’t want to enable more bad behaviour, but you don’t want to see him struggle.

  6. Andy D on March 19, 2019 at 11:55 am

    Hi Robb
    On that gift of $300,000… don’t they have to pay a chunk of income tax on that?
    Maybe 30% 40% or so

    • Robb Engen on March 19, 2019 at 9:21 pm

      Hi Andy, there is no gift tax in Canada.

      • Kelli on March 26, 2019 at 9:09 pm

        Just a note for the PC MasterCard. If you pay off the balance regularly they give bonus points as well. Couldn’t figure out how I would have 20 bucks in points to cash in. Paid off the balance regularly. That’s smart!!

  7. Amanda L. Moss on March 20, 2019 at 5:22 am

    The PC MasterCard is actually 30 PC Optimum points on every dollar spent regardless of where you spend them.

    • Robb Engen on March 20, 2019 at 1:55 pm

      Hi Amanda, no that is not true – it’s 30 points at Loblaw stores but only 10 points everywhere else. Actually, it looks like they upped the bonus at Shoppers Drug Mart so you get 45 points per dollar spent.

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