The key to building a strong financial plan for the future is to understand how much money you’re currently spending and saving. Budgeting and tracking your expenses can give you the knowledge and control you need to get through the various financial changes in your life.
We started budgeting and tracking our spending a few years ago to help figure out if we could afford to live on one income after our oldest daughter was born.
Related: How To Make A Better Personal Budget
We cut out a lot of excess spending from our budget just by taking a close look at our expenses for three or four months. Little things like coffee, magazines, snacks and the odd take-out meal can really add up when you don’t pay attention.
Budgeting Made Easy
I use a spreadsheet to track what money is coming in (salary, interest, government benefits) and what’s going out (mortgage, debt payments, utilities).
My personal budgeting spreadsheet has 75 spending categories, which I’ve customized for our own situation. Here’s a look at our home expenses:
| Home Expenses | Monthly ($) | Annual ($) |
| Mortgage/Rent | 2,025 | 24,300 |
| Electricity/Gas | 175 | 2,100 |
| Water/Sewer/Trash | 75 | 900 |
| Phone | 65 | 780 |
| Cable/Satellite | 80 | 960 |
| Internet | 35 | 420 |
| Total | 2,455 | 29,460 |
Fill in all your monthly expenses in one column and your annual expenses in another column. Add up your expenses in both columns and subtract them from total net income on both a monthly and yearly basis. The result is your cash flow surplus or deficit.
Some people think budgeting and tracking your cash flow is a waste of time; that once you pay yourself first it doesn’t matter how you spend the rest of your money. I think that’s a mistake, especially if you’ve never tried it and seen the results for yourself.
David Chilton agrees when he wrote in The Wealthy Barber Returns that not tracking our spending is leading to over-consumption and we’re now carrying debt along side of our savings.
To get any meaningful results from the budgeting process you’ll need to track your cash flow for at least a year. Once we had 12 months of data to look back on, we were able to put together a solid plan for the future by forecasting our income and expenses 12 months in advance.
It takes time to uncover spending patterns and to understand the complete picture of your income and expenses over the course of a year.
Even though I have a good handle on our cash flow, I recognize that there’s always a new financial challenge on the horizon that may require changes to our budget.
Budgeting can help you prepare for major events like buying a home, having a baby or making a career change.
Do you think budgeting is beneficial, or is it a waste of time?
Capital gains are profits you earn through buying and selling capital assets. These include, but are not limited to, stocks, mutual funds and bonds.
In the US, the IRS estimated that it was losing $11 billion per year in tax revenue by taxpayers misreporting their capital gains. As a result, in 2011 they implemented new requirements for brokerages to track and report adjusted cost base (ACB) to investors and to the IRS.
Related: Dividend Tax Credit Explained
The Canada Revenue Agency (CRA) has no such requirements and since Canadian brokerages do not provide investors with complete details on capital gains on T3 or T5 slips, the onus of tracking ACB falls to the investor.
Purchases and Sales
The adjusted cost base of a security for tax purposes is its cost. ACB is tracked for each group of identical properties owned by an individual, e.g. shares of the same corporation, even if they are purchased on multiple dates or held in separate accounts.
Dividend payments don’t affect your capital gains tax unless they are reinvested, i.e. DRIP. The ACB is cumulative until all units are sold.
Related: How To Set Up A DRIP
Here’s an example:
On January 10, 2012 you buy 100 shares of X Company for $63 a share. On May 8, 2012 you buy an additional 60 shares at $72 a share. On September 28, 2012 you sell 50 shares at $75 a share. You pay a commission of $10 per transaction.
- Your initial ACB (January) is $6,310 – 100 shares purchased at $63 plus $10 commission.
- In May your ACB increased to $10,640 – $6,310 plus $4,330 (60 shares purchased at $72 plus commission).
- In September your ACB decreased to $7,315 – $10,640 minus ($10,6450 X (50 shares/160 shares) = $3,325
You incur a capital gain of $415 – 50 shares sold at $75 a share minus $10 commission minus $3,325 (see above calculation).
Return of Capital
Some funds or income trusts such as REITs distribute a portion of your capital with your income. This is called Return of Capital. This amount will be reported on your T3 slips.
Related: Are REIT’s Worth A Look For Yield Hungry Investors?
Return of capital reduces the total ACB by the amount of the return of capital. It will increase your capital gains (or reduce your losses) when the shares are sold.
Example of calculation:
On January 21, 2011 you buy 1000 shares of YREIT at $8.37 per share. In 2011 YREIT distributes .42237 cents per share as a return of capital. On January 30, 2012 you sell all your shares for $11.58 per share. You pay $10 commission on each of your transactions.
- Your initial ACB is $8,380 – 1000 shares at $8.37 plus $10 commission.
- The return of capital decreases the ACB to $7,957.63 – $8,380 – (1000 shares at .42237 cents per share).
Your capital gain in 2011 is $3,612.37 – (1000 shares at $11.58 per share minus $10 commission minus $7,957.63).
Mutual funds and ETFs
If you hold mutual funds and/or ETFs in a taxable account you will receive T3 or T5 slips.
Related: Mutual Funds vs. ETFs
There are two sources of capital gains:
- Internal capital gains – These are a result of trading within the account by fund managers. These gains are reinvested. You simply transfer the amounts from each box on your T3 or T5 slips onto your tax return. (Note that under Canadian tax law, net losses can’t be distributed to investors.)
- Gains from buying and selling – This is trickier to calculate correctly, especially if you’re on a purchase plan.
Use this formula:
- Total amount paid to purchase shares/units
- Minus any fees and commissions
- Plus reinvested distributions (only at year end)
- Minus any return of capital
Adjust the ACB every year you own the security.
Final Thoughts on Capital Gains and Adjusted Cost Base
Maintaining the ACB and calculating capital gains for a large number of securities can be tedious and time consuming, especially if you have stock splits and reinvested dividends. You may want to use a spreadsheet or personal finance software to keep track of this information.
One tool is www.adjustedcostbase.ca.
You should also retain any statements and trade confirmations as a backup.
There are no capital gains (or losses) on tax deferred (RRSP) or tax exempt (TFSA) accounts.
Understanding how your investments are taxed will allow you to plan a better investment strategy.
One of top priorities for many Canadians is to pay off their mortgage early. A recent survey showed that current homeowners believe they’ll be mortgage free by the time they’re 55, which leaves a short window of opportunity to ramp up their savings before retirement.
To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments.
Related: How to pay off your mortgage faster
But homeowners should look at the pros and cons of paying off their mortgage debt early versus taking a slower approach and using the excess cash for other investments. Here’s why:
Low Interest Rates
With recent changes to mortgage rules and record low interest rates continuing for the foreseeable future, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.
Related: How much house can I afford?
The expected return on equities has historically been around eight to 10 per cent. While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there’s potential to earn higher returns by investing in a balanced portfolio.
If you can earn two or three per cent more by investing instead of paying off debt the compounded returns over a few decades can really add up.
We also need to diversify our investments. Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it. By sinking every available dollar into our mortgage in order to pay it off five or 10 years early, we’re neglecting our investments for far too long.
Related: Why baby boomers aren’t prepared for retirement
Instead of putting all your money into one asset – your home – take a balanced approach to build up your savings and other investments.
Pay Off Mortgage Early Or Invest?
Homeowners should consider this question every few years as their financial situation changes.
The answer will be different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first before even thinking about doubling up your mortgage payments or adding to your investments.
Some people are risk averse and will always be better off paying down their mortgage as quickly as possible. If you’ll sleep better at night by taking less risk and living debt free then do it.
Others have a higher risk tolerance and feel more comfortable with investing, and even borrowing to invest to further boost their assets.
Final thoughts
I’m taking a balanced approach by putting an extra $800 a month on our mortgage on top of our regular monthly payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.
I’ll still pay off my mortgage early, but it will take about 10 to 12 years to be completely mortgage free. Being mortgage free before I’m 45 gives me plenty of time to ramp up my investments for another decade or two before I retire.
What do you do with your extra money? Do you want to pay off your mortgage early or build up your investments?