I’ve made my share of bad financial decisions over the years, but nothing feels worse than when a salesperson convinces you to buy something that’s not in your best interest. These kinds of rip-offs usually occur when one party has more or better information than the other.
Think about the first time you bought a car or the first time you went to the bank to sign your mortgage documents. Who controlled the conversation? If you were like me, you probably deferred to the “expert” sitting across the desk and happily signed everything they put in front of you.
Related: 10 Fees To Avoid Paying
What you might not have known at the time is that some of the extras, such as extended warranty coverage or balance protection insurance for your credit card, were completely optional and most likely a giant waste of money.
Here are four big financial rip-offs to avoid:
Mortgage life insurance
If you own your home, chances are you were offered mortgage life insurance from your bank. This type of insurance is not a requirement to qualify for a mortgage, but it’s made to look that way by many lenders who suggest it at a time when you’re vulnerable and haven’t shopped around. You’ll even have to sign a waiver form to decline the coverage.
The reality is that it’s generally not a good idea to buy mortgage life insurance from your bank. It’s the one financial product that goes down in value as you continue to pay – also known as a declining benefit. Term life insurance is much cheaper and offers greater protection.
Extended warranty coverage
It’s almost guaranteed that you’ll be asked to buy an extended warranty the next time you purchase an appliance or any high-end piece of electronics. The reason for the hard sell is that retailers have big profit margins on these contracts. Stores keep 50 percent or more of what you pay for extended warranties or service plans, according to Consumer Reports research.
Consumer Reports recommends against buying extended warranty coverage. One reason is that most repairs may be covered by the manufacturer’s warranty, which should last at least 90 days or longer. Their research suggests that if a product doesn’t break while the manufacturer’s warranty is in effect, it probably won’t during the service-plan period.
Related: Gadget Insurance – Is It Worthwhile?
Many credit cards will double the manufacturer’s warranty when you use the card to make the purchase and register the product.
Balance protection insurance
One common telemarketing pitch from banks and credit card lenders is for balance protection insurance.
For a cost of about 99 cents per $100 of the average daily balance (about 1 percent per month) you can protect your credit rating against unexpected job loss or disability.
Customers might agree to add this protection to their credit card thinking that because they pay off the balance in full each month they’ll avoid the fee. Not so. The fee can based on the amount owing on your statement due date, or on your average daily balance, depending on the card issuer.
Not only that, the “protection” is riddled with exclusions, making it difficult to make a claim should you become ill or lose your job.
A CBC Marketplace investigation revealed how bank employees mislead and up-sell consumers on pricey credit card balance protection insurance. I’ve had personal experience with this, as CIBC added the insurance protection to my credit card account last year without my permission. More recently, my wife signed up for a card with TD and upon activation the customer service agent pushed balance protection coverage. When my wife declined, the agent persisted and asked, “why not?”.
Balance protection insurance is aggressively marketed to unsuspecting customers and should be avoided like the plague. You’re much better off protecting yourself with a small emergency fund, proper term life insurance and disability insurance.
Door-to-door sales pitches
It may be tempting to sign up for a home security system, or switch to a new energy supplier to save a few bucks. But always be cautious about door-to-door sales pitches. They may use deceptive pitches or questionable tactics and sell substandard, but expensive products or service contracts.
Related: City Councils, Please Ban Door-to-Door Sales
A reputable business shouldn’t require your signature at the door. Take your time and read the documentation at your leisure. If the sales pitch has a limited time offer attached to it, ask the salesperson to leave immediately and close your door.
Shop around for competitive quotes from businesses offering similar services. Contact the Better Business Bureau to investigate the company or to get a list of businesses offering similar service.
Before you sign any contract, take the time to read the fine print. Don’t get pressured into signing a contract on the spot.
Final thoughts
I’ve fallen for the extended warranty pitch a few times before and I’m guilty of signing up for mortgage life insurance on my first mortgage term. These days I’m a lot more cautious and borderline skeptical of any sales pitch that comes my way. I can spot a rip-off or a scam a mile away.
Related: Why Do People Fall For Telemarketing Scams?
What other rip-offs should you watch out for?
“I don’t invest in my RRSP anymore because I’ll have to pay tax on the withdrawals.” This type of thinking around RRSPs has become increasingly common since the TFSA was introduced in 2009.
The anti-RRSP crowd must come from one of two schools of thought:
- They believe their tax rate will be higher in the withdrawal phase than in the contribution phase, or;
- They forgot about the deduction they received when they made the contribution in the first place.
No other options prior to TFSA
RRSPs are misunderstood today for several reasons. For one thing, older investors had no other options prior to the TFSA, so they might have contributed to their RRSP in their lower-income earning years without realizing this wasn’t the optimal approach.
Related: The beginner’s guide to RRSPs
RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.
Taxing withdrawals
A second reason why RRSPs are misunderstood is because of the concept of taxing withdrawals. The TFSA is easy to understand. Contribute $6,000 today, let your investment grow tax-free, and withdraw the money tax-free whenever you so choose.
With RRSPs you have to consider what is going to benefit you most from a tax perspective. Are you in your highest income earning years today? Will you be in a lower tax bracket in retirement? The same? Higher?
The RRSP and TFSA work out to be the same if you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions. An important caveat is that you have to invest the tax refund for RRSPs to work out as designed.
Future federal tax rates
Another reason why investors might think RRSPs are a bum-deal? They believe federal tax rates are higher today, or will be higher in the future when it’s time to withdraw from their RRSP.
Is this true? Not so far. I checked historical federal tax rates from 1998-2000 and compared them to the tax rates for 2018 and 2019.
The charts show that tax rates have actually decreased significantly for the middle class over the last two decades.
Someone who made $40,000 in 1998 would have paid $6,639 in federal taxes, or 16.6 percent. After adjusting the income for inflation, someone who earned $59,759 in 2019 would pay $7,820 in federal taxes, or just 13.1 percent.
Minimum RRIF withdrawals
It became clear over the last decade that the minimum RRIF withdrawal rules needed an overhaul. No one liked being forced to withdraw a certain percentage of their nest egg every year, especially when that percentage didn’t jive with today’s lower return environment and longer lifespans.
In 2015 the federal government made changes to the minimum RRIF withdrawal table, bringing it more in-line with today’s reality:
The dreaded OAS clawback
Canadians who receive Old Age Security and have annual income between $75,910 and $123,386 will have all or part of their OAS pension reduced. This clawback is especially concerning for retirees whose minimum RRIF withdrawals push them over the income threshold.
Canada Revenue Agency uses the following example on its website:
The threshold for 2018 is $75,910.
If your income in 2018 was $86,000, then your repayment would be 15% of the difference between $86,000 and $75,910:
$86,000 – $75,910 = $10,090
$10,090 x 0.15 = $1,513.50
You would have to repay $1,513.50 for the July 2019 to June 2020 period.
This is a legitimate concern for retirees. No one wants to lose out on benefits that they’re entitled to receive. An advisor or tax accountant can help you determine a strategy that best optimizes your retirement withdrawals.
One such strategy is to make small withdrawals from your RRSP between the ages of 60-70 and delay taking CPP and OAS until age 70. This reduces the size of your RRSP for when you are forced to convert it into an RRIF and make mandatory withdrawals. It also increases your CPP and OAS benefits by 42 percent and 36 percent, respectively.
Related: CPP Payments – How Much Will You Receive From Canada Pension Plan
Canada Child Benefit
Parents with children aged 17 and under can be eligible to receive a tax-free monthly payment from the Canada Child Benefit. The CCB is a means-tested program, so the more income your household earns the less money you receive from this government program.
The Canada Child Benefit is completely phased out when your income is between ~$157,000 and ~$206,000, depending on the number of eligible children in your family.
The government uses adjusted net family income to determine how much you’ll receive from the program. Since RRSP contributions reduce your net income, it could be wise for young families to prioritize RRSP contributions ahead of TFSA contributions to reduce their net family income and help them receive more from the Canada Child Benefit the following year.
RRSP Matching
Some lucky employees work for companies that offer a matching program for your RRSP contributions. This is the best deal out there for savers. A guaranteed 100% return on your contributions. In fact, one could argue that contributing up to the maximum of your company’s RRSP matching program could be prioritized over paying off a credit card balance at 19% interest. It’s that valuable.
A company match will typically have some limits or restrictions. For example, your employer could match contributions up to 5% of your salary with the caveat that you must contribute to a group RRSP plan at a particular bank or investment firm.
It’s important to note that, even if the investment options are terrible high fee mutual funds, you should still contribute the maximum and take advantage of these generous matching dollars. You can always transfer the money over to a low fee indexing portfolio at some point in the future.
Final thoughts on RRSPs
RRSPs aren’t a scam; they’re a still a critical tool for Canadians to save for retirement. They’ve just got a bad rap over the years because of some misguided thinking around withdrawals, taxes, plus the introduction of a new and seemingly better (re: tax-free) savings vehicle.
RRSP contributions are still a key component of my financial plan. I’ve caught up on all of my unused contribution room and so now my goal each year is to max out my contribution limit (which is reduced by my pension contributions).
Related: TFSA Contribution Limit and Overview
TFSAs are great, and they get filled up next. In fact, when we paid off our car loan a few years ago we started catching up on our unused room and maxing out our TFSAs.
Both accounts are valuable parts of our financial plan and, along with my pension, will make up the bulk of our income in retirement.
Savers rejoice! We’re in the midst of a high interest savings war. The battle for your business isn’t being fought by the big banks, but by upstart FinTech companies looking to build up deposits. Indeed, the big five have mostly ignored the high interest savings account market. Why bother, when they’re hauling in record profits elsewhere?
That meant savvy savers had to look elsewhere to stash their cash and keep ahead of inflation.
LBC Digital
The first shot was fired several months ago when the relatively unknown LBC Digital (an offshoot of Laurentian Bank) started promoting its high interest savings account that pays 3.3 percent with no minimum balance required and no monthly fees.
That kind of interest rate was sure to draw wide-spread attention, but the sign-up process and user experience has been clunky at best. LBC also must have been getting some high-roller deposits because they recently changed to a tiered structure that pays 3.3 percent on balances up to $500,000 and 1.25 percent on balances above that threshold.
Time will tell whether the 3.3 percent interest rate is here to stay. Colour me skeptical.
Shades of EQ Bank’s launch four years ago, I thought. Back in 2016, EQ Bank burst on the scene offering a chequing / savings account hybrid that paid a whopping 3 percent interest. Deposits flooded in, and EQ Bank had to temporarily halt new account sign ups until it sorted out its back-end procedures. The 3 percent rate didn’t last long, settling in at a still competitive 2.3 percent everyday interest.
Wealthsimple Cash
Next to make a splash was the always creative and customer-centric Wealthsimple. Last week, the company best known as Canada’s top robo advisor announced a new product – Wealthsimple Cash – a saving and spending account that pays an eye-opening 2.4 percent interest.
Wealthsimple Cash has no monthly account fees or low balance fees. But it’s the ‘coming soon’ features that have people talking. A prepaid Visa card called the Wealthsimple Cash card will allow clients to make purchases from their account like a debit card (anywhere Visa is accepted). Clients will also soon be able to withdraw cash from ATMs across Canada, send e-Transfers, and pay bills. There’s also a promise of no foreign exchange transaction fees coming soon. The Cash card will even be made out of Tungsten metal.
I noticed a lot of confusion about whether Wealthsimple Cash deposits were covered by CDIC (they’re not). Funds are actually protected by CIPF (Canadian Investor Protection Fund) coverage through ShareOwner, Wealthsimple’s custodial broker.
I’m getting lots of questions from readers about the new Wealthsimple Cash account (hybrid chequing / savings with 2.4% interest) and its lack of CDIC coverage. I reached out to clarify what this means, and here’s what I found out:
— Boomer and Echo (@BoomerandEcho) January 23, 2020
EQ Bank
Not to be outdone, EQ Bank surprised everyone when it announced that its everyday rate of 2.3 percent got bumped up to 2.45 percent. The EQ Bank Savings Plus Account has no minimum balance, no banking fees, plus unlimited e-Transfers, bill payments, and EFTs.
Accounts are limited to a $200,000 maximum per customer. All deposits at EQ Bank are also eligible for CDIC deposit insurance.
Tangerine and Simplii
Once thought of as the pioneers of no-fee banking and high interest savings, Tangerine and Simplii (formerly PC Financial) have fallen behind these young upstarts. Both offer a pathetic 1.05 percent on their high interest savings accounts.
Their go-to acquisition strategy is to offer teaser rates for 3-6 months before the interest rate drops back down to 1.05 percent. The current promotion has Tangerine offering 2.75 percent for five months, while Simplii is offering 2.8 percent until May 20.
The Globe and Mail’s Rob Carrick also weighed in on the savings account interest rate war, led by these feisty FinTech upstarts.
This Week’s Recap:
I made a big move with my portfolio this week, switching to Wealthsimple Trade – Canada’s first and only zero-commission trading platform.
WestJet just (temporarily) deposited $50 into my WestJet Dollars account. I wrote about WestJet’s clever marketing trick over on the Rewards Cards Canada blog.
I’m finally getting into a groove after my third full week working from home this year. I’ve been doing a lot more financial planning than I expected – which has been a pleasant surprise. Freelance work has also picked up, so I find my days just fly by.
My wife and I joined a gym nearby and visit there three times a week before lunch to break up the day. I’ve stuck (for the most part) to not working during the evenings or weekends. It’s a tough habit to break when you’ve been used to doing that for a number of years.
We’ve also slowly switched to a plant-based diet (my last taste of beef was an Irish Stew in Dublin last summer). Our reasons are primarily health, environmental, and ethical. The jury is still out on whether this diet is actually saving us money. We tend to buy lots of fresh fruit and vegetables, which are not exactly cheap – especially in the winter.
I’m tracking our food budget more closely and hope to report on any significant difference in our spending. In the meantime, here’s a great post on the How To Save Money blog on cheap vegan food and how much you can save by going vegan.
Weekend Reading:
Our friends at Credit Card Genius have updated the best gas credit cards in Canada for 2020.
The brilliant Morgan Housel uses a weight-loss analogy to explain why wealth is what you don’t spend:
Food “compensation” seduced its way into 90% of the exercisers’ lives. Another study found that “people fresh from the gym overestimated their energy use by up to 400 percent and ate more than twice as many calories” as they had just burned off.
Something obvious but hard to deal with in real time is that exercise only works when its gains aren’t cashed in.
Are active managers really better in downside protection? It’s a common argument against passive investing, but the data doesn’t hold up.
Some good thoughts by Michael Batnick on the active vs. passive debate: Save more, stay invested, and avoid market timing.
Millionaire Teacher Andrew Hallam is such a prolific writer and with his latest post on how to be a great investor he channels his inner Norm Rothery to come up with some wild metaphors:
“The Russian stock market, for example, offers an intoxicating call. It grew faster than a crowd offered free vodka near the Kremlin. It swelled 53.2 percent in 2019, when measured in USD.”
Michael James reports on his 2019 investment returns. Not bad for a newly retired investor!
A great post by My Own Advisor blogger Mark Seed about staying invested even in the face of uncertainty.
In his latest Common Sense Investing video, Ben Felix looks at market forecasts and says there are two big problems with these forecasts – they often make investors nervous, and they are usually wrong:
PWL Capital’s Justin Bender must be the leading expert on foreign withholding taxes in Canada and in his latest blog post takes an in-depth look at FWT on equity ETFs.
Dale Roberts at Cut The Crap Investing says not to let foreign withholding taxes drive the ETF investing bus.
An interesting post by Nick Maggiulli debating whether big tech is taking over the stock market.
Bank of Canada governor Stephen Poloz shares an idea about how splitting home ownership with investors could make housing more affordable.
A Wealth of Common Sense blogger Ben Carlson explains why owning a home is not for everyone.
Preet Banerjee looks at the pain of paying – how the method of paying affects spending and happiness:
Global News updates its annual look at the best cellphone plans in Canada – including which deals are worth the money.
A detailed breakdown of ride sharing versus car ownership and why you might want to ditch your car.
Finally, the real challenge of the next decade is matching your retirement dreams with reality.
Have a great weekend, everyone!