This past week I met Judy, a recently divorced single mom.
Judy is a classic example of what can happen when your life goes off the rails and you spend all of your energy just staying grounded. Back in 2011 Judy’s eight year marriage imploded and she found herself with an 18 month old baby, a mortgage and a lot of heartache.
At the time, Judy received similar advice to what I gave Ryan last week. “Don’t make any major decisions while you are hurting.” So when the assets of her marriage were divided she took approximately $25,000 in cash and parked it in a money market TFSA and a non-registered mutual fund and said “I’ll deal with that later.” Later, has turned into three years and in that time her money market TSFA has returned a whopping $15 on an initial investment of over $15,000 and her non-registered mutual fund is costing her approximately $300 a year in income tax.
Now I don’t want to make any judgements on Judy’s state of mind through the divorce and whoever told her not to make financial decisions while she was reeling was right. But I highly doubt anyone intended for it go on this long without making a few changes. Waiting three years to do something has cost her hundreds, if not thousands, of dollars. After speaking with Judy for a while and showing her where things stood today I looked her in the eye and told her as gently as I could, “later, is now.”
Money market funds earn virtually no interest. They are worse than your average savings account. In 2013 Judy’s money market account returned $5.00 on a deposit of $15,194.00, for you math whizzes out there, that’s 0.03%. The first question Judy needs to ask herself is what am I holding that money for and when will I need it? Through further discussion we decided two things, first she doesn’t need that much liquid cash, so we moved half of it out into an RRSP that will earn between 6 and 8% and we took the rest and put it into a High Yield TFSA account that will earn between 2 and 3%. She still has access to liquid cash in an emergency but even on that smaller number the interest earned will be almost 30 times what she earned last year.
Second we moved the non-registered investment into the same RRSP environment. In Canada you can differ up to 18% of your income annually into an RRSP. The result is you will receive a tax credit for that money until such time as you draw it out to live on. The money Judy had in a non-registered investment was earning interest of approximately $800 per year but because it was not registered as an RRSP that interest had to be declared as income thereby increasing her tax on the year. By moving that investment into an RRSP she is now able to see that $800 in growth continue to compound tax free until she starts using it to live on or turns 71, whichever is sooner. Because Judy is only 40 years old, if she works until age 65 she could watch her money grow for 25 years before being forced to pay any tax on it. After explaining this to her, Judy decided to place approximately $19,000 in an advanced profile mutual fund which is currently returning between 6 and 8%, with any luck that money could grown to over $150,000 by the time she needs it to live on.
Judy’s not the same woman she was three years ago. When I left she told me that if she had it all to do over again she would have done a lot of things differently, both in her marriage and after but hind sight is twenty-twenty as they say. Now at least she can look forward and imagine a brighter future. With my help, a lot of hard work and a little luck Judy still has a chance at a pretty awesome life.
For more information on the Meekonomist approved investment methods discussed here write to firstname.lastname@example.org or for general information on the economy from the perspective of a Christ-follower please purchase a copy of my book above or by clicking the link here; “Meekonomics; Kingdom Economics from A Love Based Mentality.” From now until March 23 all proceeds go to AIDS Care at The Meeting House.