It’s Guest Blog Monday, and today I’m fortunate enough to have my friend (and Sushi Thursday bud) Patrick Nicol write about “Saving for your Dream Vacation.”
Patrick is an energetic guy who seems to operate on no sleep or caffeine – he gets his buzz just from loving what he does. He’s an enthusiastic and knowledgeable Investment Advisor, and if you don’t already know him as one of Ottawa’s most active tweeters, follow him now @patricknicol . If you have any financial questions, his contact details are below.
Saving for your dream vacation.
The first part is very simple, like saving for anything you must decide how much you will need for your dream vacation, plan on when it will be and then figure out how much to set aside from each paycheque to meet your goals. Easy part over. With literally thousands of investments, savings accounts, interest rates, TFSA’s, GIC and any other acronym you can think of, it gets pretty foggy as to where you should put your cash. Clearly every person’s financial situation is different however here are some guidelines and thoughts as to how to save.
Timeframe – The shorter your time frame, the fewer choices you will have. What you cannot subject this savings to, is a downturn in whatever savings vehicle you have decided on, close to your trip. Anything up to six months I would suggest a High Interest Savings Account (kind of an oxymoron these days with some institutions paying 1.50%) a Money Market Mutual Fund or if you can find a short term Term Deposit. None of these instruments will make you a very high rate of return but will make you something and ensure that you do not have any negative surprises just before your trip. Over six months to 3 years, you could start looking at short term bonds or bond funds to increase your yield a little bit, but again in today’s interest rate environment, don’t be looking for any huge windfalls. Beyond 3 years you could look at a conservative balanced mutual fund or possibly even some defensive stocks. This could increase your return, take advantage of a strategy called Dollar Cost Averaging, but of course would add to the risk column.
Once the investment has been decided, now where do we put it. No matter what your tax bracket, most of the securities mentioned above will generate interest income. Interest is taxed at the highest rate, and in some cases even higher than employment income. The ideal place to save for this vacation would be in the fairly new TFSA or Tax Free Savings Account. This allows any and all income to be tax free. Currently you can have up to $10,000 per person in a TFSA and that increases by $5,000 on Jan. 1, 2011, so a married couple could have $30,000 sitting in these accounts, a few months from now. Withdrawals from your TFSA will have no tax consequences and can be added back to your TFSA in your future (in the interest of keeping this post short, ask if you want more details on TFSA’s). If your TFSA is being used for something else, then you can save this money in an Open account at your bank or with your investment advisor. Typically these accounts are free of admin fees but should be kept separate from your day to day spending money so you aren’t enticed to spend it on other items.
This article was prepared by Patrick C. Nicol (firstname.lastname@example.org) who is Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities Corporation and the author is not a Dundee Securities analyst. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessary those of, Dundee Securities corporation.
Patrick C. Nicol | Dundee Securities Corporation | Nicol and Associates
Investment Advisor | President
T 1-613-722-1854 F 1-866-334-5347 Toll Free 1-800-826-0877 Skype patrick-nicol
220-1419 Carling Avenue, Ottawa Ontario K1Z 7L6