Mailbag – Getting Started With Student Debt, TFSAs, RRSPs, and HISAs

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*You all know the drill by now, we get a great question through our contact us page and allow everyone to benefit from it.  As always, these are real questions from real readers and identities are always protected.

Hi Kyle and Justin,

I stumbled across your podcast and love the show, its great listening to Canadian content!

I have a few general questions.

First a little background: me and my fiancée both recently finished post-secondary studies. She is a veterinarian and so her student debt and line of credit is almost $100,000 total and mine is $20,000. We are both starting out in our careers, with her in Vet-Med and me in the military. Presently we are trying to decide the best course of action in regards to finances.

Our goal is to eliminate most of our student debt this year and then to begin investing and saving for the future. Getting through our debt has been going smoothly so far. So what we want to do is set ourselves up with RRSP's and a TFSA for us both right now as we continue to eliminate our debt.

I have shopped around for financial institutions that offer less fees and good TFSA and savings rates. I first looked at ******* (blocked out for legal reasons) but their rates are no longer competitive. I am leaning towards ************ where we would both set up TFSA's (1.75%) and RSPs at (1.35%) and a savings account (1.75%).

Getting Started With Student Debt, TFSAs, RRSPs, and HISAsBear in mind this is amateur hour for me lol, so any help or advice would be appreciated.

My questions: Should we use the savings account for day-to-day purchases and living or get a chequing account?

For TFSA's, how do I purchase an ETF/index fund and deposit it into a TFSA? Can I do it at most banks or do I need a 3rd party program etc?

What should we put into TFSA's and RRSP's? Index funds, GICs? How do we do that?

What is a good outline for saving, as far a structure goes? Should we both have a TFSA, a RRSP and then a joint chequing or saving account ?

I apologize if is this long winded, we just got through reading “Wealthing like Rabbits” and we what to have a good plan for the future. We’re freaking out a bit haha, just ordered your book as well. We are trying to stay informed.

Anyways thank you so much for the informative podcast 🙂

Cheers

Matt

Hey Matt,

First of all, congratulations on taking your first steps when it comes to seizing control of your financial future and asking some smart questions.  With an upper-tier two-salary household income I think you and your fiancée will be in a great position if you continue to educate yourself and ask solid questions like these going forward.

The next thing I’m going to do is recommend taking a look at our FREE eBook.  It details exactly what I believe investing in and why I do it.  It also, takes you through my personal investment portfolio step-by-step.  I’m right up front with what I currently have my money in.  It’s relatively simple and easy to understand.  I can say it’s simple with such authority because I spend about an hour per year on managing my portfolio it to be honest.

Now, to get to your more specific questions and answers.  In order to keep things a little more organized, I’ll do this in a list format for you.  Some of the Q and A are questions that you had, but didn’t specifically ask.

1) Should I pay down my student debt or invest in my TFSA and/or RRSP?

The short answer here is that reasonable people can disagree.  Listen to myself and Rob Carrick of the Globe and Mail debate talk about the issue on this podcast.

The part of your student debt that is government loans is tax-deductible.  Consequently, depending on what province you live in and what option you chose (variable versus fixed) you might be paying a very low real interest rate on that loan.  For example, my wife graduated with a relatively small government student loan.  We are not rushing to pay it off because the federal government part of the student loan has an interest of prime + 2.5%.  The provincial part of it is from Manitoba and she pays NO INTEREST at all on that portion of it.  To calculate the “real rate of interest” she is paying on the federal part of her student loan we take the interest rate she is paying on the surface (last year prime was 3%, so 3 + 2.5 is 5.5%) and then figure out how much of that percentage she can claim as a tax deduction.  Once we calculate in how much money she will get back on her tax return as a result of that tax deduction, the actual cost to her on her government student loan debt was about 3.75%.  That’s not a bad risk-free return when it comes to deciding what to do with your money, but we think we can do better in the long-term by making the minimum payments and investing the money we would have used to pay down that student loan in long-term retirement savings (*note: that is not the same thing as paying the minimum and then using the money to buy a big screen TV or nicer car).

Now, paying off a government student loan is not a bad idea, and smart guys like Rob Carrick advocate for it all the time.  It’s a super simple way to improve your financial situation.  Where you really need to focus when it comes to the debt pay down is on the private student line of credit that you have.  Interest on that debt is not tax deductible and it is likely higher than your government student loan debt.  Obviously if you have any credit card debt, that should come even before the private SLOC debt.

2) TFSAs vs RRSPs vs High Interest Savings Accounts (HISAs)

I think you (like the vast majority of Canadians) might be a little confused about what these entities actually are Matt.

The way I describe it to my personal finance is that TFSAs and RRSPs are like buckets that you can put stuff (investments) in.  They don’t have any intrinsic value themselves.  You can’t buy them, sell them, and they don’t produce a return on their own.  Now, this is definitely not made clear by Canada’s financial institutions.  Instead of explaining this to consumers, they just go with the path of least resistance and tell people that their “TFSA rate” is __%.  What they almost always mean is that the interest rate for their HISA or GICs are __% and that you can put those investments within the TFSA.

My question for you Matt, is do you know what you would be best served with in regards to a TFSA vs an RRSP?  Sometimes using both is not beneficial if one is significantly better for your position than the other.  Check out our TFSA vs RRSP article here for more information.

3) Should we use the savings account for day-to-day purchases and living or get a chequing account?

Chequing accounts are usually much more flexible options.  This is a question your local teller or online support should be able to answer for you.  There are some interesting “all-in-one” options available at certain institutions, and some accounts with unique features.  Ask a representative to go through your regular account activity and recommend the lowest fee option that fits your needs.  I wouldn’t worry too much about the small interest rate within this account, because if you start to get a large balance going here, you should likely be investing it within a TFSA or RRSP anyway.

4) For TFSA's, how do I purchase an ETF/index fund and deposit it into a TFSA? Can I do it at most banks or do I need a 3rd party program etc?

Instead of thinking about “depositing” an investment into a TFSA, instead think of the logistics of transferring money from your chequing account (or wherever your paycheque goes) into your TFSA (or RRSP for that matter).  Then purchasing your investment (ETF/Index Fund) within that Account/Plan.  Hopefully that makes sense.

If you read the free eBook I recommended earlier, you’ll know that I recommend Questrade as the “3rd party” as you refer to it, when it comes to my TFSA.  Questrade is an example of what’s known as a discount brokerage.  Discount brokerages operate a discount to traditional “full brokerages” and basically operate on a DIY basis.  Most banks and financial institutions now have discount brokerages.  Questrade’s is the cheapest for the passive index ETF strategy that I follow.

Related: Use Questrade to Trade ETFs for Free

5) What is a good outline for saving, as far a structure goes? Should we both have a TFSA, a RRSP and then a joint chequing or saving account ?

This is one of the most difficult questions to answer because I don’t know you or your goals Matt.  For example, I don’t know if you want to buy a house or not.  If you do, that would change my recommendation considerably.  If you plan on being in the army for much of your life and moving around, then your investments would likely change because you wouldn’t need to save for a house right?

In my opinion, savings accounts have such low interest rates right now, that I don’t bother with them.  I have my RRSP account at Questrade.  I also have a TFSA there that I haven’t used yet because given my salary and American tax laws (long story… I’m an American Citizen and TFSAs don’t like us) it hasn’t been beneficial for me to do so.  I have my cheque deposited into my chequing account, I have almost all of my monthly expenses either on my credit card (which I pay monthly) or taken directly from my chequing account, and then I send the surplus over to my Questrade RRSP account.  That transaction is two clicks and it take a couple of days for the money to make its way over to Questrade.  Once I see that the cash is in my RRSP account at Questrade, I log in and use the very simple interface to buy the index ETFs I want in order to balance out my portfolio.  You could do the same thing with a joint chequing account, or you could have a joint account that you and your fiancée use for shared expenses and then each have your own chequing account to do with as you will.  I’ve seen both situations work well for different couples.

Hope this helps, good luck with your investing Matt, and let me know if you have any questions once you read the eBook!

-Kyle

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Kyle is a high school humanities teacher by day, and freelance personal finance author by night. He has been published in academic journals, and has also co-authored the book "More Money for Beer and Textbooks". In his free time Kyle likes to limp up and down a basketball court and pretend to be a tough guy in a boxing ring.

2 Comments

  1. Gil on July 5, 2015 at 3:22 pm

    From your Mailbag, “Getting started with student debt, TFSA’s, RRSP’s and HISA’s”, you mentioned to follow the ETF investments from your book that were XIU, VWO,VTI, and VXUS. Although these investments were in 2011, do you feel they still carry the same financial stability. I Love learning how all this works and the strength we gain in sharing various investments strategies. Thanks! Gil



  2. Kyle on July 5, 2015 at 9:48 pm

    I do believe they carry the same financial stability Gil. The indexes they are tracking are still working the exact same way as before right?



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