What do most people do with their tax refunds?  They spend it of course!  It’s bonus money, fun money,

But in tighter economic times when all you hear is about high debt levels, low savings rates, a growing retirement gap and fear of inflation, could this be the year to do something fiscally responsible with your tax refund?

If you want to do something responsible with the money, what should you do with it?  Buy RRSPs?  Throw it against the mortgage? Pay off some credit cards?  What about starting a TFSA?

If you are prepared to be fiscally responsible, here are two strategies to determine the best course of action

Principles of Cashflow

The principles of cashflow deals with the mathematical effectiveness of cashflow.  If you have an extra dollar, what is the best use of that dollar? It does not matter if you have $10, $100,000 or more, the principles of cashflow simply suggests what gives you the best bang for your buck.  It’s important to keep in mind that everyone has unique circumstances and you should consult a financial advisor for a detailed review of your personal situation but here are some generalized rules of thumb:

1. Pay off high interest credit card debt first.  The credit card math will work against you every time especially if you are paying 18% or more in interest.  Paying down this debt is always a great place to start if you have extra money.  It’s also important that you have the discipline to NOT accumulate the debt again once you pay it down.
2. Look at the RRSPs first to see if they make sense.  One of the benefits of making a RRSP contribution is that you get a tax deduction.  The best way to see if the tax deduction benefits you, is to follow my ONE FORMULA approach to RRSPs – If your marginal tax rate (MTR) at the time of contribution is greater than your marginal tax rate at the time of withdrawal, then the RRSP will always give you a benefit.
3. Paying off non-deductible can be a great investment.   Just check out the math in this article – paying down debts. Basically paying down a 6% debt can be the the equivalent of earning 8.8% on a GIC.  Paying down non-deductible debt can be a great investment.  The higher the cost of interest, the better the investment.
4. Buy TFSAs.  One of the problems with TFSAs is the title has mislead a lot of people into putting their money into low earning savings accounts when there are lots of ways to invest TFSAs.   TFSAs have a lot of universal appeal so they could easily move up the list depending on your personal circumstances.

The Balanced Approach

Here at Balance Junkie, the theme is about finding balance and when it comes to extra money, the balanced approach refers to dividing up the money and doing many things with it including having some fun. Some personal finance pundits have called this the conscious spending plan.  It’s in fact, what I am teaching my kids about money.

When it comes to money I am teaching my kids that when you have money, there are 4 things you can do with it.  You can spend it, share it, saving it or invest it.

A conscious spending plan says you will consciously allocate your money according the plan whether it’s your money paycheques, a one time tax refund or a large inheritance.  You can set different spending plans for cashflow versus lump sum amounts.

Here’s an example I did with my kids.  I gave them $100 and asked them to allocate this money into 4 pots:  Spend, Save, Share and Invest.  They all did different things with the money but I then said this would be their spending plan where anytime they came into money, whether it was $20 from grandma and grandpa, or $5 from their allowance money from their summer lemonade stand, they would allocate the money in the same way everytime.

Although they are pretty young kids, I wonder why adults who are theoretically capable of make better, smarter and more prudent decisions don’t do the same thing.  Maybe this is the perfect balanced approach to dealing with a tax refund:  Spend some of it, save some of it, share some of it and invest some of it.

What do you do with your tax refund?  Any other great ideas to share with others?

No related posts.

As much as we love our long weekends, the longstanding complaint is gas prices will go up and the weather will be lousy.

True to Murphy’s law, gas prices jumped up prior to the Easter long weekend. We were on holidays driving south to Salt Lake City where prices in the US also jumped.  As we were driving, even I jumped on the bandwagon asking my wife why gasoline prices always went up before long weekends.  My wife replied “So they really go up before a long weekend?  How do you really know?  do you have some statistics?”

She shut me up pretty quick so when I got back, I decided to really see if this was a trend or just a reason to complain.

Finding data

The first step was to find data.  I came across The Kent Group, who provides a broad range of data, research, analysis, and consulting services to the downstream (refining and marketing) petroleum industry.

They have an amazing database of gasoline prices going back to 1987.  Using their data for average weekly retail prices including tax, I summarized data for the past 7 years based on my home city of Edmonton.

My five cents

You can interpret data different ways but here are some of my observations:

• When I looked at the data, I could not tell if prices increased prior to long weekends but I did notice that May and October seemed to have the highest gas prices in the year.
• Gas prices at the pump are highly volatile in the year.  Little price spikes and drops are a regular occurance.
• There is a distinct trend in rising gas prices over the years.

• When looking at average prices it looks like 2011 was the biggest absolute (16.5 cents) and percentage increase (18%)
• 2008 seemed to be a strange spike probably due to the world financial uncertainty

In some other data from a CBC article, the components of the pump price has changed and evolved over time as well.  10 years ago, the price of gas was 59.4 cents and here’s the breakdown of cost:

• 49% went to taxes
• 34% went to crude costs,
• 11% went to operating margin
• 6% went to marketing

10 years later in February 2012, the cost of gas was 127 cents.  Here’s some interesting changes to the breakdown:

• Although the percentage that goes to taxes decreased to 31%, the overall revenue still increased by almost 10 cents per litre
• Cost of crude has risen dramatically and represents the highest component of the price.  53% of the price results from the cost of crude which has tripled over the 10 years.
• The cost of crude seems to have the biggest influence over changing prices at the pump.

I have not tallied up the receipts for gasoline on our trip but I am certain the total cost of gas was well under $400 despite the spike in prices just prior to our departure.  In the end, I won’t complain about that considering flights for a family of 6 would have cost me over $3500.  With this perspective, I think gas was a bargain.

What do you think about the price of gasoline at the pumps?

Related posts:

1. Why Are Commodity Prices Rising? Let Me Count the Ways

Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

~ The Five Laws of Gold (#5), The Richest Man in Babylon by George S. Clason

March is Fraud Prevention Month and the CSA (Canadian Securities Administrators) have been busy with a unique campaign designed to show investors how easy it can be to fall victim to fraud – especially in the Internet Age. I have to admit that I don’t think about investment fraud that often since I manage all of our money myself. I sometimes forget that this is not the case for the majority of Canadians.

In the era of 1% interest rates and volatile markets, investors might be forgiven for reaching for a few extra percentage points of return. Still, stepping outside of the regulated investment arena can be extremely risky. Indeed, you might not even realize you’ve done it. Let’s take a look at what CSA has done for this campaign.

BlueHedge Investments

Phase one of the CSA fraud awareness campaign involved setting up a very professional-looking website for a fictional investment company called BlueHedge Investments. It basically simulates a fraudulent company’s website, complete with claims like this:

“BlueHedge Investments ensures the success of our future generations while helping build the financial stability of our people today. Furthering green energy and resource allocation – fuelling environmental, sustainable and future energy and resources.

• Earn 9% interest per month
• Invest with professional market leaders
• Earn money risk free!”

The Alberta Securities Commission reported the following results:

“During the 10-week campaign, the BlueHedge website received almost 18,000 visits from across Canada with 71 per cent of those arriving to the site because they clicked on online ads, many of which were featured on popular search engine sites. As well, regulators found that more than 10 per cent of those who received unsolicited emails from BlueHedge opened the emails, and of those, almost 13 per cent clicked on the provided BlueHedge links.”

BlueHedge Isn’t Real

Visitors who clicked through to invest were taken to an educational website called bluehedgeisntreal.ca. There’s some great information there, including some red flags to watch for:

1. Guaranteed high returns, no risk
2. High pressure sales tactics to invest right away
3. Tax-free and offshore
4. Slick appearances that don’t measure up
5. Lack of quality information: long on buzzwords and short on details

There’s also a section on All You Need to Know in Under 5 Minutes:

1. Know your goals.
2. Know who you’re dealing with.
3. Know your investments.
4. Know the red flags of fraud.
5. Know where to go for help.

A Little Common Sense Goes a Long Way

You don’t have to be on the left end of the IQ curve to become a victim of fraud. In fact, you can see that some of the claims on the fraudulent site might appeal to more sophisticated investors, or those looking to move into the big leagues to reach for better returns. Still, the old saying about things that look too good to be true is probably a pretty good guidepost.

For our own investing, I try to make sure we hold our cash in CDIC insured financial institutions and our investments at IIROC and CIPF members. In the unlikely event that we were to ever invest in something outside of these regulated entities, I’m certain we’d make sure we didn’t invest enough of our capital to do any serious harm in the event of a 100% loss. No amount of money is worth the risk.

Have you taken any steps to ensure you and your hard-earned savings don’t succumb to investment fraud? What did you think of the BlueHedge campaign?

Related posts:

1. Online Investing: How to Get Started
2. Investment Wisdom: 5 Key Lessons
3. TFSA: Investment Gains, Withdrawals and Contribution Room

You may recall that I wrote about a brand new online service for Canadians called Finizi a few months ago. I thought I would post an update today to let you know how they’re doing. In just a few months, they’ve completed over $40 million in GIC auctions.

Finizi offers a new, easier way for Canadians to purchase GICs. Using their online portal, financial institutions can bid for your business and you can select the best rate for the GIC term of your choice. If you take a look at their top bids, you’ll notice that the rates are significantly higher than those offered by Canada’s largest banks.

Last week, I posted some GIC and savings account rates from a few mid-tier Canadian financial institutions. While these rates are higher than those of the big banks, they’re not as good as those offered by Finizi. In fact, a few readers mentioned that you can get higher rates by using a GIC broker or shopping the credit unions – both excellent suggestions.

If you’re looking for an easy way to buy a GIC at a higher rate, you may want to give Finizi a try. Their rates seem comparable to those offered by brokers and credit unions and you can handle everything online. Best of all, the service is free to use.

Finizi Update

Finizi founder and CEO Daniel Shain recently sent this press release to me in order to provide an update on Finizi’s progress since their September, 2011 launch, so I thought I would share the information with you here:

CANADA’S FIRST AND ONLY CONSUMER GIC AUCTION WEBSITE

EMPOWERS INVESTORS DURING RRSP SEASON

Finizi.com introduces new features including instant auction results, customer rewards and

Canada’s most comprehensive credit card comparison and recommendation platform 

Since launching its live online GIC purchase engine across Canada in September 2011, Finizi Corp., the company behind the revolutionary online platform www.finizi.com, has been hard at work planning for the hectic RRSP season, the busiest time of the year for GIC sales.

Finizi offers an online platform where financial institutions bid for customers’ business in live and fully transparent GIC auctions. Through the online portal, consumers view the top rates, make their selection, and complete the GIC purchase electronically without stepping foot into a bank. Also, since Finizi collects a finder’s fee from the financial institutions using its platform, the service is completely free for consumers.

The company recently finished its three-month pilot test of the website, during which it generated millions of dollars in GIC sales and provided the absolute highest GIC rates in the country. “Customers have been providing us with rave reviews and have recommended our service to their friends and family,” says Finizi Founder & CEO Daniel Shain. “The three most frequent comments we’ve received have been ease of use, love of its simplicity, and reaffirmation that this is a service that people want.”

“While we are pleased with our progress to date, in the online world, we are in a constant state of improvement, driven always by real time customer experience” says Shain. “Users wanted, and we responded with better auction mechanics.” For GIC auctions less than $100,000, consumers are now able to view the top bids within seconds. For auctions greater than $100,000, financial institutions have until the end of the day to bid. The company has also expanded their product offering with the introduction of TFSAs and monthly payout GICs.

For a limited time during RRSP season, Finizi is rewarding customers for using its service. Users that start an auction and complete a GIC purchase through the website will be entered into a draw. After the February 29^th RRSP contribution deadline winners will be selected to receive a $10 to $50 gift card from prominent Canadian retailers including Tim Horton’s, Cineplex Odeon, Sporting Life and Kernels Popcorn. Contest rules are posted on the company’s website.

Finizi also launches its first educational financial tool—the most comprehensive credit card comparison and recommendation platform in Canada. This smart engine allows customers to input and rank order their credit card requirements. From the hundreds of credit cards available in Canada, they receive a recommendation on which cards are most suitable for their usage. “What drove this development was simple,” says Shain. “Consumers want to apply for the card best for them, but who has the time or inclination to compare the different cards available from dozens of credit card issuers across Canada? At Finizi.com, consumers get to make an informed decision on what card is best for them with an engine that compares prices, reward programs, travel insurance and other benefits.”

(Disclosure: I have no financial interest in Finizi, nor was I compensated in any way for posting this update.)

Related posts:

1. Introducing Finizi: A New Financial Tool for Canadians
2. Why Are Mortgage Rates Rising?
3. Where Are Interest Rates Going?

I recently had two reasons to look up the going rates on GICs and savings accounts. I thought I’d share what I found with you today and raise the question: Is it worth it to put cash into a 5-year GIC when some savings accounts are paying almost as much while offering the same safety and more liquidity?

Why GICs or Savings Accounts?

I mentioned two reasons I was interested in looking up rates: First, we’ve been contributing more monthly to our sons’ RESP since the older two are turning 17 this year. (Yikes!) That makes this the last year we can contribute to an RESP for them and receive the 20% CESG. As a result, some cash has built up in the brokerage account where we hold the RESP. Since we’ll need the money relatively soon, stocks and bonds are not an option for us. Our discount brokerage doesn’t pay interest on cash balances, so GICs were the only choice other than zero return here.

Second, we have a GIC maturing soon and we need to decide what to do with it. Should we roll it into another GIC or put it in a savings account? This is part of the safety component of our RRSP, so again, I’m not even considering equities or bonds for this particular slice of capital.

Select GIC and Savings Account Rates for Canadians

I didn’t look up rates for every financial institution, so I’m only including the ones I investigated here. While it’s not a complete picture, it does provide a decent idea of the range of options out there today. (These rates were current as of last week and probably haven’t changed much since.)

Sample Savings Account and GIC Rates for Canadians: February, 2012

Rather than add a bunch of asterisks to the table, I’ll just point out a few key things here:

• There are two columns for Canadian Tire Financial. The second lists their rates for TFSA accounts. As you can see, there’s quite a difference. I’m not sure how long that will last.
• The rates quoted for Questrade (discount broker) are based on the best GIC rates posted in their daily bond bulletin at the time.
• Not all of these financial institutions offer all kinds of accounts. For example, only Questrade offers RESPs. Canadian Tire and Ally don’t offer RRSPs.
• Right now, ING Direct is offering a 90-Day GIC for 2.50%. That’s a great rate, but it’s only for RRSP and TFSA accounts, and it’s only available until the end of February. At the end of the 90 days, you’ll need to find a new place for that money.
• ING is also currently offering a 2% rate on TFSA savings accounts. I’m not sure how long that will last.
• There are plenty of other financial institutions out there. They may offer other options if none of the above fit for you.

All of this can get a little confusing, but it just goes to show that there are no one-size-fits-all solutions in personal finance. Five different people could look at this information and make 5 different choices based on the type of account they hold, their time frame, and a host of other factors.

Back to our original question: is it worth it to put your money into a 5-year GIC when it’s earning just a hair more than some savings accounts? Well, it depends. If you really want the maximum return on your money and you don’t need it for 5 years or more, it still looks like most 5-year GICs beat most savings accounts. If, however, you don’t want to lock up your cash, or you’ll need it before 5 years have passed, you may want to consider a savings account instead.

There are plenty of options for your cash out there. Understanding your financial situation coupled with a little homework can help you make the choice that’s right for you.

 Have you made any decisions on where to park your cash yet this year?

Related posts:

1. High Interest Savings Accounts for Canadians: BJ Guest Post
2. Are Money Market Funds a Good Place to Park Your Cash?
3. GIC Primer: Frequently Asked Questions

The following is a guest post. I’ll have my 2012 outlook up on Monday. Have a great weekend! ~ 2 Cents

Looking for a credit card can be difficult because there are so many different types of cards that offer their holders different advantages. Some credit cards have rewards for making purchases from certain stores, but others will offer people cash back when they spend a set amount of money with their cards. Finding the one that is perfect for them has gotten easier because of the credit card comparison sites that have begun to make their way to the Internet.

Credit Cards for People with Excellent Credit

The comparison sites cater to different types of people and cards. For example, some people are looking for a card that will give them a 0 percent interest rate, and these comparison sites will have several examples of credit cards that offer the 0 percent introductory rate for people with excellent credit. As this will not be the only advantage being offered by these cards, everything will be listed on this site. If people would like to apply for the card, they have the opportunity to do so right from the comparison site.

Credit Cards for People with Lower Credit Scores

Comparison sites will even have a list of cards for people with bad credit. Not everyone can qualify for the 0 percent interest rate cards mentioned above, but these sites make it easy for them to seek a credit card for average and low credit scores.

Frequent Flyer Miles or Cash Back

A popular feature for credit cards is the ability to earn points to receive frequent flyer miles. These credit cards may also have a feature that offers the card holders cash back when they have spent a set amount of money. For example, some cards will give people $200 cash back after they have spent $500 in a set amount of time, such as three months. The comparison sites will also help people find several examples of these cards.

The British Love Comparison Websites

The credit card comparison website is a favorite of the people in the United Kingdom. These sites give people hundreds of choices of credit cards, and help them choose the right one by listing the interest rate, the length of time the cards will have a 0 percent interest rate and whether or not balance transfers are allowed. They can also read the reviews written by current card holders. With all of this information on comparison sites, people looking for a credit card can find the best deals.

Related posts:

1. How to Effectively Use Cash Back Credit Cards and Maximize Rewards
2. What Happened to the Euro Deal Euphoria?
3. How Do You Deal with Financial Stress?

The following is a guest post with some good advice to kick off 2012. Enjoy!

The New Year is upon us, and for many, this time of the year signifies a time of new beginnings. People strive to better themselves by creating New Year’s resolutions, many of which are focused on health. While trying to be a better person in the new year is nothing to scoff at, there are a few New Year’s resolutions that are good for you both physically and mentally, as well as financially.

Losing Weight

Obesity is one of the greatest epidemics plaguing America today, making losing weight one of the most popular New Year’s resolutions this year. However, losing weight isn’t just ideal for your health, it is also highly beneficial to your wallet. In addition to saving money with reduced eating out and grocery bills, losing weight will also save you money longterm as it will provide you with lower health insurance premiums and keep you from suffering expensive medical conditions, such as diabetes.

Going Green

Going green has been on nearly everyone’s mind in recent years, and many are choosing to live more sustainably this year. While some aspects of going green aren’t always cheap, such as new solar paneling, everyday switches, such as switching to CDLs, adding weather stripping to doors and windows, and lowering the thermostat, can actually save you money while you help the environment.

Quitting Smoking

Smoking is in no doubt an expensive habit. Regular smokers can find themselves spending upwards of $200 a month on cigarettes, and even more so in the future should they begin to suffer from one of the numerous health conditions associated with smoking. By quitting smoking, you can save over $1,200 a year alone in cigarettes, and even more down the road by avoiding high medical bills.

Finding a Better Job

There is no doubt that millions of American’s are fighting for new jobs, whether it be selling car insurance or selling real estate, but that doesn’t mean that you should skip out of hunting for a new job yourself in the new year. Finding a new job can not only provide you with a better salary, but also with health insurance and 401(k) match that can provide you with thousands of extra dollars in the future.

Skipping the Coffee Shop

Caffeine is one of the most addictive, a socially acceptable, chemicals in our culture today, and it’s not uncommon to hear someone say, “You don’t want to see me before my morning coffee” or “I really need a Diet Coke right now.” However, that being said, caffeine is also a highly detrimental and expensive habit. The morning coffee that you grab on your way to work or that soda that you get at lunch can quickly add up. So by choosing to give up caffeine in the new year, you will be sure to save yourself a couple hundred dollars.

Everyone wants to get off on the right foot in the new year, and choosing the right New Year’s resolutions is a great way to do so. Just make sure that when you choose your resolutions that they are doing more for you than just making you feel like a better person – make sure that they will also increase your monthly budget too.

Related posts:

1. A Dozen Good Reasons to Move to Canada
2. Are GICs a Good Substitute for Bonds?
3. Is This a Good Time to Invest in Banks?

The following is a guest post. While it speaks to American consumerism, there may be some food for thought for debt-laden Canadians here too.

The economy is in shambles, and while many would like to blame the deterioration of our economy on big government and big business, a large percentage of the blame also lies in the spending habits of the American people. As a whole, we spend too much, borrow too much, and save too little.

“Look at consumption levels and control for purchasing power over the last several decades, and America is simply in a league of its own.” states Sheldon Garon, Princeton Professor and recent author of Beyond Our Means: Why America Spends While the World Saves. “The only people who come close are people in Britain, but they are about 85 percent of the level of American consumption. Germans, French and others are in the 70 percent range, Japanese even a little lower. So American’s spend like no one else.”

We’re willing to pay a couple dollars for a phone number lookup when there are other free services. We are willing to pay $5 a day for coffee when we could just make it at home and save nearly $25 a week. America is a consumerist society and even in the face of the economic downturn we are still struggling to find a balance between saving and spending.

Most entering retirement age are being forced to prolong their careers due to inadequate savings. Many recent college graduates are being forced to move back in with parents because they borrowed too much during college, and are now struggling to find a job that pay enough to cover those high monthly bills.

Consumerism is definitely in every aspect of American culture. It is advertised everywhere and can even be found being promoted in seemingly innocuous institutions such as universities and banks. Other countries provide free or low tuition rates for students while American universities promote spending tens of thousands of dollars by pulling out loans to afford prestigious universities – much like a person who overspends to purchase a nice car. Other countries provide incentives for savings and offer tax breaks to smaller savings accounts while US banks tax small savings accounts and make small banking nearly impossible for lower income households.

For many, binging on credit cards and excessive shopping are no longer an option. Because of the credit crisis, many credit card companies have made it harder to obtain cards which should help limit the amount of debt certain individuals have. But it shouldn’t be the inability to get credit that keeps American consumers from overspending.

If Americans wish to have the comfortable future they have all been raised to believe they are entitled to, they are going to have to remember what it is to work for it and save for it. Taking the time to actually decipher between needs and wants will have to become a priority, and looking at debt in such a cavalier fashion. Not everyone has an excessive mortgage, a high car payment, and thousands of dollars in credit card debt. This should not be our norm.

“If we can’t even talk about the benefits of some saving and we think that only consumer spending is good for the economy, then we’re not even getting to first base on this. We have to begin talking about the benefits of saving, and how we might restore a balance between saving and spending.”

So instead of running through that drive thru for coffee or going out to a fancy lunch or dinner, think about how much you could actually save by choosing to opt out of these luxuries. Overspending shouldn’t be a way of life, and passing rampant and uncontrolled consumerism down through younger generations is only going to continue to trouble our economy. The best financial practice is responsibility, and Americans are going to have to learn it if they wish to be prosperous without excessive debt in the future.

No related posts.

Simplicity is the ultimate sophistication.

~Leonardo DaVinci

When the Tax Free Savings Account was introduced in Canada in 2009, it was hailed for its practicality and simplicity. Any Canadian 18 years or older can now contribute up to $5000 per year to a TFSA and have those savings grow completely tax free. While TFSA contributions are not tax deductible, you will not have to pay any tax on the money you withdraw from your TFSA.

You can put just about any type of investment in your TFSA, or choose a number of different TFSA accounts for different purposes. You could simply have a TFSA savings account, or you could open a TFSA brokerage account whereby you could include stocks, bonds, ETFs or just about any other type of investment vehicle. Whether you earn interest, dividends or capital gains on your savings, your money can be withdrawn tax free. Sounds pretty simple eh?

A Few Asterisks

While I love TFSAs as an alternate savings vehicle for Canadians, they aren’t always as simple as we’d like them to be. I guess that’s just how these things go. Life is complicated. No matter how much we’d like to simplify things, there are always details, exceptions and little asterisks to contend with. TFSA rules are no different.

There has been some confusion over what happens to your TFSA contribution room if you withdraw your gains as well as your original contributions. We addressed that here in January. The latest question peppering search engines seems to be about the TFSA contribution limit for 2012. Why the confusion? Aren’t we allowed to contribute another $5000 each year?

Inflation Indexation for TFSA Limits

In addition to any unused contribution room from other years, you are usually allowed to contribute an additional $5000 per year. You may notice that there’s sometimes a little asterisk (*) next to this figure because it is indexed for inflation in $500 increments. That means that when the inflation rate applied to that $5000 causes it to rise above $5250, the government will raise the limit to $5500.

The consensus seems to be that if the CPI (Consumer Price Index) runs around 2%, that would mean we should exceed the threshold as of 2012. While that looks likely to happen, the CRA hasn’t officially announced the 2012 TFSA limit as of initial publication of this article. I spoke to someone at CRA last week and they said that the official determination hasn’t been made yet, but that it will (obviously) be out by the end of 2011. He advised us to keep watching the CRA website for TFSA updates. (Update: The CRA has left the TFSA contribution limit at $5000 for 2012.)

With the latest Canadian CPI numbers showing inflation running over 3%, it’s hard to imagine that the TFSA limit for 2012 will not be raised to $5500, but we will find out for sure within the next couple of months. I’m sure that many Canadian financial websites will carry the news once it breaks.

For Math Geeks Only

In case you’re wondering about the details of how inflation indexation is applied to the $5000 contribution limit, I thought I might include a chart* here that shows the calculations. It’s actually very simple math. For this example, I’m using a sample annual inflation rate of 2%. *I shamelessly copied this chart from Gordon Pape’s book on Tax-Free Savings Accounts.

Given that the inflation rate is not static, I’m not sure exactly which CPI rate the government uses. They could use an annual average of the monthly inflation data. I’m also not sure whether they use the headline CPI rate or the core rate, which excludes food and energy.

If you follow the chart, you can see that the cumulative inflation factor just adds 2% to the figure from the previous year. So 2% of $5000 is $100 and that is added to the $5000 amount from 2009. For 2011, you just take 2% of $5100 (which is $102) and add it to the 2010 figure like this:

2011 Cumulative Inflation Factor = $5100 x 1.02 = $5202

Since the cumulative inflation factor will put our $5000 over the $5250 needed to round it up to the next $500 increment in 2012, it seems likely that the TFSA limit will indeed be raised for that year. Again, this example is for demonstration purposes only. I’m not sure exactly which CPI rate the CRA will use. If anyone can enlighten us on that, I’d be most grateful.

I hope this answers some of the questions floating around out there regarding the 2012 TFSA contribution limit.

Update: The CRA has left the TFSA contribution limit at $5000 for 2012.

Your comments are always welcome.

Related posts:

1. TFSA: Investment Gains, Withdrawals and Contribution Room
2. TFSA Withdrawal Rules
3. TFSA vs. RRSP Duel: Who Wins?

Starting today, there’s a new financial resource for Canadians out there. It’s called Finizi. Basically, Finizi is a free online service that allows financial institutions to compete for your business. At this time they are only offering GICs, but there are plans in the works to offer competitive bidding on rates for car loans and mortgages as well.

How It Works

Basically, you just need to go to finizi.com and:

1.  Request a GIC rate

Select the type of GIC you want and specify the amount you’d like to invest.

2.  Financial Institutions Bid for Your Money

Review your bids in a live auction environment. Financial institutions bidding for your business may include credit unions, trust companies or chartered banks. So far, they have about 5 institutions on board, but many have said that they would be interested in joining once the platform is up and running. You are notified when the auction closes.

3.  Choose a Winner

Finizi will show you the top 3 rates for the auction and you can choose an in-branch or online fulfillment process. Once you choose the institution and rate you prefer, the winning bank will contact you to complete the transaction.

There is no cost to you as the customer. The bank just pays Finizi a finder’s fee. Finizi doesn’t collect money or sell the GICs directly. They simply facilitate the auction.

Win Win for Banks and Customers

Finizi provides a low cost means for financial institutions to acquire new customers. You may enjoy your GIC experience so much that you decide to use that institution for other products as well. There are no fixed costs associated with using the service, so the bank only has to pay Finizi for closed transactions. This is a great way for banks to take advantage of the huge move toward online banking with very little risk or cost.

For customers, this is just an extension of the increasing move to online financial transactions. The auction model is designed to increase flexibility and transparency for financial consumers – no more shopping around for the best rate. This way, banks can compete for your business and you can complete the whole process online from the comfort of your home if you like.

You can learn more about Finizi by visiting their website or you can watch an interview with Finizi founder and CEO Daniel Shain. If enough financial institutions avail themselves of this technology a great competitive marketplace for Canadians could emerge. It’s great to see Canadian entrepreneurs at work! Congratulations to Daniel and his team and best of luck with this new venture.

(Disclosure: I have no financial or business interest in this company, nor was I compensated in any way for writing this review.)

What do you think of this new way of buying GICs?

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