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portfolio makeover

The Globe and Mail

When Erin got an offer for a job she was thrilled about in Toronto, she didn't think twice about leaving her hometown of Ottawa to take it. Nor did the single thirtysomething business-development manager give too much thought about how the move would affect her finances.

"When I moved to Toronto about a year and a half ago, I took a pay cut of about $10,000 for the exciting opportunity," Erin says. "I haven't been saving very much, and I've been living essentially the same lifestyle as I had in Ottawa with a higher income in a less expensive city. As a result, I've incurred some consumer debt of around $6,000."

Although she's racked up some debt, Erin has since earned a raise and is making about $95,000 a year. Now she's trying to determine how best to manage her money while enjoying the life of a single, young, urban professional.

"I must admit I've been willfully blind about personal finance," she says. "The topic overwhelms me, but I want to become smarter about my money and make wise choices to set myself up for the long term. I think younger people, especially females, feel the pressure to ensure the finer things in life, but also want to be financially secure in the long term."

Three years ago, Erin bought a condo in Ottawa for $235,000 that she rents out for about $1,200 a month, which is enough to cover the mortgage payments as well as property taxes and condo fees.

She contributes biweekly to a registered retirement savings plan (RRSP), with her company matching her deposits at a rate of 4 per cent of her annual salary. The former federal-government employee also has money from a pension that she wants to transfer to an RRSP.

Although Erin has taken some steps toward building a nest egg, she still finds herself stymied by so many financial decisions. "How much should I save and how to ensure I'm on the right track for retirement?" she asks, wondering whether RRSPs, TFSAs, or other investments best suit her needs. "In retirement, I want to live in the style of life I've become accustomed to, with money for travel.

"What should I be saving per month outside of RRSPs for future goals like owning a bigger home, starting a family, or purchasing a vehicle eventually? Should I be getting into the market here in Toronto, or would I be better to keep my investment in Ottawa and rent here for the time being? I'm nervous about the condo market here given that you can get so little space for such a large price. I need help with those questions."

To assist her, we consulted Edmonton certified financial planner Roger J.M. Wiart, division director of Investors Group Financial Services Inc., and Anna Knight, a certified financial planner and adviser at International Capital Management in Toronto.

The basics


– Condominium: valued at about $250,000

– Tax free savings account: about $20,000

– RRSPs: about $17,000

– Pension: about $68,000


– Mortgage principle outstanding: $127,000

– Debt: about $6,000

Mr. Wiart's tips

1. Continue putting money into RRSPs and use tax refund to fund TFSA. Because Erin's largest expense is tax, it makes sense to top up her RRSPs. "In her previous employment, her RRSP room was limited each year by her pension adjustment," Mr. Wiart explains. "As Erin is no longer participating in an employer-sponsored pension plan, there is a greater responsibility to create her own by contributing monthly to her RRSP. Because she is in a high tax bracket in Ontario – roughly 40 per cent – she can allocate her tax refund to her TFSAs, which will avoid any tax on growth or income. Once Erin pays off her consumer debt, she will be able to allocate an extra $6,000 per year into her personal RRSP in addition to her group RRSP."

2. Use equity from Ottawa condominium to help buy a home in Toronto. "Depending on the fees, I would recommend selling her rental property and applying the equity from it to a new home or condo in Toronto.  If she still plans to be a landlord she can purchase a new rental with the minimum down-payment" Mr. Wiart says. "Two things happen when she does this. First, she avoids Canada Housing and Mortgage Corp. fees on the properties, which can be up to $8,000 if putting only 5 per cent down on a $330,000 condo. Secondly, she maximizes the tax-deductible interest on the rental condo and avoids paying higher non-tax deductible interest on her new Toronto home. However by selling the original rental condo capital gains and possibly recaptured capital cost allowance would occur which would need to be reported in her personal income in the year of sale.  Also, real estate costs and land transfer fees would apply.  I would encourage Erin to amortize both properties over 25 years and allocate extra cash to the payments on her mortgages, focusing on paying down the Toronto home sooner and avoiding non-deductible interest costs.

3. Create a short-term investment vehicle in non-registered funds or use remaining TFSA room for shorter-term goals. "Erin's RRSPs and TFSAs are all invested in a moderate portfolio, which is a common mistake in people's investment portfolios," Mr. Wiart says. "They believe they are moderate investors, and that therefore all investments should have the same moderate focus."

Depending on Erin's time frame to purchase a bigger home, start a family or purchase a vehicle, she may need to redirect a portion of her TFSA funds to a more conservative investment or start a new non-registered account, Mr. Wiart says. In other words, liquid, conservative vehicles suit short-term goals best.

"Shorter-term conservative investments should have a heavier weighting in fixed income versus equity investments," he notes. "An 80 per cent fixed income weighting with 20 per cent equity is a good place to start for a one– to two-year time frame.

"Currently, there's a growing concern over the bond markets and how an increase in interest rate will affect the price of bonds," he adds, noting that it's critical to determine a person's time frame and appetite for risk before making any investments. "The best way to combat this uncertainty is to diversify. By diversifying fixed-income investments with real estate, mortgages, cash investments, and bonds with different issuers, yields, and maturities, you'll avoid the guessing game and ensure more consistent returns."

Ms. Knight's tips

1. Eliminate debt. "The first thing I would suggest to Erin is to cash out $6,000 from her TFSA and pay off the debts," Ms. Knight says. "There's no need for them at all. If cash is available, there's no need for debt that you have to pay for with after-tax dollars."

2. Ensure efficient tax planning. Erin should ensure that she's writing off the interest costs on the mortgage of her rental property against her income and that she's capturing all related expenses.

"If she's planning on keeping her rental property in Ottawa, perhaps it could be worth investigating transferring into a corporation, thus transferring that income into another tax entity, which would be a much lower tax rate than what she's at with a salary of $95,000 plus rental income," Ms. Knight says.

Also, Erin should make sure she has enough room in her budget to put aside funds into her RRSP every year, which will significantly reduce her taxes owing. "For $1, you will get 36 to 42 per cent of a tax refund, so it's as if you are making 36 to 42 per cent instantly on your money," she notes.

3. Plan for retirement by clearly identifying short-, medium- and long-term goals. When it comes to determining exactly how much to save, Ms. Knight says it's crucial for Erin to first establish what her 12- to 36-month goals are, followed by her five- to 10-year goals, and finally her retirement goals. The first priority, however, is for her to set aside six months' worth of expenses inside a TFSA to have as an emergency fund.

Whether Erin should purchase real estate in Toronto, Ms. Knight says, would be best determined only after she's established those specific, long-term goals.

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