Registered Retirement Savings Plan - Millionaire on the Prairie

Going Out Always Costs Me Money

It’s expensive out there. Staying at home with a cup of homemade coffee, snuggled under my favourite throw, and reading a long-anticipated book is a cheaper use of my time. And it’s just as satisfying to me as anything I pay for outside my home.

I don’t know about you but it’s expensive to leave my house. Yesterday, it was gassing up my vehicle. Today, it was groceries. Tomorrow, it’s Halloween so there might be last minute run to the grocery store for candy. Later on this week, it’s dinner with a dear friend. Next weekend… sigh… I think you catch my drift.

In terms of problems, this one really doesn’t count. Over the years, I’ve built up some very good habits for my money. I use automatic transfers to fund my emergency accounts and to invest for retirement. Several years ago, I established sinking funds for annual, un-sexy expenses like insurance premiums and property taxes. And lest you think that I don’t have any fun, there’s even a sinking account for travel, gardening, birthday presents, and theatre subscriptions.

So when I say that leaving my house is synonymous with money leaving my wallet, please know that I’m taking care of my priorities before spending on the day-to-day stuff that crops up.

You see, I think it’s the same for everyone. Leaving the house usually means spending money. The world is literally designed for us to spend money everywhere. Vending machines. Coffee shops. Grocery stores. Restaurants. Drive-through windows. Retailers of every stripe. Parking lots & parking meters. It’s hard to get through the day outside of the home without spending a little something somewhere.

Priorities First

Based on my own observation, the trick is to do your saving and investing first. It’s the timeless principle to pay yourself first. You may have heard of it as living below your means. When you get paid, transfer some of your net income – ideally 20% or more – into your saving/emergency/investing account. Once that money is tucked away, you can spend the remaining amount however you want so long as you don’t go into debt.

At the tender age of 16, I got my first part-time job as a cashier in a grocery store. Every two weeks, I took home just over $130. I picked $50 as my “savings amount” and transferred it into a separate account. By the time I bought my first car 5 years later, I had socked away $8,000. (Living with parents who paid for everything helped tremendously.)

If I knew then what I know now, I would’ve embraced public transit sooner and that money would’ve gone into equity investments in the stock market. Oh, well… too late smart.

Bottom line is that I started my first habit – saving a chunk of my paycheque every time I was paid – at a tender age. When I bought my first condo, I really had to figure out where my money was going. It was the first time I realized how badly I needed an emergency fund. If I had to pay for a condo assessment, then I needed to have money set aside or else I would have to go into further debt to cover my portion of the assessment. And when I moved from a condo to a house, I learned that furnaces and hot water tanks and roofs are exactly cheap. Again, my emergency fund got some loving attention.

Tune Up Your Finances

Speaking of your emergency fund, how’s it doing? Do you have atleast 3 months of expenses in there yet? If not, get to work. If yes, then consider beefing it up. Inflation is still something of a concern. I don’t know what’s happening in your corner of the world, but things aren’t getting any less expensive as far as I can tell.

Once your emergency fund is nice and fat, focus on filing your TFSA and your RRSP. Ideally, you’ll max out your contributions every single year. Realistically, that’s not likely to happen. Do what you can to put in as much as you can. Invest your money for long-term growth. When you’re too old to send your body out to work, your TFSA and RRSP will provide the cash you need to live.

And if you’re fortunate enough to be able to max out those two accounts, then open a non-registered account and invest your money. Unlike the TFSA and the RRSP, there is no limit to how much you can invest in your non-registered account. Take advantage of that to earn dividends and capital gains, two forms of income that are taxed less lightly than your paycheque.

I speak from personal experience. It took me years to fine-tune my system, but it’s now running like a well-oiled machine. Between my automatic transfers and my sinking funds, I’m able to fill my TFSA and my RRSP every year. I’m able to send money to my non-registered account from each paycheque. And my emergency fund is nearly fully funded because it takes a very long time to save up a year’s worth of expenses. (Yes – in my view, a fully funded emergency fund is one that will keep me going for a year. You may feel otherwise.)

You Can Do This

So long as you’re investing 20% of your income, or whatever you can realistically afford, then it doesn’t really matter that you spend money every time you leave your home. Just don’t go into debt! If you’re going into debt, then you need to stop. Debt is corrosive to your ability to secure your future. Money that’s going to your creditors is money that it not going towards your financial future.

And I know that 20% is a big chunk of money. You may not be able to save that much right away. Guess what? I don’t care. You start where you are and you work your way up. Ruthlessly cut out whatever you don’t need so that you can save and invest for Future You. No one else is responsible for ensuring that you have the kind of retirement you want for yourself.

So, yes – going out is going to be a hit to your wallet, more often than not. However, if you take care of yourself by investing off the top and by keeping your emergency fund healthy, then those hits won’t matter. The money that’s working for Future You will keep doing its job, regardless of the day to day expenditures.

Housing Prices & Interest Rates

When I was a kid, one of the things I learned from my mother was that interest rates are inversely correlated to housing prices. If interest rates are going down, then housing prices are going up.

Over the last 12 months, I’ve seen this lesson play out in real life. By the time this blog post goes live, we will have passed the one-year anniversary of the COVID-19 pandemic. Yet, there are cities in this country where the housing market is red-hot. People are tripping over themselves to buy homes and they’re “winning” bidding wars to do so.

Five-year mortgage rates in my corner of the world had been on offer for as low as 1.84% up until just recently. At the time of writing this article, they’re slowly creeping up but a few can still be found at just around 2%. The Talking Heads in the media are predicting that 5-year rates will increase steadily over the next year. They say that this will be due to the economy fully re-opening as everyone gets their vaccine.

Who am I to argue with the Talking Heads?

The corollary to my mother’s great insight is that house prices drop as interest rates rise. This is due to the fact that fewer people can afford house payments when the cost of borrowing increases. Fewer people buying is a fancy way of saying lower demand. Less demand for something forces sellers to drop prices in order to sell their goods. In the housing market, rising interest rates are very strongly linked to decreasing housing prices.

For the past 10 years or so, the interest rates for mortgages have been less than 4%. I can tell you that my very first mortgage – taken out nearly 20 years ago – was for 6.5%. That seems astronomically high by today’s standards! When I was teenager and working part time as a grocery store cashier, I worked with folks who were thrilled to get a mortgage at 8%. The super-low mortgage rates of the past decade have been normalized, and I worry that people forget that rates can also move in the other direction.

Two Minds

I’m of two minds when it comes to housing. Buying a house was a very smart move for me. I was fortunate enough to buy what I needed at a price that was less than 3 times my gross income. The mortgage payments were less than 30% of my take-home pay. I could afford the repairs and maintenance that come with a house. Taxes and insurance weren’t an onerous burden on top of these other costs. The monthly nut associated with my shelter did not inhibit my ability to invest for retirement, travel, and have a bit of fun with my family and friends.

In short, buying a house was a good move for me… 20 years ago.

Today, twenty years later, I’m not so sure that buying a house would be a good financial move for me. For starters, I would have to choose between servicing the monthly nut of homeownership and every other financial goal. My mortgage, property taxes, insurance, repairs & maintenance would render me house-poor for a very long time. There wouldn’t be room in my budget for things like retirement savings, travel, entertainment, vehicle replacement, or those little luxuries that make like easier. My financial life would revolve entirely around paying for my housing, and there would be no room for my other money priorities.

I used to think that renting was a bad idea. However, my perspective has become more nuanced. If renting allows one to have a balanced life, then I think it might be a good idea. Of course, that balance has to include maxing out all retirement savings and building an investing portfolio. Those investments need to be big enough to pay for rental accommodations when the paycheques stop arriving. Whether you own a house or rent your space, you need to pay for shelter one way or another.

Cheap rates aren’t here to stay.

Today’s very low 5-year mortgage rates will go up. Securing a mortgage at 1.84% is wonderful, but that rate is likely only going to be locked in for 5 years. (And only for those who were lucky enough to grab it!) At renewal, the rate might be 3.5% or higher. Can your crystal ball predict the future perfectly? Will your budget be able to survive the mortgage payment increase that will come with a higher mortgage rate? Are you positive that you’ll still have the same income that you have now?

Even if your job’s salary stays the same, will your other expenses do the same? I’ve noticed that the cost of my streaming service goes up every 18 months or so. The price of food hasn’t gone down, ever. Taxes seem to only ever move in one direction. The list goes on. Life gets more expensive every year, yet salaries and wages don’t always go up in tandem with the increased expenses of every day life.

So even if you were only of the lucky ones to grab a super-cheap mortgage rate for a five-year portion of your mortgage, I strongly urge you to calculate how much your mortgage payment will increase when you renew. It’s not too, too crazy to believe that the bond market will push the five year rate up by 50 basis points each year for the next five years. Add 2.5% to your current rate and see what your new payment will be. Can you handle it?

Alternatives

Your first option is to pick rich parents. It’s been my observation that some parents with an excess of money are willing to help their offspring purchase a home. Financially speaking, it’s wonderful to have that kind of help to get onto the property ladder.

Not all of us can pick our parents, so that means being a little more creative.

If I were starting out today, I’d be looking at becoming a landlord. Either I’d try to buy a house with a rental suite or I would have roommates. There would have to be someone else around to contribute to the mortgage payments. If my salary paid for the minimum monthly mortgage payment, then the tenant’s rent would be what I would use for the extra payments to principle.

Would it be ideal? No. Would it have to last forever? Also, no.

A third alternative would be waiting to buy. Like I said earlier, house prices will come down as mortgage rates go up. Figure out how much of a mortgage you can afford. This number will be different than what the bank says you can afford. After all, you’re the one who’ll be responsible for the payments so look at your budget and be realistic.

Once you know how much mortgage you can comfortably carry, open an account at EQ Bank and start salting that mortgage payment away. This benefits you two ways. First, you’ll get used to having a mortgage payment since you’ll have to make that payment once you’ve signed the mortgage documents. Second, this money will help you make as large a down payment as possible.

I’m not trying to dissuade you from buying a house. Truly, I’m not. I just want you to think long and hard about the financial commitment that owning your own home will entail.

In a world without pensions, I am not persuaded that it’s a good idea for a person to spend 25-30 years paying off a mortgage without the ability to save for retirement. A mortgage debt that leads to an extended hand-to-mouth lifestyle is rarely a good thing. It limits options and inhibits one’s ability to pursue their true dreams, goals, and desires.

Retirement is coming, one way or another.

What the eyes don’t see, the heart won’t grieve…
Anonymous Online Poster

No matter how you look at it, retirement is coming.

And if you’re fortunate, you’ll get to pick when you retire. Should Life have other plans for you, then retirement may arrive unexpectedly. Either way, retirement is in your future. One of the best things you can do for Future You is to start saving today.

This year, the contribution deadline for the Registered Retirement Savings Plan is March 1, 2021. In other words, if you put money into your RRSP on or before March 1, 2021, then you will get a tax deduction that can be used against any taxes that you owe for the 2020 tax year.

Here’s a handy-dandy little chart to show you the maximum amount of money that you can put into your RRSP this year.

What’s that? You say that you don’t have $27,830 lying around to make this year’s contribution?

Do you have $1?

Fear not, Gentle Reader. The numbers listed on the chart are the maximum contribution limits. In an ideal world, you would have no trouble at all socking away this much money.

If you’re not one of the Very Fortunate Ones who can easily plunk $27,830 into your RRSP without batting an eye, then fret not. You will do what you can until you can do better. It’s really not more complicated than that.

If you can afford $1 per day, that’s $365 per year. It’s not a lot but it’s a whole lot more than nothing. If you don’t start saving this tiny daily amount, then I can assure you that you’ll regret your decision. Retiring solely on social benefits will not be comfortable.

At $5 per day, you’re looking at $1,825 per year. That’s not too shabby, but it’s also not the cat’s pyjamas. It means one less snack per day, or one less fancy coffee. (Hat tip to David Bach, who is the author of The Automatic Millionaire. This is one the first books that put yours truly on my current financial path.) Save a few calories – use your kitchen to save some money – throw that money into your RRSP and let it grow over the years.

Kick it up to $10 per day and wow! Now, you’re contributing several thousand dollars in a year. In a lot of places, $10 each day is less than you’d spend on parking your car at work. It’s less than getting a burger, fries and a drink at a fast food place. It’s not a whole lot of money, but it can certainly get you to the retirement you want if you consistently put it to good use. If you don’t believe me, check out what Mr. Money Mustache has to say about the $10 bill.

Pick your per diem.

I trust you see a pattern. By implementing a per diem for your RRSP, and setting up an automatic money transfer, you’ll be improving the chances that you’ll have a financially comfortable retirement.

Whatever amount works for your budget, that’s the amount that you should be sending to your RRSP. Before you even ask, $0 per day is not at all an appropriate amount to be saving.

Once siphoned from your daily chequing account and into your RRSP, your money will grow tax-free until withdrawn. How large will it grow? That’s up to you and/or your financial advisor.

In the interests of transparency, I will tell you that my portfolio is invested in exchange-traded funds with Vanguard Canada and iShares. I’ve gone to a fee only advisor for advice, but I do my own research and make my own investment decisions. I’m currently putting my money into equity products, after having spent 9.5 years investing solely in dividend ETFs. I’m a staunch buy-and-hold investor. That means I don’t sell after I buy. I buy what I believe to be good investments and then I just leave them alone for years and years and years. I still have the bank stocks that my parents bought for me when I was a baby…and I haven’t been a baby for a very long time!

You owe it to yourself to spend some time learning about investing your money. Save your money via automatic money transfers. Invest your money in equity products. Learn, learn, learn – as much as you can! There are books, blogs, YouTube, and people who all have information to share. Then repeat the process. Save – invest – learn – repeat!

Do not procrastinate.

Every day that you don’t open your RRSP and invest your money is a missed opportunity to grow your money in a tax-free environment. This is important because money grows faster when it is not taxed. To be very clear, money grows on a tax-deferred basis in an RRSP and you will pay taxes on the money when your withdraw it. However, if all goes well, retirement is a long way away and your money will grow into a giant pile. While you won’t be happy to pay taxes, regard that tax debt as evidence that you’re not going to be poor in your retirement. Poor people don’t pay taxes. You don’t want to be poor in your retirement.

I digress. Retirement is coming, one way or another. If you’re procrastinating about opening and/or funding your RRSP, then stop! Today’s technology means you can open and fund your RRSP from your hand-computer. You no longer need to go to a branch or talk to a human to complete these functions.

Time waits for no one. Take the steps you need to take so that you can put as much as you possibly can into your RRSP. This is a fundament step that you need to take to better your chances of having a financially comfortable dotage and being able to handle whatever financial challenges come your way when you and your income part ways.

Marginal Tax Rates

Quick! What is your marginal tax rate?

If you answered “I don’t know”, then welcome to the club! Pull up a chair and sit down for a spell. Most of us do not know what our marginal tax rate is… which is really too bad. It’s one of the more useful pieces of information to know when it comes to making informed decisions about our personal finances.

The technical definition of a marginal tax rate is that it is the rate of tax that is paid on an additional dollar of income.

…Um… what does that mean?

Good question, Gentle Reader, very good question.

Federal Tax Rates

Before you can understand a marginal tax rate as it applies to your personal income, you need to know the federal tax rates. Here’s a handy little chart I found online courtesy of the good folks at the Canada Revenue Agency.

Federal Tax Rates in Canada

15% on the first $48,535 of taxable income

20.5% on the portion of taxable income over $48,535 up to $97,069

26% on the portion of taxable income over $97,069 up to $150,473

29% on the portion of taxable income over $150,473 up to $214,368

33% of taxable income over $214,368

Let’s walk through an example together.

*** And we’ll ignore your marginal provincial taxes for now. (What? You thought the provinces didn’t want a slice of your income too?) In real life, you won’t ignore the addition of marginal provincial tax rates on your annual income tax bill. You’ll pay the provincial marginal taxes on top of your federal ones since you’re required to do so by law.

How Marginal Tax Rates Work

Jamie earns $47,000 and pays 15% in federal taxes, which works out to $7050 (= $47,000 x 15%). If Jamie earns another $1, his marginal tax rate is 15% because he stayed in the same tax bracket of 15%. Jamie’s additional $1 of income did not take him over the threshold amount of $48,535.

On the other hand, if Jamie’s side hustle earns him $5,000 in the year, then his marginal tax rate goes up to 20.5% on the amount of income that exceeds $48,535. Between $0 and $48,535, his tax rate is 15%. As soon as he earns his next $1, putting him at $48,536, he moves into the next tax bracket. His marginal tax rate is now 20.5% because that’s the rate of tax he pays on his next dollar of income.

In this case, Jamie’s income for the year is $52,000 (= $47,000 + $5000). Jamie would pay 15% on $48,535 (= $7,280.25). Then he would pay a further 20.5% on $3,465 (= $710.33). In other words, Jamie pays a higher amount of taxes on the dollars earned above the 15% tax threshold of $48,535. In this case, the amount of $3,465 is the difference between his income of $52,000 and the 15% tax threshold of $48,535.

At $52,000, Jamie’s marginal tax rate is 20.5%. More importantly, his marginal tax rate on every dollar earned beyond the first $48,535 remains at this tax rate until he hits $97,069. He owes $7,280.25 + $710.33 = $7,990.58 in federal taxes on his income of $52,000.

Imagine Jamie doubles his income to $104,000 per year…

Good for you, Jamie!

So how much federal tax does Jamie owe on $102,000?

A quick check of our handy-dandy little chart tells us that Jamie’s marginal tax rate is now 26%. Why? Because Jamie has earned more than $97,069, which is tippy-top of the second lowest tax bracket.

Further, we know that he only has to pay 26% on the dollars over and above $97,069.

So let’s get to calculating.

We know Jamie owes 15% on the first $48,535 = $7,280.25.

His next $48,534 will be taxed at 20.5%, because $97,069 – $48,535 = $48,534. So Jamie will pay $9,949.47 (= $48,534 x 20.5%).

Finally, he will pay 26% on any dollar of income over $97,069. In this case, Jamie earned $4,931 beyond $97,069 to get to his income of $102,000. The amount of $4,931 is taxed at his marginal tax rate of 26%. Jamie will owe $1,282.06 on this portion of his income.

Jamie’s total federal tax owing is $7,280.25 + $$9,949.47 + $1,282.06 = $18,511.78.

Tax refunds, anyone?

Here comes the part where things get a little exciting! The more taxes you pay on your income, the more taxes you can get back via contributions to your Registered Retirement Savings Plan. The RRSP is a great tool for saving for your retirement.

Contributions to an RRSP lead to tax refunds, which means the tax paid on that earned income is returned to the person making the contribution. The more tax you pay, the bigger your refund. And why is this so? Because a higher marginal tax rate is used to calculate your tax refund. Sweet!

The 2021 TFSA contribution limit is $6,000. TFSA contributions do not generate tax refunds. Money goes in and it grows tax-free until withdrawn. And those withdrawals are also tax-free. The TFSA is also a great way to save for retirement.

However, contributions to a TFSA are just contributions where the taxes have already been paid on the income earned. This is why contributions to TFSAs are said to be made with after-tax dollars.

Steak…meet sizzle!

Let’s say Leslie earns $250,000. According to our handy-dandy little chart, she’s paying 31% in federal taxes. Ouch!

And then there’s Alex, who earns $48,000. The chart tells us that he’s paying 15% in federal taxes.

Both of them are in a position to contribute $6,000 to their retirement. They have a choice of contributing to their Tax Free Savings Account or to their Registered Retirement Savings Plan. (In an ideal world, they would contribute to both but sometimes that’s not possible.)

Leslie and Alex both decide to contribute to their RRSPs. They like getting taxes back from their government! And both of them have realized that their tax refunds can be used to contribute to their TFSAs. Two birds, one stone – beautiful!

Leslie contributes $6,000 to her RRSP. Her marginal tax rate is 31%. This means that her RRSP contributions results in a tax refund of $1,860 (= $6,000 x 31%). She promptly puts that into her TFSA. Leslie’s $6,000 RRSP contribution has resulted in her ability to set aside $7,860 for her retirement.

Alex contributes $6,000 to his RRSP. Since his marginal tax rate is 15%, his contribution nets a tax refund of $900 (= $6,000 x 15%). He contributes that $900 to his TFSA without delay. Since he’s in a lower tax bracket, he paid less taxes in the first place. Still, he’s managed to save $6,900 for his retirement – not shabby at all!

The morale of this little tale is this. You must know your marginal tax rate so that you can make wiser financial decisions. Had Leslie and Alex simply contributed $6,000 to their TFSAs, they wouldn’t have received tax refunds. Their monies still would have grown tax-free but neither of them would have benefitted from the added little boost of also being able to invest their tax refunds.

Understanding how marginal tax rates work is just another arrow in your personal finance quiver. Knowledge is power.

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Weekly Tip: Never carry a balance on your credit card. It’s a financially disastrous move. Even if the interest paid it small, it plants the seed in your brain that credit card balances are okay. And the most certainly are not!

Learn from Others!

If I can impart one nugget of wisdom to you today, it is this. You need not make every mistake yourself in order to learn a lesson. You’re always free to learn from others. I’m not promising that you’ll avoid making your own mistakes – that’s utterly impossible. What I am promising is that some of the biggest mistakes can be avoided if you’re willing to pay attention and think about the choices made by the people in your life.

These people won’t all be your family & friends – although it’s important to pay attention to the consequences of their choices too. Sometimes, the people who can teach you important lessons are only in your life for a few minutes.

When I was in high school, I had a part-time job as a cashier in a grocery store. Living at home, I had the luxury of having all of my paycheque go towards having fun with my friends since my parents paid for my shelter, my food, and the other important stuff. I was a very fortunate kid!

Anyway, two of my customers made indelible memories on me. One customer was an elderly lady who came through my till. I don’t recall how the topic of money came up but she very specifically told me to start saving for my retirement. I was a 16 or 17 years old at the time, but her words stuck with me. The second customer was also an elderly lady. I remember watching her compare two cans of cat food, and she was teary-eyed. When she came through my till, she confessed to me that she stocked up on cat food when it went on sale because she ate it herself. At the time, each can cost $0.59. She was tearful because the price had gone up from the last time she’d shopped.

Like my parents & teachers before them, these women provided me with a very important opportunity to learn from others. In their respective cases, the lesson was about money and retirement.

Those two anonymous customers forever changed my perspective on saving money for my future. Here were two seniors, who had very different options at the grocery store. I don’t know their back-stories. I can’t give you any details about their lives. Again, I was a teenager in a cashier’s uniform who rang through and bagged their orders before wishing them a nice day.

Yet, each of them taught me a valuable lesson her own way. From that day forward, I knew down to the marrow of my bones that I had to save a lot of money for my retirement.

When I was in my 20s, I worked part-time in a bank while going to school. One Saturday, a customer came in to pay $20,000 (maybe $25,000?) towards his mortgage. Those kinds of transactions were beyond my skillset as a customer service rep so the loans officer had to process it. After the customer left, I asked the loans officer why the customer had done that. The loans officer took the time to explain to me how the customer’s lump sum payment would knock years of payments and thousand of dollars of interest off his mortgage debt. That was the first time anyone had ever explained anything about mortgages to me.

Once again, I tucked that knowledge away for the future. I promised myself that, once I got a mortgage, I would pay it off as fast as possible by using these magical “prepayment options” that the loans officer had taught me.

Now, I still made mistakes. I didn’t learn about RRSPs until I was 21. So even though, I’d been working part-time since the age of 16 and saving $50 every two weeks in my savings account, I delayed starting my retirement savings program by 5 years. My parents ensured that I filed a tax return each year, so my RRSP room was accumulating every year. I could’ve made a contribution sooner but, alas, I did not.

So what happened at age 21? That’s easy. I read the book The Wealthy Barber by David Chilton. That book changed my life! In addition to starting my RRSP, I began to read more books about personal finance. When I graduated from school and started my career, I had a firmer foundation than I otherwise would have had. Though not perfect, I had a plan for my money.

Due to my choice to learn from others, I started contributing to my retirement accounts at age 21. I forced myself to start an automatic savings program at age 16. I’ve continued to live below my means. This choice has allowed me to always have money for investing. I chose to learn from others and I’ve avoided some of the very worst mistakes that I could have made with my finances.

Again, you need not make every mistake yourself. You have the option to learn from others. Use it!

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Weekly Tip: Set up an automatic savings plan. Part of your paycheque needs to be invested every time you are paid.

RRSP Season is Back!

It’s once again the season to talk about your Registered Retirement Savings Plan – otherwise known as RRSP Season!

Between Christmas and the end of February, there’s generally a plethora of advertising about the importance of funding your RRSP. So I’m putting my $0.02 into the mix too!

An RRSP is a tax-deferred way to grow your money. An RRSP is a registered account. This means that once you’ve opened an RRSP, you can deposit money into it and watch that money grow without taxes until you take it out. The point at which you withdraw your money is the point at which you’ll pay the taxes owing. In other words, your taxes owing on the growth inside your RRSP are deferred until you take that money out.

The deadline for contributing to your RRPS for the 2019 tax year is March 2, 2020. Our dear, sweet government gives you an entire year + 60 days into the following year to contribute to your RRSP. Whatever you don’t contribute in one year will rollover into the following year’s contribution.

In an ideal world, you would contribute your maximum every single year. Your RRSP would be chock-full of the perfect investment earning you a return of 15%, year-in-year-out! It would be a world of sunshine and lollipops, rainbows, puppies and kittens galore! Who wouldn’t want to live in the kind of world?

Most people do not make the maximum contribution to their RRSP every year.

So what to do?

Contribute what you can. If that’s $50 per week, then that’s $2,600 per year. If it’s $50 per month, then that’s $600 more than $0. Find a way to squirrel away as much as you can into your RRSP. The sooner you start contributing your RRSP, the sooner you can start investing your money within this registered account. Consistency is one of the keys to building wealth over time so start as soon as you can.

If you open an account with Canada Revenue Agency, you’ll have access to your personalized RRSP contribution limit. If this amount is more than you can contribute in one year, then figure out how much of a contribution you can make. Take that number, divided it by the number of times that you’ll be paid and set up an automatic transfer so that a portion of your contribution is sent to your RRSP every time you get a paycheque.

Let’s say you can afford to put away $3200 in 1 year and you’re paid bi-weekly. That means you’ll get 26 paycheques in one calendar year. This works out to $123.08 per paycheque, which is equivalent to less than $10 per day. Set up an automatic transfer of $123.08 from each paycheque and you will have found the money for your RRSP contribution.

And if you can afford more, then I would suggest that you contribute more. I’m still of the view that stuffing your RRSP full of money is a far better option than retiring with an empty RRSP. And since I’m not a tax professional, I’m going to recommend that you do your due diligence – which is a fancy way of saying do your own homework – and learn about RRSPs, their benefits, and how they can work to minimize poverty in old age.

How do I invest in my RRSP?

The automatic transfer ensures that you’re saving money so that you can contribute to your RRSP. Once the money is inside your RRSP, you still have a responsibility to yourself to invest it. The money can stay inside your RRSP until your 71 years old so you have may have several decades before you’re forced to withdraw it. An investment period this long is best used by investing in equity products that offer the best likelihood of higher growth.

You can invest in index funds, exchange-traded funds, mutual funds, individual stocks, bonds, guaranteed investment certificates, and high-interest savings accounts. To be very clear, it’s my personal opinion that GICs and HISAs are inappropriate for your RRSP money. The rates of interest offered on those products will not keep up with inflation. By failing to keep up with inflation, your RRSP money will consistently lose purchasing power over the years. This is a very bad thing!

In my opinion, you’re going to want to invest in index funds and exchange-traded funds that are equity based, which means that they invest in the stock market. If you don’t know where to start, check out the Canadian Couch Potato website and the model portfolios that are discussed.

Once the money is in your RRSP, do whatever you can to leave it there. Your RRSP is not a savings account. Do not treat it as an emergency fund! Life has a way of getting the way of plans, but I want you to do whatever you can to leave your RRSP money alone to grow over the years between today and retirement.

What if I get a tax refund?

Remember how I said that RRSP contributions are tax-deferred? That means that you get a tax deduction for contributions that you make to your RRSP. Depending on your tax situation, you might be entitled to a tax refund after you’ve contributed to your RRSP.

This is your money to be spent however you see fit. Yet… if you’re looking for ideas of the best use of this tax refund, here are my suggestions.

Pay off or pay down outstanding credit card balances, student loans, or any other debt you may have.
Put the tax refund right back into your RRSP, so long as doing so won’t take you over your maximum allowable RRSP contribution limit.
Put the money into your TFSA so that you can maximize your contributions to all of your registered accounts.
Contribute the money to non-registered investment account.
Use the money to treat yourself to something nice – a day at the spa, a weekend road trip, travel, whatever you want.

At the end of the day, what you do with your tax refund is entirely up to you. After all, it’s your money and personal finance is indeed quite personal so you get to spend your money in any way that you think is best.

The RRSP is a Gift

Speaking from personal experience, I can tell you that from the tiniest little seed does a mighty oak grow. I started my own RRSP over 25 years ago. Each year, I contributed as much as the CRA would allow. Today, this portion of my retirement kitty is over six figures. My money is invested in a mix of exchange-traded funds – split between bonds and equity. Slowly but surely, the money is growing and I should have a nice little cushion when it’s time for me to hang up my gloves.

Use your RRSP to save for your future. It’s one of the best tools available for growing your money. When you’re old, you’ll be quite happy that you have money set aside for your dotage.

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Weekly Tip: Always re-invest the dividends and capital gains that your portfolio earns. This is where the magic of compound growth makes a huge impact. Use Dividend Re-Investment Plans whenever you can. Relying on a DRIP along with consistently saving and investing a portion of every paycheque is one of the tools I used to build my Army of Money Soldiers.

Retirement is a Function of Money, not Age

I’ve been reading many articles about how people in their 60s, 70s and even in their 80s are still working because they can’t afford to retire.

Invariably, the statement is made that the government pension is not enough to retire on and to have a comfortable life.

For the record, I want it known that I believe retirement is a function of money and not a function of age. Once employers transferred the obligation of saving for retirement into workers, it became necessary for workers to realize that retirement wasn’t guaranteed with the passage of a particular birthday.

In order to maximize your chances of retiring comfortably when you want to, you must do the following things.

First, live below your means so that you can fully fund all of your registered accounts. These would be the Tax Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) in Canada. You can contribute up to $26,500 to your RRSP for the 2019 tax year. As for the TFSA, the 2019 contribution limit is $6,000. These might be huge amounts for you, or they might be pocket change. Either way, contribute as much as you can as soon as you can. I promise you that you will need money in your dotage. These two accounts allow you to set aside money and to have that money grow without being taxed. Tax-free growth is awesome!

Second, continue to live below your means so that you can invest in you non-registered investment accounts. If you’ve got the money after fully funding your registered accounts, then don’t blow it on things that don’t bring you joy. Instead, put some of it away for your future. Non-registered investment accounts are also called brokerage accounts. Some people say to save 15% of your income. I advocate for saving until it hurts. The more you save, the longer your money has to compound and grow.

Third, stay out of debt to the greatest extent possible. Debt is a financial cancer. It puts a claim in your future income. Debt stops you from investing your money towards your own goals. Think about your debt as a claim on your time. More debt means staying in the workforce longer in order to pay off your creditors. Do what you have to do to eliminate debt from your life to the greatest extent possible. Make sure that debt doesn’t accompany you into retirement!

Fourth, get rid of your TV. The entire purpose of commercials is to get you to buy stuff. Every ad is designed to make you believe your life would be better if you opened your wallet. This is not true. Stop exposing yourself to so many damn ads! Bury your nose in a book. Go for a walk. Find a volunteer activity. A new year is about to start. Consider a resolution to eliminate television from your life, whether it be cable, Netflix, Crave, Hulu, whatever. Maybe the idea of going cold turkey on TV makes your heart race? Could you pick one day of the week to give up the consumption of commercials? Even seeing 1/7th fewer exhortations to spend will give your wallet some relief.

The size of your retirement kitty is dependent on how soon you plant and water your money tree. Save-invest-learn-repeat. Unless you’re living on 30% of your income, it’s going to take a good long time to save up a decent-sized retirement kitty. Start saving today!

You’re the one with the power to invest your money for long-term growth. You have the ability to learn about various options for your money. It’s on Today You to prepare as best you can for the arrival of Tomorrow You. Save yourself from the struggle of living on a government pension. The maximum pension payment in Canada today is less than $1200 per month. And you’re only entitled to that if you’ve worked for 40 years!!!

Even if you’re one of the fortunate ones who love their job situation, you must still think about having enough money to retire in your own terms. Ask yourself if you’d still love your job if certain conditions changes. A new boss? A longer commute? Fewer resources to do more work? A change in duties? Do you want to have the option to leave the world of work without financial worries if the job you love were to morph into one you despised?

Retirement is a function of money, not age. When you have enough money, you can retire whenever you want. Try to think about this every time you go to spend. Is your intended purchase worth another day at work?

Dollar Cost Averaging is a Great Tool

As the warm days of spring roll in and push harsh memories of winter to the recesses of your memories, you may find yourself enjoying the sunshine and asking yourself: What is exactly is dollar-cost averaging?

I’m here to tell you that DCA can be a powerful tool for investors.

In a nutshell, dollar-cost averaging is a method for systematically investing your money. Investors who use DCS invest the same amount of money into an investment on a regular schedule. That schedule can be whatever the investor choose – weekly, monthly, quarterly, annually, or any other increment. The purchase of the underlying asset occurs regardless of the asset’s price.

There are a few of good reasons to use this investment methodology.

Dollar Cost Averaging or Lump-Sum Investing?

Firstly, the DCA strategy facilitates quicker investment in the stock market. Investors can align their investments with their paycheques. Since one my guiding financial mantras is spend-some-save-some, I make sure that a part of my paycheque is promptly & automatically re-directed to my investment portfolio.

There’s a school of thought which says that lump-sum investing is better than DCA because the entire value of the lump-sum amount is put to work in the stock market all at once. If your plan is to invest a large amount in the market, the proponents of lump-sum investing recommend that you invest the entire amount at once. Check out this article from the wise fellow at www.fourpillarfreedom.com for a good discussion of the benefits and drawbacks of the two investment methods.

Theoretically, I have no quarrel with the lump-sum investment style. However, the practical reality of my life is that I don’t have large lump-sums of money lying around. I invest when I get paid because that’s when I have the money available. The money is deposited into my chequing account, then it’s shunted to my investment account, where it sits until it’s invested. For most people without large chunks of money at their disposal, DCA is a better option – in my opinion – because they can invest when they’re paid.

No Need to Time the Market

Secondly, DCA eliminates that temptation to try and “time the market.” Investors who time the market are trying to buy an investment at its very lowest price. Perhaps you’ve heard recent chatter in the system from economists about the impending recession?

What you will never hear from any of those experts is the exact date on which the recession will start. And absolutely none of them will tell you date on which the stock market will be at its very lowest point. People lucky enough to buy at the lowest point will have the best investment returns when the market recovers. Market-timers are always trying to pick the very best time to invest.

Like all investors, market-timers are trying to maximize the profits from their stock market investments. Unlike market-timers, investors following the DCA-method simply invest their money on a consistent basis. They do not bother themselves with trying to buy at the very lowest price. They’re not concerned with the very best returns. They understand that time in the market is more important that timing the market.

Automation Pairs Beautifully with Dollar Cost Averaging Investing Method

Thirdly, the power of automation complements the DCA investment strategy very nicely. If you intend to invest in the stock market, then automatically transferring money from your chequing account to your brokerage account is an excellent strategy.

Let’s say you decided to invest on the 15^th of each month. Your automatic transfer will ensure that a chunk of money is in your brokerage account for the purchase. On the 15^th of the month, you’ll buy as much of the asset as your funds will allow regardless of the asset’s price. Then you won’t think about investing again until the 15^th of the following month. Maybe you want to invest quarterly? That’s fine too. Put the power of automation to work! Gather money in your investment account until it’s time to buy some assets. Never forget the DCA can’t work for you unless you’ve set aside some savings.

This is how I invest. Every month, I invest money into my dividend-paying investments. I don’t follow the price of my exchange-traded funds from one day to the next. Instead, I buy as many units as I can when it’s time to buy. Then I don’t think about my investments again until the dividends roll in.

Easy-peasy, lemon-squeezy – rinse & repeat!

I’ve been using the DCA method to invest my money since 2011. I wasn’t interested in learning to be a wizard at picking stocks. The DCA method was easy to implement and even easier to understand. Much like every other investment method, it’s not perfect and it’s not suitable to for everyone. However, it works for me. I’m confident in this method and I’ll continue to use it until something better comes along.

RRSP Season

It’s Registered Retirement Savings Plan season! From now until the last day of February, there will many advertisements all over the place exhorting you to make a contribution to your RRSP.

If you need more detailed information about the rules, then I would suggest that you visit the website for the Canada Revenue Agency. Alternatively, you can talk to your accountant or a financial advisor. This article does not in any way, shape or form constitute comprehensive accounting or legal advice about RRSPs. I am not a professional nor am I giving you any kind of investing advice. This post is a starting point for you to make inquiries, learn the basics, and take responsibility for your future by determining how to use RRSPs to your best advantage.

For my part, I really like RRSPs. I’ve been contributing to mine since I was 21 years old. Every year, I get a tax refund which is promptly re-invested for retirement or put towards an annual vacation. I’m very diligent about automatic transfers to my investment portfolio so I’m quite comfortable with spending my RRSP-generated tax refund on whatever my heart desires.

RRSPs offer tax-deferred growth. You can pick almost any kind of investment to put under the tax-deferred umbrella. On top of that, you might even qualify for a tax refund if you make a contribution. If you’re in a higher tax bracket when you put money in than when you take it out, you’ve saved money on both sides of the transaction.

Remember – it’s tax-deferred savings, not tax-free savings. If you contribute when you’re in the 33% tax bracket, then your tax refund is based on that tax bracket. If you’re in a lower tax bracket when you take the money out, say the 26% tax bracket for instance, then you’ll pay tax on that RRSP withdrawal at 26%. This means you’ll be 7% to the good. Woohoo!

In my humble opinion, RRSPs have many commendable benefits.

However, not every product is perfect. RRSP contribution room can be lost if you make a contribution and then withdraw the money outside of two very specific RRSP programs. Those programs are the Lifelong Learners Plan or the HomeBuyer’s Plan. In short, if you contribute $1000 to your RRSP and then withdraw that money outside of the aforementioned programs, then you cannot put that money back into your RRSP in the future. Unlike the Tax Free Savings Account, which allows for contribution room to be re-captured if a withdrawal is made, your RRSP contribution room is gone forever once you withdraw your money.

Another associated drawback to RRSPs, in certain circumstances, is the creation of a nemesis commonly known as D-E-B-T.

“How can an RRSP result in debt?” you ask.

It’s quite simple. At this time of year, banks love to give people RRSP loans. Customers borrow money, contribute to their RRSP, and then they’re supposed to use the tax refund to pay down the RRSP loan. Whether the tax refund is actually applied to the outstanding balance on the RRSP loan is anyone’s guess. The tax refund goes straight to the borrower who took out the loan and it can be used however the borrower wants it to be used. Concert tickets? Holiday? Extra mortgage payment? Cigarettes? The choice is limited only by the borrower’s imagination and common sense. There’s no requirement for the tax refund to pay down the RRSP loan.

In my humble opinion, failing to pay down the loan with the tax refund is most likely a stupid move because do you know what else belongs to the borrower? The loan payments! If the tax refund is spent on something other than the RRSP loan, the loan payments still have to be made because the borrower put himself into debt by taking out the loan in the first place!

Even if the tax refund is applied towards the RRSP loan, trust me when I say that the refund won’t be enough to cover the principal of the loan which means that the borrower is on the hook for the remaining balance of the loan.

Keep in mind that the banks aren’t lending you money interest-free. They might defer the interest on the first 90-days of the loan, in the expectation that you’ll apply any tax refund towards the debt, but don’t hold your breath. Way back in the Palaeolithic period when I worked for a financial institution, this is what my overlords did for the customers. I have no idea if this is still the practice. However, if you can’t repay the loan in full within the grace period, then you will be paying interest on your RRSP loan until it’s completely repaid.

The other big drawback to the RRSP loan is that it, more often than not, requires more RRSP loans in the future if a person is intent on funding their RRSP each year. A cycle of debt is created – this is bad. See, if you’re required to make loan payments on this year’s loan, then you’re most likely not setting money aside for next year’s RRSP contribution. If you had set aside the money in the first place, then there would not have been any reason for you to have taken out an RRSP loan. Following this logic, when next year’s RRSP season rolls around, then you’ll be more inclined to take out another loan to make your next contribution.

This is an ass-backwards way to set aside money for the future. Yes – make the RRSP contribution. No – do not go into debt to do it!

“So what’s your bright idea, Blue Lobster?” you ask.

It’s simple. Go to any bank’s RRSP loan calculator and enter your numbers. The calculator will spit out a loan payment amount. I want you to set up a transfer from your bank account to your RRSP in the amount of the loan payment. Maybe the calculator spits out a payment amount of $500/mth. If your budget can accommodate this number, great – contribute $500 to your RRSP every month like clockwork. Maybe your budget can only tolerate a monthly hit of $350. That’s fine too – you’ll contribute $350 to your RRSP each month.

The point is that instead of paying money and interest to the bank, I want you to contribute that money to your RRSP. If you were willing to pay the bank some interest for the privilege of borrowing money, then I see no reason why you won’t make interest-free payments to yourself.

Either way, you’ll be setting aside money for your future. Why not do so without going into debt?

Savvy Steps for Successful Savings!

Well, 2019 is here and nearly two weeks are under our collective belts. How are you doing with those new year’s resolutions? Or as a witty little photo on Instagram called them: your casual and in-no-way-legallly-binding promises to yourself?

Personally, I don’t make resolutions. Hats off to those of you who do, but I prefer not to disappoint myself on a regular basis. My preference is to consider my options, assess my likelihood of completing one of said options, and then making a plan to complete whichever option I have deemed worthy of pursuit. I do this throughout the year, and I reserve New Year’s Day for family, friends, food, and fun!

This year, I spent part of January 1 listening to Paula Pant. She’s the wise woman behind the website Afford Anything. I’ve been following her for the past couple of years and I have to say that I like the cut of her jib. This year, Ms. Pant released a list of 26 items that you should be tweaking in order to get closer to your financial goals. I would suggest that you give this podcast a listen and figure out which ones work for you.

After listening to Ms. Pant’s podcast, I was very happy to realize that I’m doing, or have done, many of the things that she suggested. For example, I have an estate plan in place. I track my net worth and my daily spending. I’ve implemented the anti-budget into my life.

And if you want to know what I think you should do with your money in 2019, I’ve got my own list. There’s no particular order of importance since I believe that all of these tips will help you to achieve all of your short-term and long-term financial goals. Here you go!

Contribute to your Tax Free Savings Account. The contribution limit for 2019 is $6,000. Your cumulative lifetime TFSA contribution room is $63,5000. If you cannot max out your TFSA, do what you can by contributing as much as possible without violating the contribution rules.
Automate the money sent to your investment accounts and your sinking funds (see item #10). Limit your daily expenses to whatever’s leftover after your automatic transfers have funded your future goals.
Stop paying bank fees by switching your chequing and savings accounts to Tangerine or Simplii. These are two online banks that do not charge fees for deposits, utility payments, debits, transfers, or e-transfers. Remember – paying bank fess is an injury you inflict on yourself!
Cook at home more than you do now. There are literally millions of free recipes on the Internet. There are just as many free cooking lessons on YouTube. Practice makes perfect so get in the kitchen and start preparing homemade food that’s tastier than anything you can buy commercially. To get you started, here’s a marvelously easy recipe that I found for making a delicious buffalo chicken casserole.
Beef up your emergency fund unless you already have 9 months worth of income set aside. If you have to use your emergency funds, replenish these monies as fast as you possibly can so that you’re ready for when the next emergency strikes.
Don’t take on any new debt. If you think you’ll need to buy something significant in the next year, then start saving money for it so that you pay cash – see item #10.
Cut the cord. TV’s purpose is to convince you to spend money. If you cannot cut the cord completely, reduce your cable package and figure out how to stream TV shows from the Internet.
Lower your credit card limits to what you can pay off in full each month. If you can’t pay more than $1,000, $2,000, $3,000, whatever-amount, then that should be the absolute limit of credit available to you. The goal is to stay out of debt. There’s no need to have a credit card limit that’s higher than your monthly take-home pay. A higher-than-strictly-necessary credit card limit is a temptation to spend that you don’t need in your life. Call your credit card company and tell them to NEVER raise your limit without your express request to do so.
Increase the amount of money that is automatically transferred to your investment accounts. See items #4 and #7. Whatever money you’re not spending on eating out can be re-directed towards your investments.
Create sinking funds to pay for annual expenses, such as annual insurance premiums, property taxes, birthdays, holidays, travel, anniversaries, anticipated large purchases, etc…. Allocate money from each paycheque towards theses expenses. When the time comes to pay for them, the money will already be in place waiting to be spent.

Financial goals are rarely attained overnight. You’re the only one who knows exactly what you want from your money. And while I’ve provided you with this little list of money-to-do’s, you’re the person who has to live with your money choices. Hopefully, my suggestions (and those of Ms. Pant!) will take you closer to your financial dreams as you embrace all that 2019 has to offer!