Registered Retirement Savings Plan - Millionaire on the Prairie

Weave Your Own Safety Net

The deadline to contribute to your Registered Retirement Savings Plan for the 2020 tax year is March 1, 2021. I would strongly suggest that you contribute a little something to your RRSP because the money will grow on a tax-deferred basis. Tax-deferred just means that the money will not be taxed by the Canada Revenue Agency until such time as it’s withdrawn from your RRSP.

As you weave your own safety net, it would behoove you to take advantages of all legal option for avoiding the taxation of your money. In Canada, two of the best ways to legally avoid taxes are to put your money inside of your RRSP and your Tax Free Savings Account.

The care & feeding of Future You is your responsibility. Since this is a blog about personal finance, I’m going to focus on the two main reasons why you simply must weave your own safety net.

Escaping Bad Working Conditions

I’ve talked about the unfortunate reality of horrible bosses and I’ve also talked about some great advice that I received way back when. When you weave your own safety net, you are buying yourself options in the event that your working conditions become unbearable or that you’re suddenly turfed from your job.

I promise you that having a safety net brings you peace of mind. I hope that you haven’t had to experience the panic and anxiety that comes when you don’t know how you’ll pay for the expenses of your life. I’m not talking about having to missing a vacation. They’re wonderful and I do love to travel, but vacations are a luxury. I’m talking about worries stemming from how you’ll get your next meal, whether you’ll be evicted or foreclosed on due to non-payment, whether you have to suffer harassment or bullying at work because you need the paycheque. These are the kinds of financial problems that can magically disappear when you weave your own safety net.

I won’t promise that it will happen quickly, but rest assured that accumulating a several hundred thousand dollars in your piggy bank will give you the option to walk away from a toxic work environment. It will provide you with the breathing room you need to find a better job, to start your own business, or to find another way to fund your life.

However, your safety net won’t weave itself. You have to take the steps to create it. And it starts with $1. You will weave your own safety net by being diligent, by relying on tools to transfer a portion of every paycheque into your investment portfolio. The sooner you invest your money, the faster it will grow.

Should you be one of the Fortunate Few who loves their job and has never had serious problems at work, then I still want you to weave your own safety net. Why?

DB-Pensions are few & far between.

The answer is that you’re more than likely going to be responsible for footing the cost of your own retirement. Defined-benefit pensions are a rarity. These are the pensions where you know exactly how much you will be paid every month when you retire.

Defined-contribution pensions are completely different. With DC-pension, you know how much you contribute every month. However, the amount that you are paid from this pension is dependent on the strength of your investment choices. If you’ve chosen well and earned good returns over the years, then your pension will pay you a very nice sum. Conversely, if you’ve not chosen well and your returns aren’t good, then your DC-pension will not give you a comfortable retirement…and you may simply have to continue working when you’d rather not.

Investing throughout your working life gives you the option to quit earlier, if you so choose. In a perfect world, you’ll contribute to your pension regardless of whether it’s a DB or a DC variety and you will contribute atleast 20% of your paycheque to your own investment portfolio!!! After a couple of decades of uninterrupted contributions & growth, your investment portfolio will be sufficient to give you the option of retiring early if you so choose. It should be kicking off dividends and capital gains that are sufficient to fund your life.

Weaving your own safety net means buying yourself options about how you want to live your life. You’re not yoked to employment forever. Those of us who aren’t born into money know that we have to earn it by working. At some point, most of us will want to stop working for money without seeing a precipitous drop in our standard of living. The only way to quit while keeping the same way of life is to have a financial safety net that exists to replace our paycheque.

Your primary goal for your safety net is to be there when your paycheque disappears. Your safety net will then take over the job of putting money in your pocket for things like food, shelter, clothing, transportation, and entertainment.

So start today, right where you are:

As you pay off debts, re-direct 75% of each former debt payment to your investment portfolio.
Never stop learning about investments – read books, blogs, magazines, online articles.
Don’t invest in what you don’t understand.
Keep your management expense ratios low, which means under 0.5%.
Invest atleast 65% of your portfolio in equities, including half of that in international equities.
Ignore the media! The day to day gyrations of the stock market aren’t important unless you’re on the eve of retirement.
Invest for the long term, which means 10 years or more.
Build up an emergency fund so you need not dip into your investment portfolio when the inevitable emergency comes your way.

Some Final Words of Advice

Don’t become a mere conduit for your paycheque.

What are you talking about, Blue Lobster?

I’m suggesting that you are not simply a convenient link between your paycheque and someone else’s bank account. If you work hard, get paid and spend every penny that crosses your palm, then what have you done other than make someone else rich?

Instead of your employer paying sending your paycheque directly to your credit card/streaming service/subscriptions/memberships/etc, you’re the one dispersing all of your money to others… And at the end of that dissemination process, you have nothing leftover in your bank account. You were simply a conduit.

Tell me again. Why do you work so hard to give away all of your money? Don’t you want to keep some for yourself?

An indebted employee is a person with few options other than to keep going to work. Granted, one of those options includes losing everything but no one really wants to go through that experience. And you need not do so. Staying out of debt, or paying it off as fast as humanly possible, gives you the option of keeping more of your money for future you.

It’s in your best interest to do what you can to resist the pervasive societal training to become a dutiful, prolific spender. And I’m not preaching that you go to the other extreme. I don’t want you to become a miser. I truly do want you to enjoy your money and to use it in a way that maximizes your happiness. Contrary to every marketing message that bombards you daily, there is no good reason for you to obey the AdMan’s relentless message to spend-spend-spend-then-borrow-to-spend-some-more!

Determine what your life’s goals are, what dreams are most important to you, what makes your heart sing with unadulterated joy! Then only spend your money in ways that move you towards fulfilling those dreams, accomplishing those goals, and experiencing that glorious joy.

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.

Never Stop Reading!

Learning doesn’t stop with graduation. You should never stop reading. Read everything that you can get your hands on. Reading opens your mind to new ideas & perspectives. No one says you have to agree with everything that you read, but you owe it to yourself to learn as much as you can in the time you have left.

Since this is personal finance blog, I’m going to talk about the personal finance books that have shaped my financial life.

The Automatic Millionaire by David Bach

I loved this read for its simplicity and ease of implementation. After reading it, I didn’t have to spend too much time setting up my automatic transfers. 20 minutes? Maybe 30 minutes? In less than an hour, I’d created a system whereby a portion of my money went to my long-term goals, another portion went to my short-term goals, and the rest stayed in my chequing account to get me from one day to the next. Easy-peasy-lemon-squeasy!

I’ve been using automatic transfers for more than 2 decades. They eliminate the need for me to remember to transfer money from my chequing account to my investment account. The money is magically in place when it’s time to make an RRSP or TFSA contribution. There’s money waiting to be deployed to pay my monthly utility bills. Learning how to automate my money at a young age set me on a good path when it came to personal finance.

The Wealthy Barber by David Chilton

There’s something special about your first. I was 21 years old when I read this book. I was naive and very un-sophisticated when it came to money matters. However, this book impressed upon me the important of starting my Registered Retirement Savings Plan as soon as possible so I did. I was a student who paid nothing in taxes, hence I got a full tax refund back every year. Still, those little contributions to my RRSP have since grown into a nice six-figure income. What I took from this book is that investing is best started as soon as humanly possible.

The Two-Income Trap by Elizabeth Warren and Amelia Warren Tyagi

Senator Warren’s book was my first foray into the political implications of personal finance, and the risks that are associated with dual income families spending both of those incomes. I promised myself that if I ever married, I would make sure that my partner believed in living below our means just as much as I did. That way, we could live for today while still saving and investing.

While I’ve never married, I still set aside a good chunk of my salary for investing purposes. Mental gymnastics allows me to split my household income into two! Sometimes I pretend that the monthly dividends generated by my portfolio are the take-home pay of my imaginary spouse. It’s the best of both worlds – a second income without any money fights about how it will be spent!

Debt-Proof Living by Mary Hunt

This book was fantastic. I loved it because it gave me an infrastructure for how to set up my short-term money. One of the best ideas I’ve ever come across is the Freedom Account. Its purpose is to cover the irregular expenses that come up every year, but aren’t emergency expenditures. Think of things like oil changes, clothes purchases, pet expense, vacations. These are the expenses that do not occur regularly but still have to be covered. You don’t know exactly when you’ll have to pay for them but you know it’s going to cost some money.

I’ve had my Freedom Account for decades, and it’s been my safety net more than once. If you don’t have one, I suggest that you get one.

The Richest Man in Babylon by George S. Clason

It’s a parable that’s also a quick read. I loved this book! The financial principles about savings and investing have been around for centuries. And so have the mistakes that people make with their money. This parable touches upon the difficulties of not spending every nickel earned, finding good mentors, investing properly, and repaying debts. It’s also about the fact that get rich quick ideas are scams, more often that not. Building wealth takes time and consistency, but almost anyone can do it by following the right principles.

Quit Like A Millionaire by Kristy Shen & Bryce Leung

This inspirational story of retiring in one’s early 30s will stick with me for a long time. I learned about the challenges and strategies for early retirement. This book opened my eyes to idea of living outside of North America in order to save money. I learned about how to segment my money so that I wouldn’t have to sell from my portfolio during a market downturn.

Kristy and Bryce are the brains behind the Investment Workshop, one of the best free sources I have ever found for learning about how to create, maintain and re-balance your portfolio. Take advantage of their lessons to set yourself on a path for a comfortable retirement, early or otherwise.

Again, never stop reading!

As I’ve said before, you need not make every mistake yourself – you can learn from the mistakes of others. Books are a source of knowledge. They’re free from the library. Even in our COVID-19 circumstances, you can still access library books – you simply need to go online instead of into a building. Never stop reading!

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Weekly Tip: Create you own pension by investing your money towards your retirement. Fewer and fewer employers are offering pensions to their employees. This means that you have to save for your own retirement. If you don’t save the money for Future You, then no one will. Start today by squirrelling away a little bit of money, invest it for the long-term, learn a little bit more about investing, then start over. Save, invest, learn, repeat!

Taking it Day By Day

It’s been 4.5 months since the World Health Organization declared that the globe was in the grips of a pandemic. Since then, there has been much upheaval in people’s lives due in no small part to the financial impacts of lost jobs, the inability to travel, and social isolation. What are we supposed to do when going outside means taking the risk that we’ll contract a disease about which so much is still unknown?

We have to take things day by day.

By nature, I’m a planner. For example, I enjoy planning my travel. It’s fun to peruse all the websites, read up on the various sites, figure out where I want to go. In 2018, I went to Ireland for the first time. I crossed an item off my Bucket List – booking my time off then looking for a good travel deal. My biggest regret about that trip was that it was somewhat last-minute, in that I booked it only 6 weeks before getting on a plane. In the deep recesses of my travel-planner heart, I hadn’t given myself enough anticipation-time. Six weeks wasn’t enough time to dream about my upcoming trip and to imagine all the cool things I’d be seeing & doing.

Of course, in hindsight, I should have taken more time off and visited Northern Ireland and Scotland while I was over there. Who knew that a global pandemic would crush the airline & travel industries?

COVID-19 has changed things…

Today, I’m not doing as much travel planning. As you can well imagine, it’s difficult to get excited about flying anywhere when my personal view is that airplanes are the petri dishes of the sky. Similarly, long road trips are in the not-just-yet category since I’m not keen on staying in a hotel or going to restaurants.

Right now, I’m taking things day by day. My natural urge to plan has been channeled into cooking and baking. I’m already at home. My kitchen is right there. I have the ingredients and the tools to cook and bake delicious things for myself. Meal-planning is finally receiving the attention that it’s due. Trips to the grocery store are less frequent, but I do buy a lot more when I go. Once home, I start figuring out what to eat right away and how to meal-prep for the upcoming week.

As for investing, I have no choice but to take things day by day. The last time there was a big drop in the stock market was in 2008-2009. I made a huge mistake by stopping my contributions to my investment account!!! Thankfully, I was smart enough not to sell anything but I wasn’t smart enough to keep investing on the way down.

To date, the highest point of the Toronto Stock Exchange was reached on February 21, 2020. Then the market plunged, and kept plunging until March 23, 2020. The TSX has been slowly re-gaining ground since then. (Man oh man was I glad that I didn’t have access to cable TV during this time. I would’ve been a basket case listening to all the “experts” talking about investing.)

Sticking to the Plan

This time around, I stuck to my saving and investing plan. I ignored the headlines. I trusted the example set by history that the stock market will recover. No one knows precisely how, nor can anyone guarantee when the recovery will happen. This time, I decided to take things day by day and to continue to save & invest for my future.

I had a few things going for me. Firstly, I’m still fortunate enough to have my job. There are millions of people who aren’t in the same boat so they’ve had to decide whether to eat today or eat tomorrow. Secondly, I was already debt-free before the pandemic hit. I don’t have to worry about creditors or missing my mortgage payments. My financial foundation is firm. Thirdly, I don’t have cable so I missed a great many of the interviews with the people who predicted that “this time would be different.” I didn’t hear the stories from people who believe that the market could not possibly recover from COVID19.

Finally, I’m older and wiser today than I was in 2008-2009. I’ve learned from my mistakes. Had I continued to invest back then, I’d be so much closer to my retirement goals. My inexperience and fear caused me to sit on the sidelines while the market recovered. In other words, I wasn’t investing when the stock market was on sale. When I finally did re-start my investment program, I’d promised myself that I would continue to invest during the next downturn.

So when COVID19 came long and took a great big bite out of the stock market, I kept my promise. Money earned – money saved – money invested – repeat!

My portfolio still hasn’t recovered completely but I’m much farther along than I would have been had I stopped investing. I’ve been able to my more units in my dividend exchange traded funds. As a results, my monthly dividend payment has gone up considerably. This is a very good thing. I was fortunate enough to be able to make a contribution to my Registered Retirement Savings Plan. As per the advice of an independent financial planner, I invested those funds into a global equity ETF. Boom! I firmly believe that my choice to follow his advise will add a nice little kick to my RRSP in the coming years.

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Weekly Tip: Allocate your money in a way that allows you to invest in the stock market for atleast 15 years. Use broad-based ETFs to invest your money in equities. ETFs move in the same direction as the stock market. They simultaneously eliminate the risks of trying to cherry pick the next Apple/Tesla/Facebook stock. If you absolutely cannot stop yourself from stock picking, then please limit this hobby to only 5% of the equity portion of your portfolio. The other 95% of your equity investments should be allowed to chug along in a broad-based ETF for a long period of time.

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.

Doing First Things First

Go ahead, Gentle Reader – you’re on the air.

Blue Lobster, I’ve got a question for you… I’ve saved up some money. Where do I invest it for long-term future growth?

Great question! And one that I’d love to answer… but first things first. I have to state the following:

I am not a financial advisor nor am I in any way certified or qualified to give tax advice. The following post is based solely on my life’s experiences. I can tell you what I did, but I’ve made mistakes over the years. My choices were based on my particular circumstances which means that my choices might not be right for you. If you want professional advice, then I’m going to strongly recommend that you find a professional person to give it to you. I’m not a professional financial advisor so you rely on my opinion at your own risk.

Now, with that out of the way, let’s get back to your question. I like to call the following my Order of Investing Money.

First Things First

In my opinion, the best place to first put your money is into a Tax Free Savings Account (TFSA). The TFSA was created in 2009. If you’ve never contributed any money to your TFSA, then your cumulative contribution room as of January 1, 2020 is $69,500.

The TFSA does not generate a tax deduction. The money that goes into the TFSA is after-tax money. Whether you’re in the highest tax bracket or the lowest tax bracket, your money goes into the TFSA after you’ve paid taxes on it. If you invest it in equity products and you earn outsized returns, then all of the initial contribution and the growth generated can be withdrawn without any kind of tax penalty.

Allow me to be repetitive so that the following point is not lost on anyone reading this post. All money that goes into a TFSA grows tax-free. When you take it out of the TFSA, the money is not taxed by the government.

Whatever you take out of your TFSA can be contributed back into your TFSA in the following calendar year. This rule is applicable even if your withdrawn amount is higher than the amount that you’ve contributed over the years. In other words, you can withdraw both your initial contributions and the growth that has accrued, then you can contribute those amounts back to your TFSA the following calendar year.

So if you’ve invested the maximum to your TFSA, i.e. $65,000, and it’s grown to $110,000, then you can withdraw the full $110,000 whenever you want. You simply can’t put any of that money back into your TFSA until January 1, 2021.

Should I put my money anywhere else?

The next best place to save your money, in my humble opinion, is in your Registered Retirement Savings Plan (RRSP). However, there are a few major differences between the RRSP and the TFSA that you need to know about.

Unlike the TFSA, money inside your RRSP will grow on a tax-deferred basis for as long as it stays inside the RRSP. The taxes that are owed on the money that accumulates in your RRPS are deferred. You don’t pay those taxes now – instead, you will pay those taxes later. To be precise, you will pay taxes on that money when you withdraw it from your RRSP.

Contributions to your RRSP are tax-deductible. If you put money into your RRSP, then the Canada Revenue Agency will refund you the taxes that you paid on that money when you earned it. This is great!

If you’re in a high tax bracket when you contribute to your RRSP and in a lower tax bracket when you withdraw from your RRSP, then you’ll save money on taxes when you withdraw it.

If you’re in a low tax bracket at contribution and then a higher tax bracket at withdrawal, then you’ll pay more in taxes. This sounds bad but keep in mind that you’ll have had years of tax-deferred growth within your RRSP if you’ve seen good returns on your investments.

Paying taxes on money is far, far better than having nothing set aside for retirement.

And if I’ve maxed out my TFSA and my RRSP?

Gentle Reader, you’ve done me proud! If you’re in the very fortunate position of having maxed out both your TFSA and your RRSP, then I salute you. Reach over and give yourself a pat on the bat. You’ve done well!

Your next step is to open a brokerage account, aka: an investment account, and start investing your money. You’ll be contributing after tax dollars to this account. Your growth will be taxed as you earn it, but you’ll be investing your money instead of squandering it on frivolities that don’t add to your life.

Throughout this entire order of investment priorities, you should be taking care of your present and future financial needs by practicing the 4-step process for financing your dream life: save-invest-learn-repeat.

You’re going to have to take some time to learn about TFSAs, RRSPs, brokerage accounts, and the various investment options available to you.

Do not let analysis-paralysis stop you from starting. Similarly, it mustn’t prevent you from making investment decisions. You won’t make perfect decisions, but console yourself with the truth that no one does. This is why learning is such an integral part of the 4-step process.

Maxing out my accounts is impossible!

Stop fretting! No one said you have to max out all your accounts.

If you can, then great.

If you can’t max out all your accounts in one shot, then contribute as much as your budget will allow and get on with the rest of your life. The only “bad” contribution amount is $0. Anything over and above $0 is progress. Find ways to cut expenses or find ways to increase your income. The option is yours, but so is your obligation to yourself to contribute as much as you can towards the Care & Feeding of Future You.

As you learn more, you’ll earn more. And when you earn more, you’ll contribute more. It’s that simple.

Please do keep in mind that simple isn’t the same as easy. I’ve yet to find that “easy” way to earn money to contribute towards my investments. Every dollar has been hard-earned.

My advice is to start with first things first. Begin by fully funding your TFSA. Once you’ve done that, max out your RRSP. When that task is done, set up an automatic transfer to fund your brokerage account. And if you decide to not follow this Order of Investing Money, then I beseech you to continue learning about money so that you’re confidently investing for your future in a whatever manner that best suits you.

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Weekly Tip: Open an online savings account. Get one that pays higher interest than what the brick-and-mortar banks are offering. Consider EQ Bank. (I’m not being paid for mentioning this bank.) This savings account should be separate from your daily chequeing account. Set up an automatic transfer of money from your paycheque to your online savings account. This transfer should fund – in order of priorities – your emergency fund, annual bills, short-term goals, and luxuries for yourself.

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?

Automation is beautiful!

I got my first part-time job in grade 11. Every two weeks, roughly $137 was plopped into my bank account via electronic deposit. And every two weeks, I would go to the bank machine and manually transfer $50 from my chequing account to my savings account without fail. It was simple and easy.

When I got older, I learned about automatic money transfers that can be set up once and left to run indefinitely. My money would be transferred on the schedule I set and in the amount I wanted so that I could meet whatever specific goal I chose. I set up an automatic money transfer as fast as I could!

When I started my first, real grown-up job with my own office and everything, I opened up several bank accounts and designated them for various goals: travel, utilities, insurance, property taxes, charitable donations, Christmas gifts, RRSP/TFSA contributions, home renovations, etc. Every two weeks, the following process took place: my paycheque hit my bank account, my automatic transfers went into action, and the money leftover could be spent on whatever I wanted for the next 2 weeks.

Thanks to automatic transfers, I’ve fully funded my registered retirement savings plan (RRSP) every year. When the tax free savings account (TFSA) was created in 2009, I was able to fully fund that account as well. My automatic transfers mean that I always take a vacation every year, in addition to short road-trips. Automatic transfers mean that I don’t have to scramble to find money to pay for my annual home and vehicle insurance premiums, nor do I panic when it’s time to pay for my annual property taxes. When it is time for me to buy my next vehicle, I will have the funds in place to simply pay cash because I have an automatic transfer in place to set aside money to replace my current vehicle.

When one goal is fully funded, the automatic transfer stays in place. I don’t suddenly add those funds back to my day-to-day spending to be frittered away on things that won’t last. Nope! Instead, those monies continue to accumulate for the next priority of my list. Next year’s annual insurance premiums are paid off? Great! The monies can now go towards hitting the RRSP goal a bit sooner. Oh? I’ve already met my RRSP goal for next year? Then the monies go towards the TFSA! Really, that goal is funded too? Then it’s time to seriously start planning that vacation…

You see what I mean? Having the automatic transfer in place means that I’ve made the conscious choice to take some of my today money and to turn it into tomorrow money. Part of my paycheque is allotted to deferred gratification so that I can meet my future goals and satisfy my priorities. The leftover money is to be used for immediate guilt-free gratification. I don’t need to worry that I’m spending too much on an item today because I already know that my future expenses are being paid. When the time comes to pay for the non-sexy elements of life (did I mention car insurance?), the money will already be in place for me.

Automatic transfers are one of the best tools available for meeting financial goals. Once you’ve determined the priorities for your money, automatic transfers ensure that those priorities are met. I can’t think of a single better method for ensuring that money is set aside to meet your goals.

Even if you’re in debt, you can use automatic transfers to meet your goals. Simply set up a recurring payment to a particular debt so that the debt is paid down every single time you get a paycheque. The benefits of this are two-fold. First, you’re meeting your priority of getting out of debt. Second, you’re paying the least amount of interest on your debt because you are ensuring that the principal is being paid down as fast as possible which minimizes the time period over which the interest can compound.

As an example, if you have a credit card balance then you need to get rid of it. The credit card company will tell you that you only need to pay a minimum amount every month and the balance can ride until next month. For the privilege of paying less than the full amount you owe, the bank will charge you interest on the outstanding balance. It’s a recipe for riches for the bank. It’s a recipe for disaster for you.

So here’s what you do to avoid disaster. You STOP using your credit card. You go to your online bank account. You add your credit card as an online payee. You set up an automatic transfer of atleast $100 to your credit card that matches your paycheque schedule. This system means that your credit card balance is paid down on a steady schedule, at an amount that is (hopefully!) higher than your monthly minimum payment. You do this until the credit card balance is paid in full.

Make sure that automatic transfers are working in your favour, not your creditors’ favour. It astonishes me that people are so willing to give their money away when they work so hard for it. Trust me – it only takes a little bit of patience to keep it for yourself!!!