Tax Free Savings Account - 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 Tax-deferred just means that the money will not be taxed by the Canada Revenue Agency until such time as it’s withdrawn from your RRSP.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.

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?

The TFSA Isn’t Just for Savings

Go back and re-read the title until it’s burned into your brain.

A Tax Free Savings Account – TFSA – is a wealth creation tool. So long as your money is under the tax-repelling protection of the TFSA, then the government will not tax your money. The second thing to remember is that the government also will not any money that’s withdrawn from the TFSA.

When the government decides not to tax your money, then you’d better sit up and pay attention.

The TFSA is not just for savings!!! It’s enraging that the Canadian government gave one of the best investment vehicles of all time a name that causes so much confusion. The name leads people to think that savings is the primary use of this magnificent wealth-creation tool.

Believing that the TFSA can only be used as a savings account is wrong.

Why do people think the TFSA is a savings account?

The word “savings” is part of the name of the account. Including this word in the name has caused a great many people to assume that this account is simply a savings account. The government did a disservice to the populace by not calling this a Tax Free Investing Account.

From this moment forward, when you think of a TFSA, I want you to only think about which money-making investment you’re going to stuff into it. Do you want something that churns out dividends every single month, a la an army of little money soldiers? Or would you prefer to buy growth stocks that results in juicy capital gains when you sell them? Perhaps you’re just looking to invest in index funds, mutual funds, exchange trade funds (ETF), or a real estate investment trust (REIT)?

The Tax Free Savings Account is not just a savings account. Any investment that can go into your registered retirement savings plan (RRSP) can also go into your TFSA. Once your investment is inside the TFSA, any and all investment returns will grow tax free.

The other tasty cherry on this particular sundae is that all withdrawals from your TFSA are tax-free as well. Did you happen to invest $5000 into stock of the Next-Big-Thing within your TFSA and that $5000 is now worth $750,000? Well, my friend, I’m happy to tell you that you can withdraw that $750,000 from your TFSA completely tax-free.

Yes – that’s how good a Tax Free Savings Account really is.

Higher tax-free returns are a good thing.

Investments in equities are more volatile, but they have a long-term historical average return that is much higher than anything you’ll get at the bank. Let’s say you decide to buy an index fund that invests in the stock market and you’re going to hold it for 10+ years. Based on historical averages, that investment should return around 8% if held. In other words, so long as you don’t panic during the ups-and-downs of the market and you don’t sell, your investment should return around 8% at the end of those 10+ years.

Find yourself a nice little compound interest calculator. Enter 8% return, a 10-year time period, and the amount of capital that you plan to invest. Write down that number. Now go back to the calculator. Enter the 0.5% return your savings account will pay you, a 10-year time period, and the amount of money that you plan to keep in a savings account. Write down this second number.

I think you’ll find that earning a higher return over the same period of time means that more money will stay in your pocket. Remember that your money will grow without being taxed if you put your investments inside your TFSA.

Consider Using a TFSA for Long-Term Investing

Hopefully I’ve convinced you to look at the TFSA in a new light. If so, yay for me. If not, then so sad for you. The TFSA is a gift – check out this articulate, ascerbic article from Garth Turner of Greater Fool if you don’t believe me.

And it’s a shame that people aren’t taking advantage of it.

To those who’ve been persuaded that the TFSA can help them build wealth, I say the following:

Create a balanced portfolio of investments.***
Put this balanced portfolio inside your TFSA.
Leave the portfolio alone to grow tax-free inside your TFSA.

***What’s that, you say? You don’t know how to create a balanced portfolio of investments? Well, don’t fret. There are ways to learn how to do it. I suggest that you start by reading Garth Turner’s blog – Greater Fool – and learn for yourself. (I am not being paid for mentioning his website.) Remember – you don’t need to pick the perfect portfolio. You need to create a portfolio that you understand: some equities, some bonds, some cash. Those are the three magic ingredients that will bolster your chances of creating some serious wealth for your future needs.

Don’t let analysis-paralysis prevent you from starting to use the TFSA as it was should be used, as a vehicle for you to invest your hard-earned money and to watch it grow tax-free. The TFSA isn’t just for savings!

Do not use your precious TFSA room as a way to shelter money that is earning a very low rate of interest. Bank accounts are for holding short-term money. Long-term money needs to be put into investments. Wherever possible, your long-term investments should be protected from the ravages of taxation.

Tax Free Savings Account – the Gift that Keeps on Giving

Whew! The first three months of 2019 are already in the rearview mirror. Tempus fugit! Am I right or am I right?

A few weeks back, I was happy to report that the Tax Free Savings Account (TFSA) contribution limit was raised to $6,000 for 2019. If you’ve been maxing out your TFSA contribution, then this means that you’ll have to find an extra $600 in 2019 if you want to make the full contribution. At the time of publishing this post, the cumulative contribution room for your TFSA was $63,500.

Year	Contribution	Cumulative Contribution Room
2009	$5,000.00	$5,000.00
2010	$5,000.00	$10,000.00
2011	$5,000.00	$15,000.00
2012	$5,000.00	$20,000.00
2013	$5,500.00	$25,500.00
2014	$5,500.00	$31,000.00
2015	$10,000.00	$41,000.00
2016	$5,500.00	$46,500.00
2017	$5,500.00	$52,000.00
2018	$5,500.00	$57,500.00
2019	$6,000.00	$63,500.00

However, maybe you’re not so fortunate as to be able to make a full contribution this year. Maybe you’re still tackling some debt, or maybe you have other priorities at this time. For reasons known only to you, maxing out the TFSA in 2019 is not on your agenda.

Be that as it may, you should still know the contribution limits. Once your debt is gone and/or your other priorities are met, you’ll have more disposable income. The question then becomes…

Whatever should you do with that extra money?

The Ad Man & the Creditor will encourage you to buy. Buy something – buy anything! They don’t care what you purchase; their sole goal is simply to ensure that your money leaves your pockets as fast as possible and that it winds up in theirs. This is not a good thing!

I’ve talked about possible uses for TFSA money in another post. Today, I’m going to suggest that you keep your money by contributing it to your TFSA. And I’m also going to suggest that, once it’s in there, you should invest it so that it can grow tax-free. I’ll even be so bold as to say that the TFSA is a gift that keeps on giving. If you’re patient enough to invest for the long-term, the TFSA will bolster your other retirement income by creating a stream of money that you can access tax-free.

I’m not a tyrant. I know that after you’ve paid off your debt, you’re going to want to reward yourself for being so diligent and focused. I’m even willing to accept that part of your former debt payment should go towards increasing your standard of living. My suggestion to you is to have 75% of your former debt payment be directed towards your financial goals and use the remaining 25% of that former payment to increase your lifestyle.

Every little bit helps!

Even if you can’t max out your TFSA contributions right now, you should contribute whatever you can so it can grow tax free for as long as possible! As you can easily imagine, taxes are a drag on any investment’s growth. If you have to give 25% to 35% of your investment return to CRA as taxes, then that portion of your money is no longer growing in your pocket. Whenever possible, you should invest within your TFSA so that all of your money is working for you. This is the heart of tax-free investing – you don’t have to send slices of your money to the CRA through taxes. Take advantage of this investing super-power as soon as you can!

And please don’t be mislead by the word “savings” in the moniker. Your TFSA need not be limited to a savings account. You can open a TFSA at any online brokerage and you’re free to hold stocks, bonds, mutual funds, exchange-traded funds, or other investments inside your TFSA. (As an aside, if you’re going to hold US-dollar investments in your TFSA, get professional tax advice. The tax treaty between Canada and the United States doesn’t protect US-dollar investments from being taxed by Uncle Sam.)

Blue Lobster, how do you use your TFSA?

As you know, my personal preference is dividend-paying exchange-traded funds (ETFs). I hold these in my TFSA and I allow the dividends to be reinvested every month. When I retire, I’ll be in a position to withdraw several hundred dollars from my TFSA each month without paying taxes! My TFSA holds many ETF units, each of which pays me a dividend every month. By the time I retire, I’ll have many more such units which means I’ll be receiving many more dividends. And since I’ll have the option of withdrawing them from my TFSA, I won’t have to pay a penny of taxes on my divided income.

Yes, that’s right. Not only will my investments grow tax-free while inside my TFSA, they can be withdrawn from my TFSA without paying taxes on that withdrawal. How sweet it is!

One of my financial fantasies is for my TFSA to grow so large that my monthly dividend withdrawals are sufficient to fund my retirement lifestyle. If I could do that, then I’d never have to pay taxes on that money while maintaining my desired lifestyle! Can you imagine how great that would be?

However, magical thinking won’t assist me to accomplish my goals. Realistically speaking, it is far more likely that my TFSA will supplement my other retirement income streams. That’s a good thing too. Should I be so fortunate as to not need the money from my TFSA, then I’ll just let the dividends continue to compound. After all, I’m not going to waste my dividends by spending them on things that I don’t really want simply because I have them to spend.

The TFSA is one of the very few ways for your money to grow to tax-free. Take advantage of the TFSA as soon as you possibly can! Do what you can to make some kind of contribution to your TFSA. Invest that money wisely then stand back and let your investments compound over time. You will need money tomorrow, so start saving it today.

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!!!