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 Tax-deferred just means that the money will not be taxed by the Canada Revenue Agency until such time as it’s withdrawn from your RRSP.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