It’s RRSP deadline but maybe ignore the pressure
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It’s RRSP Deadline This Week
Ah, the annual week of feeling the pressure to contribute to your RRSP with the hundreds of TV and radio ads is upon us. But stop a second and think:
Last week the National Post/BMO survey came out showing where we put our money once we’ve invested in an RRSP or a Tax Free Savings Account and 57% of all the money is in cash and 23% is in GICs. WHAT?
The no-service banks have spent millions of dollars this month to guilt you into contributing to your RRSP and you probably fell for it. But 80% of the money stays there and makes you no return? That’s crazy! At half a percent interest, your money will double in 140 years! Even if you’re getting a 1% GIC return, it doubles in 70 years. Is that when you’re retiring?
Banks are like airports. You go to the airport in order to get someplace. You don’t go there just to hang around for a few weeks. Banks are the place to park your money for a bit, to have a chequing account, and your emergency savings account. Banks are not the place to do investments.
Think of it this way: You donate your $5,000 RRSP money to a teller or someone in a fancy office that’s on commission. But banks keep less than 10% of it in cash. More than 90% is lend right back out on a 4% mortgage, a 6% car loan, or 20% credit card. THEY sure know what to do to make the money grow and it’s almost all free money.
It’s the best legal scam in the world: You get half a percent – they lend it out and make between 4 and 20 percent. That’s great if you‘re the bank – lousy if it’s you. If you own a clothing store, what’s your biggest expense? It’s getting clothes into inventory so you can sell them at retail. If you own a gas station, what’s your biggest expense? It’s getting the gas at wholesale into the tanks that you can then sell at a profit. But when 80% of the money isn’t making you a return, it’s as though you’ve given the banks free money to lend out, or the clothing store free inventory they can sell!
To add insult to injury, you probably have debts that you’re paying interest on. On one hand you’re locking up that $5,000 at no return while paying out that same 4 to 20% with the other hand. What’s the best way for lenders to make sure you never pay extra or pay off your debts? It’s by keeping you broke. When you pay money into your RRSP you have a lot less money to pay on your debts. That’s a no-brainer since you don’t have an unlimited income. So the banks not only get free money to re-lend, they’re also making sure you won’t become debt free for a long time to come – and that locks in the profits in interest you’ll pay for a lot more years.
Someone please tell me how it makes any sense to save while you’re in debt. When you retire you’ll have some savings and an equal or larger amount of debt – makes no sense. Get out of debt and then you can save some serious money and really quickly – money you used to send to everybody else at 4 to 20% interest.
Since we’re going to run out of time, next week I’ll give you some investment tips, tricks, and alternatives to actually make your money grow instead of helping the banks to grow their $10 billion a year in profits.
Why 14-Year Olds Have More Money Than Their Parents
If you’re the average family and have teenagers, there’s a good chance your son or daughter is wealthier than you are. You’ve had a few decades to build up your savings or investments while they’ve had a year or two.
So how is that possible? That’s easy: They don’t have access to credit and can’t borrow their way to prosperity. Sure, you the parent have more actual cash – at least the day after payday – but you’re also paying out most of it for debts that you incurred long ago. Your teenager doesn’t have that. Everything they earn they get to keep.
If a teenager really wants that $500 sick snowboard that you’re not willing to pay for, they’ll first whine and complain and have a fit. It’s not fair, they gotta have it, and you ought to buy it. When that wave is done, most kids will get super motivated and focused if their motivation is strong enough and they don’t get the lazy or easy way out. They’ll typically do whatever it takes to save and to work. Whatever: Shoveling snow, mowing lawns, babysitting – whatever is necessary. If that’s their drive, they will save the money.
Most adults on the other hand, won’t take that part time job, do a budget, or drastically cut back our expenses to get out of debt, to buy a newer vehicle for cash, or pay for some renovations or even our holidays. Nope, we don’t do it – we have an easier and lazier way to accomplish any of that: We pull out the credit card, or use our line of credit.
There’s a difference – it’s like night and day. Going broke and borrowing, which is just delayed pain, versus the hard work right now to have what we really want.
Ah, to be a motivated teenager again…
It’s RRSP Time – But You Shouldn’t Contribute This Year
There’s a news story this week that most Canadians want to put some money into RRSPs but don’t have the cash. That’s great news!
If you want to be a doctor, you’re not doing surgeries today. You’re getting your MD, and then you’re ready to do surgeries. In the same way, it’s not the other way around with paying off your debts versus savings. It’s pointless to put some money into RRSPs while you’re in debt, or to send $200 to Visa and the next day put $200 into your savings account. Just send the $400 to Visa and get done with it. Then, and only then, can you focus 100% on getting wealthy and save the whole $400 a month.
If you have debts, forget savings and your RRSP for a year or two. Your tax deduction and interest aren’t going to equal the interest you’ll save by paying down your debts. But this is not about math – this is about behaviors and it’s 80% psychological. If it was about math, you wouldn’t sign up for a stupid 20% credit card or owe on your line of credit a decade later.
And if you think that borrowing to put money into your RRSP is a good idea, you’re doomed to be in debt for a very long time to come. You must be kidding? You’re broke, in debt, and your best thinking figures that the solution is MORE debt? Hello? If that’s what some financial person at the bank or wherever is telling you – run away fast! That person is on commission. They are making money from selling you to borrow. They’ll make money on the loan, on the RRSP, on commissions up front, and on trailer fees. THAT is the person you’re going to listen to? You have to be kidding me.
I’ve seen it hundreds and hundreds of times when people attempt to put a little into their RRSP, pay $20 extra on the credit card and juggle savings and debt. It won’t work – guaranteed. You save $50 in an RRSP and just think: That doesn’t add up to squat and you’re right. You pay $50 extra on your credit card and realize: That’s not worth the effort and I’m not getting anywhere so what’s the use – and you’re right. That shotgun approach won’t work. It takes 100% focus and commitment to one thing! Take a step back from savings and only focus on getting every debt paid off except your house. THEN you’ll have so much freed up money you’ll end up with five or 10 times as much into savings as trying to do everything off the bat.
Guaranteed, you’ll become debt free in a year or two, but only if you follow the steps one at a time:
Step one: 1 week of your net pay in an emergency savings account. It’s more than 60% of people have and turns your next emergency into an inconvenience.
Step two: Get debt free on everything but your mortgage. No more credit cards or borrowing – it hasn’t worked so far in your life. List your debts smallest to largest. Pay minimum payments on everything but the smallest. That smallest bill gets every spare dollar you have. That’ll pay it off in just a few months. Then onto the next smallest and you’re not looking up until all your debts are paid off.
Step three: 3 months of all your monthly expenses in the full emergency account
Step four: Save 10-20% in investment and retirement money
Step five: Now start paying extra on your mortgage.
If you want to reinvent the wheel and do it differently – good luck to you. E mail me in three or four years when you’re right back to where you were today – honest!
This Couple’s 25% Car Loan Has Lots Of Insights
Last week the CBC did a story of a couple in Kelowna who signed up for a 25% subprime car loan. It exploded on my Facebook page with large numbers of shares.
It’s commendable that the CBC did this feature, and great education, but I’m guessing they didn’t put this family in touch with anyone that could actually help them. But, that aside, I have 20 minutes worth of learning and warnings here, and five minutes to share them. As always, I’ll post the rest of the story on my website.
This couple had a recent bankruptcy on their credit. For five years that guarantees a rate of 20% or higher for a car loan. The dealer got them financed through the TD Automotive division. Where is it the TD’s fault this couple is really high risk. Hello? They defaulted on all their debts in bankruptcy – whatever the reason! Risk equals rate – always will. Just look at the fine print of most credit cards that range from 10% to 27%, or lines of credit from prime to prime plus 6%.
Yes, the dealer probably made over $5,000 on a huge markup of interest rate, fees, and price of the vehicle. They didn’t even get to pick a vehicle – they were told it had to be this one to get financed – not true, but it’s one of so many red flags in this story. Yes, the dealer lied when they promised (if they did promise) the couple could refinance at a decent rate in a year. That was never going to happen, but I hear that promise all the time to get people to sign up for insane financing thinking it’s only for a short time. And if this promise wasn’t in writing it wasn’t true. Never rely on verbal promises as you’ll never collect on them. Now the dealer is offering 5% financing on a new car? THAT would make things so much worse. But that’ll take too long to explain. Someone get this couple in touch with someone who can help, or go to Mosaic and get them my $20 It’s Your Money book – it would have saved them $5,000 or more.
How often does the average person buy a vehicle? Maybe every five years? Well, a salesperson sells 10-12 a month, and the business manager deals with 5-8 a day. So, you have one purchase experience versus 600 sales versus the finance manager having financed and upsold 6,000 times in those five years. With a score of 6,000 to 1 that’s like bringing a knife to a machine gun fight. You don’t have a chance – this couple didn’t have a chance.
Yes, this couple got massively ripped off. But they CHOSE to be ripped off. I’m sick and tired of our ever diminishing personal accountability. I can already think of three options this couple had, other than signing up for a loan that will end up costing them 2 ½ times the price of the vehicle.
But I can already hear a lot of people thinking that this isn’t fair and no wonder the rich get richer. Yup – they have investments and savings while YOU have debt and payments. 90% of millionaires did not inherit their wealth – they became millionaires on their own. 75% of millionaires do not finance their cars. Well – they’re rich…yes, because they don’t do dumb financing. If you want to be a millionaire, get a $2,000 car instead of a $500 car payment. Then start setting aside some money. When you have some savings, step up and buy a newer vehicle. But a $500 car payment will guarantee that you’ll be stuck in debt for another decade and won’t ever be able to save. Go look up what Warren Buffet drives if you want some more evidence.
The average guy can’t get ahead – yes you can – get your finances under control, get rid of the killer car payments, or sell that house that’s eating up 50% of your income. I haven’t had a raise in two years – well – go get a raise. Good chance you get paid what you’re worth in the market place. So up your game, get to work earlier, work smarter or harder, or upgrade your skills. The average guy can’t get ahead? Come on – stop thinking like a victim. This is Canada and not North Korea.
I’m sick of the victim mentality. Repeat after me: If it is to be it’s up to me. The government, or two people in the story stating there should be more regulations, isn’t going to fix your financial life. It’s gotta be you. My apologies if I’m being unclear.
Whatever your borrowing today, at whatever rate or payments, may seem like a good idea and the only solution. But whether it’s a car, a line of credit, a payday loan, or your credit card, it will make things worse, much worse, down the road.
When you say you can’t do it, it wasn’t your fault, you have all these payments, you had to get that loan, or it’s too hard, you’re going to spend the rest of your live proving that you’re right.
PS: Why would a new vehicle loan at 5% make things so much worse?
This couple’s first 30 months of payments has paid almost 75% of the total interest at 25% as it’s very front loaded when they owe the highest balance. Having overpaid on the price and paid very little principal, they’d still owe at least $7,000 more than the car is worth. That shortfall has to be “rolled” into the new loan. Almost 50% of people owe more on a trade than it’s worth – this couple is the rule and not the exception. A new vehicle depreciates 30% in the first year. Even if it’s a $20,000 vehicle, the moment they drive it off the lot, it’s worth $6,000 less. A $6,000 loss and $7,000 hangover of their old one means they instantly owe $13,000 more on the new vehicle…and things get worse and worse and the vicious cycle continues with no hope of trading that one for six or seven years, huge payments again because the $7,000 loss is hidden in the new one and heavens forbid it’s written off or stolen because the insurance pays the real value and not the massive over-financed loan.
Why this couple has a 25% car loan
Happy New Year! Canadians just hit $1 trillion in debt
Happy New Year – But Will This Year Be Any Different?
If you haven’t made many or any New Year’s resolutions – congratulations. There’s a good chance that those who have, are half way done breaking them in the first week anyway. It’s a bad time to make them based on societal pressure. But you do need some goals, at least for your financial life.
Write down some financial goals for this year. Whether you start them this week or next month is up to you. They’re goals and a game plan and not throw-away New Year’s resolutions. However, your goals have to be in writing. To paraphrase a quote from Larry Wiget: Nobody ever wrote down a plan to be broke, overweight, or lazy. Those things are what happens when you do not have a plan.
This year, write at least five benefits with each -that’s the part which will motivate you to stay on track. For instance, if your goal is to be credit card debt free, it’ll be pretty easy to come up with five huge benefits that’ll come as a result: No more monthly payments, it’ll be like getting a $300 raise in not making those payments. It’ll save you x amount of interest a month. It’ll boost your credit rating that’ll get you lower interest rates on other borrowing, frees up all that money to now go into savings or towards another debt that’ll get cleared off a lot faster now. That’s six easy blessings right there.
Things only change when you change, and not when the year and the calendar changes.
A huge 2014 gift to give to yourself is to set up a savings account for your annual bills: Add up your property tax, insurance, what you spend on Christmas, your vacation and whatever bills you only have once a year. Have your credit union take one-twelfth of it out of your chequing account automatically and transfer it to this new savings account. You can’t imagine how much financial and debt stress that’ll relieve when you’ve always got the money for these.
The gift of not being stupid and thinking before buying or signing: That so-called free cell phone is over $1,000 when you’re forced into a two-year contract. Get a free TV if you just sign this three year contract. Stop and think that the ad should say: Get a $290 TV when you spend over $3,000.
A gift that will keep on giving for more than 60 years: Teaching your kids about money and savings. But it’s about what you do, not what you say. Start today away and give them three jars or piggybanks: Whatever money the receive goes equally into the three jars: One for saving, one for giving, and one for spending. As they get older you can change the distribution, but start somewhere and sometime soon!
You’ll only achieve your goals if you have a written and specific plan, and if your drive to achieve these goals is stronger than your excuses or thoughts of failure.
What I wish you for 2014 is that you choose to opt out of the North American way of life: Spending money you don’t have, buying stuff you can’t afford, to impress people you don’t really like.
Some Not So Sexy Christmas Presents
THE best and so not sexy Christmas presents that most people should be getting or gifting will never happen. It’s sad but true. The good news is that they’re not just presents for Christmas – they’re the most critical presents to give to yourself for the New Year – or year round. Here are three of them:
Term life insurance for your family: Over a third of families and more than a million people with kids do not have life insurance. It’s the biggest gift you can give to your family. Conversely, it’s the biggest hell you can put your family through if you pass away. Make sure you only get a term life policy of six to 10 times your annual earnings.
Give your spouse or yourself a cut-up credit card: You can’t keep doing damage with a cut-up card. If it’s a surprise, it’ll be a great conversation on Boxing Day. If you decide together as a couple, you’re well on the way to a very different life down the road.
The gift of the truth and being honest: USA Today had a survey that asked: Have you ever over-spent on buying a Christmas present? 46% said never. Are you kidding? Half the world has NEVER overspend a single dollar on any present for anyone? The gift of honesty is telling yourself that you can’t afford something, teaching your kids that money is a finite resource, and that they’ll start to hear the word “no” a lot more. And the truth to your parents or grandparents: You can’t afford the money to see them at Christmas next year, but they can come visit you. If you have kids, nothing is greater than Christmas with family, but three or four airline tickets at the most expensive time of the year is insanity while you’re in debt. They don’t have kids and come visit you – they’ve now got a year’s notice.
It’s Just “Stuff”
A few years ago, after decades in our family home, my parents could no longer handle the physical upkeep of a large single family home. It turned out that the trauma of selling our family home wasn’t nearly as bad as what us ‘kids,’ now middle aged ourselves, had to do in order to make it happen.
One Friday we ordered one of the big commercial dumpster bins to be delivered to the house. After giving away stuff family members, friends and neighbors wanted, we knew there’d still be a lot of things that had to be thrown out: sleeping bags to tools, furniture to books, and extra dishes to everything else, none of which could go into a one bedroom nursing home unit. What we weren’t prepared for was the visual impact of a huge and full bin being hauled away, then a second bin, and a third bin. In total, the stuff accumulated over a lifetime added up to over 14,000 pounds – in the dump. Few things in life have had such a powerful and visual impact on us.
Literally hundreds of thousands of dollars of stuff, purchased one thing at a time, over a lifetime, boiled down to 14,000 pounds of trash. It sure put things into perspective. You’ll now understand why I’m just not that excited about buying that newest whatever, the next model of some gadget or another, or running up my credit cards. Hopefully it won’t take that kind of experience for you to look at “stuff” a little different in your life, or with Christmas presents this year.
When you decide you want to reach financial independence and become debt free, it needs to start by turning off the buying and borrowing tap, to end your continuous borrowing and payment cycle. That decision comes with good news and bad news. The good news is that ending your borrowing cycle rapidly accelerates the date of your debt freedom. After all, you’ve now stopped digging and stopped making things worse. Besides, if you look at all the debt you have, there’s a good chance that today, most of it couldn’t be sold on e-Bay or given away on Kijiji.