Tag Archives: getting debt free

Skip Your RRSP This Year For a 27% Guaranteed Return

If you’ve procrastinated making an RRSP or TSA contribution for 2020, you’ve got eight days left, but you might want to skip it this year.

What if I could get you a guaranteed and totally risk free return of 27%? Would that sound better than an RRSP or TSA this year? If you carry a credit card balance, like half of card holders, that’s exactly what you’ll get. Here’s an excerpt from the Money Tools book (page 144):

If you have a 10% line of credit, even in a pretty low 25% tax bracket, your real return will still be 13.3% if your priority is to pay that off.

What’s the bad news? You cannot do that if you want to save and become debt free at the same time. I’ve never seen anyone do it in 25 plus years, and you can read any number of Dave Ramsey books and find him confirming the same thing for just as many years.

We just don’t have enough money left over after paying all of our bills to make that last $200 bucks or so stretch to cover investing and paying off our debts. We can barely make the minimum payments each month. If you believe you can do both, it is the equivalent of attempting to defy the law of gravity. It won’t happen – but good luck to you. In two or three years, you’ll be exactly where you are today.

If you take three, four or five thousand dollars this week and put them into an RRSP or TSA while you’ve got high interest debt, such as credit cards or an overdraft, you’re making a big mistake.

If you’re going to borrow money for an RRSP contribution, I would suggest it’s an even bigger mistake because you’re adding to your debt and monthly payments. That’s exactly the opposite direction of where you should be going.

Yes, you should save and invest for your retirement. But a year or two of pressing the pause button is the only way to become debt free. If not, you’ll be another two or three years older, just as broke and just as poor. Before you make that pretty critical decision, read the Money Tools book chapter: Getting from here to debt freedom on page 207. You can get it from Mosaic Books on Bernard before you head to the bank to make your 2020 contribution…

(And since I always show my work: The $20 book, if you follow the two chapter sections, and what we talked about on the radio today, will end up saving you $1,530: You won’t have the 10% historical return of an investment over the next three years = out $993 compounded for three years. But you’ll have $3,000 less credit card debt at 27% (in 25% tax bracket) for a saving of $2,430. $2,430 less $993 = $1,437…excluding any tax refund – if any – if RRSP)

Save or Pay Off Debts?

Ah, just four days left in this year’s RRSP season, and the scramble is on. I was in three different financial institutions in the past few days, and three buddies all whispered that they HATE this time of the year. It’s all the stress and last minute scrambling. If you HAVE money, but haven’t gotten your savings act together all year – you have a problem. Investing isn’t just dumping some money into whatever in February, just hoping it’ll grown into something by the time a decade or two goes by. Go to yourmoneybook.com and read a couple of stories of the massive return difference between one-shot investing and a monthly contribution. That dollar cost averaging every month will get you more than twice the return.

If you don’t have money – you’ve got a problem, too – it’s just a different problem. The question is whether you should contribute or pay off your debt. I believe you need to have a game plan and a focus. Trying to do a little debt payment, a little savings, etc. doesn’t get it done, or at best it’ll take a lot longer. Take a year or two of no saving or investing and focus on getting to be debt free on everything but the house. Then go back with all that saved money no longer going towards payments and catch up your investments. It’s worth it, because it’ll only be a year or so if you actually get focused and intense.

Here’s another reason to make that worthwhile: Want a guaranteed 27% return on your money totally risk free? Pay off your credit card! All the payments you make are with after-tax money. So in a 30% tax bracket, for example, your 19% credit card is actually a 27.1% rate. Even that 6% car loan is actually 8.6%, and that’s not a bad return, either.

If you’re carrying a bunch of debt, don’t hear this to be permission to never save for retirement. It’s critical that you do. But it’s the second step after getting to be payment free. Nothing gets you a bigger return than NOT making monthly payments and paying out all that interest. Just the savings in that alone will let you immediately redirect them into retirement investments. It’s a half a step back to be able to take two steps forward. Not forever, but for a year or two it can be the best financial decision you’ll ever make.

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!

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.

Investing Lessons…The Hard Way

Two more quick thoughts for your 17 to 22-year olds from what we talked about last week.

Becoming financially successful happens from two sides: The savings side, and the borrowing – or not borrowing side. If you want to be rich, it’s a no brainer to study the habits of rich people, right? Well, the Fortune 400 richest people can teach us something we already know. To start, of those 400 richest people, 90% started with nothing – so it’s not inherited money, but rather earned on their own. For these people, 75% shared that the number one way to get rich is to pay off debt and to stay out of debt.

Of course, the best way to actually have money is to not pay it all out every month in interest and bills. That allows you to save. For students, there is a story on how to be a millionaire at age 20 by just saving $10,000. It’s on my web site – a story we did last year.

When you have money – you can invest and watch it grow… if you choose not to gamble with it. Investing is a five year or longer time horizon, and not a one-off stock or investment. It’s long track record, good growth mutual funds and the likes.

Want proof? The two so-called hottest things in investing have been gold and the Facebook, or some other IPO from the tech industry. Well, let’s see how that’s been going:

Gold yesterday went below $1,600. Now, I had said it’d be half of its high of $1,950 or so within two years, and it’s well on track. Just listen to some of the hype about gold and gold stocks. It’s been insane, and you have to know a ton of people invested with borrowed money. That’s now a double hit that will wipe out a ton of their money AND have them paying interest to add insult to injury.

Friday’s launch of Facebook stock is another great example of gambling versus investing. It’s a one-off stock. That’s way too risky for anyone of us to gamble on! The stock came out at $38. That’s what institutional investors got it for in advance. When it came out, the first few hours the stock went up. Of course it did – the almost always do. That’s individuals now getting their first chance at buying it! How do we know? On the first day every stock issued was bought and sold more than once.

So who was selling if individuals were buying? All those institutional companies who got it in advance and wanted out! You can’t buy a stock if nobody is selling! Those companies sold because they knew things you and I didn’t: During their road show of convincing these investment companies to buy the stock they reduced the forecast for Facebook profits. They also gave these institutions more stock than they thought they’d get allocated. Why? Because there wasn’t enough demand. That was a BIG warning flag for those companies to dump it quickly, and you and I didn’t have a clue.

So within a few hours, the stock was back down to its original price. By yesterday it was down to$33 from $38. Any hype to get in right away because you didn’t want to be left out would quickly have died. Today it’s at almost a 15% discount and some think, when you compare it to Google’s profits vs. price it ought to be a $10 stock.

Today you have that knowledge in hindsight. But by today you’d have lost your shirt. Don’t do it – stick with mutual funds managed by people who are on the inside and not reading about it two days late.

More Often Than Not, Being Broke Is Our Choice

A survey weeks ago by the Canadian Payroll Association found that around 60% of us live paycheque to paycheque. While their president stated he was very surprised that people were so close to the line, we shouldn’t be surprised at all. In fact, I believe the figure is actually higher!

Being poor and broke is most often a choice. We create our own mess, the mess doesn’t just happen to us. No, not consciously, but in the financial decisions we make, the debts we take on, and our priorities with money. I know that if I spill a cup of coffee, right now, this minute, I’m going to clean up the mess. That’s a cup of coffee – why don’t we take that same attitude towards our finances?

To change it around, we can spend less, or earn more. Either one works, both together change our financial situation that much faster. If we wanted to, by next week, we can make around $1,000 extra each month delivering pizza, the newspaper, or a bunch of other part time jobs. If we wanted to…

If we wanted to, we can sell our car with the big payments by next week, and drive a $2,000 beater until we’re debt free. Just not having that car payment is a huge amount of money that could go to paying off other bills. If we wanted to…

People don’t move until they’re fed up and mad with their financial situation. When we no longer want to live in the state we’re in, you’d be amazed how quickly we can change it around. But until then, we keep confusing our needs with wants, and just give our money to everybody but ourselves.

We’re like an ATM – two paycheques go in, and all the money quickly goes out to make every payment in the world, and we just hope that we’re not out of money before we’re at another payday. Everybody has their hand out for our money and we give it to them voluntarily, and then complain that we’re broke. That’s not a life – that’s surviving, and it’s not a fun way to go through life!

At some point, all the stuff we’re still paying for isn’t worth the financial pain we’ve taken on. At some point, hopefully soon, it has to become an issue of the heck with the cheeses, I just want out of the trap!

In relationships fights over money is one of the #1 issues with couples. It’s the biggest cause of divorces, and a huge contributor to male suicides. We hear this, we experience the fights, and we STILL keep doing what we’re doing? Does that make sense at all?

People know how to get wealthy and know how to avoid making their financial situation worse. But why don’t we take the steps to make it happen? The bottom line is whether we’re prepared to do what it takes to turn it around? If so, it starts with some easy steps that very few people take:

Sit down without the TV and the kids and do a written budget with your partner. Every dollar is planned, and nothing gets spent over and above the budget. It’ll really clearly show you where all your money is going. If the budget is $600 for groceries, $300 cash goes into an envelope or a jar for the coming two weeks. When that money is gone – you’re done spending.

Step two is to get an emergency fund of one week’s gross pay into a separate savings account. Stop being naïve – there will be an emergency. This small rainy day fund is critical. It will rain – you know that!

Step three is to focus on paying off your debts. No RRSP savings, no investments, no vacations, and you’re not seeing the inside of a restaurant unless you work there. But rather a 100% focus on getting debt free except the mortgage. The It’s Your Money book has an easy to understand section that has you list your bills smallest to largest, then every dollar goes to the smallest debt until it’s paid off. Then it rolls to the next one, and so on.

There was a survey done of the richest people in the world from the Fortune 400 list. Seven out of ten started with nothing. Their wealth was built entirely on their own, without inheritances. When they were asked what the number one key was to building wealth, the answer was always: Get out of debt and stay out of debt.

It might seem cruel, but if were to be honest with ourselves, would we agree with this line from Larry Winget’s book jacket: People want what they’ve got. It’s a simple formula: You have what you want because your actions produced your results.

Can you get out of the life of living payday to payday? You bet. Do you want to? I’m guessing we all do. Will you do what it takes to make it happen? Ah – that’s where 90% of people choose not to…