Tag Archives: retirement savings

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.

Seven Things the Middle Class Can’t Afford Anymore

This was an article originally published in USA Today last week. Two are medical and dental that don’t apply very much here in Canada, but how many of these are accurate, or apply to you and me in the middle class?

Vacations: Most middle-class families just can’t afford an expensive vacation without sacrificing something else. A Statista survey found that 54% of people had to sacrifice another big purchase to be able to afford a vacation. We’re not talking about a camping trip here, but anything that involves an airline flight is expensive. Add meals and hotels and you’re over $3,000 to $4,000 pretty quickly.

A new vehicle: With an average price over $32,000 it’s just not something most people can afford – either because there’s no chance they have that kind of money saved, or because they couldn’t afford the payments no matter how long the term is stretched.

To pay off debts: Debt loads are rising way faster than incomes. So every  month, finances get worse and not better. Living pretty close to spending every dime of income on bills, necessities, and minimum payments makes it really difficult to make a dent in their debts. That makes it more critical not to get into debt in the first place. Because,  once you’re in, you’re trapped for decades. How do families get into debt in the first place? Vehicles they can’t afford, houses with little down payment and high monthly payments and that subconscious refusal to acknowledge they can’t afford something.

Emergency savings: We’ve talked about this before. Basic emergency savings are one week of net pay. Then pay off your debts smallest to largest and step three is to have a three-month emergency fund in place. But almost 50% of people couldn’t miss one week of pay. Why? See number one two and three.

Retirement savings: When you’re barely able to keep your head above water today, it leaves nothing to save for tomorrow. That’s just the reality of what’s coming in versus going out. That’s why you need to pay yourself first. If it comes off your pay or out of your chequing account every month you can’t spend what you don’t have. It’s pretty much the only way to save for retirement. In a recent study, 17% of Canadians plan to use the proceeds of their house sale to fund retirement….but don’t they need to live somewhere? After all, you can’t eat your house! That’s a terrible strategy, right up there with winning the lottery to fund retirement.

Graduate As a Millionaire

85% of teenagers never take a course on credit or finances. That means they haven’t got much of a hope of being financially successful from the get-go.

The first thing most teenagers do when leaving the home is to take on a car payment, get a credit card, pay rent, and often have a student loan. But if you have teenager that’s about to leave the home, here’s a deal you can make that’ll insure their financial freedom for the rest of their life.

The only thing your teenager has to do is to save $8,000 by their 20th birthday. Nothing more – nothing less. After that, without getting into debt, or touching these savings, they can literally spend every dollar they make.

It’s the magic of compounding and works with something called the Rule of 72. Simply take your rate of return and divide it by 72 – that’s how long it’ll take for your savings to double. So at a 7% rate, it’ll double every 10 years, while a 10% rate will double it every seven years.

Do some lateral thinking of how you can help them achieve this. Maybe you can charge them rent and keep that in a savings account. Some parents match whatever the teenager saves to a certain amount – there are all kinds of ways.

Then your 20-year old just has to watch his or her savings double again and again until it reaches $1 million at age 67, using a 10% rate, and it all started with a one-time saving of $8,000.

Oh, if only we had done this when we were their age. But one more thing: Because they’re teenagers, I’d recommend there’d be two signatures on the account – just in case they get the urge to take some money out…

The Rule of 72:   At 10% it’s 72 divided by 10 = money doubles every 7 years

At 11% it’s 72 divided by 11 = money doubles ever 6 ½ years

At age              Amount now saved through compounding interest at a 10% rate

20…                 8,000

27…                16,000

34…                32,000

41…                64,000

48…                128,000

55…                256,000

62…                512,000

67…                1,014,000

THAT is the best graduation present I can think of, and it’s not hard to do at all. It works with any starting amount. Even if it’s $5,000, it’ll turn to $640,000 and that’s not a bad deal for a year of two of savings at an early age!

Adults can get there, too. If you want to have $1 million when you retire at age 67, for example, you just need to work backwards.

So at age 60 you’ll need half a million because it’ll double when you reach 67. At age 53, you’ll need $250,000 and at age 46 you’ll need $125,000, and age 39 you’ll need $63,000. When you reach any of those amounts, at whatever age, it’ll double and double until you reach a million at age 67. But, depending on your age, you may want to use a more conservative 7%, depending on your age in order to lower the risk of your investments.

However, there’s a big proviso: It’ll never happen if you’re also in debt and making a bunch of payments. Sorry, can’t be done. You need to be debt free to have some serious money to put away for investments. I know the world has taught you that you can have it all – it’s not true. There’s no chance you can save a little, pay a little here and there and still have a life with your normal rent, mortgage, utilities, gas, etc. I know you think you can and it’ll be another five, 10, or 20 years of finding out that you were really wrong and wasted another decade.

Great News! Our Debt Increased 21% Last Year!

OK, if that doesn’t sound like great news – you’re right. But this Ipos Reid survey was done for the Royal Bank. Not to pick on the Royal, but banks are in the business of helping you go broke. They’re in the lending business and generate their profits when YOU borrow money and pay interest. So it is great news…if you’re a lender.

For the rest of us: Not so much. A 21% increase in just the last year of our non-mortgage debt is insane. That’s the Canadian average, but Alberta set the record with a 63% increase in debt last year. With pretty good incomes in Alberta and elsewhere comes that part of the brain that says: It’s OK, just borrow the money – you make enough to pay it off…eventually.

The survey also found that the same 38% of us are “very anxious” about out debt level as those who responded they’re “comfortable” owing the money. If you’re in the “comfortable” group, what would move you out of that? A job loss, any emergency, your partner leaving their job, the need for a newer vehicle, or a host of things that can go off the rails. Don’t get too comfortable, because things can change in a hurry – and it’s always when you least expect it.

When interest rates are low we tend to think we’re getting free money. Well, they won’t stay low forever, and when they turn, the interest you’ll pay goes way up for something you spent years ago. There’s a current radio ad with the line: You can eat whatever you want and still lose the weight. In financial terms, it’s just as much nonsense, but I bet most of us believe it – or at least want to believe it: You can borrow and spend whatever you want and still be financially successful. No you can’t. You can’t spend more than you earn, and you can’t eat everything you want and still lose the weight. Oh how we’d love that to be true. And after all these decades of weight loss programs having a more than 90% failure rate it isn’t any different for our finances.

For the majority of us, we earn enough for what we need. But we’ll never earn enough for everything we want. And it’s the “wants” that kill our finances, choke us with monthly payments, and stop us from putting any serious money into retirement plans, or even a simple emergency fund.

Until we get real and stop buying into the ads and marketing we can’t turn our finances around. Sorry, it’s mathematically impossible. May the reality check of that hit most of us before it’s too late and before we’re in our 60s and have 20 minutes left before retirement to put some money way.

Or, if you can’t retire when you really wanted to, think back to all the credit card charges, all those vehicles you owned and sold for one-tenth of what you paid, and that line of credit that was around so long you started thinking it was a member of the family…

When You’re In Charge of Your Own Retirement Finances

We talk about finances all the time, and one of the biggest financial decisions is probably your retirement savings. Now, this is not a shot against the current government, but a comment about government programs overall.

There are a few things the government does really well. Included in that list is the military, foreign affairs and the passport office which is just incredibly efficient and well-run. But generally, any government programs are not very effective, and you will always, always be able to do better, and do more on your own, without waiting or hoping the government will come to your rescue. They won’t – and by the time you’re done waiting for a bailout package, or meaningful help from the government – you’ll be dead, honestly.

There is no place where that is clearer than with our Canada Pension Plan: The CPP pays a maximum of $884 to you in retirement. Let’s use this $884 maximum, even though the average pension benefit recipient gets $481.

Let’s take the lowest working person in the country. We’ll take someone who works from age 18 to age 65 and makes $2,000 a month. So this is a person who never gets a promotion, never gets a raise, and never improves on that income – someone who literally makes a small $2,000 a month throughout their entire working life.

Until retirement, every month, this person has $42.28 deducted from their pay towards CPP. The employer portion is the same, because employers match the deduction. So, for this person, every pay period, $84.56 goes towards their CPP in order to get a maximum of $884 each month after retirement. Simple math so far?

Now, if this person took that same $84 a month and invested it, even at just a 10% return over their lifetime, they would have $1,084,000! That translates to a monthly pension of $9,033! Let me say that again: Taking the same CPP deduction of someone who makes $2,000 a month for life, and investing it on their own, would have a pension of over $9,000 a month, AND he or she would leave an inheritance of over $1 million to their family.

THAT is why I want you to pay yourself first every month, and have some savings deducted right off your pay where you won’t miss it. What would you rather have? The $884 CPP, or your own $9,000 each month?

When you run out of money you run out of peace of mind

Less than 45% of us have any kind of savings for retirement. The simple reason is that we don’t pay ourselves first. We pay ourselves last – but since there’s no money left over right now, last means…well never. To start saving, most of us need to make some payments go away first in order to free up some money.

When our debt and payments start getting carried away, we can do one of three things: We can stay in denial and continue our optimism that it will somehow take care of itself.

We can get frustrated, depressed and throw our hands up, or we can have the courage and discipline to view these payments and debts in realistic terms and make simple and fundamental changes to turn things around.
Yes, it takes courage and discipline – nothing is easy, but it’s well worth it. After all, those who understand interest want to collect it. Those who don’t are the ones paying it.

An easy place to start is in the debt chapter of the It’s Your Money book on the step-up debt payments. It walks you through a simple example of $25,000 of debts and pays it off in less than one-quarter of the time with just $100 more each month.

Even if becoming payment free seems impossible, two easy things are to take your smallest monthly payment and do whatever it takes to pay it off. That alone frees up a bunch of money.

The second one is to cut $200 of your expenses each month. If you make it a game and not a pain and honestly look at every dollar going out the door you’ll easily do it.

We may not want to face it today, but at some point we have to change from a consumer mindset to a savings mindset. At that point it shouldn’t take a decade just to get back to zero in paying off your bills.

To have some different results, we have to do some different things. We have to make some better choices which are not based on old patterns, fixed beliefs or previous habits.

Because you and I have experienced it: When you run out of money, you run out of peace of mind.