Tag Archives: RRSP loan

RRSP Deadline and Choices

It’s the month before RRSP deadline for 2021 contributions. A couple of things you should remember and consider:

If you’re in debt, focus on paying off your debts, instead of savings. I’m not saying take the next decade with that, but stop everything else and get a single-minded focus on paying off your bills. Then go back and start with all that money you’re no longer paying to your car, line of credit, or credit card and start saving with amounts nobody else can match.

If you just put your RRSPs into savings, you’re getting maybe half a percent interest. That isn’t going to work. There’s something called the Rule of 72. Take your return divided by 72 and that’s how long it takes for your money to double. So at half a percent, it’ll be 36 years. Better returns such as at least 8% will double your money in nine or so years. Of course, your age, how often there’s time for the money to double, and how much risk you can tolerate versus your age, other assets, and when you need the money matters a lot.

A big question is why don’t people invest properly and just put it into savings.

Researchers in California some years ago, led by Sheena Iyengar, set up tables to sell gourmet jams in front of a grocery store. One booth had six different jams available, the other had a wider selection of 24 jams on display and available for tasting. The purpose of the experiment was to determine whether quantity to choose from had any impact on how many sold. And did it ever – but in the opposite way: 30% of those who stopped at the six-jam booth made a purchase, but only three percent at the bigger booth made a purchase of some kind! We prefer to make quick decisions but that becomes impossible with 24 selections so we freeze and don’t make a purchase (or decisions) at all. The same holds true for investments. People want a choice but not an over-whelming choice or people will freeze and “think about it” without making a decision at all.

But then – not making a decision is still a decision.

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)

Starting Or Rebuilding Credit

Having a decent credit rating in today’s society really isn’t an option – it’s almost a must-have. Apartment management companies will make their decisions based on your credit score, bonding companies, large numbers of hiring managers, not to mention all financial institutions, for everything from opening an account to your ATM limit, a credit card, or loan, will pull your credit score.

That makes it critical for you to get and keep a decent and clean credit report, or to rebuild it after something has gone off the rails. You HAVE to read the credit score and the building credit chapters in the Money Tools book. That $20 investment at Mosaic on Bernard or Amazon will literally turn into thousands of dollars saved on any financial stuff – or even getting the job or apartment you want!

If you’re starting credit, you’re building it. If you’re re-establishing credit, you’re healing AND starting credit again. They’re both similar in what you need to do.

The simplest way is through either a small limit credit card of a cash-collateral loan. The smaller the financial institution, such as a credit union, instead of a bank, the more they’ll help. Sorry, but to the banks, you’re one person out of the ten million credit cards they already have – and they can do without one more. Get a credit card with a $500 limit and never charge more than $100 on it. You need to keep your balance at less than 20% of the limit. In a year, they’ll increase your limit and inside a year and a half, you’ve got perfect credit if you don’t start applying at a dozen other places and going badly into debt.

Don’t believe me? Below is a print of the credit score of an 88 year old. Less than two years ago, she needed a small credit card. That’s exactly what I set up for her. Today, her credit score is 832! 850 is a perfect score, so she’s in the top one percent of the country at age 88, in a nursing home, living on old age pension!

If you need to first heal your credit, a cash-collateral loan is borrowing $2,000 or so but leaving that $2,000 with the lender as collateral. Set it up for 12 months and the tiny bit of interest you pay is worth the cost to re-establish your credit. First ask if they’ll do an RRSP loan. That’s a win-win-win to build credit again, save for retirement, and build your credit. But if they say no, it’s only because they cannot take the RRSP for collateral. Then, plan B is the cash-collateral loan. Once you’ve done that, don’t do anything else. Your bad credit will get older and start to drop off your credit report, but the new loan will be fresh, up to date, and reporting monthly to the credit bureaus. Don’t borrow more – you can’t speed up the calendar. Get this done and take a one or two year time out and you’ll be back on top!

Doing the RRSP Deadline Money Dump?

It’s getting close to the end of the month RRSP deadline and lots of people are now thinking about doing their annual RRSP investment money dump.

But you shouldn’t do it. Not just because of the insanity of the market in the last few days: The Down was down 500 points or so Friday, down almost 1200 on Monday, then a 1000 point swing on Tuesday from opening down 500 to being up almost 600 at the close.

If you’re trying to time the market, you’ll never be successful. And if you’re just dumping money into your investments once a year, you’re also going to be disappointed over the next few decades.

THE best way to invest is dollar cost averaging. We’ve talked about it before, just search here for that term and you can read some of the research.   https://www.yourmoneybook.com/dollar-cost-averaging-your-investments/

Dollar cost averaging is putting the same amount of money into your investments each and every month. No matter what the market is doing, put your monthly amount into the same investments you’ve chosen. That way, you’re averaging out the market. Some months, when it’s down, you’ll get more mutual fund shares. Other months, when the market is up, you’ll get fewer – but it’ll average itself out over the years. In other words: Set it and forget it, because you’re not retiring this month, year, or decade.

Even in the great depression, someone who stuck with investing every month, all the way through the depression was way up a decade later, compared to someone who pulled out, then re-invested, and tried to predict the market. The once a month investor had doubled their money while still in the depression. The once-a-year investor took 25 years just to break even!

If you don’t have the money, it’s probably a great idea to skip the RRSP loan. Yes, you’ll be out some tax refund – but only for this year. Then, instead of a year of payments for last year, invest something each month taken directly out of your bank account starting this month. You’ll get the refund next year, you’ve started on the successful track of dollar cost averaging, and you’re not going in debt to time the market. A triple win with just one adjustment!

Oh, and you do know, or remember, that banks are for parking your money and not the place to do your investing, right?

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!

First Time Homeowner Advice

Ah, to be a first time homebuyer. I remember back how excited I was to finally get to own my own home. Well, the bank owned it, but I got to live in it. That the payments will go on beyond most of our lifetimes wasn’t something that was going to dampen my enthusiasm.

But there are also a ton of traps and insights that are really worth knowing to save a ton of money and grief. Unfortunately, most people get their information from friends or family. They certainly mean well, but most aren’t any smarter on the subject than the buyer.

This past month, a family member joined the ranks of newly minted homebuyers. So I’m near the end of tons of e mails, feedback, phone calls, and suggestions. Most of it you can have for $20 in the It’s Your Money book if you drive over to Mosaic, but here are some of the bigger traps, tricks and savers. And most apply to anyone who is already a homeowner with a mortgage:

Shop around for your mortgage: Convenience and ignoring that advice comes with a high interest rate. My relative ended up at 3.09 for a 5-year term and $7,200 under where he started. I also applied at ING Direct on-line. It’s not an easy site and I was really surprised their rate wasn’t competitive. But that changes almost week to week and you do need three quotes.

Take a long-term fixed rate. Rates will go up, and when they do, an extra $200 or so a month will kill most anyone’s budget.

Do whatever you can to get to a 20% down payment. I know that’s asking a lot, but in this case, an extra $15,000 down payment is a saving of $3,400 CMHC mortgage insurance. With interest, that’s $6,700 over the term of the loan.

Set up a separate savings account with two or three months of living expenses. He managed to be able to set aside two months and it’ll let him sleep a lot better knowing he always has two months of savings set aside – just in case.

Borrow as little as possible from your RRSP – you can certainly borrow some of your down payment from yourself, but you do have to pay it back, which just gives you another debt and more payments, or it’ll be taxed each year. I got him down from $20,000 to $15,000. Less money now but big thanks down the road – I guarantee it.

Stay away from money from relatives. Better to borrow from your RRSP than family. If it’s a gift – that’s great, and a blessing. If it’s a loan, don’t do it. Family dinners will never taste the same and it’ll come with judgments and questions. My relative already had a slight taste of that, even before possession.

The week of closing you’ll need a lot of money. The biggest source of trouble is when buyers don’t realize the money they need at closing. Then it goes on a credit card and that balance will now be around for years since they’ve also now got the mortgage payments. You’ll need to budget:
-$800 for home insurance….my relative shopped the two best places and saved $200 and was smart enough to take a high $5,000 deductible.
-$1,000 or so for the lawyer – again, shop around – the lawyer the no-service bank recommended was $300 higher than others. It’s just paperwork, so cheap is great!
-About one months’ payment for interest adjustment to cover the first months’ interest
– Some money for the moving expenses
-And definitely some money for the first months’ repairs and purchases. Nobody moves into a new home without needing at least $1,000 of stuff right away.

My relative did it the right way: He waited and waited until he could afford it, AND he has some money set aside for the inevitable. His shopping around and being smart has saved him $19,400 so far. His house purchase will be a blessing. Thousands of people don’t do those things, and it quickly turns into a nightmare. Do it the right way – it’s worth it, and I can’t wait for Tuesday’s possession date.

Black Monday: Why You Should Learn the Lessons

Last week we talked about the nightmare of the bankruptcy of Lehman Brothers, the sale, or give away of Merrill, and the $85 billion loan injection into insurance giant AIG.

There are some big lessons for all of us individuals, as well. Sure, our first thought is about our mutual funds and RRSPs. But how many of us live on credit and are buried in payments of one kind or another?

As long as our income keeps coming in, we’re fine. But what happens when we have to do without a paycheque for two months? That’s the same as cash-flow problems for companies.

What are the odds of doing well, over the long term, if we use borrowed money to do our investing? Now, it’s fine to get a one-year RRSP loan, that’s different. But how many e mails do you want from people who look a line of credit to buy gold at around $1,000 an ounce and it’s now around $800? How many examples would you like of second mortgages to buy tech stocks in the 90s because they were never going to go down and people didn’t want to get left out? It is not investing – that is gambling, pure and simple. When someone jumps out of a 50-storey building, for 49 floors they can convince themselves they can fly. But then reality re-appears in a hurry when they hit bottom.

It’s called leverage and it’s a very dangerous shell game. One of the bankrupt firms was leveraged 33 to 1. That is: for ever dollar of assets, they borrowed $33. When shares, or in their case, these mortgage portfolios they invested in, were going up they were making a ton of money. But with a 33 to 1 ratio if investments drop three percent – that’s all – three percent – their entire assets are wiped out.

When you invest with cash – that’s the most you can lose. When it’s on margin, through leverage, you can be wiped out AND still owe a ton of money after all your cash investment is gone!

The good news? These days the rich will absolutely get richer! Why? There are a bunch of companies who have been around for decades whose stock is trashed for no reason. They have great dividends and their shares just got sucked down with the whole market.

Could you have been one of the rich people? You bet. If you’d have the cash to put into savings instead of paying the credit card, the mortgage, line of credit or the car payments.