Tag Archives: RRSP

Do You Have a 50% Credit Card Rate?

If that sounds insane, it really isn’t. Millions of Canadians have it – they just don’t know it!

Numerous surveys over the past few years show that one quarter of Canadians are cashing in some of their RRSPs before retirement. That’s more than 1.8 million people. Say it ain’t so as the old expression goes.

Two of the most common reasons for you to consider cashing in all or part of a retirement plan are to purchase a home or to pay off debts. Let’s assume you want to cash in $5,000 to pay off a credit card. The first thing you pay is a 10% penalty right off the top. So you’re actually getting $4,500. Then this amount is taxed, as if you made that money as income. In a 30% tax bracket, that’s another $1,350. So the bottom line is that the $5,000 you cashed in is really only $3,150 of net money going on your credit card. Sure, it’ll save you 20% interest on the card, but that’s not the whole story.

That money is no longer growing in your RRSP (or your Tax Free Savings Account). At a 10% return, that $5,000 would have doubled every seven years. If you’re in your 30s, you’re now missing around $160,000 at retirement. If you’re in your 50s, that $5,000 still would have doubled three more times, which is $40,000 now gone.

While you’ve now been able to pay just over $3,000 on your credit card, it likely didn’t pay off the balance. That’s bad enough with what it’s cost you in foregone investment income. Now to make things worse, the majority of people keep using that credit card again! Odds are, you’re in the majority where you’ll be back to an average $7,000 balance within two years.

That puts you back to paying 20% on your card while you’re out at least $40,000 in savings for the next 20 years. The bottom line: Your credit card is then costing you more than 48% interest. While you were hoping to make things better – they got worse – a lot worse.

On the plus side, how would you like a zero risk 28% return on your money? It’s easy: Just pay off your credit card. The 20% interest rate you pay is with after-tax money. So the real rate is over 28% if you carry a balance. That’s the biggest reason trying to save at the same time you’re trying to become debt free doesn’t work!

3 Short Stories

Instead of putting their product on sale, Pizza 73 is advertising limited edition (Edmonton) Oilers game box pizza. If you’ve ever wanted to collect used greasy pizza boxes, don’t miss this promo!

Twice last week someone asked me when governments will be back to some kind of balanced budgets. Being asked that is very rare – it’s not something that most of us do as individuals. Hands up if you even do some kind of budget… Hands up if you remember any talk about that in the last two elections? There wasn’t anything. But many remember Prime Minister Trudeau’s comment that “budgets balance themselves.” Besides, running deficits allows politicians to buy votes. Getting to balanced budgets costs them votes!

Middle of January I saw a Royal Bank ad promoting investment accounts for RRSP season. The “deal” was that you get 100 free trades until March 31st. If you need more than two or three trades in the first two months, you’re doing something wrong! You’re not a day trader, I hope, because 93% of them lose money. I manage a 7 figure investment account for a relative. It’s with a national portfolio manager in five accounts. Last year they did a total of 16 transactions. That’s three per account in a year! 100 trades should last you more than 30 years…if you’re investing and not churning, guessing, or day trading.

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)

Happy New Year…But…

Sadly, as of last week, over 25 percent of resolutions have already gone by the wayside. But I have an idea and a way out of that: Think of January as a free trial month. You get that with some subscriptions, perhaps with a fitness club trial and other offers. So learn the lesson and start again on February 1st with your financial goals!

Make sure that your financial to-do and to-resolve list starts with something really simple, really short, but also really critical. It’s an entire chapter in the Money Tools book called: Do you have a half hour?

Yes, you do have it – but do you want to invest that half hour into getting some of your financial stuff in order for at least the coming year?

First thing is to have a coffee date with your partner if you are in a relationship. If you’re not on the same wave length – nothing else really matters. Talk about your financial goals and hurdles for at least this year.

Do you want a $10,000 vacation? If you don’t have it set aside, what’s the plan to save $800 a month if it’s next winter, or save $1,500 a month if it’s this summer.

Want to just charge it on a credit card? That’s your choice if you and your partner agree…but at a 20% rate it’ll be $20,000 in total price in four years. I think that’s a horrible idea, but it’s your choice IF you agree and IF you know what you’re getting into.

Is there one specific debt want to pay off? Do you agree it’s worth it and which one? How important is it to you two? What will you do or give up to achieve it?

If you’re a home owner, and your mortgage is coming up for renewal, are you planning to stay in town, in the home, in your job? What’s the longer term life plan…..because you don’t want to sign another five-year mortgage if you haven’t talked it through, or your penalties will be upwards of $20,000 if you change your mind!

Open a TFSA or RRSP: If you don’t have one – it takes less than half an hour with an online brokerage or your financial institution – that’s it. If your tax refund or other money comes in you have a way to invest it. If you don’t – that money is most likely going to leak out elsewhere.

Open an emergency savings account: You want a basic one week net pay to start. Not hooked to an ATM. But you first need the 15 minute to just open it and put 10 bucks in it. That’s a start – and the longest journey always starts with that first step!

It lets you get traction…because without it you’re not going anywhere…

Just Do It (Some of it) NOW

Just Do It (Some Of It) Now

The Nike slogan is “Just Do It” and everybody aged 18 and up, the sooner the better, should take that to heart. Or at least do some of it. There’s a chapter in the Money Tools book entitled: Do You Have a Half Hour?

In life there are tons of things we just never get around to – for all of us at all ages. We’re too busy, maybe next week, it’s not a priority, or whatever the reason or excuse. If you don’t take the first step you’ll never take the second step – and that chapter has about a dozen things that take less than half an hour.

If you look at your bank account and have an extra $200 you might want to save it. But it’s likely you won’t – or at least if you’re in your 20s because you don’t have an investment or TFSA (tax free savings) account, or an RRSP set up. That’s just one no-brainer example. If you take less than half an hour to set up an investment account with just a $20 deposit you’ll have it if and when you have some extra money, a bonus, or maybe some cash for your birthday. But if you don’t even have an investment account, you’ll never detour the money to it. If you’ve done the half hour basics, it’s two clicks and you’ve added to your investments.

Just taking this one example at age 18 to 25 has a staggering impact down the road. Here is a chart of what just $1,000 savings gets you in compounded interest down the road if you set it and forget it (from taxtips.ca):

$1,000 in just GICs over 50 years turns to $16,000. If you’re already 25 or so, over 39 years it’ll be $7,700.

But you’re 18 to 25 so that’d be a total waste of investments. If you put it into a basket of the top 500 companies in the world (that’s called the S&P 500) the $1,000 turns into $135,000 over 50 years. If you’re already mid-20’s it’ll be $77,000.

That’s a lousy $1,000 saved – never mind if you read the teenage millionaire chapter and do it quicker for a return of $1.1 million. Or you can hope you’ll get your $900 Canada Pension – good luck with that.

So the half hour today pays off huge – but you need someone to print you off this returns chart for you to believe it. And then you have to get off your butt and make the half hour. If that’s not worth your time – I can’t help you!

George Boelcke – Money Tools & Rules book – yourmoneybook.com

Graduating to Financial Adulthood

In most places, when you’re 18 you’re an adult. In BC, the age of majority is 19 and by 21 you can do anything anywhere. You’re done with high school and can drive, drink, vote, borrow or invest, and live on your own. However, for the majority of the population, that doesn’t make them a financial adult. That can happen soon after, or it might not happen until your 30s or 40s – if ever…

This week and next, I want to go through a list of what I believe makes you a financial adult. It doesn’t mean you have to be debt free or take a university course. The essence of it is that you need to be in control of your finances and money, instead of it being in control of you. You’re pro-active versus reactive and out of control. If you do these, or know how to do these, congratulations! You’ve graduated! Some are easier than others, but all are really important.

1..You have at least one-week of income as basic emergency fund and are working towards a full three to six months of all your expenses.

2..You have two credit cards and a debit card. Your credit card balances are less than 30% of your limit (or are lowering your balances every month in order to get there) and you do not have or use an overdraft on your chequing account.

3.. In the last two years you have checked your credit report and credit score at least once and your credit report is accurate. In other words: You’ve disputed and had them fix any errors. (Go to Equifax.ca and purchase ‘score power’ which is your credit report and score.

4..You have opened an RRSP account and/or Tax Free Savings Account and make a regular monthly contribution. No matter how small – at least you’ve started and have traction.

5..You have basic insurance. Car and home coverage is obvious. But if you’re a renter, you have a tenant fire insurance policy and if you have a child, or a partner, you have a term life insurance policy.

6..Whether you’re single or married, rich or broke, you have a properly completed will. It can be a $20 do it yourself kit if you’re single, or a lawyer-prepared one if it’s more complex and you have kids. But you (or you and your partner) do have a will.

7..You know the actual amount of your net take-home pay every month. You can’t control your money if you don’t even know the exact amount you net and keep talking about your gross pay as if that were what you could spend each month.

8..You have done at least a one-time budget, or have a system of tracking your spending.

9..Your monthly spending is less than your monthly take-home pay. You may have ten cents left or $1,000 – but you’re not spending more than you earn. Financial adults figure out how to pay for something and then buy it. Others buy it and then figure out how to pay for it later.

10..You know your net worth. At least once a year you figure out what your total assets are (what you own) less your total debts (what you owe) and whether you’re growing it by savings, or whether it’s shrinking by going into debt.

11..You have a system for paying your bills every month. Waiting for the mail is not a system! Whether it’s an app on your phone, setting up automatic payments, a calendar, an on-line program or a simple check list you look at every month – it needs to be a specific system.

Waiting for the bill in the mail isn’t a plan. If the statement doesn’t come and you forget, your credit rating plummets. Blaming the post office won’t work. It’s your fault that you don’t have a system for staying ahead of the game and on top of your bills.

12..You have a proper filing system for your financial stuff. It can be six large envelopes for each of the last six years, or a ton of file folders, if you’re an organizational nerd. Kids get to say ‘I lost it.’ Financial adults don’t have that option. The graduating test will be whether you can find your tax return from 2011, or a bank statement from February within 10 minutes.

13..You are taking specific steps every month to pay off your existing debt, excluding your mortgage. You are paying more than minimum payments and your total debt is shrinking each month. You have a specific month and year that you’re working towards when you will be debt free except your home.

14..In the past year you have made at least one call to dispute a charge, ask for a lower rate, or comparison shop. If you don’t know how to stand up for your money – others will gladly keep taking it from you.

15..If you’re in a committed relationship, you and your partner spend at least an hour each month without the TV or kids discussing your money, savings, bills, purchases and budget. Kids spend – financial adults have a plan and communicate.

16..You have at least two specific and measurable financial goals. Saving more in my RRSPs, or paying off my credit card isn’t a financial goal – it’s a dream. It needs to be specific: Saving $150 a month in RRSPs is specific and measurable. Reducing my credit card balance by $200 or more every month until it’s paid off is a measurable and specific goal.

17..At least once each month you have the self-confidence to say no to an expense. It may be at work, to your kid, or to yourself. If you don’t know (or don’t want to) say no or say that you can’t afford it, or don’t need it you’re doomed to have your money continue to control your life, instead of the other way around. Setting boundaries is what financial adults do.

18..On anything expensive you shop around before committing to a debt or a bill. That includes interest rate shopping, your insurance, cell phone contract, and your credit card interest rate if you always carry a balance. Kids impulse buy until they’re out of money – financial adults don’t spend until they’re broke. If you do – you can skip the other items and save a bunch of time and effort – you’re doomed to be broke for years to come.

Canada Savings Bonds Are a Crappy Way to Save, But You Should Use Them

Breaking news alert!! Canada Savings Bonds are available again for payroll deduction purchases. Their sale is a fall-only option and available until November 1st.

They’re a really crappy rate and shouldn’t be used for investing but you don’t need to worry about your return until you get started in the first place. They’re great for getting started, for having them come off your cheque and for parking your money for a while.

If you work for an employer, go see your payroll department for five minutes today. Ask whether you can get them, or if your employer can do payroll deduction for RRSPs. If so, make it happen TODAY – if you don’t already. The only way most people save is by paying themselves first. If you wait until the end of the month to see if there’s any money left over, I can tell you right now: There won’t be. But you can’t spend what you don’t have, and that’s paying yourself first.

If that’s all new to you, it’s really easy to start. Just have 1% taken off your pay. You will never miss $20 or $30 a pay. It’s a tiny amount that won’t impact your life or your finances one bit. Then, every six months, increase it by another percent. You’ve lived just fine on a net cheque $20 less. Another $20 won’t make a difference…again,  you’ll never miss it. In another six months, add another one percent and so on until you are saving 10% of your pay.

It’s such a tiny change twice a year, you’d be amazed at how quickly your savings grow without any impact on your lifestyle or finances. Since it comes right off the top, there’s nothing for you to do. It’s on auto pilot and happening in good months or bad – in months where you’re behaving with your money, or spending it like you were a politician.

A few months ago, a relative received a letter from an ex employer he had been with for three years. They were asking where to send over $16,000 in RRSP money. When was the last time someone wanted to surprise you with an extra $16,000? You see, he had $70 or so deducted off every pay into RRSPs. After three years, with matching and growth, he had no idea what it all added up to and was sure surprised. It’s not like he missed the $70 a pay since he had it done on the first paycheque. But it sure added up…as can yours.

If you don’t have any savings options at work – shame on your employer – but you can also do it yourself. Go to your financial institution and ask to have a fixed amount transferred from your chequing to savings, a Tax Free Savings Account, or an RRSP every two weeks or every month.

Banks are for parking money. They are not places where you should be doing your investing. But it’s a start in order to get some traction. And the hardest thing with many financial lessons is to get started. It’s the first step that’s the most challenging. After that – you’ll never do without it again, as it’ll be part of your routine.

I had another minor savings plan a few years ago. I decided to live without coins. Every time I got any change, it went into a bucket. So, essentially I used $5 bills a lot because coins were always re-directed into this bucket from nickels to toonies. In one year, that ended up being over $1,000! Other than the pain of rolling them, it was a totally painless savings plan.

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.

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!