Tag Archives: tax refund

Where Exactly Is All That Money?

Good news and bad news: It’s tax season, and most of us are likely getting a refund. That’s both the good news, for obvious reasons, but also the bad news.

Most people tend to think that a tax refund is free money. As a result, they tend to treat it as such, and generally blow it. Unfortunately, it’s not found money – it’s just refunding money that you overpaid all year long.

A big refund is bad news in that you have had too much money deducted from your pay each month. All you’ve done is given the government an interest free loan. You need to go to your payroll department and increase your exemptions. When you do that, it’ll increase your net income on each paycheque.

When you now have that money on each paycheque, you can use it all year long and not the government. If it’s a big increase in your net pay, use it to immediately start an RRSP or Tax Free Savings Account. You’ll be funding it with free money and your net pay won’t be any less than it was before you fixed your deductions!

One more question with this being the big tax refund month. I was thinking the other day where exactly all our money is, and has gone.

Sometime today, just add up what you’ve earned over the past ten years. Or make it five years if you haven’t worked for a decade. It’s not hard to do, and close counts. Take your T4 slips, or a calculator, and multiply your income by the last 120 months. Sure, you had raises, promotions, or whatever. Close counts.

What you’ll have is a pretty staggering number. Your pay over the past ten years has added up to a huge amount of money. Someone earning $3,000 a month has made $360,000 in the last decade. Yet, most people have never thought of that.

Now add up what you have in RRSPs, saving, and investments. The difference between what you have in savings and what you’ve earned is spent and gone. I know, I know – lots of that money includes rent, mortgage payments, groceries, utilities and the likes.

But, if you’re like most people, what you have in savings is less than 5% of what you’ve earned. That should scare you, or should be a huge wakeup call. I’m not even talking about adding up your monthly bills or the total debt load you have.

Just comparing your 10-year income to what’s actually left is enough food for thought. Now think of how many more decades you can, or choose to work. If you do another decade what you’ve done for the last decade in borrowing, not doing a budget, and not saving much, where will you be? Financially, can you afford another decade like the last one?

Happy RRSP Deadline

So here we are just a few days from this years’ RRSP deadline. It’s the one time in the year when the no-service banks stay open forever in order to get our business. But most of us are still scrambling.

On average, our RRSP contribution is about $2,600. If we think about that, it’s a pretty puny amount to invest in ourselves and for our retirement, isn’t it. Sure, there are maybe 20 percent or so who max out. But for the rest of us it really doesn’t matter what the max is – we tend to think of what the minimum is, instead.

But why? It can’t be because we’re just really happy to pay a whole bunch of extra income tax! No, it’s because we don’t have the money! Yet the fundamental way rich people become rich is by paying themselves first. It really is that simple – yet also very hard.

Will bills and all those monthly payments, we are constantly paying for yesterday instead of investing in tomorrow. No that sounds simple, but it really isn’t. When all of our money goes to pay for yesterday’s stuff, there’s just nothing left over. It’s not like we can skip the car payments, not pay our credit cards or the mortgage for a while.

The trick, OK, it’s not really a trick, is to turn this ship around. When we don’t have all those payments, we have the money left over to invest proactively.

If you’re buried in debt and payments, I would never recommend figuring out how to save for an RRSP at the same time. You are way better off taking that money for a year or so and focusing every ounce of energy and every dollar you have to becoming debt free. I’m not saying never put money into your retirement savings but for a year or so you’ll have a way bigger return when you pay off your debts.

If you have a $400 car payment and are putting $200 into an RRSP, you’re trying to do too many things at once. If the car is paid off, you’ll then have the whole $600 for your retirement savings and you’ll catch up way quicker and will have done it much smarter.

For someone who will do an RRSP, just make sure you take the tax return and either use it to pay off some debt or stick it right back into a 2009 RRSP. THAT is how you get ahead.

For someone who is going to get an RRSP loan, consider making it a little smaller this year and also instructing your investment advisor to automatically take some money out of your chequing account for this coming year. In that way, at the end of 2009 you’ll be ahead because you’ll already have the money saved!