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Saturday, August 29, 2009

Net Worth Update - August 29th, 2009

Every time I get paid (every two weeks), I update my net worth. The idea behind this is that my goals are that my liabilities drop every two weeks, and by tracking them in this way, I am able to get a nice picture of where I stand financially. Its not a perfect balance sheet that I have (because of student loans I have a negative net worth), but the progress is what I am looking for.

ASSETS:
- up $373.82 from August 14th, 2009
- up $6009.10 from August 29th, 2008(one year ago)

These assets include my house (I give it 1% appreciation each year in my appreciation), my RRSP and my TFSA. The market went up a little bit in these two weeks, and I went to the bank to raise my contributions so this should continue to rise at a nice rate.

LIABILITIES:
- better $461.33 from August 14th, 2009
- better $10,978.26 from August 29th, 2008 (one year ago)

These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). My credit card is now slightly higher than zero (because I forgot that I had to pay condo insurance). This should impress upon me the importance of having an emergency fund.

NET WORTH:
- better $835.15 from August 14th, 2009
- better $16,987.36 from August 29th, 2008 (one year ago!)

I am hoping that these nice numbers can continue as school begins again. I am no longer getting extra paycheques because of summer school, but in a previous post I mentioned that I am lowering my taxes on each paycheque. This money will go to a loan. Looking forward, I am feeling pretty good about my finances. My net worth continues to be at an all time high and my goals of my liabilities always dropping each paycheque has worked pretty well so far (although my statistics say this only happens 72.2% of the time since I bought my house two years ago).

The last thing I am going to track is the value of the TSX. I have some asset allocation goals that I will share in future posts, and they are dependent on the value of the TSX.

TSX Graph
Current Value: 10,977.97
Highest Value in Last 2 Years: 15073.13 June 18th, 2008

Friday, August 28, 2009

What I Did With My Pay Increase

Today I did the first two steps in what I will do with my pay increase: I increased my RRSP savings by $25 every two weeks and I increased one of my loans $40 (to just come out at the beginning of the month).

I expect to get a raise of about $100 per paycheque (as a teacher in a union it is quite predictable to what I will get), and I will also increase my mortgage once my property taxes rise (that will be the third step). I decided to just increase at the beginning of the month for my loan rather than every two weeks to give me a bit more float cash at the middle of the month. I always find the 15th of the month to be a bit tighter because all of my monthly bills (heat, hydro, internet, etc.) come out at that time and I don't have my rent coming in to buffer it.

Summarizing, at the beginning of the month I have spent an extra $90 and at the middle of the month I have spent an extra $50 (or will once I raise my mortgage). Also, I currently have 12.5% going into a bond fund and 87.5% going into a Dividend fund. Long term, I want my deposits to be between 5-10% each deposit into the bond fund and the rest into an index fund, then I will balance them when the markets are at a good time.

Hopefully this will inspire some people to plan what they will do with their raises (rather than just have extra spending money altogether). Please note that I left myself an extra $10 at the beginning of the month and $50 at the middle of the month, so not all money was accounted for. My long term goal will be to save 50% of my raise and to hang onto 50% of my raise.

Thursday, August 27, 2009

Less Taxes

I have finally filled out my Form T1213, Request to Reduce Tax Deductions at Source, where the government will tax me less each pay cheque because of my RRSP deductions. The math behind this is because they are over taxing me I get back several thousand dollars at income tax time. If I get a little bit more each paycheque, they will hold onto less tax on my behalf, and I will be able to earn interest on this money (or pay off loans...which is what I plan to do with it).

I have thought about this a bit, and am only having them deduct half of my RRSP deductions, leaving the other half for myself at income tax time. The reason for this is threefold: first, I like getting a little bit of money back at tax time, second, I wouldn't want to try to plan it to the nearest cent and then owe money in March and third, because I took advantage of the Home Buyers Plan, I will start repaying it this year, so I need some of my RRSPs to do so.

I will know in 2-4 weeks if this actually goes through, but I expect that it would. All I needed to send them was a copy from my bank (you can get it from your work if they take RRSPs from you) of my regular payment plan. Once it goes through, the government sends notification to your work and your taxes get lowered. It’s as easy as that! I'll repost on here when it actually goes through.

Wednesday, August 26, 2009

Investing Theory

I'd like to discuss today an investing theory that I was discussing the other day that will guarantee conservative growth over time. It is based on the theory that most of your portfolio should be conservative with a small percentage (some say 5%) in something aggressive.

The theory behind this is that all of your deposits should be in something safe, be it a bond fund or a GIC or something with guaranteed growth. At the end of the year, any profits that you have made on this investment will be put into something more aggressive, even if it is just a Canadian Index fund.

Let's use a few numbers to get an idea. Assume that your GIC earns 5% per year and that you deposit $10,000 into it each year.

After 1 year: $10,000 in your GIC, earning $500 interest. This $500 gets put into your more aggressive fund.

After 2 years: $20,000 in your GIC, earning $1000 interest. This $1000 gets put into your more aggressive fund, making $1500 total.

After 3 years: $30,000 in your GIC, earning $1500 interest. This $1500 gets put into your more aggressive fund, making $3000 total.

...

After 10 years: $100,000 in your GIC, earning $5000 interest. This $5000 gets put into your more aggressive fund, making $27500 total.

Of course, the more aggressive fund can fluctuate making that $27500 total be able to go up or down with ease. As well, the initial deposits doesn't just have to be into a GIC, you could do 75% conservative deposits, 25% aggressive deposits, with still the interest earned on your conservative investment going into the aggressive investment.

There is one fundamental problem I have with this investment style, and that is that it gets *less* conservative as time goes on. If I have been saving for 20 years, I want to make my portfolio potentially more aggressive when I am younger (to maximize growth) and less aggressive as time goes on. This does the opposite. In this guaranteed system though, there is no potential for loss as you are only "gambling" (if you want to call investing a gamble) with your interest gained.

Friday, August 21, 2009

Paying Down Your Mortgage

As September rolls around, my property taxes will rise on my condo. This always makes me think about my mortgage and how I can improve it.

Before I begin, here is a list of TD's mortgage rates. Here are BMO's. Here are Scotia's. Here are Royal Bank's. Here are CIBC's. Here are ING Direct's.

Fixed vs. Variable - a Fixed mortgage is a mortgage where the interest rate is locked in for a set amount of time. If you get a five-year fixed mortgage, with a term of 25 years, you pay the mortgage over 25 years, but the interest rate will stay the same for the next five years. The advantage to this is that when rates are low (like now), you can lock in a nice low rate for a relatively long time. These rates are mostly on average higher than a variable rate mortgage. A variable rate mortgage is generally prime plus a percentage (now most banks have prime +0.4%). Historically there have been far better deals with variable rate mortgages, but if mortgage rates shoot up, you can end up paying more (although this rarely happens). Your payments will not increase until the interest that you are charged is more than your payments.

Open vs. Closed - An open mortgage is a loan where you can make extra payments (or increase your regular payments) with no penalty. A closed mortgage you have your payments and you cannot increase them or make extra payments without paying a penalty. The interest rates on closed mortgages tend to be lower.

What You Can Do To Pay Down Your Mortgage More Quickly - The harsh reality of mortgages is this: if it takes you 25 years to pay off, you will be paying more in interest than the value of your house. A quick example, a $200,000 mortgage at 5% over 25 years (with monthly payments) charges 1169.18 per month, which is a total payment of $350,754 or $150,754 in interest!

Pay A Big Down Payment - You can get away with putting down only 5% of the value of your home according to the Canadian Mortgage and Housing Corporation, if you pay less than 20% of the value of your home you must take out CMHC housing insurance which is added onto the principle of your house. In order to help people with this, if you have RRSPs take advantage of the First Time Home Buyers Plan where you can withdraw up to $25,000 from your RRSP to go towards the purchase of your home. This money must be repaid back into your RRSP over 15 years.

Get A Lower Interest Rate - feel free to renegotiate with your mortgage company (or another company) when you hear that interest rates drop. If it is financially beneficial to you to switch mortgages because rates fall, then do it!

Pay Your Mortgage Whenever You Get Paid - if you get paid once a month, then it is fine to make monthly mortgage payments. But if you get paid every other week, why would you only pay your mortgage at the beginning of the month (other than habits from renting). The cost savings can be tremendous because of the savings in interest. If you use my previous example of a $200,000 mortgage over 25 years at 5%, the bi-weekly payments drop to $539.32, saving you only $200 over 25 years, but you have lowered your payments as well!

Each Time You Get A Raise Increase Your Payments - This is what I do. Since I have other loans on top of my mortgage I don't do this as aggressively as I should, but I will describe my scenario. I will get my property tax increase, which goes directly to my mortgage. Let's say it goes up $10 (as it did last year), I will then top up my mortgage $15 (for a total increase of $25 each pay). Since I do this when I get a raise, I don't feel the pinch at all! By doing this last year (I haven't run the numbers this year because I don't know what my increases will be), I saved 2 and a half years on my mortgage!

If you have an open mortgage, make a lump sum payment - If money falls into your lap (be it tax returns, inheritance, good fortune at work), putting down a lump sum payment goes right against the principle of your mortgage. As described previously, I work summer school in the summer and always put a few hundred bucks towards my mortgage extra.

Finally a word on purchasing a house and how you know if you can afford it. My recommendation is to take whatever you are paying for your current rent and double it for the next six months. Lets say you are paying $900 in rent. Take the extra $900 and save it towards your down payment for the next six months. If you are able to do this, you will be able to comfortable afford your house and there will be no pinch. If you are unable to do this (or hope that your mortgage and insurance and utilities and all that will work out to about the same as renting) you probably aren't ready for home ownership yet.

Thursday, August 20, 2009

Inflation and Pensions

At about Christmas, when there was a shortfall in pension funds, the Ontario Teachers Pension Plan announced that retired teacher's pensions would no longer be indexed to inflation. Depending on the assets held by the Pension Plan, from years after 2009, it may only be indexed to half of inflation.

Lets run some numbers to see how damaging this could be. To make the numbers convenient, I will use a salary of $100,000 at retirement (it sounds like a lot, but 30 years from now when I retire that probably is what it will be at). As well, we will use various inflation rates, all indexed to half of that. What the index means is that your money that you get will be increased by half of inflation. So if inflation is 2%, you will get 1% extra money. The problem is that the cost of everything has gone up 2%, so that although you are making more money, you have less money to spend.

Scenario 1: $100,000 at retirement and 2% inflation
- after 5 years: salary is $105,101.01
- spending power (relative to $100,000): $95,193.22 (you can purchase five years from now the same as if you made $95,193.22 in the first year)
- after 10 years: salary is $110,462.21, spending power: $90,617.49
- after 20 years: salary is $122,019.00, spending power: $82,115.29
- after 30 years: salary is $134,784.89, spending power: $74,410.81

So after 30 years, your salary will only purchase about 74% of what it did when you started retirement. If the average teacher retires at 55 or so, this is at 85 years of age, where people will still be around (as we continue to live longer).

Scenario 2: $100,000 at retirement and 4% inflation
- after 5 years: salary is $110,408.08, spending power: $90,747.39
- after 10 years: salary is $121,899.44, spending power: $82,350.90
- after 20 years: salary is $148,594.74, spending power: $67,816.70
- after 30 years: salary is $181,136.16, spending power: $55,847.66

So after 30 years in the second scenario, you will only be able to purchase about 56% of what you could when retirement started. This is where things start to get scary. Since the early 90s, governments have tried to keep inflation at 2% (or less), but any period of hyperinflation (in the 8-10% range) and this could cripple lots of people's retirements.

Scenario 3: $100,000 at retirement and 6, 8, 10% inflation
- after 30 years at 6% inflation: salary is $242,726.25, spending power: $42,261.10
- after 30 years at 8% inflation: salary is $324,339.75, spending power: $32,232.02
- after 30 years at 10% inflation: salary is $432,194.24, spending power: $24,768.43

OK, this is starting to get a bit ridiculous. No one expects 10% inflation over the next 30 years. It is possible though to expect inflation in the 2-4% range, where at least one third of your money will have eroded.

Even if you aren't a teacher, please take a look at your pension to see if this holds true. Inflation is very dangerous to your spending power in retirement, where it can be difficult to make more money (unless you have saved for your retirement outside of your pension).

Tuesday, August 18, 2009

RRSPs vs. TFSA

This post will help me to organize my ideas about whether it is better to invest in a Registered Retirement Savings Plan or a Tax Free Savings Account. Of course, it is best to maximize them both, but this post is for those (like myself) who are unable to do so).

RRSPs
- can hold any investment (within reason) within your RRSP
- get an immediate tax rebate from your deposits (so if your marginal tax rate is 40% and you invest $1000 into your RRSP, you get $400 back from the government)
- interest grows tax free inside your RRSP
- you must begin withdrawing at age 65
- you get taxed on any amount that you withdraw (you are deferring your taxes on this money...instead of paying them now (when you probably have less money), you will pay them later (when you probably have more money)
- maximum contribution rate is 18% of your previous year's income up to a maximum of $21000 less the Pension Adjustment on your T4 slip

TFSAs
- even though it is called a "Savings Account" you can still hold most investments within your Tax Free Savings Account (I have a bond index fund for mine)
- interest grows tax free inside your TFSA
- you have already paid taxes on your money now, so no immediate tax benefits, but when you withdraw the money, you do not have to pay taxes on it
- maximum contribution is $5000 (although this is expected to go up slightly as time continues)

From a mathematics standpoint, lets show what is the best deal for people to do, and then the reality:

My example will be a single $5000 deposit, earning 5% per year, at a tax rate of 35%, grown over 10 years.

RRSP:
- $5000 invested, $1750 credit now,
- if you reinvest this $1750, you will end up with $10,995.04 at the end of ten years
- assuming the tax rate is still 35% when you withdraw, you will have $7146.78

TFSA
- $5000 invested, $0 credit now
- valuation after ten years is $8144.47

So what is the better option? It is different for everyone, but this is how I see it:

RRSP - great having a tax break now! Even though it ends up as a little less money in the long term, most adults are in a worse current financial situation than they are in the future. The other sad reality is that the $1750 credit I don't think is always reinvested, making the TFSA a much better plan. The final benefit to an RRSP is that the money is locked away (at least until you buy a house), so that you don't have access to it.

TFSA - financially this makes the most sense, but there is the human factor to consider. This money is not locked in. There is never a penalty to withdraw, so if you need money you can go into this fund. As long as you consider this money in your TFSA to be retirement money that you cannot touch, this is the better option.

Saturday, August 15, 2009

Net Worth Update - August 15th, 2009

Every time I get paid (every two weeks), I update my net worth. The idea behind this is that my goals are that my liabilities drop every two weeks, and by tracking them in this way, I am able to get a nice picture of where I stand financially. Its not a perfect balance sheet that I have (because of student loans I have a negative net worth), but the progress is what I am looking for.

ASSETS:
- up $268.23 from July 31st, 2009
- up $5980.29 from August 14th, 2008(one year ago)

These assets include my house (I give it 1% appreciation each year in my appreciation), my RRSP and my TFSA. I put a few extra dollars in my investments this period, but it is still a nice raise from a year ago.

LIABILITIES:
- better $655.96 from July 31st, 2009
- better $11,524.47 from August 14th, 2008 (one year ago)

These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). Additionally, my credit card would be on here near, but it has had a (near) zero balance in 2009.

NET WORTH:
- better $924.19 from July 31st, 2009
- better $17,504.76 from August 14th, 2008 (one year ago!)

Those are excellent numbers once again! A few realities about my current situation though:

1) I am currently teaching summer school, basically giving me double paycheques throughout the summer. My second (and final) paycheque was for about $1000, so a net worth increase of $924 isn't that impressive. I have been spending a little more freely for the summer because of the extra cash though.

2) We should be back to normal for my payments and bills coming up for the next paycheque. My raise will take effect September 11th and I hope to have my taxes dropped as well giving me a little more disposable income, so I can keep my credit cards at zero. I have been pretty pleased with how the summer has gone financially, and hope to keep it up throughout 2009.

The last thing I am going to track is the value of the TSX. I have some asset allocation goals that I will share in future posts, and they are dependent on the value of the TSX.

TSX Graph
Current Value: 10,848.01
Highest Value in Last 2 Years: 15073.13 June 18th, 2008

Wednesday, August 12, 2009

Emergency Fund

The question that I am posing, and hoping to answer, is how much money is enough for your emergency fund. An emergency fund is intended to be used, of course, in an emergency. My definition of an emergency is a) when you lose your job, b) when something unexpected happens, c) a cushion in case of unintended expenses.

A good suggestion that I got from Million Dollar Journey is to begin by having $1000 in an emergency fund, then pay off your loans, etc. By having $1000 set aside, you should never need to go to your credit card, or lines of credit or anything like that in the case of an emergency. If your motor goes on your car, or you need to buy a new roof or whatever, this money is intended for stuff like this, so you don't need to borrow in order to cover it.

In these tough economic times, there is a threat for everyone of losing his or her job. Of course, you are saying, "This could never happen to me", but for everyone that is a realistic concern. I would recommend having at least three months expenses saved up in an emergency fund in case of job termination. What are three months expenses? Basically these are your fixed expenses (less investments): mortgage (or rent), food, monthly bills, loans, etc. If you lose your job, likely investments and variable expenses will be pulled back. In three months, you should be able to recover financially and find another job (one would hope).

In the same way, if you have a rental property, you should also have an emergency fund set up. What this fund will be is at least three months worth of rent. This should cover if there are unexpected vacancies, as well as some money left in case of emergencies (or maintenance). You don't want to have to tip into your personal finances in order to maintain your property, or if a month or two goes by without any renters, so if you are going this route, please make sure that you have enough float cash to cover.

Some people use a line of credit for an emergency fund. I would recommend against this as a shift in mentality. If you have money saved for your emergencies, it is much more positive than having to borrow money for emergencies. It is another level of freedom that you wouldn't otherwise have. If you lose your job, do you really want to have to pay back a line of credit?

My recommendation to everyone is to open up a Tax Free Savings Account and put $1000 in there (or at least contribute every paycheque until you are there). Then if something bad happens and you need some cash, you will have it. Remember to try to minimize your consumer debt!

Monday, August 10, 2009

More Links about Education and Money

I am just going to post a few links (with a running commentary) for people who want more information about where money matters are taught in schools. Some say that they are, some say that they aren't. I teach Grade 11 math and that is my favourite unit. We generally discuss the mathematics side of compound interest and mortgages, but I always leave one lesson open to discuss financial matters (saving for university, how you will pay it back, budgets, loans, mutual funds, why not to go to a "Cash Mart", etc.). There are also high school electives in business and marketing, but I am not sure if they talk about saving and spending.

Learning How To Avoid The Debt Trap - a post from the Toronto star explaining how an MBA ended up with a high paying job and in his parents basement at 30 years old. They also talk about the importance of talking about compound interest (which is done in the mandatory Grade 11 math course).

Money Instructor - A link for all teachers showing how they can put financial ideas into their classrooms. These are for youngers students generally, but these sound financial ideas (save some money, spend less than you make, if you can't afford something you have to save before you can buy it) can be reinforced from a young age and hopefully will stick.

Young and Out of Work - A depressing article stating that for young people the unemployment rate is 21%. For a comparable read, check out "The Tipping Point", who discusses that unfortunately when you graduate school and how the economy is doing can greatly contribute to your success. They discuss in this article that you can ride out the recession while in school. As well, students think that because they have a University degree in whatever and a $20,000 student loan that they are entitled to a high paying job. Unfortunately, those days are over.

Tips To Teaching Money Management Skills - a nice post and suggestions on how to teach financial management to your children and students.

A Cartoon Buffett, Teaching Children About Money - Finally, Warren Buffet is creating a cartoon starring himself teaching children about money. I can't wait for the action figures!

Sunday, August 9, 2009

Tips to Spend Less Money

Here is a list of things that I try to do in order to minimize my spending. Please note that these will not work for everyone, and I know that there it lots of room for improvement, but these are the things that I actually do and I will comment on them.

1. Cut down the cable/internet - This goes for the phone as well, but by looking at how much you are spending on Cable and Internet and lowering this down can save you significant money in a month. I rarely watch television, so just have the lowest 20 channels on, and in the summer I haven't hardly watched any television. In the winter, this may change though. I used to live with a roommate who was a gamer and needed ultra high speed internet, then my sister moved in and worked from home and connected to her work computer so she also needed a good connection. Now I still have high speed internet, but saved almost $40 per month by switching down.

2. Minimize your phone bill - I pay about $50 per month for my Bell phone bill. There is no call-waiting, call answer or any of those features that do not come free with the line. I also do not have a cell phone, where from what I hear the prices can become huge in a month. Similarly, I do not text message (not having a cell phone prevents this nicely). I realize that this is much more difficult for people who have already had these "luxuries" to go without them (or if you have teenagers), but it is something that I have done.

3. Stop going out to eat - My family will note that this happens occasionally, but this is just a question of mathematics. No matter where you go to eat, it will cost 2-10 times more than if you cook it yourself. I can hear what you are thinking, "I can't make a lasagna for less than $10 and I can get that at such and such a restaurant for that". That may be true, but you won't be cooking yourself an individual sized lasagna. It’s true that preparing your own foods takes time, and after a hard day at work it is much easier to go out, but financially it doesn't make sense. As well, everyone in the world pretty much got a lunch packed for them as a kid going to school. Please try to do the same thing for yourself at lunch at work. I also walk by a Tim Horton's everyday going to school, but have got in the habit of taking a travel mug of my own coffee with me so the temptation isn't there. I will admit that my new habit is to bring a travel mug with me for a long car ride and stop for a coffee after a few hours, but no one is perfect.

4. Never buy something when it immediately comes out - If you wait six months (or longer) after a product comes out, it will be significantly cheaper (almost no matter what the product). The negative comes that you have to wait this time, but financially it makes sense. If it is a car, wait until a year and buy one used (and save yourself huge money). If it is a television, you can buy the brand new 58 inch flat screen, or buy last years 32 or 44 inch model for a fraction of the cost (I do not have a flat screen television by the way, but am dreaming of one). The point is, when a product comes out, it is much more expensive, so feel free to wait for a bit for a price drop.

5. Minimize your car expenses - I do not own a car (although my girlfriend does), so my car expenses are pretty much at zero. If you are in a family and can go down to one car, the savings are huge. If you are unable to go down to one car, feel free to buy a used car. The savings are tremendous.

6. Shop around - The quote from one book is "a dollar saved is two dollars earned". Ignoring the tax implications for now, if you are purchasing a product, why not try to get the best deal on it? Try not to be an impulse buyer (although I totally am and if I see the sign that says "Sale" or "Limited Time Offer" I usually fall for it). I try to say to myself "In the next month I will need a new _____" and then look at 3 or 4 stores every weekend for the next month to find the prices and then look for when the price drops and pick up the product then. If you purchase things at the end of season and out of season, great deals can be had as well.

7. Pay cash - This is for people with no willpower like me. I set myself a budget. I take out ____ for spending every two weeks. When I run out of money, I stop spending. It's as easy as that. You can be as harsh or as lenient as you want in this manner, but by changing your spending from a variable expense (that changes week to week) to a fixed expense (that is the same each week), you can more easily plan to save and pay things off. This has probably been the best thing that I have done to limit my spending. I will rarely use my credit cards now(except when purchasing medical supplies), and the savings have been tremendous.

Wednesday, August 5, 2009

How To Save Money

We have had lots of guests at our house in the last two weeks. A lot of great conversations and great discussions. Inevitably, the discussion turns to my boasting for my goals of 2009, one of which was to read 200 books (it turns out that is much more difficult than it sounds...I am only at 33 so far so my revised goal is 52 books).

As they go by my bookshelf which shows my reading accomplishments for 2009, they come across "The Automatic Millionaire" and they say "I wish I had that book, I can't save anything". With the discussions that my family had with my aunt and uncle, they borrowed the book (along with "The Wealthy Barber") to give to their adult kids to put them on the path to savings.

Other discussions with other friends turned to stories of how they would never be able to save enough for a house. This post goes out to all of you (and you in cyberspace) that need a push to getting started on savings.

Most people who read financial blogs (myself included) have been savers for years and don't remember the first time they began saving. For myself, I had just read the "Wealthy Barber" and decided to go to the bank and take advantage of the automatic withdrawal and automatically contribute $50 each paycheque to my RRSP. I had read in that book (or a book similar) that you would be able to do it, and that you wouldn't notice the difference in your spare cash, and it was right.

It also mentioned that savings is a little addictive. Meaning that it feels good to see your assets rise. The reason for this is because of compound interest and the fact that the more you save, the more you earn.

My best advice is just to start saving with automatic withdrawls. The best way is to use an RRSP, which can be purchased from whatever bank you want from as low as $25 at a time. I would recommend an Index Fund, because of the low costs. If you aren't sure that you can afford it, just put the minimum in ($25 per paycheque). My other recommendation is that whenever you get a raise, to put half of the raise into your savings. So if I started this year with $25 per paycheque in my RRSP and then I got a $100 raise, I would have $75 per paycheque put into my RRSP after the raise.

The advantage to using an RRSP is the immediate 30% tax exemption that you get for it (or whatever your tax rate is). Some of my friends have begun RRSPs as soon as they hear the amount that you get in taxes back. No one wants to pay taxes, and this is the best way to do it immediately.

If you are saving for something other than your retirement, like a house, a great option is the Tax Free Savings Account. In this account, you can earn interest tax free (unlike regular investments where you have to pay taxes on your earnings within the account, and also unlike RRSP where you pay taxes on the money that you withdraw). You can also purchase mutual funds within these accounts.

It should be mentioned that if you are purchasing a house and live in Canada, you can take advantage of the First Time Home Buyers tax credit and can withdraw up to $25,000 from your RRSP towards your down payment. Please note that it has to be repaid over 15 years.

In the end, please just begin to save. With the automatic withdrawals, it is done automatically and after the initial setup takes literally no willpower at all. Then you will look back after a few months and say "Wow, I have just saved a lot of money!".

Sunday, August 2, 2009

Two Good Links From The Toronto Star and more!

My girlfriend was reading the Toronto Star online and found these excellent articles that she thought that I'd love (and I do). Here they are:

Teenagers Lacking Education On The Financial Facts of Life - A good article discussing how there is no formal financial education in the Ontario curriculum. As a math teacher, I totally agree and would love to teach a course like this. As mentioned in previous posts, I try to do this as much as possible already, but a formal course on finance would be great! As the article says, there is a formal Grade 10 course in Careers and Civics, you could throw a financial course in there as well and it would be great!

Frugal or cheap - This article discusses when even frugal people put a limit on the quality of the things that they purchase. My favourite quotes are "The distinction between frugality and a tightwad is that, for a tightwad, it hurts to spend" (my girlfriend thinks this makes me a tightwad, but it only hurts me to write cheques) and that a spendthrift is "...unable to feel distress even when financial situations take a turn for the worse".

A third good link (although not from the Toronto Star) is Million Dollar Journey's Paying Off Debt: Lowest Balance or Highest Interest First? where the consensus is that it is better to pay off debt in the way that motivates the individual the most. I couldn't agree more.

All articles are great reads, so take a look!

Saturday, August 1, 2009

Net Worth Update - August 1st, 2009

Every time I get paid (every two weeks), I update my net worth. The idea behind this is that my goals are that my liabilities drop every two weeks, and by tracking them in this way, I am able to get a nice picture of where I stand financially. Its not a perfect balance sheet that I have (because of student loans I have a negative net worth), but the progress is what I am looking for.

ASSETS:
- up $654.84 from July 17th, 2009
- up $5838.77 from August 1st, 2009(one year ago)

These assets include my house (I give it 1% appreciation each year in my appreciation), my RRSP and my TFSA. The market swung up a bit in the last two weeks (my brother even told me that his investments are above zero percent all time meaning tha the recovered his losses from the last year/this year...I am not quite so lucky)

LIABILITIES:
- better $847.39 from July 17th, 2009
- better $11,241.25 from August 1st, 2008 (one year ago)

These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). Additionally, my credit card would be on here near, but it has had a (near) zero balance in 2009.

NET WORTH:
- better $1502.24 from July 17th, 2009
- better $17,080.02 from August 1st, 2008 (one year ago!)

Those are excellent numbers once again! A few realities about my current situation though:

1) I am currently teaching summer school, basically giving me double paycheques throughout the summer. I got my first paycheque for about $700 or so, affecting my assets and my liabilities.
2) Because of the way the month fell, I got three pays in the one month, giving me some more disposable income.

The last thing I am going to track is the value of the TSX. I have some asset allocation goals that I will share in future posts, and they are dependent on the value of the TSX.

TSX Graph
Current Value: 10,787.15
Highest Value in Last 2 Years: 15073.13 June 18th, 2008