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.
Tuesday, August 18, 2009
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
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!
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!
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!
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