A question was put to me the other day is it better to contribute to your RRSP or to pay off your consumer debt. The benefits to RRSP contribution are clear: more money for yourself when you retire, tax-free growth in these investments, and the most immediate: a tax deduction. If I contribute $1000 immediately, I will get $350 (approximately) back at income tax time. All of these factor lead you to believe that you should contribute to your RRSP as much as possible (up to 18% of your salary I believe is the most up to date figure).
But what about consumer debt? What should you do if you owe $50,000 on personal loans (non investment and non-mortgage loans)? My philosophy is always to make small changes based on when you have extra money coming in. I personally have a lot of school debt, and although the interest rates are low now, it still burns me to have to pay so much out of each paycheque towards loans.
I believe that some debt is fine. If you are purchasing an asset that will leave you with positive cash flow (ie. a rental property, or a cottage or a loan to an RRSP, etc.) then that debt is fine and will take care of itself in the long term. But consumer debt (credit cards, don't pay for 18 months, etc.) should be paid immediately. When I retire I want to make sure that I have plenty of assets and no debt of any kind to show, giving me total freedom to do what I want.
I believe that people should contribute to their RRSPs and get rid of their debt whenever possible. For me, when I get a raise, I always up my RRSP contributions and also increase my debt repayments. Doing exclusively one or the other won't help as much. Only repaying your debts may make you feel slightly better, but getting money back at RRSP time or looking at your portfolio and smiling will encourage you to continue.
Friday, October 16, 2009
Saturday, October 10, 2009
Net Worth Update - October 10th, 2009
I truly believe that my listing your goals and tracking your goals it is much easier to make progress. Here is the usual update!
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 $450.53 from September 25th, 2009
- up $7777.54 from October 8th, 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 little more aside this week (see a future post on how I lowered my taxes and increased my paycheque for 2009).
LIABILITIES:
- better $678.26 from September 25th, 2009
- better $12,479.33 from October 8th, 2008(one year ago)
These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). Once again, my four tutoring jobs help in this. It is a little worse than usual because of prescriptions carried forward on my Mastercard.
NET WORTH:
- better $1128.80 from September 25th, 2009
- better $20,256.87 from October 8th, 2008 (one year ago!)
Excellent statistics as usual. Of course I am a numbers guy, so this looks great. To think that my net worth has increased by $20,000 in a single year makes me tremendously happy. As well, in 2009 I have decreased by liabilities in every paycheque but two (when I paid for my summer school course and when we went on holidays). For me right now, where paying down my debt is a high priority, this is extremely exciting.
The last thing I am going to track is the value of the TSX. I have some asset allocation goals that are dependent on the value of the TSX.
TSX Graph
Current Value: 11,436.92
Highest Value in Last 2 Years: 15073.13 June 18th, 2008
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 $450.53 from September 25th, 2009
- up $7777.54 from October 8th, 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 little more aside this week (see a future post on how I lowered my taxes and increased my paycheque for 2009).
LIABILITIES:
- better $678.26 from September 25th, 2009
- better $12,479.33 from October 8th, 2008(one year ago)
These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). Once again, my four tutoring jobs help in this. It is a little worse than usual because of prescriptions carried forward on my Mastercard.
NET WORTH:
- better $1128.80 from September 25th, 2009
- better $20,256.87 from October 8th, 2008 (one year ago!)
Excellent statistics as usual. Of course I am a numbers guy, so this looks great. To think that my net worth has increased by $20,000 in a single year makes me tremendously happy. As well, in 2009 I have decreased by liabilities in every paycheque but two (when I paid for my summer school course and when we went on holidays). For me right now, where paying down my debt is a high priority, this is extremely exciting.
The last thing I am going to track is the value of the TSX. I have some asset allocation goals that are dependent on the value of the TSX.
TSX Graph
Current Value: 11,436.92
Highest Value in Last 2 Years: 15073.13 June 18th, 2008
Sunday, October 4, 2009
The Rebalancing Act
In today's post I am going to try to explain my long term plan for rebalancing my portfolio. I find it easier (financially) to have things planned out, so that even when my portfolio runs hot (or cold) if I stick by the rules that are decided long beforehand everything will work out well in the long run.
Rebalancing your portfolio (in my case) is just making sure that I have a certain percentage in each asset class. In my simple portfolio, I have two asset classes: stocks and bonds. Stocks would be considered to be the more risky asset (as those who have had money in the stock market lately would agree with me) and bonds would be considered to be more conservative.
One of the old financial sayings is the 90 minus your age rule. That is, the percentage of your portfolio that should be in stocks is 90 minus your age. I am currently 31, so that should mean that I have 59% stocks and 41% bonds. This is far too conservative for me, so I decided to make my own splits that will become more conservative over time, allow me to reap the gains of the stock market (regardless of my age) and even in the case of an economic down turn (if one hits 20 years from now when I am planning to retire) I will still be able to retire when I want.
My basic rebalancing act is this. Each paycheque I deposit 90-95% of my investment money into stocks and 5-10% into bonds. The reason for this is that in the long term, I believe that there will always be money to be made in the stock market. When the Toronto Stock Exchange hits a two-year high (that is, the highest value in the last two years), I will rebalance by portfolio to a 50-50 split of stocks and bonds. My doing this, I will still have money in the stock side of my portfolio, but I have claimed a lot of the profits along the way.
Will this be maximizing my profits along the way? Probably not. If the stock market were to rise nonstop for 5 or 6 years (pretty much from 2002-2008) I would not have as much money in this scenario as if I had all my money invested in the stock market. But, I will be less affected by a 10% drop in the market in one year, as I have taken a lot of my profits along the way. All investment books that I read say that you should be buying when people are selling (obtaining stocks when the prices are low) and selling when others are buying (selling stocks in a hot market). This plan will allow me to keep money in the market always, and minimize my chances of risk in the long term (as the money will tend towards 50% stocks and 50% bonds).
Rebalancing your portfolio (in my case) is just making sure that I have a certain percentage in each asset class. In my simple portfolio, I have two asset classes: stocks and bonds. Stocks would be considered to be the more risky asset (as those who have had money in the stock market lately would agree with me) and bonds would be considered to be more conservative.
One of the old financial sayings is the 90 minus your age rule. That is, the percentage of your portfolio that should be in stocks is 90 minus your age. I am currently 31, so that should mean that I have 59% stocks and 41% bonds. This is far too conservative for me, so I decided to make my own splits that will become more conservative over time, allow me to reap the gains of the stock market (regardless of my age) and even in the case of an economic down turn (if one hits 20 years from now when I am planning to retire) I will still be able to retire when I want.
My basic rebalancing act is this. Each paycheque I deposit 90-95% of my investment money into stocks and 5-10% into bonds. The reason for this is that in the long term, I believe that there will always be money to be made in the stock market. When the Toronto Stock Exchange hits a two-year high (that is, the highest value in the last two years), I will rebalance by portfolio to a 50-50 split of stocks and bonds. My doing this, I will still have money in the stock side of my portfolio, but I have claimed a lot of the profits along the way.
Will this be maximizing my profits along the way? Probably not. If the stock market were to rise nonstop for 5 or 6 years (pretty much from 2002-2008) I would not have as much money in this scenario as if I had all my money invested in the stock market. But, I will be less affected by a 10% drop in the market in one year, as I have taken a lot of my profits along the way. All investment books that I read say that you should be buying when people are selling (obtaining stocks when the prices are low) and selling when others are buying (selling stocks in a hot market). This plan will allow me to keep money in the market always, and minimize my chances of risk in the long term (as the money will tend towards 50% stocks and 50% bonds).
Friday, October 2, 2009
Happiness for the future...
At the end of math class, one of the girls in my class was complaining that all she had to do is work this weekend at Tim Horton's. She said that she had to work from 6am - 4pm every day this weekend and had tonnes of hours in the week. I asked her if she was saving any of the money, and she said that her mother made her put a percentage of it into savings and a percentage into saving for school and some she was allowed to spend. I told her that if she would save 10-20% out of every paycheque, she would be very rich in the future. I didn't get into the math of it (that will come later in the semester), but it sounded good that her mother was helping her get a head start in her financial life.
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