I am going to quote directly from Timothy Ferriss' book The Four Hour Work Week:
"Most people will never be able to retire and maintain even a hotdogs-for-dinner standard of living. Even one million is chump change in a world where traditional retirement could span 30 years and inflation lowers your purchasing power 2-4% per year. The math doesn't work (Living Well, March 20 2006, Suzanne McGee). The golden years become lower-middle-class life revisited."
I am now going to quote Jonathon Chevreau's November 12 article:
Baby boomers around the world are ready to retire psychologically but not so sure they can pull it off financially, a study released this morning says.
“Around the world, adults who’ve worked their entire lives have differing visions of what they want their retirement to look like, yet unfortunately they struggle to make that vision a reality” said Liz Zlatkus, president of Hartford Life’s international wealth management division. Its research points to “a tremendous need for financial education and professional advice about investing for long-term goals.” The poll found “overwhelmingly” respondents are concerned about having enough money to retire.
These are major problems that I am facing with average Canadians who have simply invested a small amount each year into our most popular retirement vehicle: The RRSP.
Take a look at Chevreau's article from today. http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx
I am going to use this article to argue the fact that the R that stands for Retirement in RRSP is completely misleading and should simply be used as a tax savings device. The fact is this: even if a Canadian is maxing out her RRSP on a yearly basis she is still limited by the rules by which Canada applies for her contribution amount. If she is able to achieve a conservative return over the long run there is still the tax bite on the other end. Not only that but as every year goes on inflation is going to reduce the purchasing power of the money within the RRSP.
Studies have shown that if one were to invest all their money in equities outside of RRSPs that are subject to capital gains they can likely be better off in the long run. However, the motivation is not there for the average Canadian to invest outside of an RRSP due to the tax advantages of making contributions.
Therefore, the tax advantages of the RRSP when contributions are made are the main reason why someone should have an RRSP. That is a fantastic reason. This should be used as the only reason to look at RRSPs. Retirement planning has to be something totally separate from RRSPs.
The point that I want to get across is this: Canadians have to take a much more active approach towards financial planning. Simply investing every February into an RRSP is not enough.
Moves have to be made outside of registered investments. Conservative leverage should occupy a place in your portfolio if you are suited for it. Mortgages should be paid off rather than extended. Cash flow management should be an active topic in all families. Compounding debts should be avoided as much as possible. Monthly cash flow should account for budgeting towards savings programs and/or emergency funds. If you work does not supply a proper disability plan one should be looked into to provide income replacement solutions should there be that need.
As boomers age we are seeing the evidence that proper planning has not accomplished by many. Retirement is much like an insurance program. Something to fall back on should the time come that either we don't want to work or we cannot work any longer. Much like a suitable disability program there should be enough to fall back on to produce a sufficient stream of after tax income.
Simply investing in RRSPs is not going to provide that solution.
Thursday, November 22, 2007
Wednesday, November 7, 2007
Experts On Call: Nov 03 Audio
Tuesday, November 6, 2007
Seminar
Tomorrow I will be speaking at 7pm at the Embassy West in Ottawa. It will be a free information seminar on The Mortgage Accelerator.
If you would like to attend you can RSVP at 1-877-330-1131.
Hope to see you there.
If you would like to attend you can RSVP at 1-877-330-1131.
Hope to see you there.
Saturday, November 3, 2007
The Mortgage Accelerator
Today I will again be featured on Experts on Call on Ottawa's CFRA 580am at 4pm. I will be discussing 'The Mortgage Accelerator'. To listen live click here.
I will also be speaking with Mortgage Architects on Wednesday November 07 at 7pm in Ottawa at the Embassy West Hotel.
Although the program is considered to be innovative and valuable, it is also complex and difficult for an individual to implement on their own. We have built an experienced management team to manage the program for the individual as well as to provide detailed reporting. In the upcoming weeks I will have the ability to provide clients with a unique web based experience that will not only allow people to log in and track their progress but also to show their whole financial picture in an easy to access platform.
For the purposes of the radio show I am going to give a rundown of how the program works.
Benefits of the Mortgage Accelerator:
1. Pay down your mortgage faster.
2. Gradually make your mortgage payments tax deductible.
3. Increase your tax returns every year.
4. Build an investment portfolio as you pay down your mortgage.
Key Ingredients in a Mortgage Accelerator:
1. A mortgage:
Preferably a readvanceable mortgage. Merix is an excellent provider of these products. These types of mortgages are also known as 'money merge' accounts.
2. Conservative investment loan program:
The key word: conservative. Size doesn't matter when starting out. For most people, I recommend starting small with a leverage program. Getting comfortable is important when using borrowed assets. It is very important to review all the aspects of the risks involved before entering such a program. However, when done properly, it can be an excellent tool for financial growth.
3. Return of capital investments:
AKA T-SWP programs. Click here for my last article regarding ROC investments. As well, here is an article from Fidelity about their T-SWP programs.
4. Management:
Since there are different transactions involved in making the payments either tax deductible or directed towards the mortgage, it is important to have proper structure. This calculator will help you see your potential outcome based on how much you consider putting towards the accelerator program.
It is very easy to use. Simply input your numbers into the white boxes in the left column. The 'potential savings per month' column is what you can save over and above your mortgage. This also is programmed to show how much of an investment loan program you can service. Play with it to see what you are comfortable with.
The management component is very important because there will be five separate transactions that take place. These transactions are very important towards the tax savings and debt reduction. In order to have this working properly the structure is the most important element.
If you would like a detailed diagram of how the Mortgage Accelerator works feel free to email me.
Again, feel free to listen to the program today at 4pm 580am Ottawa.
I will also be speaking with Mortgage Architects on Wednesday November 07 at 7pm in Ottawa at the Embassy West Hotel.
Although the program is considered to be innovative and valuable, it is also complex and difficult for an individual to implement on their own. We have built an experienced management team to manage the program for the individual as well as to provide detailed reporting. In the upcoming weeks I will have the ability to provide clients with a unique web based experience that will not only allow people to log in and track their progress but also to show their whole financial picture in an easy to access platform.
For the purposes of the radio show I am going to give a rundown of how the program works.
Benefits of the Mortgage Accelerator:
1. Pay down your mortgage faster.
2. Gradually make your mortgage payments tax deductible.
3. Increase your tax returns every year.
4. Build an investment portfolio as you pay down your mortgage.
Key Ingredients in a Mortgage Accelerator:
1. A mortgage:
Preferably a readvanceable mortgage. Merix is an excellent provider of these products. These types of mortgages are also known as 'money merge' accounts.
2. Conservative investment loan program:
The key word: conservative. Size doesn't matter when starting out. For most people, I recommend starting small with a leverage program. Getting comfortable is important when using borrowed assets. It is very important to review all the aspects of the risks involved before entering such a program. However, when done properly, it can be an excellent tool for financial growth.
3. Return of capital investments:
AKA T-SWP programs. Click here for my last article regarding ROC investments. As well, here is an article from Fidelity about their T-SWP programs.
4. Management:
Since there are different transactions involved in making the payments either tax deductible or directed towards the mortgage, it is important to have proper structure. This calculator will help you see your potential outcome based on how much you consider putting towards the accelerator program.
It is very easy to use. Simply input your numbers into the white boxes in the left column. The 'potential savings per month' column is what you can save over and above your mortgage. This also is programmed to show how much of an investment loan program you can service. Play with it to see what you are comfortable with.
The management component is very important because there will be five separate transactions that take place. These transactions are very important towards the tax savings and debt reduction. In order to have this working properly the structure is the most important element.
If you would like a detailed diagram of how the Mortgage Accelerator works feel free to email me.
Again, feel free to listen to the program today at 4pm 580am Ottawa.
Thursday, November 1, 2007
The Scoop on Return of Capital
What is Return of Capital?
Distributions from an mutual fund may contain capital gains, dividends, interest income and return of capital. A return of capital is any distribution from a mutual fund that is not treated as either capital gains, dividends, or interest income. These funds are commonly referred to as TSWPs or T-series.
When you receive a return of capital, you are essentially getting back some of your investment.
What is the benefit of Return of Capital?
As a tax deferral device, ROC distributions can be an effective way to defer taxation of investment income.
For example:
1. More cash available today
2. Higher after tax returns on investment income
3. Lower your tax bracket in retirement
4. The ability to defer tax to cheaper dollars in the future
5. More control over when you take capital gains
Good Thing or Bad Thing?
Answer is....depends.
Return of capital cannot be confused with erosion of capital. In other words it is your own after tax money that is actually being paid back to you. This puts the investor in the drivers seat as to when and how he receives their income and pay their capital gains.
However, consider the fact that in down markets an ROC can reduce the capital of the original investment and in up markets the income can be considered a return of growth. The longer a unit is held the better the tax deferral can be.
The investment selections should be conservative and flexible enough to weather ups and downs in the market. As well, depending on the strategy consistency in the income should be there. Fund companies have the ability to change the distribution at their discretion. However, investors will have the opportunity to reinvest a percentage should there be a dramatic increase.
Borrowing to Invest
The popularity of borrowing to invest in ROC funds has increased over the past two years. This can be a gray area for regulators. Investors should be careful not to depend on ROC income to fund an investment loan payment. While this can be looked at as an excellent tool for tax savings, this is not a prudent way to look at servicing an investment loan.
Risks involved in leverage programs should be closely examined in each individual case. Cash flow should there in every situation to finance you loan even without the ROC income.
Strategies
ROC income is an essential component for creating 'Tax Deductible Mortgages' or 'Money Filter' programs. When you properly this can be an effective tool to lowering your taxes while you reduce your debts. Not only that but ROC can create a compounding effect over the long term whereby you can greatly increase your tax returns on a year by year basis.
As we move ahead in our understanding of how these funds can be used at any age we will see a growing popularity of programs utilizing the benefits of these funds.
The key to any investment strategy must have three components:
1. Be conservative based on your personal risk tolerance
2. Educate yourself on every investment choice you make
3. Think long term
Those are the key elements to using ROC wisely.
Distributions from an mutual fund may contain capital gains, dividends, interest income and return of capital. A return of capital is any distribution from a mutual fund that is not treated as either capital gains, dividends, or interest income. These funds are commonly referred to as TSWPs or T-series.
When you receive a return of capital, you are essentially getting back some of your investment.
What is the benefit of Return of Capital?
As a tax deferral device, ROC distributions can be an effective way to defer taxation of investment income.
For example:
1. More cash available today
2. Higher after tax returns on investment income
3. Lower your tax bracket in retirement
4. The ability to defer tax to cheaper dollars in the future
5. More control over when you take capital gains
Good Thing or Bad Thing?
Answer is....depends.
Return of capital cannot be confused with erosion of capital. In other words it is your own after tax money that is actually being paid back to you. This puts the investor in the drivers seat as to when and how he receives their income and pay their capital gains.
However, consider the fact that in down markets an ROC can reduce the capital of the original investment and in up markets the income can be considered a return of growth. The longer a unit is held the better the tax deferral can be.
The investment selections should be conservative and flexible enough to weather ups and downs in the market. As well, depending on the strategy consistency in the income should be there. Fund companies have the ability to change the distribution at their discretion. However, investors will have the opportunity to reinvest a percentage should there be a dramatic increase.
Borrowing to Invest
The popularity of borrowing to invest in ROC funds has increased over the past two years. This can be a gray area for regulators. Investors should be careful not to depend on ROC income to fund an investment loan payment. While this can be looked at as an excellent tool for tax savings, this is not a prudent way to look at servicing an investment loan.
Risks involved in leverage programs should be closely examined in each individual case. Cash flow should there in every situation to finance you loan even without the ROC income.
Strategies
ROC income is an essential component for creating 'Tax Deductible Mortgages' or 'Money Filter' programs. When you properly this can be an effective tool to lowering your taxes while you reduce your debts. Not only that but ROC can create a compounding effect over the long term whereby you can greatly increase your tax returns on a year by year basis.
As we move ahead in our understanding of how these funds can be used at any age we will see a growing popularity of programs utilizing the benefits of these funds.
The key to any investment strategy must have three components:
1. Be conservative based on your personal risk tolerance
2. Educate yourself on every investment choice you make
3. Think long term
Those are the key elements to using ROC wisely.
Tuesday, October 30, 2007
A Summary of Tax Relief
Here is a summary that I received from Fidelity investments regarding today's news regarding tax relief:
Canada’s Government Delivers Broad-Based Tax Relief for Individuals, Families and Businesses
The Honourable Jim Flaherty, Minister of Finance, today presented the Government’s 2007 Economic Statement, which proposes broad-based tax relief for all Canadians, including a further reduction of the goods and services tax (GST).
"Given the uncertainty in the global economy, now is the time to provide additional tax relief for Canadians," said Minister Flaherty. "Our strong fiscal position provides Canada with an opportunity that few other countries have—to make broad-based tax reductions that will strengthen our economy and leave more money in the pockets of ordinary Canadians."
Since coming to office 21 months ago, the Government has taken action that will reduce the overall tax burden for Canadians and businesses by about $190 billion, bringing taxes to their lowest level in nearly 50 years.
At the heart of the Tax Relief Package is an additional 1-percentage-point reduction in the GST, effective January 1, 2008. This tax cut fulfills the Government’s key campaign commitment and builds on the initial GST reduction introduced in Budget 2006. For consumers, the total savings from the 2-percentage-point reduction in the GST will amount to approximately $12 billion next year.
Individual savings will be significant:
1 family purchasing a new $300,000 home will save $3,840 in GST.
2 family spending $10,000 on home renovations will save $200 in GST.
3 family spending $30,000 on a new minivan will save $600 in GST.
The GST credit will be maintained at its current level, translating into more than $1.1 billion in benefits annually for low- and modest-income Canadians.
The Government is proposing additional tax relief for individuals and families by:
1 Increasing the basic personal amount to $9,600 retroactive to January 1, 2007. The basic personal amount will be increased to $10,100 on January 1, 2009. This proposal will provide Canadians with an additional $2.5 billion in tax relief in 2007 and 2008.
2 Reducing the lowest personal income tax rate to 15 per cent from 15.5 per cent retroactive to January 1, 2007.
Families earning between $15,000 and $30,000 will pay on average almost $180 less in tax in 2008 as a direct result of the tax measures announced in the Fall Economic Statement.
Families earning between $45,000 and $60,000 will pay on average almost $400 less in tax in 2008 as a direct result of the tax measures announced in the Fall Economic Statement.
Families earning between $80,000 and $100,000 will pay on average $602 less in tax in 2008 as a direct result of the tax measures announced in the Fall Economic Statement.
For Canadian businesses, the Government will be:
1 Reducing the general corporate income tax rate to 15 per cent by 2012, starting with a 1-percentage-point reduction in the rate in 2008 beyond the already scheduled reductions.
2 Reducing the small business income tax rate to 11 per cent in 2008, one year earlier than scheduled.
"We are putting business taxes on a five-year track downward to help stimulate further economic growth and create even more jobs," said Minister Flaherty. "We are ushering in a new era of declining business taxation in Canada. It will be a steady, predictable decline that businesses can count on and can plan on."
With these reductions, Canada’s general federal corporate income tax rate will fall by one-third between 2007 and 2012, and Canada’s corporate tax rate will become the lowest among the major industrialized economies.
The Government also announced it is planning additional debt reduction of $10 billion this fiscal year, for a total of more than $37 billion in debt relief since coming to office. This is the equivalent of $1,570 for each man, woman and child in Canada.
As a result, the federal government’s debt-to-GDP ratio—its debt load as a share of the economy—is expected to fall below 25 per cent by 2011–12, three full years ahead of the original target and its lowest level since the late 1970s.
With the additional debt reduction in the Economic Statement, the total value of personal income tax relief provided under the Tax Back Guarantee will rise to $2.5 billion by 2012–13.
Canada Pension Plan Remains Strong for the Benefit of Canadian Seniors
The Canada Pension Plan is on a financially sustainable footing for at least the next 75 years, according to the 23rd Actuarial Report on the Canada Pension Plan, which Minister of Finance Jim Flaherty tabled in Parliament today.
"The long-term health and viability of the Canada Pension Plan will ensure that seniors receive the benefits that a lifetime of working and contributing to this great country provides," said Minister Flaherty. "Canada is one of the few countries in the world with sound public pension plans, and the Canada Pension Plan serves as a model for others to follow."
The Canada Pension Plan provided over $26 billion in benefits to over 4 million beneficiaries in 2006–07.
Today’s report, by Chief Actuary Jean-Claude Ménard, will offer an important point of reference for federal and provincial finance ministers as they begin their statutory three-year review of the Canada Pension Plan in 2008. The report will also be examined by a panel of three well-respected independent actuaries, who will report publicly on their findings in advance of the federal-provincial review process.
As for now I have just been going over the info. Hope to have some commentary on the changes in the next day or so.
Canada’s Government Delivers Broad-Based Tax Relief for Individuals, Families and Businesses
The Honourable Jim Flaherty, Minister of Finance, today presented the Government’s 2007 Economic Statement, which proposes broad-based tax relief for all Canadians, including a further reduction of the goods and services tax (GST).
"Given the uncertainty in the global economy, now is the time to provide additional tax relief for Canadians," said Minister Flaherty. "Our strong fiscal position provides Canada with an opportunity that few other countries have—to make broad-based tax reductions that will strengthen our economy and leave more money in the pockets of ordinary Canadians."
Since coming to office 21 months ago, the Government has taken action that will reduce the overall tax burden for Canadians and businesses by about $190 billion, bringing taxes to their lowest level in nearly 50 years.
At the heart of the Tax Relief Package is an additional 1-percentage-point reduction in the GST, effective January 1, 2008. This tax cut fulfills the Government’s key campaign commitment and builds on the initial GST reduction introduced in Budget 2006. For consumers, the total savings from the 2-percentage-point reduction in the GST will amount to approximately $12 billion next year.
Individual savings will be significant:
1 family purchasing a new $300,000 home will save $3,840 in GST.
2 family spending $10,000 on home renovations will save $200 in GST.
3 family spending $30,000 on a new minivan will save $600 in GST.
The GST credit will be maintained at its current level, translating into more than $1.1 billion in benefits annually for low- and modest-income Canadians.
The Government is proposing additional tax relief for individuals and families by:
1 Increasing the basic personal amount to $9,600 retroactive to January 1, 2007. The basic personal amount will be increased to $10,100 on January 1, 2009. This proposal will provide Canadians with an additional $2.5 billion in tax relief in 2007 and 2008.
2 Reducing the lowest personal income tax rate to 15 per cent from 15.5 per cent retroactive to January 1, 2007.
Families earning between $15,000 and $30,000 will pay on average almost $180 less in tax in 2008 as a direct result of the tax measures announced in the Fall Economic Statement.
Families earning between $45,000 and $60,000 will pay on average almost $400 less in tax in 2008 as a direct result of the tax measures announced in the Fall Economic Statement.
Families earning between $80,000 and $100,000 will pay on average $602 less in tax in 2008 as a direct result of the tax measures announced in the Fall Economic Statement.
For Canadian businesses, the Government will be:
1 Reducing the general corporate income tax rate to 15 per cent by 2012, starting with a 1-percentage-point reduction in the rate in 2008 beyond the already scheduled reductions.
2 Reducing the small business income tax rate to 11 per cent in 2008, one year earlier than scheduled.
"We are putting business taxes on a five-year track downward to help stimulate further economic growth and create even more jobs," said Minister Flaherty. "We are ushering in a new era of declining business taxation in Canada. It will be a steady, predictable decline that businesses can count on and can plan on."
With these reductions, Canada’s general federal corporate income tax rate will fall by one-third between 2007 and 2012, and Canada’s corporate tax rate will become the lowest among the major industrialized economies.
The Government also announced it is planning additional debt reduction of $10 billion this fiscal year, for a total of more than $37 billion in debt relief since coming to office. This is the equivalent of $1,570 for each man, woman and child in Canada.
As a result, the federal government’s debt-to-GDP ratio—its debt load as a share of the economy—is expected to fall below 25 per cent by 2011–12, three full years ahead of the original target and its lowest level since the late 1970s.
With the additional debt reduction in the Economic Statement, the total value of personal income tax relief provided under the Tax Back Guarantee will rise to $2.5 billion by 2012–13.
Canada Pension Plan Remains Strong for the Benefit of Canadian Seniors
The Canada Pension Plan is on a financially sustainable footing for at least the next 75 years, according to the 23rd Actuarial Report on the Canada Pension Plan, which Minister of Finance Jim Flaherty tabled in Parliament today.
"The long-term health and viability of the Canada Pension Plan will ensure that seniors receive the benefits that a lifetime of working and contributing to this great country provides," said Minister Flaherty. "Canada is one of the few countries in the world with sound public pension plans, and the Canada Pension Plan serves as a model for others to follow."
The Canada Pension Plan provided over $26 billion in benefits to over 4 million beneficiaries in 2006–07.
Today’s report, by Chief Actuary Jean-Claude Ménard, will offer an important point of reference for federal and provincial finance ministers as they begin their statutory three-year review of the Canada Pension Plan in 2008. The report will also be examined by a panel of three well-respected independent actuaries, who will report publicly on their findings in advance of the federal-provincial review process.
As for now I have just been going over the info. Hope to have some commentary on the changes in the next day or so.
Wednesday, October 24, 2007
Are You Making the Most of Your Rental?
I have a rental property for a few reasons. Not only do I see it as a good way to grow equity over the long term but I also get some nice tax benefits from it. I found this link on the CCRA the other day and thought it would be useful for people who hold rental properties and are looking to get the most out of the tax benefits.
Enjoy.
Enjoy.
Tuesday, October 23, 2007
Buzz: Canadians in for Retirement Shock
In relation to some of the comments I made a few articles ago, Fidelity investments released a study stating that Canadians are in for a retirement shock. Have a read.
I have also posted the link in the BUZZ section.
I have also posted the link in the BUZZ section.
The Mortgage Accelerator
Over the past two years I have been developing The Mortgage Accelerator. In the meantime the concept has gotten out there and it has been proven that it is working for people.
What the program does for an individual is very valuable:
1) Gradually convert your existing mortgage payments to eventually be 100% tax deductible
2) Pay mortgages down faster
3) Grow an investment portfolio while you pay your mortgage down
4) Generate larger tax returns
5) Consolidate existing debt and free up cash flow
This is all done through the use of conservative, long-term leverage combined with unique investment programs. Since the actual program is complex proper management becomes crucial. No one financial advisor or mortgage broker can do this strategy on their own. However, when combined and worked properly this strategy is incredible.
Over the past month I have been working on assembling a team of professionals that are going to enable the program to come to life. Proper management of the programs have now been put in place and the process has been defined. What this means is that the program is becoming a reality.
The original vision of Financial Management Partners is coming together as a result of the finalizing of the Mortgage Accelerator program. What FMP will be providing for people is the access to no bias, innovative professionals in every area of finance to provide for all your needs. No longer will there be need for a financial planner who dabbles in every area. For example, there will be a network to the top Critical Illnesss and Disability Insurance provider in Canada, Sterling Mutuals independant dealer investment, various insurance brokers, advanced mortgage brokers, accountants, etc.
In the future I will be involved in radio shows, seminars, and advertising moving across Ontario. Not only that but there will be a launch of the new Financial Management Partners website that will provide people involved in the Mortgage Accelerator program with an in depth reporting system of their progress. This will be the same for Money Filter programs as well as RSP Meltdown strategies.
This is going to be groundbreaking due to the fact that this will enable someone to view their overall financial picture in one place, see their mortgage getting wiped away, and provide a link to their investment portfolio. It is a large step to making life simple for the average Canadian.
Click this link to try the Mortgage Accelerator calculator. This will show you based on the amount that you can potentially save per month how fast the program will work for you and how much you will save.
Instructions: put in your numbers on the left hand column of the first page. Only fill in the number in white. The rest will populate itself.
I hope you enjoy it.
What the program does for an individual is very valuable:
1) Gradually convert your existing mortgage payments to eventually be 100% tax deductible
2) Pay mortgages down faster
3) Grow an investment portfolio while you pay your mortgage down
4) Generate larger tax returns
5) Consolidate existing debt and free up cash flow
This is all done through the use of conservative, long-term leverage combined with unique investment programs. Since the actual program is complex proper management becomes crucial. No one financial advisor or mortgage broker can do this strategy on their own. However, when combined and worked properly this strategy is incredible.
Over the past month I have been working on assembling a team of professionals that are going to enable the program to come to life. Proper management of the programs have now been put in place and the process has been defined. What this means is that the program is becoming a reality.
The original vision of Financial Management Partners is coming together as a result of the finalizing of the Mortgage Accelerator program. What FMP will be providing for people is the access to no bias, innovative professionals in every area of finance to provide for all your needs. No longer will there be need for a financial planner who dabbles in every area. For example, there will be a network to the top Critical Illnesss and Disability Insurance provider in Canada, Sterling Mutuals independant dealer investment, various insurance brokers, advanced mortgage brokers, accountants, etc.
In the future I will be involved in radio shows, seminars, and advertising moving across Ontario. Not only that but there will be a launch of the new Financial Management Partners website that will provide people involved in the Mortgage Accelerator program with an in depth reporting system of their progress. This will be the same for Money Filter programs as well as RSP Meltdown strategies.
This is going to be groundbreaking due to the fact that this will enable someone to view their overall financial picture in one place, see their mortgage getting wiped away, and provide a link to their investment portfolio. It is a large step to making life simple for the average Canadian.
Click this link to try the Mortgage Accelerator calculator. This will show you based on the amount that you can potentially save per month how fast the program will work for you and how much you will save.
Instructions: put in your numbers on the left hand column of the first page. Only fill in the number in white. The rest will populate itself.
I hope you enjoy it.
Monday, October 22, 2007
Canadians and Tax Knowledge
Mackenzie Financial recently released at 10 question quiz to test Canadians and their knowledge of tax in Canada.
Here it is:
Take the Quiz:
1. "You are only allowed to contribute to a Registered Retirement Saving Plan (RRSP) up to the age of 69."
2. "The limit to what I can contribute to my child's Registered Education Savings Plan (RESP) each year is $4,000."
3. "A 65-year-old may allocate up to 50% of their Registered Retirement Income Fund (RRIF) income to their spouse or common law partner."
4. "If a parent transfers an asset into joint ownership with an adult child, future income taxes are split 50/50."
5. "You can pay for an adult child to take care of younger children in your household and deduct the cost of child care expenses."
6. "Net capital losses realized in a given year may be carried back to any of the three preceding tax years."
7. "You can reap the benefits of a donation to a charity on your 2007 tax return provided the donation is made by March 1, 2008."
8. "If I redeem or sell units of my non-registered mutual fund in 2007, I will have to include 50% of any realized gain in my 2007 tax return."
9. "If I donate publicly listed stock, for example BCE stock, to charity, I can avoid paying tax on the capital gain no matter how long I've held it."
10. "I can claim a tax credit for 2007 of up to $500 for each child under 16, who registered this year in a qualified physical activity."
Email me and I will send you the answers. The average wound up being 3 out of 10. This has been equated to the ever changing and complex Canadian tax system.
Here it is:
Take the Quiz:
1. "You are only allowed to contribute to a Registered Retirement Saving Plan (RRSP) up to the age of 69."
2. "The limit to what I can contribute to my child's Registered Education Savings Plan (RESP) each year is $4,000."
3. "A 65-year-old may allocate up to 50% of their Registered Retirement Income Fund (RRIF) income to their spouse or common law partner."
4. "If a parent transfers an asset into joint ownership with an adult child, future income taxes are split 50/50."
5. "You can pay for an adult child to take care of younger children in your household and deduct the cost of child care expenses."
6. "Net capital losses realized in a given year may be carried back to any of the three preceding tax years."
7. "You can reap the benefits of a donation to a charity on your 2007 tax return provided the donation is made by March 1, 2008."
8. "If I redeem or sell units of my non-registered mutual fund in 2007, I will have to include 50% of any realized gain in my 2007 tax return."
9. "If I donate publicly listed stock, for example BCE stock, to charity, I can avoid paying tax on the capital gain no matter how long I've held it."
10. "I can claim a tax credit for 2007 of up to $500 for each child under 16, who registered this year in a qualified physical activity."
Email me and I will send you the answers. The average wound up being 3 out of 10. This has been equated to the ever changing and complex Canadian tax system.
Tuesday, October 16, 2007
Experts on Call Repost
Monday, October 15, 2007
Don't Know What You Don't Know
I was planning on writing my next post on Mortgage Acceleration strategies. However, I have to address this.
Last week InvestorED.com released a survey that found that 46% or Ontario's adults have never taken the time to set out a financial plan on how to save for retirement. It also found that 58% do not have a plan to save for their children's education and 88% have never had a plan to save for their home. The overall results show that many are running the risk of spending too much today at the expense of tomorrow.
Here's the problem. People are starting to retire more and more as the boomers age. I see people who want to retire above their means. Little steps along the way would have made their retirement lives much easier. I have to tell these people that they just don't have enough to live on what they want to during retirement. Had I known them for longer this would be avoided.
So why are people not planning?
A comment on one of the articles reporting the results stated that many lower to middle income people do not feel that they have either the earned income and/or accumulated capital to bring to the table to get the advice from a financial planner. Not only that but they also feel that most planners would be unwilling to spend time on an individual basis without the means to generate the necessary business returns.
That brings me to the idea of a 'financial advisor'. There is no shortage of critics of the financial advice business. In fact, I have to opportunity to hear stories almost on a daily basis of unethical treatment of client's money by 'financial advisor's. These arguments against the industry has led many people to not have faith in the people who claim they have an individuals best interest at heart.
This leads some to a 'do it yourself' approach. However, the fact that many take this approach with little knowledge is a dangerous thing. Take the tech bubble of the late nineties. An argument can be made that if many had taken a quality advisor's advice that they may have weathered the storm of the bust.
The voice of the 'anti-advisor/do it yourself' approach is at times coming from the retired population that may have three to four hours per day to analyze the markets and be successful. These are the stories that dominate the yearly Money Sense that tells the story to the average millionaire.
The fact is this is a fraction of the actual population. The rest seems to not know what questions to ask in order to get the best out of a financial advisor. On the other hand since they don't there may be a feeling of distrust due to the alarming number of scandals that put a black cloud over the industry.
Many high net worth, highly educated, and innovative people use an advisor simply to implement the strategy they have taken the time to lay out. Not only that a second opinion by a professional never hurts.
With a lack of overall personal finance education and knowledge of the industry the average person sees 'financial planning' as a steep uphill journey. For example, it isn't uncommon to hear people that buy RRSPs without actually knowing what one is and how it works.
Take the time to know what you want from a plan and have the basis of knowledge to know what you want. If you don't make sure you take the time choose the right advisor. Do your homework. Don't be afraid to ask questions. Look up your advisor on the MFDA or IDA websites depending on who your advisor is governed through. You will likely find any dirt there if there is any to be found.
I posted an article regarding the idea of planning last month. The idea was to provide a ground up approach to someone who may be just starting out. It is not uncommon for someone to be well into their lives when they reach this point. It is never too late to plan, the trick it to just take the first step.
Last week InvestorED.com released a survey that found that 46% or Ontario's adults have never taken the time to set out a financial plan on how to save for retirement. It also found that 58% do not have a plan to save for their children's education and 88% have never had a plan to save for their home. The overall results show that many are running the risk of spending too much today at the expense of tomorrow.
Here's the problem. People are starting to retire more and more as the boomers age. I see people who want to retire above their means. Little steps along the way would have made their retirement lives much easier. I have to tell these people that they just don't have enough to live on what they want to during retirement. Had I known them for longer this would be avoided.
So why are people not planning?
A comment on one of the articles reporting the results stated that many lower to middle income people do not feel that they have either the earned income and/or accumulated capital to bring to the table to get the advice from a financial planner. Not only that but they also feel that most planners would be unwilling to spend time on an individual basis without the means to generate the necessary business returns.
That brings me to the idea of a 'financial advisor'. There is no shortage of critics of the financial advice business. In fact, I have to opportunity to hear stories almost on a daily basis of unethical treatment of client's money by 'financial advisor's. These arguments against the industry has led many people to not have faith in the people who claim they have an individuals best interest at heart.
This leads some to a 'do it yourself' approach. However, the fact that many take this approach with little knowledge is a dangerous thing. Take the tech bubble of the late nineties. An argument can be made that if many had taken a quality advisor's advice that they may have weathered the storm of the bust.
The voice of the 'anti-advisor/do it yourself' approach is at times coming from the retired population that may have three to four hours per day to analyze the markets and be successful. These are the stories that dominate the yearly Money Sense that tells the story to the average millionaire.
The fact is this is a fraction of the actual population. The rest seems to not know what questions to ask in order to get the best out of a financial advisor. On the other hand since they don't there may be a feeling of distrust due to the alarming number of scandals that put a black cloud over the industry.
Many high net worth, highly educated, and innovative people use an advisor simply to implement the strategy they have taken the time to lay out. Not only that a second opinion by a professional never hurts.
With a lack of overall personal finance education and knowledge of the industry the average person sees 'financial planning' as a steep uphill journey. For example, it isn't uncommon to hear people that buy RRSPs without actually knowing what one is and how it works.
Take the time to know what you want from a plan and have the basis of knowledge to know what you want. If you don't make sure you take the time choose the right advisor. Do your homework. Don't be afraid to ask questions. Look up your advisor on the MFDA or IDA websites depending on who your advisor is governed through. You will likely find any dirt there if there is any to be found.
I posted an article regarding the idea of planning last month. The idea was to provide a ground up approach to someone who may be just starting out. It is not uncommon for someone to be well into their lives when they reach this point. It is never too late to plan, the trick it to just take the first step.
Thursday, October 4, 2007
Experts on Call Broadcast Sept 29/2007
The replay of the broadcast on CFRA can be heard here: 1, 2, 3, and 4
The topic was Are RRSPs Right For You.
The topic was Are RRSPs Right For You.
Saturday, September 29, 2007
Are RRSPs Right for You?
Today I will be speaking on CFRA in Ottawa from 3-4. To listen live click here.
What is going to be discussed on the program is RRSPs and if they are right for everyone. I had touched on this earlier in my Living In Canada post in regard to how this would specifically effect the Ottawa population.
The main points that I plan to cover in the program are:
1. Is it possible to have too much in an RRSP?
2. The positives and negatives of RRSPs
3. Are RRSPs for everybody?
4. The 'RRSP Freeze'
5. The 'RRSP Meltdown'
1. Is it possible to have too much in an RRSP?
Yes.
How do I know if I have too much in my RRSP? Well, let's look at a common scenario:
John is 55 and plans to retire in 10 years. His retirement plan is to have an annual income of $50,000 (in todays dollars) to meet needs during a 25 year retirement. This means that John will need in the area of $900,000 in his RRSP to meet these needs on an after tax basis (assuming an average return of 8% and inflation of 3%).
Here is the problem: John has invested well and accumulated in the area of $600,000 in his RRSP already. Assuming he doesn't make one more contribution his RRSP will have grown to over $1.2 million by age 65. This leaves him too much in his RRSP.
Why is this a problem? Since an RRSP is a tax deferral device every dollar that John takes out is taxed at his marginal tax rate as income. Not only that but any assets left in his RRSP at the time of death will either be rolled to his spouse or all taxed in one lump sum to the government. In the end Ottawa is likely to receive nearly half of his savings.
2. The positives and negatives of RRSPs
For anyone who is paying tax an RRSP is easiest way for someone to save and receive a tax deduction at the same time. I have also noted before that if it weren't for this vehicle many people would not have saved at all. Therefore it provides the discipline needed for many people to save. At the same time your money has the ability to grow on a tax deferred basis which allows time and compounding growth to effectively work on your investment.
For those reasons I do not abandon the belief in the RRSP entirely.
However, let's look at the negatives. I have noted one above. The tax bite that is taken when you use the assets built inside your RRSP. For some this could lead to higher taxes and/or claw backs of government benefits.
Another negative is government control. Since your money is considered to be registered you have to follow the rules that the government imposes on you. This leads to investment control, contribution control, and withdrawal control.
3. Are RRSPs for everybody?
That comes down to a case by case basis. However, numbers will prove that by using tax deductible vehicles in non registered investments(such as conservative leverage) and taking advantage of Canada'a capital gains exemption that investors are likely ahead with this method.
However, let's assume that someone does utilize the strategy of conservative leverage (borrowing to invest) as an alternative to RRSPs, certain risks have to be addressed. Not only that, the investor has to be a likely candidate to qualify for such a program. Risks vs rewards in this situation have to looked into deeply to see if it is the right strategy for you.
If it isn't than RRSPs are likely an excellent vehicle for you. Many people are beginning to recognize the value to utilizing both strategies.
4. The 'RRSP Freeze'
So let's assume that you may be thinking that you have too much in your RRSP. What should you do?
First thing is to stop contributing. Start working on a plan to invest outside of your RRSP. This is not to be done because you no longer believe in the vehicle itself but rather that you now recognize that it may not be the best place for your money as you approach retirement.
If you are in a lower tax bracket or if you see that you are not going to use all of your assets in your lifetime consider taking the tax hit now and reinvest in a conservative non registered investment subject to capital gains. In the long run you will save a lot on tax.
5. The 'RRSP Meltdown'
Let's revisit John's situation.
Now that John has realized that he has too much in his RRSP he has done an RRSP Freeze. The next step would be to consider an RRSP Meltdown.
Instead of contributing to his RRSPs John has taken out an investment loan at 7% interest for $100,000 in high quality, conservative mutual funds. John makes interest only payments on the loan for $7000 annually for which he takes $7000 out of his RRSP to cover.
Since the payment for the investment loan is tax deductible and the withdrawal from the RRSP is taxable he ends up net no tax at the end of the year. The interst deduction offsets the taxable RRSP withdrawal so that he is effectively not taxed on the RRSP withdrawal.
Not only that but the non registered investment, given time, will grow to produce much more tax efficient wealth subject to capital gains. Therefore, 50% of his growth is now tax exempt. John just saved a lot of tax.
Check out some opinions on this strategy from Garth Turner and Tim Cestnick 1, 2.
What is going to be discussed on the program is RRSPs and if they are right for everyone. I had touched on this earlier in my Living In Canada post in regard to how this would specifically effect the Ottawa population.
The main points that I plan to cover in the program are:
1. Is it possible to have too much in an RRSP?
2. The positives and negatives of RRSPs
3. Are RRSPs for everybody?
4. The 'RRSP Freeze'
5. The 'RRSP Meltdown'
1. Is it possible to have too much in an RRSP?
Yes.
How do I know if I have too much in my RRSP? Well, let's look at a common scenario:
John is 55 and plans to retire in 10 years. His retirement plan is to have an annual income of $50,000 (in todays dollars) to meet needs during a 25 year retirement. This means that John will need in the area of $900,000 in his RRSP to meet these needs on an after tax basis (assuming an average return of 8% and inflation of 3%).
Here is the problem: John has invested well and accumulated in the area of $600,000 in his RRSP already. Assuming he doesn't make one more contribution his RRSP will have grown to over $1.2 million by age 65. This leaves him too much in his RRSP.
Why is this a problem? Since an RRSP is a tax deferral device every dollar that John takes out is taxed at his marginal tax rate as income. Not only that but any assets left in his RRSP at the time of death will either be rolled to his spouse or all taxed in one lump sum to the government. In the end Ottawa is likely to receive nearly half of his savings.
2. The positives and negatives of RRSPs
For anyone who is paying tax an RRSP is easiest way for someone to save and receive a tax deduction at the same time. I have also noted before that if it weren't for this vehicle many people would not have saved at all. Therefore it provides the discipline needed for many people to save. At the same time your money has the ability to grow on a tax deferred basis which allows time and compounding growth to effectively work on your investment.
For those reasons I do not abandon the belief in the RRSP entirely.
However, let's look at the negatives. I have noted one above. The tax bite that is taken when you use the assets built inside your RRSP. For some this could lead to higher taxes and/or claw backs of government benefits.
Another negative is government control. Since your money is considered to be registered you have to follow the rules that the government imposes on you. This leads to investment control, contribution control, and withdrawal control.
3. Are RRSPs for everybody?
That comes down to a case by case basis. However, numbers will prove that by using tax deductible vehicles in non registered investments(such as conservative leverage) and taking advantage of Canada'a capital gains exemption that investors are likely ahead with this method.
However, let's assume that someone does utilize the strategy of conservative leverage (borrowing to invest) as an alternative to RRSPs, certain risks have to be addressed. Not only that, the investor has to be a likely candidate to qualify for such a program. Risks vs rewards in this situation have to looked into deeply to see if it is the right strategy for you.
If it isn't than RRSPs are likely an excellent vehicle for you. Many people are beginning to recognize the value to utilizing both strategies.
4. The 'RRSP Freeze'
So let's assume that you may be thinking that you have too much in your RRSP. What should you do?
First thing is to stop contributing. Start working on a plan to invest outside of your RRSP. This is not to be done because you no longer believe in the vehicle itself but rather that you now recognize that it may not be the best place for your money as you approach retirement.
If you are in a lower tax bracket or if you see that you are not going to use all of your assets in your lifetime consider taking the tax hit now and reinvest in a conservative non registered investment subject to capital gains. In the long run you will save a lot on tax.
5. The 'RRSP Meltdown'
Let's revisit John's situation.
Now that John has realized that he has too much in his RRSP he has done an RRSP Freeze. The next step would be to consider an RRSP Meltdown.
Instead of contributing to his RRSPs John has taken out an investment loan at 7% interest for $100,000 in high quality, conservative mutual funds. John makes interest only payments on the loan for $7000 annually for which he takes $7000 out of his RRSP to cover.
Since the payment for the investment loan is tax deductible and the withdrawal from the RRSP is taxable he ends up net no tax at the end of the year. The interst deduction offsets the taxable RRSP withdrawal so that he is effectively not taxed on the RRSP withdrawal.
Not only that but the non registered investment, given time, will grow to produce much more tax efficient wealth subject to capital gains. Therefore, 50% of his growth is now tax exempt. John just saved a lot of tax.
Check out some opinions on this strategy from Garth Turner and Tim Cestnick 1, 2.
Thursday, September 27, 2007
Mortgages: Fixed vs Variable (Wots....Uh The Deal?)
It isn't difficult to find a sea of information on this topic. Most leads to the conclusion that over an extended period of time one is always better off using a variable rate mortgage over a fixed rate mortgage. However, why do statistics show that eight out of ten mortgages are done on a fixed rate?
Am I missing something here???
I found a study done in 2001 at York University that concludes that over the period of 1950 to 2000 on a 15 year mortgage one would have saved an average of $20,000. That isn't pocket change. Three years later the same professor revisited the study given the climate at the time and came up with the same conclusion.
So what is it that is making so many people lock into fixed rate mortgages? The answer is emotional: stability. The idea of warding of the risk of any unplanned spike in the current interest rate. Generally people feel more at ease when they can sleep at night knowing what their payments are and what they will be over a given period of time.
However, let's explore some ideas associated with this 'stability'. Have a look at this. Another statistic showing past proof as to why variable is the answer.
Here's some other reasons:
I believe wealth is attained by proper planning and reducing the amount of money that goes to tax and/or institutions. One thing that is not often explored in the argument of fixed vs variable rate mortgages is the idea of 'front end loading'. Often this is a term associated with mutual funds. However, let's look at it in the context of mortgages:
Fixed rate mortgages are designed so that in the early years of the mortgage amortization the bulk of the payment goes towards interest. In the later years this payment reduces and becomes mainly principle. This means that the institution designs it this way to ensure that they are not only going to get paid first but also if you move your mortgage, refinance, or adjust your amortization schedule you will in a sense reset the front end load. The result of this is thousands of dollars over the life of your mortgage going to institutions and not into your own net worth. This compounds even more as we are seeing 30, 35, and even 40 year mortgages. Not only that but mortgage brokers get paid considerably higher on a fixed mortgage due to front end loading. Therefore consider that when taking advice.
One of the big reasons (not just money saved on interest) to explore with a variable rate is the fact that you only pay interest on what you owe. Why is this important? Variable rates are often up to one point lower than traditional fixed rates and float based on the present prime rate. This also gives you flexibility in your payment schedule. Take, for example, if you are doing a Mortgage Accelerator program. Every extra dollar that is put towards your mortgage in this scenario will result in a reduction of the interest component of your payment in the long term. Unlike a fixed schedule that predetermines the interest component for each payment of the term.
I will often tell people that one of the most important steps towards financial freedom is taking the steps to reduce the amortization time of their mortgage. Many do not realize the out of pocket money that is necessary to cover an entire amortization period and the money that can be saved be paying down the mortgage faster. Just that reason alone is enough for an average individual to take these steps. Not only that but the freedom to produce wealth, leverage your net worth, and take advantage of time becomes a major factor in looking at the positives.
If one could reduce that even more by choosing a variable mortgage over fixed rate why wouldn't they?
All the answers to all my questions come down one thing: risk vs reward.
Am I missing something here???
I found a study done in 2001 at York University that concludes that over the period of 1950 to 2000 on a 15 year mortgage one would have saved an average of $20,000. That isn't pocket change. Three years later the same professor revisited the study given the climate at the time and came up with the same conclusion.
So what is it that is making so many people lock into fixed rate mortgages? The answer is emotional: stability. The idea of warding of the risk of any unplanned spike in the current interest rate. Generally people feel more at ease when they can sleep at night knowing what their payments are and what they will be over a given period of time.
However, let's explore some ideas associated with this 'stability'. Have a look at this. Another statistic showing past proof as to why variable is the answer.
Here's some other reasons:
I believe wealth is attained by proper planning and reducing the amount of money that goes to tax and/or institutions. One thing that is not often explored in the argument of fixed vs variable rate mortgages is the idea of 'front end loading'. Often this is a term associated with mutual funds. However, let's look at it in the context of mortgages:
Fixed rate mortgages are designed so that in the early years of the mortgage amortization the bulk of the payment goes towards interest. In the later years this payment reduces and becomes mainly principle. This means that the institution designs it this way to ensure that they are not only going to get paid first but also if you move your mortgage, refinance, or adjust your amortization schedule you will in a sense reset the front end load. The result of this is thousands of dollars over the life of your mortgage going to institutions and not into your own net worth. This compounds even more as we are seeing 30, 35, and even 40 year mortgages. Not only that but mortgage brokers get paid considerably higher on a fixed mortgage due to front end loading. Therefore consider that when taking advice.
One of the big reasons (not just money saved on interest) to explore with a variable rate is the fact that you only pay interest on what you owe. Why is this important? Variable rates are often up to one point lower than traditional fixed rates and float based on the present prime rate. This also gives you flexibility in your payment schedule. Take, for example, if you are doing a Mortgage Accelerator program. Every extra dollar that is put towards your mortgage in this scenario will result in a reduction of the interest component of your payment in the long term. Unlike a fixed schedule that predetermines the interest component for each payment of the term.
I will often tell people that one of the most important steps towards financial freedom is taking the steps to reduce the amortization time of their mortgage. Many do not realize the out of pocket money that is necessary to cover an entire amortization period and the money that can be saved be paying down the mortgage faster. Just that reason alone is enough for an average individual to take these steps. Not only that but the freedom to produce wealth, leverage your net worth, and take advantage of time becomes a major factor in looking at the positives.
If one could reduce that even more by choosing a variable mortgage over fixed rate why wouldn't they?
All the answers to all my questions come down one thing: risk vs reward.
Tuesday, September 25, 2007
A Part of All You Earn is Yours to Keep
Part of my goal with this blog is to show people how it is not difficult to turn existing financial plans into innovative and rewarding concepts that can maximize wealth, minimize tax, and maximize cash flow.
However, where does someone start when they are at the very beginning of their financial journey? It is always tough to take the first step.
One thing that is a fact about our habits when it comes to spending/saving habits of the average Canadian is that more often than not the majority of cash flow that we earn goes to someone else. The first thing that you might think of is the obvious: taxes, mortgage, debts, etc. However, consider the money that is going to entertainment, groceries, vacation, consumer spending, etc. It is all money that is making some entity other than yourself wealthy.
If there is anything left over than perhaps it may go into an RRSP or a high interest savings account for emergencies. More often than not emergency funds are liquidated for renovations, new cars, etc leaving you at square one. Not only that but most RRSP contributions are done at year end with what is left over. This doesn't usually amount to a significant savings.
Here is the concept I want to illustrate:
PAY YOURSELF FIRST
What does this really mean?? It means taking a portion of your income (let's say 10%) and put it away for yourself before the other people come to the door. More often than not you will see that you do have the cash flow to develop these rewarding habits.
These are basic concepts that build the foundations of authors like George C Clason and David Chilton
I have used the term dollar cost averaging in my blogs. This concept takes equal monthly contributions to the same investment regardless of cost. This way not only to you benefit from lows in the investment but you investment also grows on the highs. Wisebread has a 'for dummies' explanation here I highly suggest a read.
The point that I want to get across with the use of dollar cost averaging and the idea of paying yourself first is this:
While there may be better strategies and tools for you to save tax and grow more wealth, the habits that you develop in the early stages will help you recognize how to move ahead towards the future. You will be surprised how quick your investment will grow when fed properly.
Here is a quote directly from The Richest Man in Babylon:
"Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade."
Now if you are able to connect this financial concept to the concept of growing your financial knowledge along the way not only will you become wealthier but you will also become smarter with your money altogether.
However, where does someone start when they are at the very beginning of their financial journey? It is always tough to take the first step.
One thing that is a fact about our habits when it comes to spending/saving habits of the average Canadian is that more often than not the majority of cash flow that we earn goes to someone else. The first thing that you might think of is the obvious: taxes, mortgage, debts, etc. However, consider the money that is going to entertainment, groceries, vacation, consumer spending, etc. It is all money that is making some entity other than yourself wealthy.
If there is anything left over than perhaps it may go into an RRSP or a high interest savings account for emergencies. More often than not emergency funds are liquidated for renovations, new cars, etc leaving you at square one. Not only that but most RRSP contributions are done at year end with what is left over. This doesn't usually amount to a significant savings.
Here is the concept I want to illustrate:
PAY YOURSELF FIRST
What does this really mean?? It means taking a portion of your income (let's say 10%) and put it away for yourself before the other people come to the door. More often than not you will see that you do have the cash flow to develop these rewarding habits.
These are basic concepts that build the foundations of authors like George C Clason and David Chilton
I have used the term dollar cost averaging in my blogs. This concept takes equal monthly contributions to the same investment regardless of cost. This way not only to you benefit from lows in the investment but you investment also grows on the highs. Wisebread has a 'for dummies' explanation here I highly suggest a read.
The point that I want to get across with the use of dollar cost averaging and the idea of paying yourself first is this:
While there may be better strategies and tools for you to save tax and grow more wealth, the habits that you develop in the early stages will help you recognize how to move ahead towards the future. You will be surprised how quick your investment will grow when fed properly.
Here is a quote directly from The Richest Man in Babylon:
"Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade."
Now if you are able to connect this financial concept to the concept of growing your financial knowledge along the way not only will you become wealthier but you will also become smarter with your money altogether.
Friday, September 21, 2007
Virtues of a Successful Plan
I really enjoy Scott Young's blog . He writes mainly on overall efficiency and tips on how to achieve success in life
He wrote a recent article that I felt had some really wise points that could be coresponded to the concept of financial planning. In my business I often encounter people who have recently become very excited over a particular aspect of their finances and often ramp up too fast. I am often telling people to take things slow and comfortable.
Here are some points to read over and ask yourself if it corresponds to your overall plan. ( I copied this directly from his article).
1. Eliminate Distractions - This may sound obvious, but it is easily forgotten. How often do you supplement boring activities with additional stimulus? Television, music, radio or IM in the background of your tasks. The problem is that although these distractions may help pass the time, they are destructive when trying to engineer a creative flow.
2. Accelerate Slowly - No car can go from 0-100 mph in 2 seconds. Why do you expect your mind to work the same way. Flow implies a certain cognitive motion. I believe this is an apt metaphor. I often spend the first fifteen minutes of an article messing around with the first paragraph and subject. After I build up speed I can write almost as fast as I can type.
3. Switch Gears During Roadblocks - It is hard to build up speed when you keep crashing into roadblocks. The best suggestion I have is to build some tools to smooth them out. Work out problems on paper instead of just your head so you won’t break the flow when you encounter a tough problem.
4. Carve Clear Rules and Goals - Rules and goals form the highway for your cognitive drive. Imprecise goals are like twists and turns in the highway, forcing you to slow down. Poorly defined rules and standards are like gravel on the highway, preventing you from reaching top speeds. Figure out exactly where you want to end up and what needs to be done to get there before you put your mind into drive.
5. Master Your Tools - Know the ins and outs of your vehicle before you start driving. If you use computer based software, schedule out some time to learn minor features that might help you overcome mundane tasks later. If you use physical tools, practice various techniques and motions so you will need less experimenting when you start.
6. Environmental Controls - Modify your environment so it fits your ideal of a productive workspace. If your office doesn’t feel right, make some changes until it suits your image of a productive area.
7. Dissect Your Stop Signs - Everyone has mental stop signs that keep them from a creative focus. This could be insecurity with your topic, lack of experience, fear or distaste. When you consistently have trouble getting to a peak flow, examine what might be stopping you. When you dissect these stop signs, often you can find detours around them.
8. Your Body is an Engine - Don’t draw a firm line between body and mind. If your body is unhealthy, fatigued or toxic, that will influence your brain. Exercising regularly and eating a healthy diet is a must. It is easy to scoff at such a suggestion as being non-essential — until you try it. I was amazed at what a difference a little care for the body can do.
9. Avoid Carrots and Sticks - You aren’t a donkey. Don’t expect external rewards to create intrinsic motivation. You are better of redesigning your environment and your tasks to suit your mind, then try and trick your subconscious to behave.
10. Timebox - Give yourself a deadline. A deadline is the creative equivalent to getting out and pushing your car when it stalls. It won’t help you when you reach top speeds, but it can help you when you are stuck. Timeboxing is the practice of giving yourself a set amount of time to work (say 60-90 minutes) after which you will take a break. This nukes procrastination and pushes you into gear.
11. Patience - It’s a virtue, remember? Moving slowly is uncomfortable. But you need to accept that instant creative acceleration is almost impossible to produce. The first fifteen minutes of writing for me are often frustrating and painful. The last fifteen are effortless. Be patient and you can slowly slip into flow.
He wrote a recent article that I felt had some really wise points that could be coresponded to the concept of financial planning. In my business I often encounter people who have recently become very excited over a particular aspect of their finances and often ramp up too fast. I am often telling people to take things slow and comfortable.
Here are some points to read over and ask yourself if it corresponds to your overall plan. ( I copied this directly from his article).
1. Eliminate Distractions - This may sound obvious, but it is easily forgotten. How often do you supplement boring activities with additional stimulus? Television, music, radio or IM in the background of your tasks. The problem is that although these distractions may help pass the time, they are destructive when trying to engineer a creative flow.
2. Accelerate Slowly - No car can go from 0-100 mph in 2 seconds. Why do you expect your mind to work the same way. Flow implies a certain cognitive motion. I believe this is an apt metaphor. I often spend the first fifteen minutes of an article messing around with the first paragraph and subject. After I build up speed I can write almost as fast as I can type.
3. Switch Gears During Roadblocks - It is hard to build up speed when you keep crashing into roadblocks. The best suggestion I have is to build some tools to smooth them out. Work out problems on paper instead of just your head so you won’t break the flow when you encounter a tough problem.
4. Carve Clear Rules and Goals - Rules and goals form the highway for your cognitive drive. Imprecise goals are like twists and turns in the highway, forcing you to slow down. Poorly defined rules and standards are like gravel on the highway, preventing you from reaching top speeds. Figure out exactly where you want to end up and what needs to be done to get there before you put your mind into drive.
5. Master Your Tools - Know the ins and outs of your vehicle before you start driving. If you use computer based software, schedule out some time to learn minor features that might help you overcome mundane tasks later. If you use physical tools, practice various techniques and motions so you will need less experimenting when you start.
6. Environmental Controls - Modify your environment so it fits your ideal of a productive workspace. If your office doesn’t feel right, make some changes until it suits your image of a productive area.
7. Dissect Your Stop Signs - Everyone has mental stop signs that keep them from a creative focus. This could be insecurity with your topic, lack of experience, fear or distaste. When you consistently have trouble getting to a peak flow, examine what might be stopping you. When you dissect these stop signs, often you can find detours around them.
8. Your Body is an Engine - Don’t draw a firm line between body and mind. If your body is unhealthy, fatigued or toxic, that will influence your brain. Exercising regularly and eating a healthy diet is a must. It is easy to scoff at such a suggestion as being non-essential — until you try it. I was amazed at what a difference a little care for the body can do.
9. Avoid Carrots and Sticks - You aren’t a donkey. Don’t expect external rewards to create intrinsic motivation. You are better of redesigning your environment and your tasks to suit your mind, then try and trick your subconscious to behave.
10. Timebox - Give yourself a deadline. A deadline is the creative equivalent to getting out and pushing your car when it stalls. It won’t help you when you reach top speeds, but it can help you when you are stuck. Timeboxing is the practice of giving yourself a set amount of time to work (say 60-90 minutes) after which you will take a break. This nukes procrastination and pushes you into gear.
11. Patience - It’s a virtue, remember? Moving slowly is uncomfortable. But you need to accept that instant creative acceleration is almost impossible to produce. The first fifteen minutes of writing for me are often frustrating and painful. The last fifteen are effortless. Be patient and you can slowly slip into flow.
Wednesday, September 19, 2007
Understanding Credit
A common theme for the average Canadian is debt and process of eliminating it. However, many people do not fully understand credit and the process surrounding lending. I talk a lot about the use of good debt and many people are starting to recognize the benefits behind it. Often I see young people who understand the value of time in partnership with a quality leverage program. However, due to their situations they may not be in a position to participate due to their credit situation.
I was able to attend a seminar by a trusted Canadian investment lender this week and his approach was to educate financial advisors on understanding credit. He brought up a good way of understanding credit. He named it 'the 6 C's of credit'. I felt that not only should advisors know this but also the average Canadian investor.
He broke it down like this:
1. Capacity:
or Total Debt Servicing Ratio. This is the number by which lenders decide if you have the capacity to carry a debt or handle more payments based on current income. To arrive at this number you divide your total monthly payments (loans, mortgage, lines of credit, etc) by your gross monthly income. Most lenders are going to look for <40% of monthly income.
An example of where capacity might cause problems is for self employed people that don't show all of their income due to deductible expenses. While they may have the capacity for tax reduction, lenders may look at their earned income as insufficient for the capacity to carry extra credit.
2. Capital
This is your net worth. It is an easy calculation: assets minus liabilities.
Recently I am seeing many young people who may have entered into a mortgage with little down payment. However, many people may have existing debts and few assets. This may put someone in a negative net worth situation. Similarily renters often are in this situation due to the fact that they may not be saving.
Establishing net worth on the positive will always work in your favour even if this means simply establishing an emergency fund or a small investment portfolio through dollar cost averaging http://www.wisebread.com/dollar-cost-averaging-my-path-to-becoming-a-not-so-nervous-investor.
3. Collateral
Collateral is defined as a pledge of property or other assets that the borrower uses as security against borrowed monies. The relationship between the value of these assets and the amount of the loan is called the loan-to-value ratio (LTV). This number is expressed as a percentage (loan amount/collateral value=ltv)
Often the minimum assets pledged must be equal to the original loan amount.
4. Credit History
This is the area which I thought would be the most useful to every type of investor. Many people do not understand the concept of a Beacon Score. This represents an applicant's credit "worthiness" and likelihood of repaying debt based on statistical analysis of behaviour. This relates directly to a collection of information and statistics about past behaviour in meeting credit obligations which contributes to the development of the score.
Some factors that contribute to the development of a beacon score:
-time in file
-number and types of accounts
-residence status
-late payments
-bankruptcies, wage garnishments, liens, collection items
-too many requests for new credit and credit enquiries
TIP: when shopping for a mortgage use a broker rather than shopping around. A broker will have your credit pulled only once and shop around for you.
It is encouraged to take the time to check up on your credit history on a regular basis. Equifax gives you different options to receive your history. Identity theft has become a growing concern. For this reason alone you should check it out.
5. Character
While examining the other C's will help with character lenders are also going to look at things like:
-time at job
-occupation type
-time at residence
6. Comfort
You have to take the time to examine the threshold of debt that you are able to carry comfortably. For some this may be zero. However, taking the time to understand the different types of debt, what is tax preferential debt, and debt that can produce wealth will have a possitive effect on how you use it and carry it. Once you can see debt for what it is your threshold may significantly rise.
TIP: If you haven't read Rich Dad, Poor Dad , you should. It is an excellent story explaining how debt can work for you. Not only that but it will also show how to really get assets working for you as well.
I was able to attend a seminar by a trusted Canadian investment lender this week and his approach was to educate financial advisors on understanding credit. He brought up a good way of understanding credit. He named it 'the 6 C's of credit'. I felt that not only should advisors know this but also the average Canadian investor.
He broke it down like this:
1. Capacity:
or Total Debt Servicing Ratio. This is the number by which lenders decide if you have the capacity to carry a debt or handle more payments based on current income. To arrive at this number you divide your total monthly payments (loans, mortgage, lines of credit, etc) by your gross monthly income. Most lenders are going to look for <40% of monthly income.
An example of where capacity might cause problems is for self employed people that don't show all of their income due to deductible expenses. While they may have the capacity for tax reduction, lenders may look at their earned income as insufficient for the capacity to carry extra credit.
2. Capital
This is your net worth. It is an easy calculation: assets minus liabilities.
Recently I am seeing many young people who may have entered into a mortgage with little down payment. However, many people may have existing debts and few assets. This may put someone in a negative net worth situation. Similarily renters often are in this situation due to the fact that they may not be saving.
Establishing net worth on the positive will always work in your favour even if this means simply establishing an emergency fund or a small investment portfolio through dollar cost averaging http://www.wisebread.com/dollar-cost-averaging-my-path-to-becoming-a-not-so-nervous-investor.
3. Collateral
Collateral is defined as a pledge of property or other assets that the borrower uses as security against borrowed monies. The relationship between the value of these assets and the amount of the loan is called the loan-to-value ratio (LTV). This number is expressed as a percentage (loan amount/collateral value=ltv)
Often the minimum assets pledged must be equal to the original loan amount.
4. Credit History
This is the area which I thought would be the most useful to every type of investor. Many people do not understand the concept of a Beacon Score. This represents an applicant's credit "worthiness" and likelihood of repaying debt based on statistical analysis of behaviour. This relates directly to a collection of information and statistics about past behaviour in meeting credit obligations which contributes to the development of the score.
Some factors that contribute to the development of a beacon score:
-time in file
-number and types of accounts
-residence status
-late payments
-bankruptcies, wage garnishments, liens, collection items
-too many requests for new credit and credit enquiries
TIP: when shopping for a mortgage use a broker rather than shopping around. A broker will have your credit pulled only once and shop around for you.
It is encouraged to take the time to check up on your credit history on a regular basis. Equifax gives you different options to receive your history. Identity theft has become a growing concern. For this reason alone you should check it out.
5. Character
While examining the other C's will help with character lenders are also going to look at things like:
-time at job
-occupation type
-time at residence
6. Comfort
You have to take the time to examine the threshold of debt that you are able to carry comfortably. For some this may be zero. However, taking the time to understand the different types of debt, what is tax preferential debt, and debt that can produce wealth will have a possitive effect on how you use it and carry it. Once you can see debt for what it is your threshold may significantly rise.
TIP: If you haven't read Rich Dad, Poor Dad , you should. It is an excellent story explaining how debt can work for you. Not only that but it will also show how to really get assets working for you as well.
Thursday, September 13, 2007
Getting the Most of Your Investment Dollar pt. 1
Remember that commercial with the jingle "Hands in my pocket?" Well, that is the investment world. Everybody wants your dollar and they are spending lots to get it. Between mutual fund companies, insurance companies, and the banks, thousands are spent on one purpose: the privilege of managing your money and they will show you the numbers to back this up.
With so much out there, even the best professionals have a tough time choosing what is right for their clients. It is easy for people to make the wrong choices and worse, pay a financial advisor to do that for them. Moreover, most people do not know what is being done with their money and why.
As I type this I look at the TSX to see that there has been a recoup of some of the downfall that we saw over the summer. Many investors read the headlines and see their falling investments and ask themselves the question: "Where is the best place for my money?" It is a worthy question, but I would like to follow that up with "How can every individual get the most out of every dollar they have invested?"
Let's start with the trusty GIC. A dependable safe haven for volatile times. In times of historically low interest rates we also see a reflection in GIC rates. Billions of Canadian dollars are held with the banks in a GIC at this very moment receiving a low return, but on the other hand this is "low risk."
Let's define risk in terms of investing. I think we would all agree that risk to investors can be associated with the loss of capital. Studies have shown that after inflation (the reduction in the value of your dollar) and taxes your real return is actually in the negative with GICs. This means that at the end of the day, let's say in 5 years, the actual value of your dollar is less than when you started. Now that study is from 2004 but I have not seen a dramatic increase in GIC rates and one would argue that life has gotten more expensive.
In the meantime the bank has benefited from 5 years worth of leveraging and making a lot of profit from your money. Not only that, but if you choose to access your money within the stated period of time the bank will charge you a fee or penalty.
This defines risk to me and not necessarily getting the most from my invested money.
I use the idea of building a solid foundation in your portfolio like you would with a building. Once that core has been established you have a lot more freedom to take a more aggressive approach. However, with any investment time always reduces risk. For example, take a core quality balanced mutual fund that holds not only equity but also bonds and other fixed income vehicles. With quality management you will often see a decent real return based on five years (8-10%). I see that as a conservative core to build for yourself.
However, this opens up a big can of worms: Mutual Funds. Here's a crash course on how mutual funds work.
Do mutual funds fit the average Canadian? Are you better to invest in mutual funds vs. index funds? What about the fees associated with investing in funds? What about returns? What about loads? What am I investing in with my mutual fund?
All valid questions.....pt. 2 Mutual Funds
With so much out there, even the best professionals have a tough time choosing what is right for their clients. It is easy for people to make the wrong choices and worse, pay a financial advisor to do that for them. Moreover, most people do not know what is being done with their money and why.
As I type this I look at the TSX to see that there has been a recoup of some of the downfall that we saw over the summer. Many investors read the headlines and see their falling investments and ask themselves the question: "Where is the best place for my money?" It is a worthy question, but I would like to follow that up with "How can every individual get the most out of every dollar they have invested?"
Let's start with the trusty GIC. A dependable safe haven for volatile times. In times of historically low interest rates we also see a reflection in GIC rates. Billions of Canadian dollars are held with the banks in a GIC at this very moment receiving a low return, but on the other hand this is "low risk."
Let's define risk in terms of investing. I think we would all agree that risk to investors can be associated with the loss of capital. Studies have shown that after inflation (the reduction in the value of your dollar) and taxes your real return is actually in the negative with GICs. This means that at the end of the day, let's say in 5 years, the actual value of your dollar is less than when you started. Now that study is from 2004 but I have not seen a dramatic increase in GIC rates and one would argue that life has gotten more expensive.
In the meantime the bank has benefited from 5 years worth of leveraging and making a lot of profit from your money. Not only that, but if you choose to access your money within the stated period of time the bank will charge you a fee or penalty.
This defines risk to me and not necessarily getting the most from my invested money.
I use the idea of building a solid foundation in your portfolio like you would with a building. Once that core has been established you have a lot more freedom to take a more aggressive approach. However, with any investment time always reduces risk. For example, take a core quality balanced mutual fund that holds not only equity but also bonds and other fixed income vehicles. With quality management you will often see a decent real return based on five years (8-10%). I see that as a conservative core to build for yourself.
However, this opens up a big can of worms: Mutual Funds. Here's a crash course on how mutual funds work.
Do mutual funds fit the average Canadian? Are you better to invest in mutual funds vs. index funds? What about the fees associated with investing in funds? What about returns? What about loads? What am I investing in with my mutual fund?
All valid questions.....pt. 2 Mutual Funds
Wednesday, September 12, 2007
RRSP Contributions vs. Extra Mortgage Payments
I don't want to come off as critical of the RRSP. In my previous post I wrote that I feel that this is one of the only things that gets a lot of Canadians saving and it is one of the only legitimate tax savings vehicles for salaried employees. However, when asked what is good money management and the secrets to building wealth I will always tell people the same thing:
Do what you can to save as much tax as possible and do what you can to reduce the amount of money you are paying to institutions.
This all comes back to cash flow. Keep more of what you earn in your pocket. What you do with it at that point is a whole different story. My personal belief is that the average Canadian today is stretched to the limit with cash flow and doesn't have a lot left at the end of the day for savings or RRSP contributions. This can be attributed to things like high mortgages, compounding debts, and costs related to everyday life.
I was recently reading an article talking about pre-tax dollars and where is the best place to put them: RRSPs, non registered investments, or extra contributions towards a mortgage. This takes into account that an investment in a non-registered investment or an extra contribution to a mortgage would be done with after tax dollars. When that is taken into account the RRSP argument is going to win every time. Not only on the benefits of the contribution itself, but also on the tax end, even though the RRSP is the worst form of taxation you will have. This study was done on the basis that some investors feel that the loss of the dividend tax credit and/or capital gains/losses can be an upside to investing outside of an RRSP. The numbers prove it and once again the RRSP comes out on top.
You can have a look at the article here.
However, something I stumbled upon years ago was The Smith Maneuvre. I have been interested in the ins and outs of the Smith Maneuvre since 2003. What Fraser Smith preaches is the benefits of the tax deductible mortgage. He is right that there are many benefits to changing your payments to generate more tax savings. However, the by product of what Smith promotes is a reduction in the ammortization period of the mortgage itself. In my opinion that is a more attractive result to the average Canadian than just the tax savings. What Smith has done is incorporated the use of 'good debt' to fuel this strategy.
Smith was not the first to use this strategy. However he was the first to market it well. He did it so well that he actually tied his name to it. Talbot Stevens actually wrote about the same strategy in the book 'Dispelling the Myths of Borrowing to Invest' Stevens is a promoter of the use of conservative leverage on many fronts and he does it well. In fact, many of the strategies that I employ come from Stevens in one way or another.
The point that I am trying to make by referring to these two pioneers of the use of leveraged investing is that they are restructuring the use of this tool to use the tax benefits to apply to mortgages. The reason is is that for every dollar that is spent on interest used towards an eligible investment is 100% tax deductible. Each dollar is treated the exact same way as any dollar that is put into an RRSP.
The benefit here, in relation to my previous points, is that when these tax deductions are applied to a non-registered asset that is subject to dividends and/or capital gains the non-registered investment will come out on top every time in terms of money in your pocket. That is because the money being used is no longer after tax dollars like in the article I noted above. Not only that, but when you use leveraged investing you will usually have a larger sum of money working for you sooner, thus taking advantage of time. The end result is the same tax savings with a larger investment subject to less tax.
Back to the RRSP contributions vs. extra mortgage payments. My argument is if you can use tax deductible dollars to apply a leverage strategy towards a tax efficient income stream (which is a whole other entry) and apply that towards extra contributions on your mortgage you will be ahead for many reasons. I will list a few.
1) Every person who has accelerated their mortgage in one form or another knows the thousands that can be saved in non-tax deductible interest going to institutions
2) The freedom of being mortgage free sooner can provide for more time to take advantage of compounding. Not only that but you will have more cash flow to contribute to a plan through dollar cost averaging.
3) The continuation of leverage use on a conservative, educated, and long term method can not only provide for a compounding tax savings over the years but also a dramatic increase in wealth.
4) No mortgage, a house, and a tax efficient investment portfolio beats no mortgage and a house.
Again, I am not saying that RRSPs are not a valuable tool for the average Canadian. I am just saying this is my recommended solution to a common question. These are areas that need to be explored when talking to average Canadians today.
Do what you can to save as much tax as possible and do what you can to reduce the amount of money you are paying to institutions.
This all comes back to cash flow. Keep more of what you earn in your pocket. What you do with it at that point is a whole different story. My personal belief is that the average Canadian today is stretched to the limit with cash flow and doesn't have a lot left at the end of the day for savings or RRSP contributions. This can be attributed to things like high mortgages, compounding debts, and costs related to everyday life.
I was recently reading an article talking about pre-tax dollars and where is the best place to put them: RRSPs, non registered investments, or extra contributions towards a mortgage. This takes into account that an investment in a non-registered investment or an extra contribution to a mortgage would be done with after tax dollars. When that is taken into account the RRSP argument is going to win every time. Not only on the benefits of the contribution itself, but also on the tax end, even though the RRSP is the worst form of taxation you will have. This study was done on the basis that some investors feel that the loss of the dividend tax credit and/or capital gains/losses can be an upside to investing outside of an RRSP. The numbers prove it and once again the RRSP comes out on top.
You can have a look at the article here.
However, something I stumbled upon years ago was The Smith Maneuvre. I have been interested in the ins and outs of the Smith Maneuvre since 2003. What Fraser Smith preaches is the benefits of the tax deductible mortgage. He is right that there are many benefits to changing your payments to generate more tax savings. However, the by product of what Smith promotes is a reduction in the ammortization period of the mortgage itself. In my opinion that is a more attractive result to the average Canadian than just the tax savings. What Smith has done is incorporated the use of 'good debt' to fuel this strategy.
Smith was not the first to use this strategy. However he was the first to market it well. He did it so well that he actually tied his name to it. Talbot Stevens actually wrote about the same strategy in the book 'Dispelling the Myths of Borrowing to Invest' Stevens is a promoter of the use of conservative leverage on many fronts and he does it well. In fact, many of the strategies that I employ come from Stevens in one way or another.
The point that I am trying to make by referring to these two pioneers of the use of leveraged investing is that they are restructuring the use of this tool to use the tax benefits to apply to mortgages. The reason is is that for every dollar that is spent on interest used towards an eligible investment is 100% tax deductible. Each dollar is treated the exact same way as any dollar that is put into an RRSP.
The benefit here, in relation to my previous points, is that when these tax deductions are applied to a non-registered asset that is subject to dividends and/or capital gains the non-registered investment will come out on top every time in terms of money in your pocket. That is because the money being used is no longer after tax dollars like in the article I noted above. Not only that, but when you use leveraged investing you will usually have a larger sum of money working for you sooner, thus taking advantage of time. The end result is the same tax savings with a larger investment subject to less tax.
Back to the RRSP contributions vs. extra mortgage payments. My argument is if you can use tax deductible dollars to apply a leverage strategy towards a tax efficient income stream (which is a whole other entry) and apply that towards extra contributions on your mortgage you will be ahead for many reasons. I will list a few.
1) Every person who has accelerated their mortgage in one form or another knows the thousands that can be saved in non-tax deductible interest going to institutions
2) The freedom of being mortgage free sooner can provide for more time to take advantage of compounding. Not only that but you will have more cash flow to contribute to a plan through dollar cost averaging.
3) The continuation of leverage use on a conservative, educated, and long term method can not only provide for a compounding tax savings over the years but also a dramatic increase in wealth.
4) No mortgage, a house, and a tax efficient investment portfolio beats no mortgage and a house.
Again, I am not saying that RRSPs are not a valuable tool for the average Canadian. I am just saying this is my recommended solution to a common question. These are areas that need to be explored when talking to average Canadians today.
Tuesday, September 11, 2007
Living in Canada
Today we get to see where our city ranks in terms of living. Money Sense has released the best places to live in Canada for the year 2007. Ottawa/Gatineau has ranked number 1.....and for good reason?
I moved to Ottawa a year ago from London (no.8) and have taken the time to learn about my new local demographic. Aside from financial reasons (highest average income, strong job stability, stable real estate values) you also get a beautiful city to go along with it. One thing to consider is that all the Canadian tax dollars go to Ottawa. Therefore it isn't surprising that many places you might go to are postcard worthy. Not only that, but in any direction you can be quickly out of the city and to somewhere beautiful where one can enjoy the landscape.
For the most part the largest employer is the government. Some of the features that government employees benefit from are above average incomes, job stability, and a nice pension to look forward to. Commonly you may see a household with two income earners in this position. In 2005 the average Canadian income for a household of two income earners or more was in the area of $65,000 per year. A place like Ottawa obviously has many people living above that standard.
A household like that would obviously be paying a lot of tax and likely they would be using RRSP contributions as a vehicle to offset this. This got me thinking about an article that I read a few years ago titled 'Cashing Out RRSP Might Make Sense' that I found in the Toronto Star.
The article applied more to a middle income earner that would not have a pension in retirement saying that RRSPs may not be advisable to a contributor that will be receiving a pension due to the fact that they would be subject to clawbacks of the Guaranteed Income Supplement and/or Old Age Security. The article stated that it might be wise to 'cash out' RRSPs prior to 65.
This leads one to think about the purposes of the RRSP.
For many Canadians this is the one forced savings plan that they have. Some Canadians would never have saved a dime if it were not for this vehicle. The incentive: tax deductions for every dollar that is put into the plan. Not only that but to sweeten the deal the contributions can grow on a tax deferred basis until the money is withdrawn.
For savvy Canadian investors this is elementary.
However, are RRSPs for everyone? It is a good question and it leads me to analyze the negatives that surround Canada's most prominent savings vehicle.
RRSPs have no collateral value. In the bank's eyes an RRSP is not an asset for the purpose of net worth. Therefore you can rarely borrow against the value of an RRSP. RRSPs have limits. You are capped on the amount that you can deposit each year. This poses a problem for the higher income earners.
The Toronto Star article highlights a big point. Every dollar that is taken out of an RRSP is taken into account when calculating income. Income is treated the poorest for the purpose of tax. Not only that, but it can increase your retirement income to higher tax brackets and/or clawbacks.
So, are RRSPs for everyone? Yes, in a way. All Canadians want to save tax and are limited in manner by which they can. Also, it provides the discipline that many may not have in order to save on a year to year basis. However, Canadians need to be aware of proper exit strategies.
This leads me back to Ottawa government employees. With such high pensions does it make sense for these Canadians to invest in RRSPs. My answer is yes. It promotes savings and it saves tax. However, exit strategies need to be examined prior to retirement. Cashing out RRSPs does make sense for some.
You just have to know how to do it right.
I moved to Ottawa a year ago from London (no.8) and have taken the time to learn about my new local demographic. Aside from financial reasons (highest average income, strong job stability, stable real estate values) you also get a beautiful city to go along with it. One thing to consider is that all the Canadian tax dollars go to Ottawa. Therefore it isn't surprising that many places you might go to are postcard worthy. Not only that, but in any direction you can be quickly out of the city and to somewhere beautiful where one can enjoy the landscape.
For the most part the largest employer is the government. Some of the features that government employees benefit from are above average incomes, job stability, and a nice pension to look forward to. Commonly you may see a household with two income earners in this position. In 2005 the average Canadian income for a household of two income earners or more was in the area of $65,000 per year. A place like Ottawa obviously has many people living above that standard.
A household like that would obviously be paying a lot of tax and likely they would be using RRSP contributions as a vehicle to offset this. This got me thinking about an article that I read a few years ago titled 'Cashing Out RRSP Might Make Sense' that I found in the Toronto Star.
The article applied more to a middle income earner that would not have a pension in retirement saying that RRSPs may not be advisable to a contributor that will be receiving a pension due to the fact that they would be subject to clawbacks of the Guaranteed Income Supplement and/or Old Age Security. The article stated that it might be wise to 'cash out' RRSPs prior to 65.
This leads one to think about the purposes of the RRSP.
For many Canadians this is the one forced savings plan that they have. Some Canadians would never have saved a dime if it were not for this vehicle. The incentive: tax deductions for every dollar that is put into the plan. Not only that but to sweeten the deal the contributions can grow on a tax deferred basis until the money is withdrawn.
For savvy Canadian investors this is elementary.
However, are RRSPs for everyone? It is a good question and it leads me to analyze the negatives that surround Canada's most prominent savings vehicle.
RRSPs have no collateral value. In the bank's eyes an RRSP is not an asset for the purpose of net worth. Therefore you can rarely borrow against the value of an RRSP. RRSPs have limits. You are capped on the amount that you can deposit each year. This poses a problem for the higher income earners.
The Toronto Star article highlights a big point. Every dollar that is taken out of an RRSP is taken into account when calculating income. Income is treated the poorest for the purpose of tax. Not only that, but it can increase your retirement income to higher tax brackets and/or clawbacks.
So, are RRSPs for everyone? Yes, in a way. All Canadians want to save tax and are limited in manner by which they can. Also, it provides the discipline that many may not have in order to save on a year to year basis. However, Canadians need to be aware of proper exit strategies.
This leads me back to Ottawa government employees. With such high pensions does it make sense for these Canadians to invest in RRSPs. My answer is yes. It promotes savings and it saves tax. However, exit strategies need to be examined prior to retirement. Cashing out RRSPs does make sense for some.
You just have to know how to do it right.
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