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Sunday, May 20, 2012

Green Spot: It’s Ok to Toss Some Things

Posted by Tim Stobbs on January 8, 2010

Trying to be ‘green’ is always an interesting thing to do especially in the New Year season of everyone wanting to get organized.  Why?  Well because you get into this somewhat odd debate with yourself about throwing things out.  Should you find another use for the item you want to toss, could somewhat else use it, or could I sell it in a garage sale? Or should it just be tossed into a landfill and be done with it?

For example, I recently got a new backpack to use a to/from work bag as a Christmas gift.  It’s to replace the bag I got for free when I started my first job post-university so the old bag is about nine years old and a buckle recently broke on it.  I could technically repair the buckle and someone else could use it, but really it’s an old work bag.  So does it really matter?

In the end I decided to just toss the bag.  Why? Well because I realized something important.  There are reasonable limits to doing the right thing and if you go to far to the dark green side you may end up unhappy about your life.  The old bag was just taking up space an not being any use to me.  Everyone I know has a work bag already so really the effort involved in repairing the bag and selling it was likely going to be pointless.  Keeping the bad would not make me any happier or improve my life in any way.  So it hit the garbage bin.

So this bring up an interesting concept.  If you want to get organized would you be better off not spending the money on new shelves, storage units or any other organization aid and just toss the stuff  you don’t need instead?  That way you are not consuming any new resources and you have less stuff in your life.  Obviously sell what you can first or give it to charity, but keep it reasonable. Not one really wants your old fry pan with a worn out non-stick coating.

Perhaps the obsession with not throwing stuff is wrong, when the real battle should be about reducing the new stuff you bring into your life. What do you think?  Do you toss things out easily and just avoid new things or do you try to reuse as much as possible?

Comments: 10 Comments to Read

Filed Under: Environment, Happiness

Response to Reader Question #16

Posted by Tim Stobbs on January 7, 2010

In a somewhat unusual fashion I got a comment on this post from a reader, Robert, that basically turned into it’s own post by size alone.  Actually I thought Robert did a good job getting in to a few more details than I did in the original post.  So give it a read and let me know what you think. -Tim

How valuable is the RRSP deduction?

The Registered Retirement Savings Plan (RRSP) is a government program meant to encourage people to save for their retirement. Up to your contribution limit, you receive a tax deduction for contributions you make. For example, if you are in the 32% tax bracket and contribute $1000, you will receive a refund of $320. In retirement, all withdraws are taxable, so if you withdraw $1000, it will be added to your taxable income.

If you will be in a lower tax bracket (http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html) in retirement than your working life, this can work very well. In the example above, suppose you are in the 25% tax bracket in retirement. You invest $1000 and get a refund of $320. The money doubles by retirement, and you withdraw $2000. At 32%, the tax would be $640, but in the 25% tax bracket you only owe $500, a savings of $140.

There are some potential pitfalls with RRSPs. If you are in the same tax bracket or higher in retirement, you will not reduce your tax bill. The taxes will be postponed, but because all withdraws are taxed, your tax bill could represent the same proportion of your account, 32% in the example above. There are a few considerations to keep in mind. First, the government is constantly changing the tax rates and tax brackets. The tax brackets tend to increase with inflation, but recently the basic personal amount has increased from $8,500 to  $10,000 to reduce the amount of tax paid by those who earn the least. On the other hand, tax rates were much higher during the 80s and 90s, and could be increased again. Second, tax rates and tax brackets are different among provinces. If you move from Alberta to Quebec, you are almost assured of paying more tax. Third, certain government benefits (http://www.cra-arc.gc.ca/benefits/) are income-tested. For example, I receive the Child Tax Benefit, but only because my RRSP contribution brought my income down below the maximum.

So, it’s impossible to say that RRSPs always make financial sense. In fact, there are too many variables to really know that you’ll have more after-tax income. But there are certain benefits that make an RRSP useful. One example, as mentioned above, is reducing your net taxable income to qualify for government benefits. Another one is income splitting. When only one spouse works, or one spouse has a much higher income than the other, or when one only spouse has a pension, a spousal RRSP allows the higher income spouse to save and invest in the name of the lower income spouse. That way, it is possible to balance income in retirement and both make use of the lower tax brackets. For example, a couple where one spouse earns $85,000 will pay more tax (in the 36% AB tax bracket) than a couple where each spouse earns $42,500 (in the 32% AB tax bracket).

Even if the RRSP doesn’t reduce tax, only postpones tax, it was always useful for reducing the taxation of interest income. For example, GICs and bonds accumulate interest each year and, even if it is not paid, it is still taxed. Holding the GICs or bonds in an RRSP, or now a TFSA, avoids that tax leakage until a withdrawal is made. A TFSA has a very similar financial benefit, after tax, as an RRSP, but they have different limits and different timelines. An RRSP is meant for saving in anticipation of not working: maternity, disability, sabbatical or retirement. Because withdrawals increase your taxable income, any year that you have little or no income is a good opportunity to withdraw funds from your RRSP.

For someone planning to retire before age 65, without an employer-sponsored pension, RRSPs almost certainly make sense when your income is over about $40,000. Because you can elect to start CPP anytime between age 60 and age 70, and OAS doesn’t begin until age 65, you will likely have less income before age 65. That is a great opportunity to make withdrawals from your RRSP.

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Filed Under: Guest Post, Investing

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The First $100K of Investments

Posted by Tim Stobbs on January 6, 2010

I’ve heard from several people that the first $100,000 of investments are the worst and after the last three years I can believe it.  It’s been  a very long road to get here.  Back in Dec of 2006 my investment net worth were a mere $32,100.  By the end of 2007 I was at $50,700 and then 2008 knocked me back down to $49, 100.  So the majority of my growth was in the last year.  So what happened exactly in 2009?

Well I’ve been looking at the numbers to sort that out since in my mind I didn’t do very much different than the previous years.  Yet this is the factors that leap to my mind when I looked at the numbers in detail:

  1. Do Not Underestimate a Bottom in the Market.  During the market drop in 2008 and into 2009 I never stopped investing.  Was it scary? Hell yes!  But I keep buying stocks that looked attractive and kept putting money.  The pay off was a huge surge in growth.  For example my TFSA did a 54% return while my wife’s TFSA managed a 30% return.
  2. A Good Pension Plan.  I took a new job at the end of 2008 with a damn good defined contribution pension plan.  I contribute 5% and they put in 6%.  Yet I can also tap two other programs to boost my employer’s contribution from 6% up to a total of 11%.  So grand total that’s equal to 17% of my salary going into my pension plan.  So when you add that to a bit of growth its easy to see how it went from nearly $0 to over $15,000 in a year.
  3. Have a Plan.  In 2009 I wanted to add $25,000 to our various accounts (I’ve yet to confirm if I made that goal).  That goal helped me to stay focused on adding to our investments regardless of everything else in my life.  I kept at it and made sure to keep investing even when I had doubts (which trust me I had them).
  4. Luck helps.  I won’t lie to you my TFSA result was more about dumb luck than skill.  I picked three stocks for that account which I bought mainly for their distributions (on average a 10% yield) and they just happen to do very well over 2009.  Also me getting the second job at the School Board obviously helps with boosting my cash available for investing for the last two months of 2009.

So overall I would say the three things that got me to my first $100,000 was having goals, being stubborn enough to follow the plan and a bit of luck.  So I’m sorry to say I don’t have any investing secrets to share or a plan to make you rich fast.  It all comes down to deciding your goals and keep working for them even when things get hard.

Comments: 7 Comments to Read

Filed Under: Investing

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