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Wednesday, July 23, 2014

Saving Is Not Future Spending

Posted by Tim Stobbs on July 3, 2014

People don’t save enough.  At least that seems to be the theme of multiple studies and opinion pieces around the internet.  We often blame poor education, or consider using forced saving programs, but ignore the underlying reason people don’t save anything: the motivation is damn poor to save anything.

After all the majority of people out there consider saving equal to future spending.  So they think:  “I’m saving today to spend this money later”.  With that in mind it is fairly easy to see why saving for 40 years to fund some distant vague ‘retirement’ is as appealing as paying to watch paint dry.  The daily demands are so much more obviously appealing like a trip to somewhere warm in the middle of the next winter.

So perhaps the issue is people need to change how we view saving, instead of thinking of savings as future spending perhaps we consider it buying freedom instead.  At least on the motivation side of the battle this is a bit more appealing to say, I’m not spending this $100 on more crap for my house instead I’m buying freedom. Yes I know $100 isn’t much, but if you keep doing that on a frequent basis in a decent investment it does start to buy your future freedom.

The part of increasing your motivation is to give something specific to visualize to help out with the motivation.  Imagine each monthly savings is giving you an extra week out of the office forever…what would you do with your extra week?  Go hiking, spend it with family, start your business, or anything else you always wanted to do.  It helps to have an idea of what you are saving for.

The other way I personally find to make saving easier is to automate as much as the process as possible, you want to make the act of saving easy.  Why?  Well when you motivation is fairly thin to begin with it doesn’t take much to get side tracked by something silly.  For example, if you were trying to get into a habit of running you shouldn’t let the first small chance of rain cancel a run..otherwise you are making it easier to fail.  The same idea of saving, so I setup automatic payments to our savings account each month to move the money over the day after payday.  That way there is as little resistance to it as possible to the act of saving.

So how do you motivate yourself to save?  What tricks have helped you build a good saving habit?

RESP Or Getting Free Money

Posted by Tim Stobbs on April 28, 2014

You might have noticed that on my investment net worth statements I NEVER mention our RESP account we have setup for our kids.  The simple fact is I treat that money as theirs and that I’m only the caretaker of it.  So I tend to ignore it for most of the time.  Yet as number of my friends have been having kids lately I keep telling a similar story that might be useful for some other parents out there on how to save rather painlessly for your kid’s education.

I’m a firm believer in taking free money when every I can get my hands on it so for a number of years we filed our taxes and got our government grants for our kids.  The two programs we typically got money from were the Universal Child Care Benefit and Child Tax Benefit.  The Universal is by far the most straight forward, you get $100/month for each kid under the age of six while the Child Tax amount depends on your income but again is paid monthly.

Rather than actually spending any of that money on my kids I treat the entire amounts as free money and I setup a family RESP plan and put the money in that account where we get a 20% grant on what we put in up to $2500 per kid per year.  So in total I started our RESP account for the kids with all government money, where they added in more government money after we put in.  Then as the kids got older I kept the contributions the same and slowly starting paying ourselves after the kids’ Universal Child Care stopped (right now the contribution is $167/kid/month).  The advantage of this method is your income by this point has typically gone up a bit so it is a bit easier to cover it yourself.

Our investment of choice is actually boring as hell, it is just a dividend mutual fund which has returned about 6% since we picked it in 2005.  Yet overall all these actions has resulted their RESP account having a balance of $45,800.  Not too bad when in fact I haven’t put in that much of my own money.  Also this means I’ll likely surpass my target of saving $40,000 per kid, as my oldest is now 9.  So assuming things continue the same pace the kids should have ~$100,000 between both of them when I’m ready to quit full time work around age 42.

Obviously there are several different ways to approach saving for your kid’s education, but I found our method fairly easy to use.  If you have kids, how much are you trying to save?  Are you on track to meet it? Any other ideas on how to save for their education?

Maxed Out

Posted by Tim Stobbs on April 9, 2014

While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.

Until that moment I had forgotten how unusual that state of being is for most people.  The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary.  So it wasn’t the fact they couldn’t save, but rather they had chosen not to.

In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue.  That doesn’t even touch the used TFSA contribution room out there as well.

So why is saving such a difficult thing to do?  After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments).  So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved.  Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less.  Can you not live on 90% of your income?

Granted if you don’t have a pension plan this takes a bit more planning to really pull off.  18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season.  How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source.  By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year.  This helps keep your cash flow up while saving.  The downside of this trick is you do have to file it every year (in most cases).

I should also point out I also had extra RRSP contribution room for a number of years (~$30k).  It was only between some planning and adding extra money for years that we managed to catch up.  Yet it can be done and when you put your mind to it.

So have you ever maxed out some contribution room?  If so, how did you do it?  If not, what is preventing you?