People always seem to amaze me once in a while.  In my other job, as a school board trustee, we had a difficult decision last night regarding a school closure and I was surprised that the board actually voted unanimously in favour of a hard choice.  It wasn’t an easy choice, but it was the right one.  This got me thinking about people and their spending habits.  Do people overspend just because it’s the easy choice and they are avoiding a hard choice?

If you really think about it, if you are making good money and you have access to credit, it isn’t a big deal if you overspend in one month.  Then perhaps you have a few odd events in another month and you get some more debt. So slowly over time you get used to spending more than you make and then before you know it your up to $30,000 in debt and wondering where the hell it came from.  Getting into debt is an easy choice.  Staying out of it or even paying it off is a hard choice.

I won’t lie and say that saving up for what you want before you buy it is easy.  The reality is it is hard to wait when you are so used to getting things NOW regardless of price thanks to credit.  Saving is the harder road but the payoffs can be bigger as well.   That is the point of hard choices, they are not easy ones, but doing what is right in the long run can produce amazing results.  In my case it is reducing my mortgage at a huge rate and allowing me to dream doing what ever I want all day long in just over a decade.

So how do you make a right choice even when it is hard?  To me there is no set formula on decisions.  Some times I look at the math involved and use that to decide.  Other times the decision is mainly emotional and I have to feel my way to a solution.  Regardless of how you come to a choice you need to decide how much do you want your dream.  If it is important enough you will find a way to make it happen even with all the hard choices to get there.

So what hard choices have you faced lately and you did the right thing? In my case, I’m proud I decided to pay off the mortgage in the next few years.  It would have been easier to just spend more, but my wife and I choose a bigger hill to climb and we are looking forward to the view from the top.

Habits in personal finance are your best friend and your worst enemy.  On one hand when you develop good habits like using low cost investments like ETF’s or perhaps learning you don’t have to spend that last $20 in your pocket just because you have it.  On the other hand when you are so used to saving a lot then hard to get in the habit of spending more when you can honestly afford it or given yourself permission to just enjoy spending some of your money.

I face this little push and pull on my savings all the time.  It sort of creates an interesting internal debate on what I want in the future (ie: retire at 45) versus what I want now (today that is a toss up between a Blu-ray player or an extra half an hour sleep in).  For the longest time I sort of avoided this debate by focusing mainly on what I needed rather than what I wanted, which worked fine for a while but recently has fallen apart.

Why? Well that’s easy.  I’ve began to realize that any extra savings I do at this point is fairly minor in the overall picture.  For example, I’m currently putting an extra $2900/month to my mortgage beyond my regular payment.  At this rate the mortgage should be paid off in a bit over than 2.5 years.  So yes I could save my next raise at work and shave off perhaps a month more, but really what’s the point?  If a month going to help my long term goals out that much? No not really, so why not spend some of that next raise.

This is the point where I get into trouble.  I’m not even sure what I would spend the extra money on yet.  You see I’m nervous about getting in the habit of spending more on a monthly basis and falling into the lifestyle inflation trap where you just keep spending more for each raise that you earn.  So I’m somewhat stuck in a saving groove and a bit nervous about getting out of it.

Perhaps the answer really shouldn’t be mind this time.  Perhaps I should just turn it over to my wife and say “So what do you want most in life, beyond what you already have?”  Then spend the money on that.  After all I have to say several excellent compromises have come from my wife over the years like increasing spending money but focusing it on certain areas like eating out.   She’s got a better intuitive balance on spending for today that I do.

So if you’ve been in the savings groove how did you get out of it?  Or what do you want most beyond what you already have?  I’m just curious what people spend their extra money on.

Recently we started our oldest son on an allowance and it has been amusing for him to near constantly hold his first tonnie in his hand for the last few days.  He talks just about non stop about buying something with his money.  His personal favorite obsession at the moment is lego, so we keep pointing out he will have to save up some more toonies prior to buying something.

So how did we come up with an allowance system?  Well that was a bit of guess work and a few other common suggestions I’ve hear about.

First off, I’ve heard from a few different sources that a rule of thumb for allowance should be about $1/week/age of kid.  So according to that we should be giving my son $5 a week, which to start out is just nuts for me.  We decided on $2/week because we wanted him to learn about saving up for things.  You can’t buy much at $2 and that is the point.  He will have to learn to save if he wants anything bigger.

Also I feel pay should reflect what is done for it.  Right now his responsibilities are minor.  He just have to clear his dishes from the table after supper and lunch each day.  Then once a week he is expected to help clean up the kid’s play area in the basement.  As we add other duties I’ll be happy to raise up the level of pay.

We also had some prerequisites we were waiting for prior to introducing the allowance.  First off he has to be able to count to ten and recognize numbers.  After all it’s just about impossible to teach about money with out using numbers.  Second he had to get the concept of money, at least the part of that is what we exchange to get things and then we exchange our time doing things to get more money.  The last requirement was the fact his wants were exceeding what we where willing to pay for.  I really do want my kids to get the idea that wants are unlimited, but money is limited so you have to choose what you want.

So that’s the current plan for allowance in our house.  I suspect it will keep evolving for a while, but it’s already been useful to explain some concepts like we don’t replace money.  If he loses the money it’s gone and we won’t replace it.  So if you have kids on allowance, how much do you pay?  What chores do you assign your kids?

18,533 - this is how many days I have left if I were to live to the current life expectancy of a Canadian Male (Currently 80.4 years).  When a lifetime is put into days that can essentially be ticked off rather then years which are large incomprehensible chunks of time, money decisions can really be put into perspective.

My end goal is retirement at 45 - this gives me a specific number of days to achieve my two-parted goal of minimizing expenses and saving enough money to live off of to support the lifestyle I want.  Every spending decision between now and that deadline can be assessed against whether or not this is going to assist or hurt the attainment of that goal.  For example, a couple of weeks ago I wrote about a vacation and how it is essentially a waste of money.  Even though I am excited to go someplace warm and drink pina coladas for a week or so, the trade off is that my house is not getting paid off and my savings are not growing, (my two primary goals of the moment) all for a week away someplace warm - which, if this were something I did a couple of times a year would have a significant impact on my end retirement goal.

I have family members who are in their mid-to-late 50’s and have plans of continuing to work for several more years.  All of these people are relatively well off, and to my knowledge really have no reason to work other then to maximize their pension money, or top up their retirement funds.  The mindset of trading time in my 50’s because I have to work is foreign to me.  I realize that my opinion on work may change at some point, but thinking that I have to work at 55 is a situation I don’t want to be in.  At 55, with less then 10,000 days of expected life left (some of which may not be at optimal health) the last thing I would like to be doing is worrying about making more money.  I’ve spoken with these family members and asked what they really want to do, and in general they don’t really have a plan.  I think if they had a plan and knew what they wanted to do, they might realize that grinding their time away at work may not be the best thing they could be doing now, and they may have enough money to afford to retire.

I also know people who refuse to create a plan and “live for today”, which (from my observation) generally means living paycheque to paycheque (and going into debt when the paycheque isn’t enough) and justifying the lack of financial responsibility by thinking they may die tomorrow, which means these people don’t bother saving, paying off debts, creating a spending plan, setting goals (essentially everything that a site like this and a majority of readers of personal finance sites follow).  What I see this attitude leading to in the long-term is a lack of freedom.  Eventually (unless the people do die tomorrow) the debts that are being taken on need to be paid (or they increase exponentially), savings need to be created (or the person would have to work forever), and the “fun” that is being had today turns into tomorrow’s problem.  I “live for today” as well, I just choose how I “live” so that if I am still around in my 80’s, I don’t have to be working.

I realize that this post is a little morbid in nature, but I think everyone needs to think about the future, and how much future is left.  If you think of your life in (average) days remaining (for me anyways), it puts spending and financial decisions into perspective.

Am I the only one who thinks in this morbid manner, or are there other people out there that weigh money decisions in this frame of mind?

When you have a TFSA, an RRSP and an open investment account, which assets will ideally go in which accounts? These are general ideas to keep in mind while planning your TFSA contributions.

Once there are funds inside the TFSA, a huge benefit is that income and capital gains are not taxed. The practical application is that transactions no longer trigger tax consequences, much like inside an RRSP. A TFSA is very useful for high turnover trading. If you are investing (or speculating) using a strategy that frequently sells positions, it would result in realized gains and losses in an open investment account. Within an RRSP, the taxes are all paid at withdrawal. But in a TFSA, those gains are never taxed.

Generally, it is recommended to put fixed income (bonds and GICs) inside an RRSP and capital growth (equity) in an open investment account. There are two benefits to having the fixed income inside the RRSP: avoiding paying taxes on the income and keeping the slow growth in the RRSP. Since the RRSP withdrawals will eventually all be taxed, it makes sense to keep the total as low as possible. High-yielding securities could then pose a difficulty. Take, as an example, 5% preferred shares at $20. They will grow from $20 to $25 at maturity (often years in the future) and pay $1.25 per year taxable income each year. The RRSP will shelter the income, but it will also increase the value. A TFSA is the perfect account for an investment like this.

The general strategy in regards to types of income is: interest or business income, dividends, capital gains, return of capital. This assumes that you believe you will earn the same return in each case. Some examples of each type of income follow. Interest income is usually paid by bonds and GICs. Business income is earned from income trusts, although this will be taxed in 2011 and become like dividends. Dividends are usually paid on preferred shares and common shares. Capital gains come from growth in market value, usually from common shares or junk bonds. Finally, return of capital is often paid by REITs (real estate investment trusts). Because they have depreciation, the income they pay may not be taxable. It may eventually be classified as capital gains. The choice isn’t so simple, because you may expect greater growth from capital gains (buying growth stocks cheap), it may be best to hold that investment in a TFSA, instead of a GIC at 3%.

One strategy using TFSAs is available to all adult couples: income splitting. The government doesn’t really care who makes the TFSA contributions. If a couple has only one income, or two incomes in different tax brackets, it will probably make sense to have one spouse contribute to both TFSAs. That way, it is possible to use more TFSA room. If one spouse makes $20,000 per year and the other makes $80,000 per year, it doesn’t really matter who pays which bills. $10,000 can be used (in 2010) to contribute $5,000 to each TFSA, regardless of who earned the money. It is possible that, in retirement, there will be enough money in each TFSA that the couple can choose who will make their other withdrawals in order to minimize the total tax bill.

Canadians now have more ways to save tax while saving and investing for their future. Each has distinct benefits and uses. The RRSP offers deductions, and I recommend making an RRSP contribution first if your income is over about $40,000. Many Canadians have debt, and I recommend paying down debt before making a TFSA contribution. This is especially true if the TFSA would hold fixed income and the debt has a higher interest rate. A TFSA is usually the lowest priority, unless it is for short term savings or for a high-yielding investment. In the comments, please share how you use your TFSA differently than your RRSP and debt repayment.

Robert is a Certified Financial Planner (CFP®) in Calgary who develops financial plans and also gives objective advice regarding all types of savings and investment products. He believes that not having money worries can allow people to spend their time in other meaningful areas of their life. Robert is married, has three children and is involved in his church, in his community association and in the school. Robert is on track to retire at age 42, although he and his wife plan to change careers and work for the benefit of children.