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Sunday, October 4, 2015

Stop Blaming the Rich

Posted by Tim Stobbs on September 22, 2015

Okay, are you sick of this never ending federal election campaign in Canada?  Goodness knows I am already.  Yet perhaps the single thing that is pissing me off the most during this campaign is the idea of ‘let’s blame the rich’ theme. Or really more actually I’m not terribly impressed that a few of the proposals out there are to roll back the latest TFSA limit increase since ‘only the rich can use them’.

I okay with general idea of fairness.  After all no one likes to be screwed over in life and it does make entirely sense to me to have progress tax brackets that increase as income goes up.  After all if I am earning more I can easily pay a bit more to help out those that don’t earn much.  I don’t consider that unfair, but rather practical.

Yet rolling back the TFSA limit increase because only the rich can use is a damn crappy reason.  Um, news flash people…those how have built business, got high paying jobs and actually save some money to get rich…the system wasn’t fair to begin with.

For example, RRSP contributions are based on last years income up to 18% (to a given maximum), so the reality is that is actually worse for lower income people.  Since the more you earn beyond perhaps $40,000 a year it gets easier to save that amount.  Meanwhile the TFSA limit is equally to everyone over 18.  Even when it means the lower income people can potentially save a MUCH higher percentage of their income as compared to a person making $100,000/year.  Case in point the $10,000 limit of $40,000 is 25% of their income, which is WAY higher than the RRSP percentage.  Yet for the $100,000 income person the $10,000 TFSA limit is only 10%.

Then when we get to investment gains those that save also get some extra breaks, capital gains are only taxed at half of your marginal tax rate and Canadian dividends also benefit from a significant tax break.  The dividends are such a good break that if you earn less than $44,000/year they actually end up being tax free.

The system is built around encouraging people to save and invest, so those that do are rewarded by paying less tax.  Fairly simple right?  Yet it amazes me that people want to blame the rich.  Did you ever consider the fact the ‘rich’ may have started off just like you but rather than spend their money they decided to save it instead.  They learned a bit about investing and made ever more money.  It was often a hard long road, but after a number of years and the miracle of compound interest they are doing well.

Compared to those at my age and savings I’m likely considered rich or top 20% at least.  Yet the money just didn’t appear in my accounts in a puff of smoke…I got a degree and then a good job.  Then I saved for a decade straight likely spending less money than you did last year…that is why I have a net worth of over $750,000.  So go ahead and take away the TFSA limit increase for all I care…just stop blaming me for your problems and perhaps start to save something yourself.

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?