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Time and Choice

February 2, 2011

I wrote the following on my Facebook business page last night (http://on.fb.me/e6ke8E):

Due to the magic of compound interest: if you have two 22-year-olds earning 12% on their money, the first contributes $2,000 annually for the first 7 years and the second contributes the same amount for the next 37 years – they both end up with $1,200,000 at age of 65.

I don’t know what else needs to be said here other than time cannot be made up by extra deposits. $2000 a year is only $167 dollars a month. How much is your cable? What would you rather have at the end of the day: nothing (maybe some good shows which you can download or stream for a fraction of the cost) or 1.2 million. Its unfortunate that most people will say cable. I don’t have cable. With all the free access to stuff online why the hell would I pay 166 dollars a month so I can sit 5hrs a day in front of Jerry Springer. I would rather have 12% (or even 5% or 8%) growth than 100% loss.

It’s doubly unfortunate, and I’m not mocking, that most people don’t think they can ever achieve that kind (or proportionately similar amount) of income. It’s just a matter of putting money into a well diversified, protected, and properly managed financial plan and waiting “x” amount of time.  We accept limits much too easily I believe. Our limits are defined by our belief and nothing else; and our habits become dictated by that belief. It’s a human failing to accept the comfort of resignation over the assumed anxiety of effort. We should be putting the same sensibility to our financial health. The ‘wait-and-see’ attitude frankly takes way too much time. Act now and talk about a plan with your advisor. It is exciting and fun to see the possibilities that arise when you simply tweak a few lifestyle decisions. You actually have more money through a plan; you are not sacrificing your weekly coffee (unless its three a day). Discipline reveals your dreams; and, in this case, does not need to exist for long. Time and choice are not scary, they are opportunity.

 

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Potential Dangers of RRSP. Yes or No?

January 29, 2011

Though I am being a bit derivative by posting this I thought it was a very important consideration for those of you who rely solely on RRSP’s strategies for their source of future wealth. I had not previously come across this research, or this thesis, but I believe it to be worthy of note.

Very briefly, it suggests that we are all told to invest heavily in RRSP’s in order to earn investment gains and defer paying tax until much later in life, when presumably your marginal tax rate will be lower (i.e. when you retire and have less annual income). It claims that this will do the investor no good since your tax rate may not actually be lower in the future. Either you will retain enough disposable income to maintain your MTR, or the Government of Canada will continue to increase the tax rates.  In either of these cases, it maintains, at retirement you will either see no taxable advantage or, in other cases, you may even lose money since your tax rate could actually higher than it was when you first begun making your contributions.

Yesterday (and coincidentally), I posted an article on Twitter (@nextgeninvestor) called “The Great RRSP//RRIF tax-grab” (http://opinion.financialpost.com/2011/01/28/the-great-rrsprrif-tax-grab-one-ex-pats-solution/). This article spoke about this exact phenomenon. In this case, retiring Canadians realized that they would lose money on their RRSP withdrawals due to the fact that the promised-lower-tax-rate-in-retirement was, in reality, actually higher. They claim the Government new this and conveniently raised the tax brackets to take advantage of a huge amount of the population having a huge amount of money in RRSP’s that it was soon looking to withdraw.  To combat this, the Reiterees actually withdrew everything, left the country, and became ex-pats. It is another interesting consideration.

Regarding these arguments, I will save my recommendations  for a later time. At this point I will allow you to draw your own conclusions. I will say, however, that it says nothing of income splitting (that is transferring your RRSP deposit to the lowest tax paying spouse)  and that it assumes a government increase in tax rates over time. Furthermore, I suppose that this would only effect those who are relatively close to the next tax bracket in the first place. For others, it would likely take a substantial increase in the rates by the Governenment to make it disadvantageous for them to not invest for a time when they will not be taking as much taxable income.  Whatever the case may be, it does make a good argument against having all your retirement eggs in one basket.

RRSPs and rising cost of government

By: Larry MacDonald

Tue, 25 Jan 2011 19:40:13 +0000

It’s generally accepted that persons in the lower tax brackets are better off contributing to TFSAs instead of RRSPs. But could all tax brackets be better off avoiding RRSPs? I’ve lately come across comments in discussion forums, blogs etc. that suggest as much.

RRSPs should be avoided by everybody, the comments say, because taxes seem to always go up – so by the time one gets to retirement, their tax rate will be higher than the rate at which they made RRSP contributions. Here’s a sampling of the comments, from 3 different persons:

1. “I wouldn’t sock away thousands a year in RRSPs like some people are doing…you save some income tax now, but when you retire, and start using your contributions, you will be paying more in income tax (I’ve never heard of the government lowering their taxes).”

2. “RRSPs are a form of gambling. You roll the dice that your tax rate in retirement will be lower than when you’re working – which was true for most people in decades past. But how can income taxes in Canada possibly stay at current levels, now that our national debt has erupted and the deficit made structural?”

3. “If taxes are going to go higher and higher over the next 10-20 years, then why should we put money in an RRSP just so that it will be taxed under those higher rates when we convert to a RRIF? Wouldn’t we be better off paying today’s taxes and investing outside the RSP?”

Could their fears be substantiated by future events? After all, the pattern over previous decades has been for tax burdens to rise.

According to the Fraser Institute’s Canadian Consumer Tax Index, the total average tax bill of the Canadian family has climbed from 33.5 per cent of income in 1961 to 41.7% in 2009 (if the large deficits in government finances during 2009 are assumed to represent deferred taxes, then the tax burden in 2009 is closer to 44% of income).

As the capacity for raising taxes on employment income nears exhaustion, new sources of tax revenue could be targeted, notably the billions of dollars held in RRSPs (which many think are the savings of the well-to-do). It might be assumed the voting power of retirees would render retirements benefits sacred cows no politician would dare touch — but it has been contemplated before.

In the early 1990s when Canada was dealing with a fiscal crisis, the federal government considered a number of measures to bring its budget deficit and debt under control. Two trial balloons floated involved imposing a capital tax on RRSPs and a capital levy on institutions administering RRSPs, as Hansard shows (http://webcache.googleusercontent.com/search?q=cache:L9o7CjZlZNwJ:www2.parl.gc.ca/HousePublications/Publication.aspx%3FDocId%3D1105168%26Language%3DE%26Mode%3D1%26Parl%3D37%26Ses%3D1+%22former+finance+minister+floated+another+trial+balloon+in+early+December%22&cd=1&hl=en&ct=clnk&gl=ca) (search on “trial balloon”).

 

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My challenge to you

January 24, 2011

I know from time to time I express my concerns over your financial security in harsh realities. Perhaps it stems from my visceral need to shake you into coherence. Is there not a better way to get my point across? I am sure you are aware that simply existing without engaging yourself in an exiting, fun, and goal-setting, attitude means that you are existing in reaction to things that are readily manageable. Although you would agree that you have a responsibility to deal with the manageable (which I call predictable) financial scenarios of life, you often don’t consider it. And if you won’t consider that, how can you realistically consider the damaging effects of the unmanageable and unpredictable scenarios of life that are even more detrimental to our financial security.

It is inconceivable (to quote from “The Princess Bride”) that many of us willingly ignore the responsibility that exists through a heartfelt examination of  the realities of managing our financial health. In fact, we barely ever even indulge in the examination itself. If we did, we would exist in dissonance with our existing apathy and would be forced to deal with it. This is my role: to advise you that it will not necessarily “work out in the end” if you don’t plan it accordingly. To challenge your own apathy is not negative; and I believe this is what holds people back. Dissonance (or the emotional realization that things that “are” do not coincide with the way you want them to be) creates new excitement and opportunities.  We control our own lives through feelings and emotional concentration. Doing so effectively rids you of the hopelessness that derives from the fallacy that life controls you.

A client said said to me recently that men in their 20’s and 30’s don’t handle their business like men of the previous generation (“like her father,” she said). She said we are too busy playing video games and going out for wings and beer and watching UFC that we don’t take out the garbage, work in the yard, fix the car, save for our kids education, shovel the driveway, make breakfast for our family, clean the house, fix the roof, have good ‘date’ nights with our partners, and so on. We are failing at handling the responsibilities sought after by our partners (forgive me for speaking in “traditional” family terms only, it’s for brevity only) because we are self-absorbed, selfish, lazy, and ignorant of what I can only term “family man pride.” We wrongfully assume that “she” will handle it…it’s no wonder she gets bored with us.

With the existence of another contemporary fallacy that believes working 70hrs a week will make you successful, we are struggling with handling our, more important, family business. Not that I’m saying you shouldn’t work hard or love what you do (most of us do one without the other), but if you do so without plan and passion you are misguided and possibly wallowing through life in a routine. The same holds true for your financial health.

There are too many predictable cracks in our fountain of wealth that we, out of fear, refuse to acknowledge. The cracks can easily (and profitably even) be plugged. It’s even fun and exiting! Where along the way did we look at financial planning as dreadful…believe me it’s pretty exciting. Another question: How does thinking that I am going to to “sell you” assist you achieve your financial freedom? It does not. You are just being dumb and selfish and self-conscious.  You’d be amazed at the families in financial difficulty who, when I ask if I can help, simply say “no we’re good.” To this day I don’t get it. A partnership with trained and licensed individuals who have an ethical, a personal (and yes even financial) vested interest in the quality of your life is not something that is detrimental to you or something that you should willingly ignore. Do you fix the foundation of your house when it has a crack in it? No. You hire someone who specializes in foundations so you don’t do it wrong and make it worse. Why don’t you do the same with money? Your money is even more important than your house.  A ship never gets to where its going by random chance and a good engine, it takes a conscientious captain, a good team, and a good plan.

This article challenges those of you who have only superficially dealt with each paycheque as it comes in to actually look at how little you have to do to make a gigantic difference in your financial health. We’re not even talking about new money…just sensible maneuvering of existing money.

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Poor Spending and our Genetics?

January 21, 2011

A Halifax advisor colleague of mine Stephanie Holmes-Winton (see her excellent blog at www.advisordefusingdebt.wordpress.com) discusses the research done by Dr. Santos of Yale University. Dr Santos was curious to determine if the poor spending habits of humans comes from a genetic predisposition.  The following is an exerpt from http://www.advisor.ca dated Jan 14, 2011:

Dr. Santos and her team gave their small community of capuchin lab monkeys some money – not real money of course, rather unmarked coins the primates could use like money. This was to be her monkey economy and the coins were the currency. The team of researchers introduced the monkeys to a monkey market which they had created for them. They taught the monkeys how to use their coins to gain food and treats. Our primate cousins quickly got the hang of it and began using their monkey money with ease.

As it turns out, the monkeys got up to a few bad behaviors humans sometimes exhibit, like stealing the coins when no one was looking or taking them from other monkeys.

Things were humming along at the monkey market and then came the twist: the monkeys were given situations where they had to take risks. Dr. Santos wanted to see if the primitive friends would make the same mistakes we humans do when presented with financial risk. What they found is that monkeys, just like humans dislike loss more than they like gains.

In the end, Santos and her team discovered that indeed those impulses that drive our financial behavior were no different than those of our very prehistoric relative “Ida”, the lemur. Our financial behavior is indeed to some extent is in our DNA and a 35-million-year-old habit can be hard to break.

I surmise that the very same carnal impulse that causes us to zig when we should zag in the market also drive our behaviors around spending and debt. The very instincts that once upon a time kept us alive don’t always serve our financial best interest. The best part of Santos’ discovery is that we are not destined to repeat the monkey’s behavior or even our own. Our ability to see what we have done and make a different choice is remarkable.

Make no mistake behavior is a huge part of finance from the panicked investor wanting to sell at the worst possible time to the borrower purchasing a house they can’t afford. It’s coming from the same place in our brains. Offering clients’ behavior change recommendations as part of their work with you may go a long way to helping them make meaningful financial change without allowing irrational instincts to sabotage their efforts.

To add somewhat to this I ask you if you really should be upset because our neighbor bought a new SUV and you have no kids. What the hell do you need such a ridiculous new vehicle for if yours is perfectly acceptable and paid for and running well. This need to compete is undoubtedly also part of our genetics as well and is often a major part of our financial undoing. It is a self-conscious “tell” of our weakened emotional state and only leads us into unnecessary debt. Your emotional health should be based on how much cash flow you retain, not how much you display.

So, what do we do with this new found knowledge?  Again, I turn to Stephanie for a creative resolution for 2011:

As the new car smell of 2011 wears off and the excitement of promises made during a champagne induced pledge to be better this year fades, I’ve got a challenge for you.  Let’s start a resolution revolution.  Every year millions of us make a resolution to do better with our money, but generally by the third week of January we’ve abandoned the thought and gone right back to what we were doing before.

If you change nothing, you change nothing.  One thing I know is that our clients will not listen to advice that we are not willing to follow ourselves.  So for the next four weeks I dare you to be the change!  From today until midnight 28 days from now change the way you spend.

Go On A Cash-Diet

Don’t worry; there are no pesky points or weigh-ins on this diet.  All you have to do is this:

  • Gather your family  (if your are single, get a few friends together to join you in your resolution);
  • Decide how much money you are willing to spend on a weekly basis on emotionally affected expenses such as food, clothing, entertainment, gifts, coffee, eating out, liquor, etc.;
  • Elect one person to retrieve your family’s weekly cash amount;
  • Divide the funds based on who normally does what, making sure everyone has at least a small amount to spend on themselves only;
  • And repeat for four weeks.

Rules

  • NO ADVANCES.  Take the cash on the same day every week.
  • TELL EVERYONE.  The more people you tell about your little resolution the more revolutionary it will become.  Tell clients too; they might just start to open up about their cash flow knowing you are working on yours.

You can do just about anything for four weeks.  I myself live like this most of the time, and I’ll be on it with you because I wouldn’t ask you to do anything I wouldn’t do.  The limit isn’t as important as the fact that there is a limit.  So, in the words of a very famous active wear company … just do it!

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5 Secrets of Successful Savers – Alpha Consumer (usnews.com)

January 12, 2011

5 Secrets of Successful Savers – Alpha Consumer (usnews.com).

One of the most common questions I hear from readers of Generation Earn is how they can begin building financial security, especially when they’re still paying off student loans or other types of debt. After interviewing dozens successful savers over the years, many of whom are profiled in the book, I’ve noticed that they tend to have the following five traits in common. With the exception of the last one, they are all strategies that anyone can begin implementing today.

Here are the five secrets of successful savers:

1) They started slowly. Overcoming the initial inertia that prevents many of us from saving is often the hardest step. That’s why starting by saving just a small amount can get you on the path towards bigger savings. Nicole Mladic, a 31-year-old communications director in Chicago, couldn’t afford to put away a big chunk of her salary when she was in her mid-20s, so she started saving 2 percent. A few months later, she raised it to 3 percent, then went to 4 percent, and eventually reached her goal of 10 percent. Today, her net worth is over $90,000.

2) They read about financial and economic news. A survey by HSBC Direct found that people they call “active savers,” which make up about one in five Americans, tend to pay attention to financial news. That might help them maintain a general awareness and savviness about money, and also teach them about basic principles such the importance of not trying to time the market, and finding accounts that don’t charge hefty fees.

3) They save regularly, often through automated systems. Online banking makes this technique easy: Sign up for monthly transfers into a brokerage or savings account. You can also transfer funds directly from your paycheck so you never even see the money, which means you won’t miss it. Check in with your human resources department—you might be able to set up an automatic savings account through your paycheck in addition to your automatic retirement savings.

[In Pictures: 12 Money Mistakes Almost Everyone Makes]

4) They find saving pleasurable. This trait might sound counter-intuitive: How can anyone enjoy saving money, since doing so essentially prevents the pleasure of a purchase today? But some people—especially successful savers—naturally feel more pleasure while socking money away rather than spending it, since they know they are building financial security, and they can spend it one day in the future. If you don’t naturally feel this way about saving, you can teach yourself to, by focusing on how much financial security means to you each time you add to your savings accounts.

5) They first began saving as a child. The HSBC survey found that most active savers had been saving money since they were little and they learned the value of saving from their parents. While adults today who didn’t receive those lessons can’t change their past, they can help pass on better lessons to their own children by talking about finances and family budgeting often. Doing so would put them in the minority: A Charles Schwab survey found that only one in five parents frequently talk to their teens about family budgeting and spending decisions, and just over half of parents teach their teens how to save regularly.

One trick that combines these strategies is to encourage elaborate family discussions about what you will do with all the money you are saving. For example, if your savings goal is to take a family vacation to Belize, children can draw pictures of the rainforest, parents can crunch some numbers, and soon you’ll be snorkeling in the coral reefs.

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.

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Pay yourself first.

January 11, 2011

Remember:

Those who spend first and invest what’s left always end up working for those who invest first and spend the rest. Also, and most importantly, your money should be tied up in investments not assets.

With that in mind read an excellent, simple, and potent strategy below: (the experpt can be found at: http://www.taxtips.ca/freein30/payyourselffirst.htm)

Pay Yourself First!

This means that the first priority when you earn money is to put some of it aside to save for your future.  This is the key to your financial freedom

Use

bullet 10% of your gross income for making extra payments on your debt, or
bullet 10% of your gross income for saving or investing outside of an RRSP, or
bullet 15% of your gross income for making contributions to RRSPs.

The reason for using 15% for making RRSP contributions is to include your approximate tax savings in your contributions.

Example:

Your family income is $70,000 per year.  If you are using your pay-yourself-first money to make extra payments on your debt, you would use 10%, or $7,000.

If you want to contribute your pay-yourself-first money to your RRSP, you would contribute 15%, or $10,500.  If you are in a 30% tax bracket, your refund for the RRSP contribution will be $3,150.  This means you are out-of-pocket only $7,350.  If you are in a 40% tax bracket, your refund would be $4,200, and you would be out of pocket only $6,300.

So, in order to have approximately the same after-tax money as when you are using 10% of your gross income to pay down your debt or save outside of an RRSP, you will have to contribute about 15% of your earnings to your RRSP.  You can then do what you want with any tax refund.

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What’s Wrong With Failure? (via Magiawen’s Hideout II)

January 8, 2011

Below is posted an excellent commentary on the positive aspects of failure. It can be best described by the following fallacy: “this thing we (often) call ‘failure’ is not the falling down, but the staying down.”

There is no failure except in no longer trying. -Elbert Hubbard A life spent making mistakes is not only more honorable but more useful than a life spent in doing nothing. -George Bernard Shaw If you have made mistakes, there is always another chance for you. You may have a fresh start any moment you choose, for this thing we call "failure" is not the falling down, but the staying down. -Mary Pickford So anyway. We have all these quotes and adage … Read More

via Magiawen's Hideout II