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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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