Posts Tagged ‘TIPS’


Time and Choice

February 2, 2011

I wrote the following on my Facebook business page last night (

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.



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” ( 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 ( (search on “trial balloon”).



Poor Spending and our Genetics?

January 21, 2011

A Halifax advisor colleague of mine Stephanie Holmes-Winton (see her excellent blog at 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 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.


  • 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!


Pay yourself first.

January 11, 2011


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:

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


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.


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.


Loans, Mortgages, Credit Cards,Debt items, etc

December 9, 2010

Always protect outstanding balances through purchasing insurance coverage that covers the amount and the duration of the liability. For example: If your Mortgage is payable in 20 years and you owe 300k, purchase a 20 year Term policy with a face value of 300k. This is remarkable cheap to purchase and is not only responsible (if you care about your family..ha) but necessary in some cases. Do the same for Lines of Credit, Credit Cards, and so on. If you already have it in place with the bank, you will be shocked at how much you are overpaying for a different type of coverage. Always, and I mean always, buy private coverage for these items through your investment advisor because bank sponsored Creditor Insurance (another name for what I am talking about here) is over priced, depreciates in face value, cannot be transferred to a permanent policy (as can Term Policies; and no medical is needed upon conversion), and goes to your beneficiary when/if you die so that they can pay off the debts and keep the difference. I paid 56 dollars a month for insurance for a 15000 dollar line of credit. I paid this same amount (despite depreciating loan values) for over 10 years. Once the loan was paid off, I lost the coverage that I had (foolishly) paid over 6000! dollars for (think about it, paid 6000 dollars insurance on a 15000 dollar loan. Now I know better. You can get about 500000 dollars coverage (Term 20) for like 40 dollars a month (if you’re in your 30’s) and you can transfer it to a permanent policy or cancel it once your debt is paid off. Think of the math on that.


Emergency fund: TFSA all the way.

December 9, 2010

Even if you can withdraw from your Mutual Fund without a fee you would be WAY better off using a TFSA for emergency money because money withdrawn (principal and/or growth) is NOT included as income for the year as it would be for Mutual Fund withdrawals:

Hence the money is taken “tax free.”

The only caveat is that (unless you use a withdrawal and carry-forward strategy, which I will talk about later) your TFSA contribution room is only 5k.

It is vital that you avoid taking any income that will be included as income for tax purposes. There are many ways to save and grow income without affecting your taxable income. There are even other ways to take money and have it reduce your taxable income (hence the RRSP).

For example: If you are receiving a taxable lump sum (like severance or salary bonus etc) and you suspect that you may need to utilize the money for living expenses, you should never ever deposit it into your bank account. You should look at one of the following strategies:

1. Retiring allowance:
Revenue Canada allows you to shelter money into what’s called a retiring allowance as part of the Income Tax Act. So long as your company qualifies — it must have a payroll of more than $2.5 million and one or more employees severed within the past six months — you can shelter $2,000 per year, for each year of service up to and including 1995 (even if you started work in November or December, for example, part years count as full years; therefore you can shelter the full amount for that year). For example, if you were hired in 1985 and severed in 1997, you would qualify for 11 years of sheltering.

2. Transfer to RRSP
Suppose you determine you’ll have $10,000 remaining after your retiring allowance options are used. And to keep the exercise simple, also suppose you have $10,000 of RRSP contribution room available for the year. You can ask your employer to take that $10,000 and put it into your RRSP (the employer must get Revenue Canada’s approval to do so through a letter). At year end, the company will send you a slip that says they paid you $10,000 with no taxes withheld. Normally you would claim this as incomfor the year and pay taxes on it. But try to arrange to have the employer pay out this money the following year. That way it becomes income for 1998. And if you arrange for the RRSP transfer described above, you will have all this money tax deferred in 1998, meaning you can claim this contribution on your 1997 tax return, lowering your taxable income. In other words, you’ve made a healthy RRSP contribution at a time when your income is high and you have money growing tax deferred, a big help as you search for a new job or make other plans. Should you have to draw on these funds, you may be taxed at a lower amount, and when funds are especially tight, it’s nice to know you’ll be giving less to the government.

3. Reduce taxes
Assume you have expenses of $2,500 a month and you have $5,000 in savings. If you think you could be out of work for some time and you don’t have the cash reserves to weather the storm, you may want to use your severance pay another way. Instead of taking this money in cash, you could put it all in an RRSP. If you don’t, be forewarned that Revenue Canada is going to tax it quite heavily; at a minimum 30 per cent. And, should you find a job sooner than expected, you’ll have just given Revenue Canada 30 per cent for nothing. Try rolling the payment into a short-term money market fund inside an RRSP. When your two months worth of savings have run out, you can begin to draw from the funds. Continue to pull out the same $2,500 as long as you need it, keeping in mind you’ll only pay tax on the amount you take out; anything under $5,000 is taxed at 10 per cent withholding tax. When you find your next job, roll the remaining money into something long-term.


Income Splitting and Investing

June 21, 2010

Simple Tip: The higher-income (and hence higer tax-paying) family earner should pay all the bills (rent, mortgage, utilities, groceries, credit card bills, etc) as well as any income tax bills for the lower income earner. This frees up the lower earner’s “retained earnings” to maintain a larger investment base with which to invest at a lower taxable rate.
Moving down one tax bracket can translate into a +10%* differential in possible investment returns from a similar investment strategy over that of the same investments by the main earner (subject to identical investment strategies and return scenarios).
*Estimate based on combined marginal and provincial (NS) rates for 2010. see