Mar 302012
 
Pretty bad month compared to this time last year (-_-’) My income for the month was pretty good but the TSX dropped 2.6% so my portfolio didn’t fair too well. Also had my car maintained and washed, which is part of my discretionary spending. My swing trade on volatility is also under water right now, which drags my net worth down for the month despite any savings I’ve accumulated. On well, that’s what I get for speculating. Hopefully you can learn from my experience and don’t make the same mistakes I did. My long term goal is to just manage my debt and invest extra money I have, especially when the stock market is dips.
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*Side Income:
  • Part-Time Work = $700
  • Dividends = $300

*Discretionary Spending:

  • Eating Out = $100
  • Others = $400
*Net Worth: (MoM)

  • Assets:
  • Cash = $3,900 (-$100)
  • Stocks = $70,200 (-$2,300)
  • RRSP = $21,700 (+$100)
  • Home  = $248,000
  • Liabilities:
  • Mortgage = $207,500 (-$400)
  • Margin Loan = $18,700 (Unch)
  • Bank Loans = $2,600 (-$1,100)

*Total Net Worth = $115,000 (-0.69%

I wonder if anyone else’s net worth dropped? In other news the federal budget came out yesterday. I like that we are phasing out the penny. I think it’s about time we removed the 1 cent coin from our currency. I think this will speed up cash transactions and we can use the metal for something else, like manufacturing it into something actually useful or at the very least sell it to other countries. Our national deficit now is $25 billion, which means after collecting all the taxes, the government is still short $25 billion this year to fund all it’s programs. The shortfall means the government will need to borrow more money and we’ll slide deeper in debt. The ideal situation is a balanced budget, where the government spends as much as it makes, and there’s very little or no debt. Maybe we’ll get there some day, but not any time soon.

* Numbers are rounded to the nearest $100.
Mar 272012
 

Compared with other nations, developed countries are the best places to live for anyone who wants an equal opportunity to become successful. Yet some people in these countries like Canada and the US are still upset about income inequality, a lack of proper health care, education, and a poor standard of living for the minority, despite the fact that the same problems exist everywhere else in the world but much worse. I think it’s all relative. People generally compare themselves with their friends, families, and neighbors. Of course they never feel like they make enough, because there will always be someone they know who makes more than them. Maybe they should try comparing their income to the national median instead. The typical Canadian living alone only makes about $30K a year.

img source: cdn.runt-of-the-web.com

I try not to compare my finances with others. But in reality, my quality of life depends on the wealth of others around me. The reason I don’t feel rich is because I live in one of the most unaffordable cities in North America. In the 4 years that I’ve been saving and investing, I have built up a net worth around $100K. By the time I’m 30 years old I plan to reach $400K. The average household net worth here is over half a million dollars. So $400K wont buy me a lot here. Once I pay off my mortgage, I will have enough money left over to maybe provide 10 years of living expenses for myself.

But what if I moved to Florida, and had the same $400K. Well I can get a 2 bedroom condo with similar amenities as my current home, and similar strata fees (HOA) for just $100K. Since I won’t have a mortgage, my yearly expenses should be below $15K. This is because my total living expenses now, minus my current mortgage is below $15K a year. Plus isn’t everything in the US cheaper? Which means I can invest my remaining $300K into inflation protected securites (i bonds perhaps) which will take me 20 years to use up.

Even better, I can take my $400K and move to somewhere like Mexico or China where the average salary is less than half of what the average Canadian or American makes. I can go for 30 years or more without running out of money. Of course I can always go broke buying luxuries, anywhere in the world, but as for basic living expenses, the less fortunate people are around me, the richer I will feel. That’s why we’re lead to compare our lives to others, not just other people, but other people in our immediate surroundings. Sounds kind of shallow and narcissistic but is this just a part of human nature?

Macleans has an income comparison calculator. Click here to see where you fit.
If you’re making more than $30K then you’re probably already making more than most Canadians (*^.^*). What I plan to do one day is move to a smaller city when I retire, where my money can go further. In short, want to feel rich? Don’t live in expensive places.

Mar 242012
 

This is a continuation from the RRSP post earlier this week. There is a legit way to split the income between two people to minimize their overall taxes. It’s called a spousal RRSP and it’s one of the best tax saving strategies available to couples.

In a spousal RRSP one person makes a contribution, but his or her spouse is the owner of the plan. The maximum amount of spousal RRSP room the couple can make is determined by the contributor’s RRSP room, not the plan’s owner. Below is an example of a hypothetical couple named Hubby (contributor) and Wifey (annuitant), and how a spousal RRSP can help them.

  • Hubby and Wifey are both in the 30% income tax bracket.
  • Hubby contributes $10,000 to Wifey’s spousal RRSP. The money now becomes hers, while he gets the tax credit. (Any bank will gladly help them with this)
  • Since Hubby puts money into an RRSP, he becomes $3,000 richer from the tax refund. (To get the refund he just files his annual tax return like usual)
  • 2 years later the couple talks about starting a family
  • After another year or so a baby is born

 

 

 

 

 

  • Wifey decides to stay at home to take care of the baby.
  • She does not make any money the following year from her job. But she takes out $10,000 from her spousal RRSP account.
  • Money redeemed from an RRSP is considered income, but in Canada you don’t pay taxes on the first $10,000 you make.
  • So Wifey takes out money from her spousal RRSP tax free.

To summarize, Hubby started with $10,000 of his own after tax income. But by using a spousal RRSP he ended up with $3,000 for himself, and $10,000 for Wifey. Not a bad deal.
And this doesn’t even include any investment income they’ve made over the incubation period from the RRSP contribution to taking the money out again.
Even considering a very conservative 3% annual return, that $10,000 initial RRSP investment would have easily made them an extra $1,000 by the end, all tax free.

The only thing to watch out for is in order for the RRSP withdrawal to be taxed under Wifey’s name, Hubby must not have made any contributions into the spousal RRSP in the current year or the 2 preceding calendar years.
So if Wifey withdraws money any time in 2012, for example, then Hubby must not have made any contributions in the calendar years 2012, 2011, and 2010, because otherwise the withdrawal will be taxed based on Hubby’s income.
There are other small things to keep in mind too. You can find more info on spousal RRSPs in this document, courtesy of Standard Life. I don’t have a family yet, but when I do, I plan to use this strategy.

Mar 222012
 

RRSPs can be used to lower our overall tax burden. Continued from How to Use the RRSP: Part 1

Another use for an RRSP is to treat it as a jobless fund. I don’t have an emergency fund in the traditional sense, but if for whatever reason I stopped working, didn’t qualify for E.I. benefits, and ran out of TFSA money, I would immediately sell $12,000 of the stocks in my RRSP account and withdraw small amounts of money from it each month to cover my living expenses until I can find a more permanent solution. Luckily I have never had to resort to such an emergency ( ´_⊃`) I do have to pay a withholding tax when I withdraw money from an RRSP account, but depending on the circumstances I might get that tax refunded. Spending RRSP money when I have NO other taxable income is even better than spending it when I retire when I’ll have CPP benefits, (social security,) OAS,and other government or private pensions to push my income into a higher tax bracket. I do lose the contribution room, but I will likely be using spousal RRSPs to lower my RRSP portfolio anyway.

In the tables above, an RRSP strategy can help save $3,000 in taxes. Money invested in RRSPs can grow tax free so it’s a good place to hold bonds and US equities.

Another possible use for RRSPs is the Home Buyer’s Plan. As long as contributions are made to an RRSP for at least 90 days, home buyers can take up to $25,000 out of their RRSPs without any penalty to buy a qualifying home. For couples, that means they can take out $50,000 to help pay for their home together. Certain restrictions apply such as the couple will need to repay all their RRSP withdrawals within 15 years. But it’s another option for people with large retirement accounts, but very little savings otherwise. Similarly the Lifelong Learning Plan allows you to borrow money from your RRSP to finance full-time schooling for either you or your spouse. So if your wife or husband is going through school, this is another option besides student loans. But you do have to pay back the withdrawn RRSP funds within 10 years.

Like I said before, the RRSP is not a retirement tool, but rather it’s a tool for creating wealth. Next time, spousal RRSPs (゜∀゜)

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Random Useless Fact: One third of Americans now plan on working past the age of 70.

Mar 202012
 

Last month a reader asked for my take on RRSPs (401K plan equivalent.) This topic is long so I’ve broken it up.

The truth is, I like the RRSP, but probably not for the same reasons as other people. The basics of how RRSPs work is they defer our taxable income to another year when we’ll hopefully be in a lower tax bracket. I suppose this why it’s called the Registered Retirement Ravings Plan. So it must be used as a retirement vehicle right? Nope. Please don’t let yourself be fooled by this misleading naming convention <(`^´)> We must never trap our minds into thinking that way. It’s like if we believe the Tax Free Savings Account is meant to be used as a savings account, then we’ll never realize the TFSA’s full potential. To become successful investors, we have to look at the bigger picture. We must convince our minds that the RRSP, despite its name, is not about retirement. Instead it should be thought of as a wealth creation tool to mitigate taxes and maximize prosperity. Retirement planning is just one aspect of the RRSP, but it can be used for so much more. Here’s why. All capital is fungible. Remember those words. It’s probably the best advice I’ve given on this freedom 35 blog in awhile. Because as soon as we earmark certain money for retirement, savings, vacations, emergencies, or anything else, we put limitations on what our money can do for us. We must think outside the box, be flexible, let money flow in the path of least resistance, and remember that even RRSPs are fungible and liquid sources of capital.

image source: savethebills.com

One use for an RRSP is to put a mortgage into it. (This is not related to the HBP)
RRSP holders can lend money in the form of a mortgage to property investment companies. This is basically a secured loan where the RRSP holder earns interest on a mortgage. It’s like a debt instrument that should give us better returns than current bond yields today. The lender and the property owner set the terms together through a trustee (such as a bank) and the loan is secured by the real estate. If that’s not quite clear ಠ_ರೃ , here’s a simple way to think about it: You know how you can get a mortgage from a bank to buy a home? Will now imagine YOU are the bank, and someone else wants a mortgage from you. So you give them the mortgage, eg: $100,000. and they pay you back over time with interest. Interesting huh? Some investors are unaware they can do this. There are start-up and ongoing costs to hold a mortgage inside an RRSP so I haven’t done this yet myself because I need more money first to make the investment feasible (・へ・) So I can’t speak from experience, but one day I might use this strategy.

“I believe Arm’s Length Mortgages are Canada’s Hidden Investment Gem! …Having coordinated many of these deals with both lenders and borrowers, I assure you that they are a simple, easy and VERY profitable investment instrument. [they] have been around for many years—this isn’t something new, but they are a little known product”
~Kasey Young, Business Development Associate at TD Waterhouse

There are many other reasons why I like the RRSP, and most of them have nothing to do with retirement either.
Next time, I’ll explain how I use my RRSP as an emergency fund \(^_^)/

fungible: Interchangeable. Can be replaced and moved around easily.
trustee: A 3rd party company that has the legal obligations to deal with matters without any conflicting interest.

References:
http://www.manainvestments.com/index.php?option=com_content&view=article&id=27&Itemid=50
http://www.aspcanada.com/2010/05/arms-length-mortgages/