Friday, February 17, 2017

Money talk

This time of the year there is lots of chatter going on out there about investing, since the deadline to contribute to RRSP’s for the 2016 tax year is March 1st. Naturally, all of this talk about investing leads to other discussions about financial planning, in general.  Here are some of my random thoughts, ideas, and rules of thumb when it comes to money:
  • Plan ahead. It’s always best in life to hope for the best, but plan for the worst. While that may sound negative it is always best to live on less than you earn and save some money for the future. No one knows where life will take you. Having savings not only provides you with a plan B should something go wrong but, more importantly, having some money gives you options in life whether it be in making an investment or starting a business. Who knows what opportunities will come your way. Having some money in the bank gives you the option to seize them! One of the fascinating aspects of the work I do is to be able to see how my clients approach money. I have been absolutely amazed at the saving abilities of some of my clients who are in lower income brackets. Saving is their mindset and it doesn’t matter how much or little they earn, saving is just what they do. The ability to save is definitely not about how much money you do, or don’t make. It is about your habits and mindset and the conscious decision to live under your means so you have some money left over to save.
  • Investing in an RRSP or TFSA?* If your income in retirement will be similar to your income right now then it may not make sense to contribute to an RRSP. RRSP’s are great for tax shifting in the sense that any contributions you make now will lower your current taxable income. When you withdraw the funds from your RRSP, in retirement, you will be taxed at whatever your income level is at that time. So, if you are in a high tax bracket now, but will be in a lower one in retirement it makes sense to contribute to an RRSP in your higher earning years. If your current income tax bracket is not high, then it may make more sense for you to save into a TFSA. While there is no tax deduction for contributions to a TFSA, any investment gains made within your TFSA grow completely tax free and there are no tax implications for withdrawals. Speak to your financial planner for more information on retirement strategies.
  • Pay extra on your loans. On mortgages and installment loans, it’s a great idea to get into the habit of paying extra, every month. You’ll be surprised at how much faster you pay off this debt (especially on your car loan). Set up the extra payments so they come out automatically and you won’t see it as optional. If anything goes wrong in your life (sickness, job loss etc), you can always revert to your original lower payment. My rule, when it comes to cars is, if you feel like you cannot comfortably afford the payment within a 5-year term (or less) then you are buying too much car. Time to check yo’ self and look for something more affordable!
  • Create healthy money habits when you are young to set yourself up for the future!. Getting in the habit of saving and spending less than you earn when you are younger will help you immensely as you get older. If saving is a regular habit when you have little money you will not even think twice about saving as your income grows.
  • What is your relationship with money? Mindset is a game changer when it comes to finances. Consider your relationship with money. Is it a healthy one? Is it positive or negative? Our thoughts can create our reality and if you treat money as a difficulty I believe it will be one. It’s important to treat the money we have with a healthy level of respect and to save for the future but to also enjoy life sometimes too.
  • Have some fun with your money. I firmly believe that you should leave some room for fun money in your budget, regardless of your financial situation. Every week pay yourself a cash allowance, which you set based on your budget. Allow yourself the freedom to do whatever you want with it, with no guilt attached. Depending on the amount you give yourself you could use it to go to a movie, eat out, buy fancy coffees, or clothes etc. Having cash is key in this exercise because it’s tangible and once it’s gone, it’s gone. We have been doing this in my house for years and it has worked very well for us. We take our money out every Friday, without fail, and it must last the week. Once it’s gone it’s gone but we allow ourselves to have fun and enjoy whatever we spend it on. We have kept this habit up through tough financial times and abundant ones and it has always helped keep us accountable but also allowed us to have some fun at the same time. It’s a great budgeting exercise!
  • If you can’t pay for it now, you can’t afford it. Yes, there are some exceptions to this rule for big ticket items like an education, and buying houses, or cars. Consumer debt is at an all time high. Many of us are living beyond our means and it’s time to get back to basics and start paying for things the way our parents generation did, by saving for things before purchasing them. Being in debt is optional and not a given. Allow yourself the freedom of being debt free. You deserve it!
  • Buy life insurance when you are young*. The article doesn’t agree with me on this. But, here me out. You buy life insurance for the future. If you are young and single right now you may think that buying life insurance is a silly expense. My philosophy is to buy it when you are as young as possible because the premiums are usually so cheap it’s a joke! As you get older (when you naturally start thinking about buying insurance), you will find that it’s often more complicated to get due to health reasons and it’s typically much more expensive. I say “set it and forget it”. Buy as much as you can possibly afford when you are young and you won’t need to think about it again as you get older!
  • Pay off debts while saving at the same time. if you spend all of your money tackling debt you will only get into debt again if the car breaks down and you need to pay the mechanic to get it back on the road. In my mind, it makes more sense to pay down debt but to also set aside some savings, at the same time. It will help as a mental exercise in saving and getting into a healthy savings habit. You will also be able to see your bank account grow  and this will help to create a mental shift to abundant thinking, as opposed to focusing on lack.
  • Be kind to yourself when it comes to money. There are lots of things we should or shouldn’t be doing when it comes to money and it is easy to place the blame on yourself if you aren’t financially where you’d like to be. The reality is that wages don’t often keep up with the cost of living your life and raising a family. So, don’t be too tough on yourself! But, do take the time to ask as many questions as you can so you can work within your means to create a better financial future for you and your family.

*While I have lots of ideas and thoughts on money, I am a Mortgage Broker, not a financial planner or life insurance agent. If you would like information on financial planning or purchasing life insurance I can refer you to some great people that would love to help you. If you have some general questions about money or budgeting or mortgages I’d be happy to chat so feel free to drop me a line! 

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