Success starts with socking cash away when you're young
Financial Literacy Month ends with a review of the ABCs of personal finance
Wealthy Barber Returns author David Chilton says his most important financial advice is to pay yourself first and start saving at a young age.
Photograph by: Glenn Baglo, PNG Files , Postmedia News
As Financial Literacy Month ends, individuals are reminded to review their basic personal finance issues.
People are advised to start paying themselves first, namely putting aside 10 per cent of money they receive, and earmarking various amounts toward other goals: perhaps something fun like a smart-phone, something longer term like a special trip, and a charitable cause.
"Beyond pay yourself first, I still say 'start young' is the most important personal finance advice, by far," said David Chilton, who wrote The Wealthy Barber Returns last year.
"It's getting young kids to save, whether they're in their 20s or 30s, and to live within their means. Living within their means is what financial planning is all about; it's still what we struggle most with."
The magic of compounding, or Rule of 72, shows that dividing 72 by your annual rate of investment return determines how many years it takes to double your money. The younger you start, the more time you have for your money to double, quadruple and so on.
For example, Mary invests $2,000 a year from age 25 to 30, a total investment of $12,000. Walt invests $2,000 a year from age 30 to 65, total investment of $72,000. If they both get annual stock market returns of 12 per cent, each winds up with about $1 million at age 65.
Money put into an in-trust account for a youngster is controlled by the contributor, usually a parent or grandparent, until the child turns 18. Capital gains are attributed to the child.
Registered Education Savings Plans attract a Canada Education Savings Grant of 20 per cent, to a maximum of $500 on $2,500 contributed for each child annually. Money taken out by a youngster attending post-secondary school, or a sibling in the case of a family plan, is partly taxable in the hands of the student.
A Tax-Free Savings Account can be opened as early as age 19, and while contributions are not tax deductible, withdrawals are tax free. The annual contribution limit has just been increased to $5,500 for 2013. But a TFSA shouldn't be used like a bank account, because if money is withdrawn one year, the contribution room isn't recovered until the following year.
As fewer companies offer employees a defined-benefit pension, and with 93 per cent of pensions in Canada being underfunded at the end of 2011, Registered Retirement Savings Plans have become crucial for retirement. RRSPs allow people to get a tax deduction on contributions while in a higher tax bracket, then make withdrawals while in a lower tax bracket, usually in retirement.
You often want to withdraw TFSA money while in a high tax bracket and RRSP money while in a low tax bracket.
Most people are best off holding bonds, T-bills and money market funds that pay interest in TFSAs or RRSPs, while keeping stocks and funds that pay capital gains or dividends in non-registered investment accounts.
Note that fees can quickly erode your profits and even the principal invested. Commission-based financial advisers profit from sales of products like mutual funds, which charge annual management fees of about 2.5 per cent on Canadian equity funds and 1.0 on bond funds. Fee-based advisers charge about 1.0 per cent of your portfolio value, depending on size. Fee-only advisers charge by the hour or by the service provided.
People are advised to start paying themselves first, namely putting aside 10 per cent of money they receive, and earmarking various amounts toward other goals: perhaps something fun like a smart-phone, something longer term like a special trip, and a charitable cause.
"Beyond pay yourself first, I still say 'start young' is the most important personal finance advice, by far," said David Chilton, who wrote The Wealthy Barber Returns last year.
"It's getting young kids to save, whether they're in their 20s or 30s, and to live within their means. Living within their means is what financial planning is all about; it's still what we struggle most with."
The magic of compounding, or Rule of 72, shows that dividing 72 by your annual rate of investment return determines how many years it takes to double your money. The younger you start, the more time you have for your money to double, quadruple and so on.
For example, Mary invests $2,000 a year from age 25 to 30, a total investment of $12,000. Walt invests $2,000 a year from age 30 to 65, total investment of $72,000. If they both get annual stock market returns of 12 per cent, each winds up with about $1 million at age 65.
Money put into an in-trust account for a youngster is controlled by the contributor, usually a parent or grandparent, until the child turns 18. Capital gains are attributed to the child.
Registered Education Savings Plans attract a Canada Education Savings Grant of 20 per cent, to a maximum of $500 on $2,500 contributed for each child annually. Money taken out by a youngster attending post-secondary school, or a sibling in the case of a family plan, is partly taxable in the hands of the student.
A Tax-Free Savings Account can be opened as early as age 19, and while contributions are not tax deductible, withdrawals are tax free. The annual contribution limit has just been increased to $5,500 for 2013. But a TFSA shouldn't be used like a bank account, because if money is withdrawn one year, the contribution room isn't recovered until the following year.
As fewer companies offer employees a defined-benefit pension, and with 93 per cent of pensions in Canada being underfunded at the end of 2011, Registered Retirement Savings Plans have become crucial for retirement. RRSPs allow people to get a tax deduction on contributions while in a higher tax bracket, then make withdrawals while in a lower tax bracket, usually in retirement.
You often want to withdraw TFSA money while in a high tax bracket and RRSP money while in a low tax bracket.
Most people are best off holding bonds, T-bills and money market funds that pay interest in TFSAs or RRSPs, while keeping stocks and funds that pay capital gains or dividends in non-registered investment accounts.
Note that fees can quickly erode your profits and even the principal invested. Commission-based financial advisers profit from sales of products like mutual funds, which charge annual management fees of about 2.5 per cent on Canadian equity funds and 1.0 on bond funds. Fee-based advisers charge about 1.0 per cent of your portfolio value, depending on size. Fee-only advisers charge by the hour or by the service provided.
On the expense side of your personal balance sheet, there is good debt borrowed for appreciating assets, often investments or a house, and bad debt borrowed for depreciating items, like a vehicle.
Canadian household debt is at 163 per cent of family net income. Lines of credit and auto loans are on the rise, while mortgage and credit-card debt are falling slightly. The average British Columbian has $38,837 in non-mortgage debt.
Lines of credit, mortgages and car loans can cost three to seven per cent a year. Credit cards can charge 10 to 14 per cent interest for a standard card, 18 to 20 per cent for a gold card, and as much as 29.9 per cent for a department store card.
Paying your entire monthly balance by the due date gives you a three-to seven-week revolving interest-free loan each month. But Canadians have average outstanding credit card debt of $3,539, which at 14 per cent interest would take 14.3 years to pay off by making minimum monthly payments.
Consider a mortgage of $240,000 charging 5.75 per cent annual interest. If you paid it off in 25 years, at $1,509.86 per month, it would cost you $212,956.61 in interest alone. However, if you paid it off in just 10 years, at $2,634.46 a month, it would cost you $76,235.35 in interest.
Canadian household debt is at 163 per cent of family net income. Lines of credit and auto loans are on the rise, while mortgage and credit-card debt are falling slightly. The average British Columbian has $38,837 in non-mortgage debt.
Lines of credit, mortgages and car loans can cost three to seven per cent a year. Credit cards can charge 10 to 14 per cent interest for a standard card, 18 to 20 per cent for a gold card, and as much as 29.9 per cent for a department store card.
Paying your entire monthly balance by the due date gives you a three-to seven-week revolving interest-free loan each month. But Canadians have average outstanding credit card debt of $3,539, which at 14 per cent interest would take 14.3 years to pay off by making minimum monthly payments.
Consider a mortgage of $240,000 charging 5.75 per cent annual interest. If you paid it off in 25 years, at $1,509.86 per month, it would cost you $212,956.61 in interest alone. However, if you paid it off in just 10 years, at $2,634.46 a month, it would cost you $76,235.35 in interest.
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