Category Archives: Money Tips

You’re Richer Than You Think

That’s the campaign tagline Scotiabank launched back in 2006. At the time, Canada was in an economic downturn (political-speak for recession) and the bank caught a lot of flack for the slogan. I happen to like it. A lot.

Piggy Bank on CashThe slogan elegantly captures the idea that we all have more money than we realize. The problem is, most of us don’t keep track of how we spend it. We’ve all had that moment when we look at our bank account balance and think “Where did my money go? I have nothing to show for it!” Lots of little purchases can add up to the feeling of having no money. The reality is, we simply need to keep track of our spending. When we do, we might be satisfied with where our money goes but, if not, we’re armed with the information we need to make changes.

Let’s do some math. Maybe you like to grab a coffee on the way to work each morning. At Tim Hortons that would cost you $1.70 for a medium and at Starbucks a Grande would be about $2.10. For this exercise, let’s pretend you get four weeks vacation and 10 statutory holidays. That means you would buy 230 cups of coffee, or spend between $391 and $483 a year. Let’s imagine you go out to lunch a couple of times a week at $8 a shot. That’s another $768. We can all think of lots of other small, repetitive purchases we make but let’s just use these two for now. If you eliminated those purchases you would have $1,205 every year to invest. Now let’s imagine you do that for 10 years and you manage a return of 5.63% which is our annualized return at the time I’m writing this. After 5 years you’d have over $7,100, after 10 years you’d have about $16,500 and after 20 years it would be almost $45,300! (For this calculation we did not increase your contribution for inflation. If we had, you’d have even more money.)

Now, I’m not suggesting you give up coffee and going out for lunch. If you enjoy those – great! Pick any small, regular expense you have – cable bill, cell phone package extras, whatever. The point is we all have little expenses that add up without our realizing. We could cut out some of those as a small sacrifice andmake a big difference to our retirement savings.

Ever Wish You Had More Money?

“If only I had more money…” Ever heard yourself utter those words? If you only had more money you’d… Travel more? Save more for the kids’ education? Invest more? The trouble is, most of us can’t just demand a raise every time we want more money. Well, what if I told you there is a way you could make more money without asking for a raise and didn’t require getting a second job? Would you be interested?

Let’s do some math. Let’s say you live in Ontario and your taxable income is $60,000. That would make your marginal tax rate (the amount of tax you would pay on an additional dollar of income) 31%. That means you would need to earn an extra $1.45 for each additional $1 you want to take home (1.45 x 31% = 0.45). Now let’s turn that around. If you could save $1 it would be like earning an extra $1.45! Get it? You buy things with after-tax dollars which means if you buy something for $100, you had to earn $145 in order to make that purchase. If you can buy things on sale, it’s like earning more money. When you consider your marginal tax rate, it makes waiting for a sale price really appealing. Of course we all know you have more money in your pocket when you spend less, but we rarely stop to consider how much we actually had to earn in order to have that money in our pockets. When you do, it makes your money seem much more valuable.

Now let’s really make things interesting. Let’s see what happens if you take the money you saved and invest it in a tax-sheltered vehicle such as a RRSP. Like lots of men, I love a big screen TV. Basically, the bigger the better. If I’m considering a new TV that retails for $1000 but I wait for a 20% off sale, I save $200. Remember, I had to earn $1630 in order to spend $1000 in after-tax dollars (my marginal rate is 38.5%). The $200 I save during the 20% off sale represents $325 in additional earning.

Ok. If I then invest that $200 in my RRSP, I save $77 in income tax. In other words, I save $200 on the TV but the government gives me a tax refund of $77 which means my actual savings on the TV is $277 and the $200 contribution really only costs me $123! Oh yeah, and that $200 will continue to grow tax-free! Let’s not forget I also have a new TV! If you commit to saving 20% – or more – on everything you buy, it’s not hard to see how it can be an important pillar in your retirement strategy.