Power in hearing the word “Try”

Never Try comiting to failureThere are many important words to listen for in conversation even in conversation with ourselves.  Try is one of those words.

We have all asked someone for a simple commitment and gotten the “I’ll try” response.  Instantly it is clear that they have no intention of doing it.  Some time in childhood trying shifts from a full out effort, to a commitment to possible attempt before failing or giving up.  I’ll try becomes a commitment to fail.

Armed with this knowledge our words often give our secrets away, even secrets we have yet to admit to ourselves.  The power of this word is when we start listening to our own words, whether in conversations with others, or the words we choose to express ourselves in our thoughts.  Too often we know we plan to fail, but have yet to realize it.

Armed with the word try we can become much more powerful listeners  hearing not only the words, but start to hear the more discrete details hidden in many simple statements.

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20% More

Chasing the carrot

Chasing the carrot

I still remember I when I heard someone say this for the first time;

“If I had a little more money I could be as happy as I was when I was broke.”

OK, it wasn’t stated exactly like that, but it is a great summary, and since hearing it, I have heard it over and over again.  The first time I heard it went like,

“Tell me about a fun time in your life.  A time when you where happy?”  I started.

“University, I was beyond broke, my parents didn’t pay my way like the kids now.  I couldn’t even afford a car, but it didn’t seem to matter, we had fun.”

“What would it take to get your life to a happy place like that again?”

“I’ve been working on that.  I think if i can just make about 20% more, I would be there.”

This from someone making a good income.  I am sure they would have said the same thing if asked a few years earlier, and making considerable less.

Why is it that so many feel that more money will bring the happiness, even if they feel the happiest times didn’t always involve money.  If you are looking for more, we will never get there, as more will always be an option.  Happiness and money I do believe are linked until the point you can live a basic life, a life without hunger or lacking safety.  After that I would suggest that happiness is more likely a mind set, an outlook on life or a personal commitment.

I have watched people that have said a small raise would solve all their debt issues more than double their income and with it only increase their debt.  I no longer believe more money will solve the problem, it is only a symptom of the true issue.  Hoping that more money will bring happiness, is mistaking the symptom for the problem.

Find happiness and it will only make it easier to make your financial life work, and what is better than living a happy life.

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What is the value of a year?

What is the value of a year?  Let’s say life is good and you save $5000 a year, If for one year you worked out of town, away from home, how much would make it worthwhile?

A $20,000 increase would mean you would jump 5 years ahead in savings.

A $40,000 increase would mean you would jump ahead 8 years on your savings.

What is the value of a year of lifestyle versus a year of net worth building?  How do you come up with an answer?  Does the lifestyle benefit of more savings offset the losses?

What if you could give up your expenses and save $100,000 in one year, being 20 years of savings?

The more we save, the easier it can be to live a great lifestyle, finding balance is a personal choice and not a one size fits all.

Currently in Canada the majority of markets it is also less expensive to own than rent, compounding the benefits if the savings help you move into home ownership.

Of course this argument could hold true for the rest of your life, at which point time was never made to enjoy the sacrifice.

Discussing sacrifice versus reward, whether it is giving up time or cutting expenses makes for an interesting discussion, mostly about priorities, values and what sacrifices you are willing to make for a better life tomorrow.

For me sacrifice made sense, with money set aside for fun.  However having young children has changed my personal view of this, as family time while my kids are young is something I am unwilling to give up.  I am also putting a larger priority on experience spending.  Experience spending for me is family vacations and other opportunities to expose the boys to learning and or fun.

This conversation does seem to be shifting, I hear more need and deserve with no option to sacrifice, sometimes with devastating consequences.

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Saving RRSP room?

13 CAM RRSP Month Blog Saving RRSP RoomSaving RRSP (Registered Retirement Savings Plan) room is a great strategy if you are expecting a large tax year in your future.

For example if you make $70,000 a years, but sell an asset that adds $100,000 to your taxable income in one year.  If you had enough RRSP room to put the 100,000 into your RRSP you would save a lot more tax than if you had made the same deductions over the lower income year.

Another good time to save your RRSP room is on a year you have a really low income, this could be a sabbatical year, job transition, maturity or disability year.

A simple concept, but with future value and different tax calculations to figure out what is best it is usually a good idea to discuss this with an accountant.

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RRSP Beneficiary Designation

13 CAM RRSP Month Blog Beneficary DesignationRRSP’s (Registered Retirement savings Plan’s) and all registered accounts (RIF, LRSP and other registered accounts) offer the ability to designate a beneficiary, seems simple enough, however there is a list of common and sometimes very expensive mistakes.  Below I have listed a few of the common errors.  It is simple to fix the beneficiary now, however your estate may or may not be able to correct it later.

No beneficiary designated – This means the RRSP goes to the estate, not to a beneficiary.  This eliminates the tax benefits of leaving the accounts to your spouse, and also the creditor protection these accounts often have.  It also means it can be contested with the will and in some cases be dealt with by the guardian trustee or a list of other negative issues.

No beneficiary – The account then goes into the estate.  This can lead to higher fees and subject accounts to tax that would have otherwise been spared this expense.

Out dated beneficiary – Often after marriage updating the beneficiary on an RRSP is not top of mind, but updating this is simple, if something happens correcting it later it can be a real hassle.  I have heard of stories of the RRSP account accidently going to the ex wife and the tax bill paid by the current.  Have yet to see this, and with good planning hopefully I never will.

Not naming a spouse – With RRSP’s a disabled dependent and the spouse can receive tax preferred treatment.  The RRSP can roll over into the their RRSP with no tax issues on passing if they are named as the beneficiary.  If anyone else is named the beneficiary the RRSP is taxed.  It is normal for many people to want to put their children as the beneficiary.  It is important to consider the tax benefits of leaving it to the spouse (of disabled dependent  before choosing anyone else to be the beneficiary.

Beneficiaries can be on your RRSP, your work RRSP, pensions and many other accounts.  I recommend that you review all your finances at least once a year, and that point check to ensure these details are all correct.  It can make a big difference and save lots of money and stress later.

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Are RRSP’s Creditor Protected?

13 CAM RRSP Month Blog creditor protected It wasn’t too long ago that pensions, some locked in retirement accounts and insurance products were the only protected option for Canadian investors in the event of bankruptcy.  For the individual investor only the insurance options were available, as the rest would need to be set up by their employer (if they have one).  However as of July 2008, Bill C-12, an amendment to the Bankruptcy and Insolvency Act changed this.  This change provides the same protection for RRSP’s, Spousal RRSP’s, RRIF’s and some other registered accounts.

Hopefully no one invests with the intention of going bankrupt, but managing risk is about handling what we did not intend.  What this protection provides is a planning opportunity for those who want to protect themselves from this risk.  This could be a business person who wants to protect his retirement savings from business risk or a family hit by the financial devastation that can follow illness or injury.

The money does need to be place into a protected account a year before, and before you know of the pending issue.  The main purpose of this change as I understand it was to extend the same benefits of retirement savings offered to employees with a pension to those who do not have access to a pension.  As always before counting on this protection I would recommend discussing your unique financial situation with a professional as the smallest detail can make a big difference.

A last point would be to consult with a professional before accessing your money if you find yourself struggling financially.   Too often I see people cash out there RRSP’s and other protected investments trying to turn things around, when they could have saved those assets and used them to jump start a new financial life.

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Using the RRSP “Gross up” Strategy

13 CAM RRSP Month Blog gross upThis is a simple strategy to increase the size of your RRSP (Registered Retirement Savings Plan) without losing more of your income to savings.  The best way to explain the concept is with an example.  To keep the math simple we will say the tax rate is 50% (please note that there is no 50% tax rate in BC, the benefit of this strategy should be calculated at your real tax rate, however for the example 50% is much easier to visualize).

Example, John makes a $4,000 RRSP contribution at our imaginary 50% tax rate.  With this he can expect to save $2,000 on his income tax.  As many put there refund back into their RRSP, the gross up strategy says he should borrow the same amount as the refund and then use the refund to pay back the loan.  This increases the tax savings now and gets the money into your account sooner, giving your money longer to earn interest.  Now if you add a $4,000 contribution and $2,000 refund together and make that your new contribution you would now get $3,000 at our 50% rate, so we need to run through this a few times until the extra tax savings no longer makes much of a difference.

 

Normal RRSP contribution of $4,000 would create a $2,000 tax savings

Gross up RRSP contribution of $4,000 would become $8,000, with a refund of $4000 to pay off the $4,000 loan required to make the contribution.

 

To see if this strategy works for you can work out the difference at your tax bracket and hopefully with this strategy you can save a little more for retirement, without having to find any extra money.

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How much can I contribute to my RRSP?

13 CAM RRSP Month Blog How much can I contributeInstead of calculating how much RRSP (Registered Retirement Savings Plan) room you have and risk getting it wrong, I recommend looking on your “Notice of Assessment” which is sent out each year after you file your tax return.  On this form you will find both your TFSA (Tax Free Savings Account) contribution limit as well as your RRSP contribution limit.

If you contribute to an RRSP plan or Pension Plan at work will also need to be considered when determining how much you can contribute.  You are also allowed to over contribute up to $2000.  This is allowed without penalty, however you do not get to deduct the over contribution from your income.  I would use this as a safety net and do not usually recommend intentionally using this room.

Your RRSP contribution room is made up of a percentage of your taxable income from the previous year to a maximum in 2012 of $22,870 and 2013 of $23,920, added to the unused room from previous years as far back as 1991.

The RRSP contribution limit has worked as a great annual savings target for many.  It is very rare to see someone contribute the maximum to their RRSP each year and not have a sizable retirement savings.

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RRSP Deadline

The RRSP deadline for your 2012 contribution is March 1 2013.  If you are planning to get an RRSP (Registered Retirement Savings Plan) this year time is running out.  Leaving it to the last minute can be a big mistake.  With investment decisions being rushed can led to bad choices, make sure you leave lots of time to make the right choice for you.

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RRSP’s and Education (LLP)

13 CAM RRSP Month Blog  LLP education

 

The LLP (Life Long Learning Plan) can be a great option, although I rarely see a fit for it.  The Life Long Learning Plan allows you to borrow money from your RRSP (Registered Retirement Savings Plan) without the tax consequences that you incur when withdrawing the funds.  Below I have listed the common benefits and negatives to make it assist anyone who is considering this plan.

The benefits of the LLP

  1. You can borrow from your RRSP to fund your schooling (College, university, trade school).
  2. No need to pay back the funds until after you finish school.

The down side

  1. You do need to pay back the money of face tax issues
  2. If you are not working your income may be low enough paying the tax makes more sense to get the money.
  3. The money does not earn interest while you are using it.
  4. There may be fees involved in accessing the money.

If you are not working while going to school, often it is a low enough income year that taking the money out of your RRSP can make more sense, and if you are working it is usually possible to pay for school out of your existing income.  When it does make sense it works great and then I would recommend talking to a professional planner and visiting the Canadian Government website for the current details as they can change over time.

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