Almost every financial planner will tell you that you should set aside money for a rainy day. It’s like a golden rule that you must have a rainy day fund. Some advisors say 3 months income, others 6 months. Some even say a year’s income should be stored in cash or cash-like savings just in case you lose your job, have a massive car repair bill, a dead fridge, or you suddenly need to go on a trip to Belize.
On some sunny spring days, it rains money. By leaving an upside-down umbrella outside, you can create a rainy day fund.
Fortunately I’m not a financial planner so I can say whatever I want and I’m going to tell you that unless you’re in a very special circumstance you shouldn’t have a rainy day fund.
Rainy day funds enable random trips to Belize
I’m sure you noticed that one of the emergencies I just rattled off was kind of different. To paraphrase high-quality children’s television, it just wasn’t the same as the others. Look, I’ve got nothing against Belize but the first thing you have to realize about yourself is that when given a large quantity of cash you’re very likely to spend it either on a big stupid purchase or many small stupid purchases. Maybe you’re the one person who absolutely won’t under any circumstance succumb to the immense pressure of a lump of cash equal to several months of income. Don’t lie to yourself, you’re probably not. You’re probably thinking “Dean it’s my savings, I can do what I want.” Sure. Just don’t lie to yourself about your real motives— call it savings for a random trip to Belize, not an rainy day fund.
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Ahhh, pensions. They can be your ticket to financial freedom. In the best of cases, having a pension is like having a job for the rest of your life without working. In other cases employees view their pensions as silver-bullet solutions to retirement and ignore their financial responsibilities. Sadly many people don’t pay any attention to their pensions or the place a pension holds in their financial future until it’s too late to make a difference. Today I’m going to introduce you to the various types of pensions and how to determine their value. Along the way I’ll touch on some common questions. We have lots to talk about so hang in there!
What is a pension?
A pension is an agreement between the pensioner (beneficiary) and the payer to receive a set amount of money (benefits) on a regular basis, generally following retirement from employment. Typically pension payments will last until the beneficiary dies. In some cases, the beneficiary’s surviving spouse or family will continue to receive benefits, possibly at a different rate.
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The time-value of money is the principle that money today has a different value than money tomorrow. At the centre of this concept is the annuity and its formula, which I will not derive or prove here because I’m the only one who will find it interesting. An annuity is a set of fixed payments that are made over a specified period of time. I’m going to focus on a specific type of annuity here: a life annuity. A life annuity is an insurance policy sold by an insurance company that pays a (usually monthly) payment to the buyer until the buyer (or the buyer’s surviving partner in some cases) dies. Sometimes you just want to be able to know how much money you’re going to have in the future and the life annuity is one way to do that. Life annuities can seem expensive if you’re not used to seeing the numbers. The high price is the price of certainty. I’m going to talk about annuities in the context of retirement, but the math involved translates into pretty much every area of finance so pay attention. The words annuity and life annuity will be used interchangeably depending on context. Get ready to bite off more than most of us can chew, myself included. Continue reading →
I’ve met quite a few people who complain that their ‘investors’ or mutual funds lose their money all the time. Some of them use this as justification to just blow all their money on boats and going out for lunch every couple of days. Bad call bros. Your investor may be making terrible choices (which you have allowed) but more than likely you can fix the problem, get in control and stop being such a fatalist about your financial future by switching to index investing. Of all the potential reasons why your investment situation is sucking, there are two that are most likely the problem for you:
- Your investor or mutual fund is picking stocks that suck
- You’re paying insane MERs.
Index investing is the way to beat half of the money investing in the stock market, guaranteed! Seriously. Continue reading →
Awhile back I introduced a simple rule of growing your net worth: pay or save towards the highest after-tax interest rate first, regardless of what you owe or own. Today I’ll introduce the investment types with respect to taxes and run some numbers using a rental property as an example. Each investment type affects your taxes in different ways and what you choose to do with your money should certainly take your taxes into account. Continue reading →
One of the easiest things I’ve done to allow me to better understand my financial situation was to get CRA online access (the CRA is the Canada Revenue Agency). The CRA, through a service called “My Account”, allows you get pretty much all of the paper information you’d get from them automatically but online, accurate, up to date and securely. And it’s free.
Here are a few things you can do with CRA online access:
- See your unused RRSP and TFSA contribution room
- See your previous notices of assessment and reassessment
- See your T4 / T4s and other tax slips
- Modify your previous tax returns returns
- Change your address, apply for child benefits or arrange direct deposit
CRA online access mitigates your laziness
I know what you’re thinking already. Boring! ”Why the heck would I want any more information than what they already mail me, Dean?” I’ll tell you. Because you won’t get wealthy by burying your head in the sand and because you’re lazy like me. Imagine you’ve received your income tax refund (or paid income tax owing) and then you realize you missed a deduction worth $15. The average person wouldn’t ‘waste’ the time filing it. That’s lame. It’s $15!! If you found that much money on the side of the road you’d pick it up. If someone told you to hold their toothbrush for 10 minutes and then they’d give you $15, you’d probably do it. Well with CRA online access it takes about 10 minutes to modify your tax return. Or 3 minutes to change your address when you move so that your cheques will arrive on time (still using cheques? Get direct deposit with CRA online access!). Plus it doesn’t increase paperwork for anyone because it’s all online. Yada dada.
Look, I’m making a big deal out of this. But as you read more of my stuff you’ll start to see a recurring theme: small things make all the difference.
This one time I was walking down the street with my laptop in hand. A crazy dude pointed a gun at me from across the street and I instinctively lifted my laptop to stop the bullet. Fortunately I was fine and the perp was apprehended but my laptop was devastated. Ok, this didn’t actually happen. But things with similar effects happen every day, and that’s why I’ve been backing up everything for the past few years. I use a service called Backblaze because they’re cheap, reliable and tech-savvy, but we’ll get to that in a second. Continue reading →
A few days ago I gave you all a crash-course in RRSPs. You had a blast reading it but then I threw in another acronym at the end: TFSA. You were probably like “where did that come from, Dean?”. Now I’m going to tell you. The TFSA is the Tax-Free Savings Account. It was introduced by the Conservative government in 2009 as yet another way to help us pay less taxes on our savings even though Canadians don’t seem to save that much. Also, they hadn’t met their quota for acronyms (seriously we have IPP, RRSP, RRIF, RESP, RDSP, they’re even talking about introducing a PRPP and that’s not all of them).
If you are ignoring TFSAs because you’re deeply in love with RRSPs or you’re just too lazy to learn, listen up. TFSAs KILL. They’re awesome. They will turbo-charge and nitro your financial position if you use them correctly. If you have a modest but solid income and savings tendencies, a TFSA will change your life. Continue reading →
Today I want to talk about something that confuses a lot of people: the registered retirement savings plan or RRSP. The RRSP is a quintessentially Canadian retirement-savings tool that was introduced by the Liberal government in 1957. Some of you may be asking why I am talking about RRSPs literally days before the end of the RRSP “season”. There are two reasons. The first is that it’s bad practice to pay attention to RRSP seasons because you’ll get better return for your dollar, save money and have less stress in your life if you’re contributing year-round because of dollar-cost averaging. Secondly, I want to make sure you take the time to understand the RRSP instead of quickly skimming this and then making hasty decisions. Continue reading →