Blog : Guest Post

Starting to save early for retirement is extremely beneficial in the long run, especially if you have the dream of retiring with $1 million as so many Canadians do. It’s not an easy feat, but for most Canadians, retiring with $1 million is a realistic goal. You most likely won’t be flying private or have a butler, but retiring with $1 million means you can live comfortably (especially if you follow the 4% rule, which suggests withdrawing no more than 4% of your nest egg each year to maintain the principle, if you factor in interest rates and inflation).

So how can you actually save a million dollars? Discipline and planning will help you pave the way to seven figures by retirement. Here are 8 tips to help get you there:

1. Save early

Let’s say you’re 25, you have no real savings, your annual earned income is $40,000, and you plan to retire in 40 years. In order to retire with $1 million, you must save $502.14 each month for 40 years at a 6% rate of return.

Now let’s say you wait until you’re 45 to start saving (maybe paying off debt has held you back), and at this point you have no real savings, your annual earned income is $72,000, and you plan to retire in 20 years. In order to retire with $1 million, you must save $2164.31 each month at a 6% rate of return.

What to take away from this: It’s never too late to start saving, however, building wealth later in life or in the last decade before you retire can be really hard. To live well when you’re old means you should start to save while you’re young. Most millionaires in retirement that I know developed good spending, saving, and investing habits when they were young. Also, starting earlier gives your money more time to grow through compounding interest. Saving thousands a month right now may seem (or be) impossible, but you’re better tp start saving something.

2. Pay yourself regularly

Setting up automatic withdrawals (or “payments to yourself” as I like to look at them) from your checking account to your savings (or RRSP) is a great way to build wealth. It may be an adjustment at first (since you’re used to having that “extra” income), but you’ll get used to it pretty fast. You’ll also feel great knowing you haven’t dipped into cash you “should be” saving, and soon enough you won’t even miss the money.

What to take away from this: You’re doing something really good for yourself (and future you) by setting up automatic payments! Saving should be habitual and easy, so don’t make it painful or harder than it has to be.

3. Live within your means

This one shouldn’t come as a surprise to you! I’ve talked about living within your means before, and how you should avoid the pressure to spend and keeping up with the Joneses.

To know if you’re living above your means, answer this one question: do you carry a credit card balance that you’re having trouble paying off in full? If you answered yes, please read on.

You don’t need the biggest home or newest car (and anyone who makes you feel that way need not be in your life). Simply establish a comfortable standard of living you can maintain. Save at least 10% of your paycheque and save your bonuses (and raises) instead of spending them. If you live within your means you won’t need to dip into your reserve funds, and you can actually watch your savings grow.

What to take away from this: Earn more money, or spend less of what you earn (the latter is much easier to do).

4. Manage debt

Credit cards, lines of credit, loans, and any other debt you can think of should be managed and paid off ASAP, otherwise you risk throwing away thousands of dollars in interest each year. Even if you have to stop saving for a year or two, do it!

Oh, and maybe before you lay down the plastic again, ask yourself if you have enough cash in your checking account to cover the purchase. If the answer is no, ask yourself why you’re spending money you don’t have.

What to take away from this: Pay off your debt as quickly as possible (high interest debt first) and be responsible with your credit card(s).

5. Don’t splurge too soon

While a home may appreciate in value and help you eventually build wealth, a car depreciates the second you take it out of the lot, so consider where you’re making your big purchases. If you can afford the monthly payments on your leased Audi, great! But, if your monthly car payments are higher than your monthly RRSP contributions (or other savings), you need to reassess what you’re doing.

A new job or pay increase can be exciting and trigger a desire to upgrade, but rather than going out and buying the most expensive sports car in the lot, or the biggest house on the block (hello, house poor!) consider an option that’s somewhere between what you have now and what your dream is.

What to take away from this: Splurging too soon may throw you into debt you don’t want to be in. Also, buying top-of-the-line items right away leaves little to look forward to the next time you make a similar purchase. Spend your money thoughtfully.

6. Be frugal

Being frugal doesn’t mean you’re cheap – there is a difference! Prioritize your spending so you can have more of the things or experiences you really want. Let’s say it’s your partner’s birthday. A frugal person would probably have made dinner reservations, since it’s an occasion to celebrate. A cheap person won’t make reservations and may not even make dinner at home.

Indulging is okay; we all need it at times. But affordable indulgences are what you should be after (example: barbecue a surf n’ turf dinner at home instead of going to a pricey steakhouse). Make sure you’re spending within the lines.

What to take away from this: Understand that paying more doesn’t necessarily mean you’re getting better value.

7. Invest 

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

According to a study by Statistics Canada, 31% of those surveyed betweem ages 45 and 60 said their financial preparations for retirement were insufficient. Further, a study by RBC revealed 56% of non-retired Canadians were worried they wouldn’t be able to enjoy the life in which they are currently accustomed to.

Investing is one of the most powerful tools to grow your wealth. Putting all your savings into a bank account that returns 1% is not the way to grow your wealth quickly. Investing your money provides larger returns and means you could have multiple income sources, helping you rest easier in retirement.

Make sure to watch out for high and hidden fees, as they can eat away at your investments’ potential growth. Plenty of low-cost solutions for investors are popping up, and fee based advisors, like some robo-advisors, can offer unbiased investment advice, as well as help you set realistic financial goals that match your life goals.

What to take away from this: Put your money to work for you, and you eventually won’t have to work so hard for it.

8. Re-evaluate

Life changes, so don’t expect everything to go according to plan. It’s easy to say you’ll save 10% or 15% of each paycheque, but the reality is, it’s not so easy!

Inflation, income changes, emergencies, employment changes, life expectancy, and priorities (ever had a baby? It’s expensive, and wonderful!) in general can affect our financial plans. When it comes to saving, it’s always better to save more than to be sorry you didn’t.

What to take away from this: Stick to the fundamentals, and adapt as your life changes.

Retiring with $1 million doesn’t have to be a dream if you plan for it. Use my tips as guidance, and you could make your dream a reality.

 

Try out this Million Dollar Savings Calculator to see how much you should start saving each month to retire as a millionaire.

This article was written by Randy Cass, and was originally published here on June 8, 2016.

This article was written by Sandi Martin from Spring Personal Finance and was originally published on Spring the Blog July 21st 2015, but it was so good we wanted to share it on our blog as well!

If you’ve ever tried and failed at budgeting, or if you’ve never tried at all because it sounds so hard and boring, this post is for you. Those of you with a budgeting system that works and that you possibly even love and want to have babies with are excused for the day. Those of you who are convinced that budgeting doesn’t work are kindly asked to leave the room and do a little more thinking on that subject.

Okay, now that it’s just us, let me tell you a secret: I’ve tried (and failed) at budgeting so many times that it would be embarrassing if I sincerely thought that it was easy (it isn’t) and everyone else knew how to do it (they don’t). The truth is, budgeting is hard and boring. Anyone who tells you different has a book to sell.

But it’s still worth doing. 

Budgeting is worth doing if you have limited income and lots of commitments. It’s worth doing if you spend more than you make and have been for years. It’s worth doing if you’re naturally frugal, if you have joint accounts, if your income is hard to predict, or if you have more money than God.

The cloud of tv shows and books and blog posts (probably even this one) that swirls around the concept of budgeting obscures its value, which is:

• To know how much we have available to spend right now, given the commitments we’ve made for the immediate future
• To set aside money we don’t need now for things we know or think we’ll need in the future
• To base our future spending decisions on a documented (rather than estimated) past
• To know if a sudden or contemplated change to our income or expenses will be sustainable over the long term, and whether we should adjust our spending before it becomes a crisis

And finding a budgeting system that works for you, whatever your circumstances, is a matter of deciding why you’re budgeting in the first place…and only then deciding on a system to do it.

Starting with a system without thinking about what it has to do for you is one of the two reasons people fail at budgeting. (The other reason is that they’re using too many categories, btw.)

For example: You’re self-employed, with irregular income, joint expenses with your spouse, and a little bit of debt you’d like to get out from under. A particularly painful month makes it very clear that you’ve got to do something about your money, so you sign up for Mint. You enthusiastically set up your accounts and create a budget, logging in on your cell phone throughout the day and categorizing transactions enthusiastically…until your bank balance doesn’t quite match your Mint balance, and you realize that you forgot to budget enough for food but budgeted too much for shoes, and you were sick that week so you stopped checking whether Mint was categorizing your transactions properly, and now you’ve finally found a good deal on an almost-new freezer that you’ve been looking for for months on Kijiji and are flipping between your bank account and your Mint account trying to figure out if you can afford to take out the $400 to pay for it without throwing a major wrench into the next few weeks before your clients pay you, so…you think you’ve failed at budgeting.

Or: You and your partner work full-time at great-paying jobs, but have limited free time to do all of the million and one things you need and/or want to do, like spend time with your kids and cook at home. Every once in a while you think “we make lots of money…shouldn’t we have more to show for it?”, so one day you sign up for YNAB, take a few evenings to watch the videos, and begin assigning a job to every dollar you earn. You faithfully enter your transactions for a week, but realize your partner hasn’t been, and – given the punishing deadlines at work – probably won’t. You know you’re really supposed to enter those purchases manually, and feel kind of guilty every time you download them from the bank, and then your team starts a really exciting project, your kids finish the school year, and it’s not like you can’t pay off your credit card bill every month, and – besides – you make lots of money, so…you think you’ve failed at budgeting.

You aren’t wrong to get discouraged (although in each case you could conceivably have succeeded by dint of sheer bullheadedness). You’re just using a budgeting system not particularly well-suited for your circumstances. You’re spending your time solving a problem of lesser significance than your real problem. You’re using a rolled-up newspaper to fight off a bear, or a bazooka to get that damned chipmunk off your lawn. 

Those people that we dismissed earlier? The ones who were in love with their budgeting system? They’re not us. What works for someone willing to helpfully share their opinion on reddit might not work for you for any number of very legitimate reasons.

So here’s what I propose: before you read another budgeting book, or test-drive another system, think about the most important problem you’re trying to solve. Is it really important to know how much you can spend now, and of lesser importance that you know how you spent last month? Are you trying to plan for the future and need to know what your normal and comfortable spending patterns are, but don’t have any real reason to change them?

(Some people can’t even answer this question right away. If you genuinely don’t know where to start, don’t sweat it. You’ll get there.)

I’ve failed at budgeting in the past. Many long years of trial and error, punctuated by brief bursts of book-inspired inspiration and longer bursts of discouragement have taught me this: the books aren’t necessarily wrong, anybody can make any budget system work (eventually), and chipmunks can be scared off with bazookas, but budgeting works best if you know why you’re doing it in the first place, and only then choose a tool that’s appropriate for the task.

By Sandi Martin of Spring Personal Finance.

The point: it doesn’t matter what method you use to pay off debt, or if you use any method at all. What matters is that you stop creating new debt.

It’s out there: the mathematically precise, strictly rational formula for paying off your three credit cards, small car loan, and fluid line of credit balance. It’s not too hard to calculate the most efficient way to allocate every dollar and wring the most interest-busting bang out of each buck.

If that doesn’t work for you – and let’s be honest, it often doesn’t  – there’s a psychologically motivating method that throws math out the window and concentrates on tickling your brainpan with the momentum of every dollar that’s paid off – like the eponymous snowball rolling down a hill.

Proponents of these two camps are territorial and permanently at odds. (I’m just spitballing here, but I imagine it has to do with not being able to live inside somebody else’s brain and see how it works, like so many other disputes.)

Frankly, I don’t care how you pay off debt, so long as you simultaneously stop creating more.

Enter debt consolidation. Often a polarizing bone of contention between the two camps, debt consolidation – for those three of you in the back of the room unfamiliar with the concept – is when a lender gives you the money to pay back all of your other debt that’s scattered across the country and pay them back instead. They win by getting a new loan on the books, and stealing market share from the competition. You win by bringing down your overall interest rate.

What’s to argue with, right?

This is what to argue with: there’s a teeny-tiny window of opportunity in which debt consolidation is a powerful tool to bring your debt-free date closer and eat vast chunks out of the total amount of interest you’ll pay. That window of opportunity is open for about half an hour, and when it closes, it’s so hard to reopen that it might as well be painted shut.

If from the outset you don’t commit to a payment that is equal to or more than the amount you were paying on your unconsolidated debt, and that will get your three credit cards, small car loan, and fluid line of credit paid off in less time than they were originally amortized for, then you’re not paying down your debt, you’re just moving it around.

If you don’t take a long, hard look at how you got into debt in the first place, and – from minute one of your newly consolidated life – take measured, calculated steps to not do it again, those credit card balances are going to creep back up again. You’ll find yourself in the same office, maybe even in front of the same banker, signing a new set of loan papers for a new consolidation loan three years down the road.

I began my career in banking in the heyday of debt consolidation lending. The amount of new unsecured dollars added to our lending portfolio was a huge component of our sales scorecard, and while the focus shifted to include a wider spectrum of  product sales after 2008, banks are still hungry for your debt consolidation dollars. *

Folks, I’ve seen a lot of debt consolidation train wrecks, and about five of them where due to circumstances beyond the borrower’s control. The other 7,256,219 were due to the window slamming shut, either because the borrower didn’t know or didn’t care about it.

I’d love to blame the bank for it (you know I would), but I can’t. Yes, the banker you sit across from has incentive to talk you into stupid stuff that’ll not only shut the window of opportunity, but nail it closed and board it up too. (“Increasing your cash flow” is a phrase that comes to mind.)

But down in the land of brass tacks, you just signed a loan to pay off other loans. If you weren’t thinking about how you got to this point at this point, when else are you going to think about it?

If it was important enough to you to take action, why isn’t it important enough to change your behaviour?

* They’d like those dollars to be in the form of a secured line of credit, though, and will sell you on the fact that you can consolidate again and again and again, without ever having to go back into the bank to do it.

This article was written by Sandi Martin of Spring Personal Finance and originally appeared on Spring the Blog here. 

This article was written by Sandi Martin from Spring Personal Finance and was originally published here on March 29th 2016.

Ah, spring. The time of year when flowers bloom, birds sing, and the entire internet starts yelling at you for getting a tax refund or – even worse – getting a tax refund and then spending it.

The horror.

The conventional wisdom goes something like this: You shouldn’t get a tax refund, because it means that your HR department deducted too much tax from your paycheque, and you’ve been giving the government a tax-loan all year, you dummy.

Or this: The only thing you should spend your tax refund on is an RRSP contribution, because then your taxes will be lower this year, too, creating a virtuous circle of lower taxes for your income-earning lifetime. (You dummy.)

They’re all missing the point.

The problem here is one that finance writers themselves caution you against: your tax refund isn’t somehow a separate class of money than the stuff that’s deposited to your bank account every two weeks, and thinking about it differently than you think about your paycheque leads to the finger-wagging advice above…or a guilty feeling for not following it.

Let’s think of it in a different way, and maybe it will help: your tax refund is part of last year’s income, and you’re getting it today instead of with your paycheques last year. What would you have done with it if you’d been getting it all year rather than a month from now?

This is a good argument for asking to reduce your income tax deductions at source if you regularly get a refund because you pay union dues, childcare costs, contribute to your RRSP or donate to charity (among other things). Not because of the interest-free government loan malarky, but because you’ll be able to spend the income you earn when you earn it, instead of the following year. Be careful, though: if you’re not totally sure that you’ve calculated correctly, or that your tax situation this year will be the same as last year, maybe a tax free loan to the government with a refund in April is a better scenario than the reverse, especially if the resulting tax bill comes as a surprise.

Let me put it another way: what’s the goal of paying less in taxes? If your answer is “ummm…to pay less taxes?”…think of the possibilities you’re missing! (Also, you’d be a great finance writer.) Unless your goal in life is to stick it to the man, or to stop funding Provincial Program X or Federal Program Y (good luck with that, by the way), you probably want to give the government less of your money so you can use it to do the things you want to do with it.

Take the big picture view, and look at a refund as just another piece of your total income pie (mmmm….pie….). Use the total pie to spend on the things that are important to you, whether that’s as part of your overall debt reduction efforts, saving to quit your job, or finally paying for that activity your kids have been dying to join.

Treating your income tax refund as a special class of money that can only be used to do virtuous things actually encourages the other bad behaviours finance writers are bugging you about all the time: you’re in danger of relying on a future windfall to solve your spending or saving problems.

Don’t do that.