Author: Kevin Fraser

Secrets of the Wealthy – Live on 20% of your income

I hear you.  It is inconceivable that someone except the wealthy could actually live on 20% of their income.

When GC goes on to say live on the 20%, he scribbles on a white board the following:

Income – 100%

Subtract Taxes – 40%

Pay Yourself – 40%

Live on – 20%

He then says that if you can afford to pay the government 40% for the in-the-present services they provide, you should be willing to invest in your future for no less!

And if you are taking 40% of your gross income for investing, that leaves you 20%!

Understanding that 85% of (American) households are spending 110% of their income (hopefully the stat is take-home income and not gross income) one can imagine the frustration at being told you should be living on 20% and not 66% of gross.  The immediate reaction is “there is no way to reduce my expenses to live on 20%”.

I am right here with you.  That was my initial reaction too.

But then something magical happened.  GC said, “Ok, you can’t live on 20% if you are making minimum wage.  So make more than minimum wage.  Take your current expenses.  That becomes your 20%.  Now, how much do you have to earn to have the 100% to live on the 20?”

Now, the magical part wasn’t my being insulted about my middle class income.  I expect you reacted the same way to that statement I did initially.  But then I had a mindset shift that said work the problem from the opposite direction.  And this is what GC was getting at.

As an aside, the Canadian Government lets you save 18% of your income tax-deferred in an RRSP so that you will have retirement income.  

This is not an overnight fix.  This may not be a quick fix.  It may take months to years.  But the first step is mindset.

Once you shift mindset, you need to determine how to increase your income.  Some jobs have capacity for extra income (pay raise, overtime, bonuses, commission).  This that don’t would require either education/training for a promotion or transfer, or a new job, or as a last resort a side hustle.

GC says a side hustle should be the last resort because it takes away from your focus on your main job to the detriment of both.  But this is a post for another day.

As always, if you want to discuss this post, or anything else, give me a shout!

Once you are ready to set aside some (or all) of that 40%, let me know and we can discuss how I can help you out.  There are multiple avenues to apply step 4!

Manage your Travel Insurance while on the trip; Anywhere, Anytime!

Exciting news today from one of the Insurance Companies I deal with.  They now have an online portal so that clients can manage their Travel Policies.

  • Convenient access anytime, anywhere
    • Immediate assistance 24/7—perfect for when you can’t reach me or the companies’ Customer Service team!
    • Accessibility from any (internet connected) device (phone/tablet/laptop/desktop)
  • Self-serve policy management
    • The ability to modify your policies,
      • add extensions,
      • renew existing policies,
      • and more!
  • Self-serve claim management
    • start a medical**, dental, trip cancellation or trip interruption claim online,
    • upload claim documents to an existing claim, and
    • check a claim’s status.

**If you are admitted to a hospital overnight, your claim can’t be started online.

If you are planning a trip (or have one booked) and need Travel Insurance, reach out!

 

kevin@ksfraser.com
587-600-0013
Airdrie, Alberta
Canada

Pay Yourself First

This is a bit of advice that many coaches and advisors provide.  But do you know what they mean?

This is related to the Secrets of the Wealthy post.

Problem 1 – You can’t save yourself rich

It’s a well known “secret” that you can’t save yourself rich.  If you take any excess money at the end of the month, and stick it into a “savings” account at the bank, the interest rate (if any) will almost always be less than the real rate of inflation.  So over time, your purchasing power decreases.

Problem 2 – No spare money!

Another issue with “saving” is that 85% of households spend 110% of their income.  Therefore there isn’t any extra money at the end of the month.

The solution?

This is not the entire solution, this is step 1.

Pay Yourself First!

What this means, is before you spend ANY of that income that came in, pay yourself off of the top.   Ways to do this:

  • Have your employer deposit a portion of your income into a different bank account.  Out of sight, out of mind!
  • If your employer refuses (or if you are self employed), the first action you take on pay day is to move the amount you are “paying yourself” into that other bank account.

And once the other bank account accumulates enough “savings”, purchase an asset (something that generates passive income). (Step 4 of the Secrets of the Wealthy)

How much to pay yourself?

If you are following the Secrets of the Wealthy posts, you will see that the recommendation from GC was to live on 20% of your income.  With that number, he is saying you should be paying yourself (i.e. saving) 40% of your income.  I will expand further on that in the related post.  I hear what you are thinking – there is no way to live on 20% of your income.  I address this in the related post!

Secrets of the Wealthy!

One of the people I follow shared today the following Secrets of the Wealthy. Of course, there is more context than just the sound bite. The secrets:

  1. Pay yourself first
  2. Live on 20% of your income
  3. Don’t lose money
  4. Invest in assets that cash flow
  5. Have more passive income than earned income.

He goes on to say:

“The most important is to be patient and invest for the long term. If there is immediate gratification, it is most likely an expense rather than an investment. Investments take time to bear fruit.”

I will expand on these points in the next few posts. So don’t get your hackles up on the live on 20% until I’ve expanded on that…

If you would like to discuss any of these, or any other topics, please reach out!

I just learned a new term – HENRY

HENRY – High Earner Not Rich Yet. High income, but even higher lifestyle.

Have you heard this term before? High Earner Not Rich Yet. This is used to describe people who have a high income, but an even higher lifestyle.

I learned the term reading an article about a couple who called into Dave Ramsey’s show. They earn 225,000 between the 2 of them, but they have almost 1,000,000 in debt (student loans, car loans, mortgage, credit cards…). Due to their debt load and rising interest rates, they are now on the verge of bankruptcy.

How ChatGPT describes the RRSP and TFSA

Have you heard about ChatGPT? It is a chatbot that is powered by an Artificial Intelligence. It has a reasonable knowledge base behind it, but remember to take things with a grain of salt (at least for the next few years).

Disclaimer: This is a very generalized article. The basis of it probably applies to your situation, but the details may not. And while I am a financial advisor, I am not YOUR advisor (unless, of course, we do have the advisor-client relationship). You should talk to your (an) advisor before taking action because of this article!

Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are two of the most popular savings options in Canada. Both of these savings plans offer benefits and drawbacks, and the right choice for you depends on your financial goals and circumstances.

RRSPs are savings plans designed specifically to help Canadians save for retirement. Contributions to an RRSP are tax-deductible, and any income earned within the RRSP is not taxed until it is withdrawn. This tax-deferred growth can help boost your retirement savings over time. Additionally, RRSP contributions may lower your taxable income in the year you make the contribution, which can reduce the amount of taxes you owe.

TFSAs, on the other hand, are savings accounts that allow you to earn investment income tax-free. Unlike RRSPs, contributions to a TFSA are not tax-deductible. However, any income earned within a TFSA, including investment earnings, capital gains, and dividends, is not taxed when withdrawn. TFSAs are a good option for individuals who want to save for short-term goals, such as a down payment on a house or a vacation.

When it comes to contribution limits, RRSPs have a annual contribution limit that is based on your income, while TFSAs have a set annual contribution limit that increases over time. Currently, the annual contribution limit for TFSAs is $6,000. Withdrawals from an RRSP are taxed as income in the year they are made, while withdrawals from a TFSA are tax-free.

Another key difference between RRSPs and TFSAs is that RRSPs have a deadline for making contributions for the current tax year, which is typically in the first 60 days of the following year. TFSAs, on the other hand, have no deadline for contributions, and unused contribution room can be carried over from year to year.

In conclusion, both RRSPs and TFSAs offer benefits, and the right choice for you depends on your financial goals and circumstances. If you are primarily focused on saving for retirement, an RRSP may be the better option, as contributions are tax-deductible and investment growth is tax-deferred. However, if you are saving for short-term goals, a TFSA may be the better choice, as contributions are not tax-deductible, but withdrawals are tax-free. Before making a decision, it is important to consider your financial situation and consult with a financial advisor to determine which option is best for you.

It’s RRSP Season – or would the TFSA be better?

For the rest of the month, you will be bombarded with ads for RRSP investments. But is the RRSP the right vehicle for you to invest in?

Disclaimer: This is a very generalized article. The basis of it probably applies to your situation, but the details may not. And while I am a financial advisor, I am not YOUR advisor (unless, of course, we do have the advisor-client relationship). You should talk to your (an) advisor before taking action because of this article!

What is an RRSP?

Let’s review the RRSP. It is a tax deferral. You take after tax dollars, invest into an RRSP, claim the amount invested as a deduction against your taxable income, and receive a reduced amount of taxes owing due to this. If your taxes owing goes negative, you get a refund. This in effect converts your contribution to a pre-tax investment.

Withdrawal Time (Retirement)

When you withdraw the money from your RRSP years down the road (i,e, retirement) , it is now taxable income. So you pay taxes on the withdrawal.

If you contribute when you are in the first tax bracket (income less than $50,197 in 2022), you save the 1st tax rate (about 15%). But if when you withdraw the money, your pension, CPP, OAS, GIS puts you into the second tax bracket, your RRSP withdrawal now is taxed at the second rate (20%). So by deferring the taxes, you are actually paying more taxes than had you invested in a non RRSP account.

TFSA

Contrast to a TFSA account. Once again, you take after tax money and contribute. The options to invest in are usually the same (or very similar) as what’s available in the RRSP, so lets pretend you bought identical investment funds within the accounts. For this comparison we will assume identical returns within the RRSP vs TFSA. When you take money out of the TFSA, you do NOT pay taxes on the withdrawal. You will have an extra 15% or 20% (or more) at withdrawal time.

Conclusion

At the end of the day (assuming same contribution date and withdrawal date), you keep more money coming out of the TFSA than out of the RRSP, UNLESS you also invest the tax refund. The power of compounding will make the RRSP worth more if you do in fact also invest the refund into your RRSP.

Now, if you are in a higher tax bracket at contribution time, the calculations change. This is why it is important to speak with an advisor!

Schedule a Meeting with Kevin

Schedule a meeting

Do you have a Risk Management Plan?

Do you have a plan for when something unfavorable happens?

Back when I was a Project Manager, one of the earliest activities we did in a project was the Risk Management Plan. As we were scoping out the project, we would identify things that could go wrong, and what their impacts would be. We also identified what the preventative measures we could take were, as well as the post-event actions to take.

As we did this, we identified the costs of the preventative measure, the cost of the event, the cost of post actions, and the likelihood of the event. We could then determine if taking the preventative measures were of value.

What does this have to do with a person’s life?

We face risks each and every day. Consider that your job is (usually) a large part of your life. What happens if there is a snow day? If you are on salary, you might cheer and do something else. Or perhaps your employer has given you a laptop so that you can work from home. But what if you are a wage employee, and don’t get paid if you don’t work? Or what if your car breaks down, do you have a different way to get in?

And those are reasonably minor risks, with potentially low (big picture) impacts. How about if your house burns down?

Insurance is one way of passing the financial risk of an event to a 3rd party.

We regularly go through our Risk Management Plan trying to identify risks we haven’t yet identified, validating the ones we have, re-costing the preventative measures and the expenses of the event, as well as updating our post event actions.

Would you like to find out how we can help you with your Risk Management Plan?

Schedule a Meeting with Kevin

Schedule a meeting

Have you maxed out your RRSP?

It’s not too late (yet) to contribute to your RRSP and be able to deduct it from last year’s taxes.

And you don’t have to contribute to an existing account. You are allowed to have accounts at multiple institutes. It is the dollar amount that matters!

Questions? Don’t hesitate to contact me!

kevin@ksfraser.com
587-600-0013
Airdrie, Alberta
Canada

Schedule a Meeting with Kevin

Schedule a meeting

CMHC lowers Credit Score required to qualify

A few days ago (July 2021) the Canada Mortgage and Housing Corporation announced that it was rolling back its minimum credit score from 660 to 600. They had raised their score a while ago from 600 to 660 thinking that making it harder for people to get a CMHC insured mortgage would help cool the housing market. Unfortunately for them, the other insurers didn’t follow suit so all it did was cost them market share.

Does this mean NOW is the ideal time to purchase that house you were eyeing up?

If you would like to discuss your financial goals and plans, give me a shout!

kevin@ksfraser.com
587-600-0013
Airdrie, Alberta
Canada