Stacking Bordens #1: RRSP v TFSA

Stacking Bordens #1: RRSP v TFSA

If you’ve read some of my other posts about money, found here and here, I’ve explained how 2016 is the year I turn things around. I used to be really bad with my spending, I didn’t understand much about personal finance, and I never really new what this ignorance was costing me.

So, after a few panicked life episodes where I feared for my financial future, I read a few books and completely overhauled my finances.

I’ll write about what I did as simply and as hilariously as I can, but it’s important to do your own reading so that you make decisions that are best for your situation. I am not a financial advisor, nor am I very smart.

This post is about the difference between a TFSA and and RRSP, and which I prefer. This is a great place to start for the average Canadian interested in Stacking Mad Bordens. The TFSA and RRSP are the two greatest tax-dodging, wealth building mechanisms available to Canadians, and we should all have one of each.

Much of what I have learned on this topic comes from the writing of Gordon Pape. This nice man.

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After reading Dave Chilton’s The Wealthy Barber Returns, I recommend Pape’s books on RRSPs and TFSAs. For my American fanbase, the RRSP is the equivalent of the 401K, while the TFSA is your ROTH IRA.

An RRSP is like a bucket. You can fill it with money. It’s not an investment, just a bucket. However, for every dollar you contribute to an RRSP, your taxable income is reduced by a dollar. If you make $55 000 a year, you will pay about $14 300 of that to the tax man.  But if you make $55 000 and contribute $5000 of that to an RRSP, you will only pay tax on $50 000, meaning a tax bill of $13 000. Not bad, right? And you still have that $5000, it’s just waiting in your RRSP account until you need it. The day will come, however, when you retire and want that $5000. It is a Registered Retirement Savings Plan after all. However, because you are likely to have a smaller income when you retire, that $5000 will be taxed at lower rate than when you are working. You can’t avoid the tax man, but you can hold him at bay. For a while.

A TFSA doesn’t hold the income tax man at bay initially. Contributing to a Tax Free Savings Account will not reduce your taxable income. If you make $55 000 and contribute $5000 to a TFSA, you will still be taxed on the $55 000. So what’s the point?

The POINT is that the TFSA, just like an RRSP, is also just a bucket. It holds things. If you put money in it, it holds money. If that money accrues interest, then you can spend that interest without ever paying tax on it, or the principle. That’s not true for any other banking product, registered or non-registered (not a TFSA or RRSP). In every other situation outside of a TFSA,  you would have to claim the additional income on your taxes.

From this description, it would seem like the RRSP might be the winner, but I don’t think so. Because the TFSA and RRSP are just buckets, you can put things in them other than money. These buckets can hold your INVESTMENT portfolios.

Here’s where the TFSA wins in my books. If you hold your investment portfolio in a TFSA, you can MAKE A KILLING in the stock market and pay no tax on that money at all. EVER.

For example, if I contribute $458 a month to a TFSA (the maximum amount allowable. There’s a $5500 a year cap) that holds investments with an average annual rate of return of 6%, I will have invested $55 000 after ten years, but my TFSA will be worth $76,844.03. At 25 years I’ll have contributed $137 500, but my TFSA will be holding $319,860.10.

Funds in an RRSP can also be invested at the same rate of return, but you would owe a good chunk of that money to this guy, who can, quite frankly, afford his own sweaters. If you max out your contributions to your TFSA, then start thinking about the RRSP.

I’ll get into details on exactly where and how I have invested my money in a future post (it’s just index funds, nothing exciting)  but the Canadian reader would benefit greatly from checking out The Value of Simple from their library, in which Dr. John Robertson spells out exactly how to open an investment account for every major (and some not so major) bank in the country.

Fill your buckets. Stack some Bordens.

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66 Days to Being Absolutely Ripped for Life, Part V

66 Days to Being Absolutely Ripped for Life, Part V

This one is about counting calories and the worst run I’ve ever had.

If you’re interested in beginning at the beginning, I explain my plan in part I, IIIII, and IV but very simply my new rules for exercise are;

  1. Get out of bed everyday and exercise
  2. However I want
  3. for 30 minutes

Because I read that it takes the average person 66 days to form a habit, I will follow these rules for a continuous 66 days without interruption.

My diet during these 66 days (and counting) has been … not perfect.

I’ve been eating a good breakfast. My nice wife usually makes us eggs in the morning. Which is pretty great. I pack a lunch of leftovers, and dinner is mostly veggies and fish. I do eat junk food sometimes, but I try not to eat a lot of it. If I’ve kept it to three square meals a day without much snacking, I consider it a good day. So, as you can see, no hard and fast dieting rules this time. Just guidelines.

I’m not counting calories.

But if you want to, it’s easy. This simplest way to do this is to find out your Total Daily Energy Expenditure. This is kind of a rough estimate of how many calories you normally burn in a day. Mine is 2530. What this means is that, based on my profile (M, 33, 5’11 and a bunch of other factors) I need to eat 2530 a day to maintain my current weight.

If I want to lose weight, I eat less than that.

To know how many calories I eat, I’ve used Livestrong’s MyPlate and Myfitness Pal. Both of them do exactly what they are supposed to do. You create an account, add your age, weight, height, etc., and log your food (you can customize meals on both, which is convenient if you eat a lot of the same things) to get your calorie intake.  You can subtract the calories you lost exercising (both programs will help you with this) and in the end you’ll have your over all daily caloric intake.

If that number is less than your TDEE, congrats. You’ve lost a little weight. Now do it again, every day.

If you can manage it, counting calories in this way totally works. You’ll probably lose weight. Even if these numbers aren’t 100% accurate, I think mostly it just quantifies your process and makes losing weight a more concrete, objective experience. Understanding these numbers can be very helpful in your weight loss journey.

But I hate it. It takes long time and bums me out, so I haven’t done it in years.

Here are some pictures! This is day one, day 14 and … day 50!

Yes. I kept up with my plan for at least (I don’t want to give away the ending) 50 days. I wish I knew exactly how much I weighed at the beginning and throughout the process. I would guess that I’m around 195 in that first pic, and 182 or so by day 50.

It wasn’t hard to keep up. I’ve said it before, getting out of bed at 6:00 to lift heavy things or push yourself on a treadmill sucks. But I just kept doing it. I didn’t miss a day.

Once, I decided to take my wife out for dinner to celebrate something, I forget. This was around day 40 or so. We went to the kind of place where you fry your own fish. Delicious, at the time, until not long after I found myself sick at every end. The next day, despite definitely having food poisoning, I decided that NO, I would not break the streak.

So after about 23 hours on either the couch or the toilet, I got up, I dressed in my warmest clothes, set a timer for 30 minutes, and ran around my apartment building in circles, sweating and aching, wanting to die. I puked almost immediately upon completion of the run, had a shower and slept in fits. It was awful. But I did this.

And I didn’t break the streak, and now anytime I don’t feel like running, I just remember that if I can manage it when I’m close to death, I can manage it anytime.

Next time: Day 66 and the Marathon I Stupidly Signed Up For!

66 Days to Being Absolutely Ripped for Life, Part IV

66 Days to Being Absolutely Ripped for Life, Part IV

If you’re interested in beginning at the beginning, I explain my plan in part I, II and III, but very simply my new rules for exercise are;

  1. Get out of bed everyday and exercise
  2. However I want
  3. for 30 minutes

Because I read that it takes the average person 66 days to form a habit, I will follow these rules for a continuous 66 days without interruption. This is my “week two” post (full disclosure, the 66 days have long since passed).

Here is a comparison after day one and day fourteen –

You can see that there was already a little improvement in my physique after just fourteen days of regular exercise. It would be hard to tell without taking pictures, so that’s the first recommendation I would make for tracking your progress. Take a picture once a week.

My routine by the end of week two had started to become pretty darn…routine. I really had three workouts, I called them weightscircuit, and cardio. Every day I would just pick one of these routines and go to it for 30 minutes. I think that varying the routine has been extremely helpful to keep me somewhat enthusiastic about the gym. If I was only doing one of these routines, I feel like I would burn out with boredom quite quickly.

I also don’t make any arbitrary rules about workout frequency. I just pick which ever I feel like doing, even if I do the same thing five days in a row, and do it. Some days the weights just look too heavy, other days I can’t fathom getting on the treadmill. The circuit is a nice blend of both, so I pick this one often. The weight machines are organized in a nice circuit at my community centre. The circuit includes machines that focus on chest, back, shoulders, and legs. I just do one set of 8-10 reps at each machine and move on, repeating the entire circuit for about 30 minutes.

Once, for a week, I only did cardio on the exercise bike because I was trying to finish a book. Maybe my “weights game” suffered a little, but I didn’t care. I would get back to weights when I felt like it, and over time all would even out. I assumed.

It also helped, I think, that I kept track of every workout. I just kept a note on my phone and added a star every time I worked out. You could always look at a calendar to see how many days you’ve worked out, but as you’ve probably read about in freakanomics, or your behaviour analysis textbooks, even small incentives can change a person’s behaviour. I started to look forward to filling up a line, even “getting to the comma” at the end of the week.

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It seems small, but I think it helps.

(NNP and NSW = No New Pants and No Sad Wife. You know, from being fat and dying young)

So take pictures and keep track of your workouts. Both have been motivating, and useful if you’re going to write a super engaging and helpful blog about your progress.

Next time on Getting Ripped: Diet and the Worst Workout of my Life

How Understanding Bank Fees Saved Me $500 000

How Understanding Bank Fees Saved Me $500 000

MER. Management Expense Ratio. Mother#&@%* Eats your Return.

Haven’t heard this term before? Either had I. When I finally paid off my student loan, I went to see a financial advisor at a Big Brick and Mortar Canadian Bank, she talked me into investing in a high MER mutual fund. And I did. For years.

You know when want to buy a car, if you’re interested in a particular model, you do  your research into mileage, expense, reliability, costs, etc. That’s just smart shopping. But I didn’t and I would suggest that most people just don’t consider the fine details  when purchasing a financial product from the bank, like a mutual fund. I certainly did not.

In my ignorance, I did not equate “financial advisor” with salesmen. To me, a car salesman existed entirely to rip you off, a financial advisor was totally different. They are there to give you the best advice possible to manage your money. Why? Because you belong to the bank and so, as a kind gesture, the bank provides free financial planning services to help their customers make good decisions. Because they are kind. Because they want what’s best for you.

But that, of course, is the lie.

And they’ve been successful lying to us for years. Because they were allowed to.

Prior to July 2016, Canadian mutual fund salesmen and Investment Advisors did not have to publish the MERs of a fund they sold you. The MER of course being the fee associated with buying a mutual fund. It’s a yearly fee that you pay to your bank and advisor for “managing” your mutual fund. And these fees are expensive. Usually 2.5% every year for as long as you hold the fund. This adds up quickly.

2.5% may not seem like a lot to invest in a mutual fund, but here’s what Canadian Finance Guru, Preet Banarjee said on the topic last month on the  CBC . The article is titled, “Banks misleading clients on mutual funds”

If you have a fund that has an MER of 2.5 per cent, that’s going to consume almost 50 per cent of the potential value of the portfolio over 25 years,” he explained. “When you frame it that way, it becomes very clear that fees are a big deal.

This makes sense. If you’re mutual fund is returning a conservative 5% a year, half of your returns are going to fees.

50 PERCENT!?

Since I plan on retiring 25 years from now with $1 000 000 in the bank, a MER of 2.5 would cost me $500 000 by the time I’m ready to hang up my white board pens.

Now, of course, you can’t escape fees all together, but you can drastically reduce fees to well below 2.5%. My investments cost me less than 1% currently, and I have plans to reduce them to about 0.3% or less in a few years when I have a little more capital. (I’ll explain exactly how you can do this too in another post, promise)

So, if it’s possible to pay less, why do banks charge such high fees for mutual funds? Because financial advisors are salesmen. And, as they’ve been allowed to hide fees from us for years, they’ve gotten darn good at it.

Do you know what the MER is on your mutual fund? It took me forever to find it. It doesn’t tell me the MER on my bank statement, my T3, my online banking account, or even on the fund’s website, which is supposed to give a detailed history of its performance. I had to find out the MER of my mutual fund in the fine print of the physical paperwork that I signed when I bought into the fund years ago. And I was pissed off.

It gets worse when you imagine that you have a good understanding of how your fund is performing, and you have yet to subtract the MER. Think you’re getting a nice 6% or 7% return on your investments? Sorry, you’re not. It’s more like 6 – 2.5, meaning you’re getting a paltry return of 3.5%. Barely beating inflation.

But that’s going to change. New banking regulations are coming into place this summer which will demand that banks disclose fees when  bankers or advisors push products on their customers. This is from the Globe and Mail,

“As client fees become more transparent, some investors are going to get sticker shock in what they are paying, particularly if they are in mutual funds with high MERs [management expense ratio fees],”

Sticker shock. There’s the used car analogy again.

While focusing entirely on fees rather than your returns is kind of like the tail wagging the dog, it’s important to note just how much these fees are eating into your returns.

But you can do something about it. You can refuse to be a MERman (or MERmaid) but that’s another post.

(Hint: It’s ETFs and Index Funds)

66 Days to Being Absolutely Ripped for Life, Part III

66 Days to Being Absolutely Ripped for Life, Part III

I go into some detail as to why I made this 66 day commitment in part I and II, but very simply my new rules for exercise are that I will, for 66 days;

1. Get out of bed and exercise
2. However I wanted
3. for 30 minutes

Because I read that it takes 66 days to form a habit, it made sense that the first 66 days would be the most difficult. They were.

(Full disclosure, it’s been more than 66 days since I began this journey ((I hate that phrase, and I apologize for it. (((Are double brackets a thing?))) )) and I will share my successes and failures along the way, as well as where I’m at now, in further editions of this story)

Aside from day one, in which I felt excited and energized by a new routine, the rest of that first week was difficult. Because I live in a small condo, my only real option for exercise is the community centre gym down the block. It’s small, but it has everything I need to have a variety of work out choices. A few treadmills and bikes, a bunch of benches with free weights and bars. That’s really it. The gym opens at 6:00, and if I want to get to work by 7:30, I need to get there just as it opens. This means getting out of bed at 5:40.

For some of you, this is not a big deal. For me, it was tough. That first week I had to keep changing the alarm song on my phone as I so quickly grew to resent the music and artist that woke me up at such a dark, cold hour.

My routine is pretty simple. I get up, put on the clothes that I leave in the washroom, make instant coffee and walk to the gym without a shower, and half asleep. Usually in the rain. When there, I try to vary my workout. Sometimes I run on the treadmill for 30 minutes, sometimes I do a circuit of the weight machines, other times I’ll use the exercise bike (this is best if I have to do reading for my grad program, which is often). Sometimes I’ll do a free weight routine. Usually Triceps, biceps, chest, back, shoulders for 3 sets of 10-15 each, keeping breaks between sets to a bare minimum.

On the weekends, while I will let myself do just 30 minutes if all I’m feeling, but I’ll usually do both weights and cardio at the gym, or if it’s nice out I’ll do the 10k run around Stanley Park. This is my favourite, but it’s also crowded if you don’t head out before 8:00am.

The first week went much like above. It was difficult after three or four days to get up that early, and I was finding myself starving when I got to work, and falling asleep at the couch at the “early” hour of 10:00.

Before I started the new routine, I usually skipped breakfast and stayed up past midnight, getting out of bed around 7:00. I learned quickly that this whole experiment would shake up my entire day, not just my mornings.

I also found that while it was hard to get up, once I got moving I felt just fine. And throughout the day I felt good, if a little tired, because I had exercised. I felt the pride that comes with doing something difficult while most people are still asleep. That sense of pride was the first true benefit of my new fitness regime.

I liked feeling like I had accomplished something before my students even arrived to start the first class.

That’s what carried me through into week two. And probably into week three, and four…

Next time: I’ll post a picture after two weeks and share some of the ways I’ve been tracking data.

What I Did With My Money Before I Knew I Needed to Do Something With It

What I Did With My Money Before I Knew I Needed to Do Something With It

Embarrassed and afraid that I don’t understand much about my personal finances, that I can’t afford the things I need, and that I’ve felt ‘broke’ since I paid my first bill at 18, I’ve resolved to make some changes. At 33.

It began with the fear of not knowing, which is a deathly, cold, but somehow sweaty feeling that creeps in whenever I don’t understand something that I know I should. This fear, which set in most recently after a visit to the bank where I faked my way through figuring out how I was going to pay for graduate school, can at times drive me toward making good choices. Not always, but sometimes.

This time, it lead me to picking up Dave Chilton’ s The Wealthy Barber Returns out of a stack of someone else’s unwanted overflow.

This book taught me a lot, such as what a TFSA (US, Roth IRA) and RRSP (US, 401k) were, how (and why) to pay down my debts, and how to start saving for what I needed.

Some things, I already knew. This is a post about where I started.

After university, I had a boatload of student debt. No one’s fault really but my own. I worked throughout school and my parents helped me out generously, but I qualified for loans and so I took them. And spent them. Mostly on dial-a-beer, cds, concerts, pizza, a few vacations with my then girlfriend, a few new guitars and amps, and the occasional textbook. After five years and two undergrad degrees, this was about $28 000 worth of almost fruitless spending with borrowed money.

This was irresponsible.

And while I’m not defending myself, I knew that while I was in school the loans were interest free, and after school I would just pay them back with the money I received from the amazing job that was sure to come.

I didn’t see the loan as a tax on my future income; I saw it as part of life. Everyone had debt, right? My parents had debt, and they were smart people. I planned to enjoy university while I could and worry about it later. That was the plan.

When I graduated I had about $3000 in my bank account and a job making $18 dollars an hour (26 hours a week) as a Special Education Assistant in Vancouver, by far the most expensive city in the country. Almost broke, not making much more money than my expenses, including debt repayment, and with no intention of finding a second job, I did what any wise 22 year old would do. I bought a second hand scooter. I named him Cringer, because he feared hills and speed over 50.

It cost 2/3 of my savings, but it was super rad. It was a Yamaha BW50. It was also a poor decision.

Eventually I found a job teaching. It paid $37 500 and I felt like I hit the jackpot. But as my income increased, so did my spending. It wasn’t long before I upgraded to a new motorcycle and got out of the basement apartment and into a place with a pool, closer to the mall. I still never had more that a thousand dollars in the bank, but I was a teacher now. I was gilded. I was going to be OK.

I kept up this lifestyle for half a decade. Never having much savings, just trying to have fun and eat good sushi. I had never heard the term “Lifestyle Inflation”, but I was sure guilty of it.

But the debts didn’t go away. I never really checked the OSAP (Ontario Student Assistance Program, the lender) website which let me track my payments. I just assumed things were going well. After a few years, when I finally did check it, I was stunned by how much money I still owed. Where had all my money been going every month?

You already know – to interest. Ug. I felt sick.

The OSAP website included an interest calculator, and when I found out what my loan was costing me on my current repayment schedule, I was floored. It was well over 30 grand.

Immediately, I panicked and took the few thousand I did have in the bank and threw it at the loan. Then I upped the repayment schedule and stopped the daily sushi binge. For 2 years, between 24 and 26, I didn’t spend a lot of money. I ate primarily from the discount grocery store, didn’t go on any big trips, and gave every spare dime to the OSAP people.

One day, I got a letter in the mail. In a large, bold font it read: “Congratulations, you have paid your student loans in full”. It was a proud day, and that letter hung on my fridge for over two years.

I wish I knew the damage that interest repayments can have on my debt repayment. I just didn’t understand that paying the minimum was no way to pay down the debt. I know, it’s very naive, and I have no excuses.

But mistakes build character, and I know now. To this day I take on debt only when absolutely necessary, and even then it’s an extremely difficult decision. I’ll explain in future posts when and in what circumstances I’m comfortable with debt. For now, I just want to start my money story with the mistakes I’ve made that got me to where I am.

Very early I learned –

  1. Pay more than the minimum. Pay as much as you can, actually. Mr. Money Mustache calls debt an emergency. He feels that you should treat debt like your hair is on fire. While I don’t think I would resort to never paying for a coffee if I were in debt, I very much understand the sentiment.
  1. Just because you can pay your bills every month doesn’t mean your money situation is fine. I felt for a long time that if I could afford my monthly bills, then I was OK. But it just isn’t the case. Looking at your money month-to-month is like looking at your health day to day. “Well, I don’t have heart disease today, guess I can eat another six dozen donuts before bed.” Taking such a small view of your finances will hurt you in the long run.

Learn from my mistakes to avoid making your own.

Next time on my money story: Why even when I thought I had gotten my act together, I had not. A story of bank fees and consumer ignorance.

What Lawrence of Arabia Taught Me About Grit

What Lawrence of Arabia Taught Me About Grit

Do you remember this scene form Lawrence of Arabia? Peter O’Toole, the titular character, is awaiting assignment with a few other officers. Lawrence lights a cigarette then hold’s the match between his thumb and forefinger and until it burns out.

Impressed, William Potter tries to do the same – until he shouts in pain and throws the match to the ground.

William Potter: Oh, It damn well hurts!

 Other officer: So what’s the trick then?

 Lawrence: The trick, William Potter, is not minding that it hurts.

There. That’s it. Everything you need to know about grit.

Things are hard. Working full time while completing an MA is hard. Going to the gym every single day is hard. Losing weight is hard. Running a marathon is hard, and it hurts.

Other people, stronger people, deal with things that are much, much harder every single day.

Have you watched Bojack Horseman? It’s pretty funny, but even if you’re not interested in animal puns and depressed, alcoholic equine, this scene makes an important point. It’s the final scene from the second season.

Turning your life around is also hard. Making good decisions is hard, but you gotta do it every day so that it gets easier.

If I’m chatting about my work or fitness, people have occasionally asked me how I “do it.” I would shrug and say, “I don’t know, I just do it.”

I think what they are asking is, “What’s the trick?”

I never really had a good answer before I watched Lawrence of Arabia one Sunday afternoon a few years back. Then it clicked. It’s a great movie, but this is one of my favourite scenes of all time ever filmed.

After Lawrence speaks, William Potter walks off looking confused. As if he doesn’t get it, as if Lawrence was keeping his trick a secret. Of course he’s not, he’s just saying, very simply –

There is no trick.

Sometimes things hurt. Sometimes they’re hard. That’s ok. Suffering through the hardship of burned fingertips is so unimaginable to William Potter that there must be some magic to it. But there’s no magic.

The match burns all fingers equally. The only trick is how you deal with it.