Do I Really Need a TFSA? (YES) but also some things you need to know.

TFSA

The tax-free savings account (TFSA) is a freaking unicorn of an account that the Canadian government introduced in 2009. Similar to the Roth IRA for Americans, this account allows you to contribute up to $5,500 per year and any interest you earn inside this account will not be taxed. I am such a fangirl for the TFSA that I can actually save you from reading the rest of this post: if you do not have a TFSA, you need to go open one NOW.  I think the vast majority of Canadians can benefit from having one. So let’s dig into this a little bit more:

What is a TFSA?

Welcome to the most poorly named account ever created. TFSA is a total misnomer and it should be treated as more of an investment account than a savings account. Because the big win with a TFSA is that you do not pay taxes on the money when you withdraw it like you would with an RRSP.

Tell me more, you say? Gladly.

Here are key takeaways about the TFSA:

They can also do all the things with your money!

I think the biggest mistake people make with the TFSA is that they deposit money into it as if it is a regular savings account.  Just like an RRSP, you can invest your money in a TFSA into all kinds of fun things like index funds and GICs.  Please please please invest the money in your TFSA, and you will see why this is important in my next point –>

They are tax-sheltered!

What does that mean? All that beautiful money that accumulates inside of your TFSA…it’s ALL yours. Unlike the RRSP, the TFSA is not tax-deferred but it is tax-sheltered. Meaning? You have to pay tax on your money on the way in but not on the way out.

In essence, the government has agreed that if you make a buttload of cash on the investments in your TFSA, they will not tax you on those gains. If that money was sitting in a regular account, you better believe they are taxing a minimum of 10% on those earnings.

Do you want to earn a lot of interest over many years and then not give the government any of it? I know I do.

What does this look like? You invest $10,000 in a TFSA and leave it alone for ten years. Assuming a 7% annual return, you have $19,671 in that account at the end of ten years. You do not have to pay taxes on that $9,671 of earnings. Freakin A.

 

You can take the money out whenever you need it!

Holy sh*t, this may not sound like a big deal but the fact that you can withdraw money from this account whenever you want is a HUGE deal. Unlike an RRSP where you face serious penalties for withdrawing before the age of 65 (except in a couple specific circumstances), you can pull the money from your TFSA to pay cash for a car. Put a down payment on your house. Go to Burning Man. Whatevs.

I am not saying you SHOULD do that, but it is nice to have an account alternative to the RRSP that is way more flexible and can be used for a variety of short and long-term savings goals.

In fact, I treat one of my TFSAs (I have two) as my emergency fund. Money in your TFSA can be withdrawn anytime and you can actually get your hands on it within 24-48 hours, making it kind of great for an emergency fund. My emergency fund earns 1.95% interest and is nice and accessible if/when I really need it.

The only catch: if you have hit your total contribution limit (i.e. $52,000) and you withdraw money from your TFSA, you cannot re-contribute that dollar amount until the next calendar year.

 

You can contribute up to $5,500 a year!

Since its inception in 2009, the government has given $5,500 of contribution room to the TFSA each year (with the exception of 2015, where they jacked it up to $10,000). If you have never contributed a dime, the contribution room rolls over.

That means for anybody who was 18 or older in 2009 and has been a resident of Canada that whole time – you have a whopping $52,000 of contribution room in your TFSA!

If you have been a non-resident of Canada during that time, I highly suggest you check your contribution online at cra-arc.gc.ca. For instance, my contribution room is $35,500 (which lol, as if I’m running right up against that limit). If you want to know more, check out my recent post about how else your finances will be impacted when you move abroad.

 

This is great and everything…but which accounts should I have?

Totally with you. I opened a TFSA in 2009 because my mom told me to.

And remember how I only opened an RRSP through work six months ago because someone handed me a bunch of paperwork to fill out and then I magically had an RRSP? I had no idea if I actually needed one or not. So how do you know where to send your dollars each month?

Some key things to help you decide:

Are you an average to high-income earner?

The cut-off is somewhat arbitrary but if you make more than $40,000 a year, it makes a lot of sense to put money toward an RRSP.   Especially if you are a high-income earner (think 200K+), the tax savings are too good to pass up. You will get back almost half of the money you would normally be paying in taxes (i.e. if you contributed up to the limit of $24,930, you save about $12,000 in taxes). 

Will you have a lower income in retirement than you do now?

For most of us, that’s a big PROBABLY. If you are one of the few remaining humans in Canada that still has a defined benefit pension plan, then you need to think about if that income paired with your investments would actually lead to you having more cashflow in retirement than you do now. If that is the case, a TFSA can be a great option.

Do you plan on retiring early?

This account is absolute gold if you are working toward financial independence at a young age. If you have max out your TFSA today, that account will have matured to over $100,000 in the next ten years – assuming you do not contribute another dollar in that time. Unlike your RRSP (and 401(K) for Americans), which you have to sit around and wait to access, you can tap your TFSA anytime in early retirement.

 

I hope that cleared up some of the nonsense around RRSPs and TFSAs. I know, it is still a bit of a mindf*ck trying to figure out where you should be saving your money. The bottom line is that it is better to get started with something than to do nothing at all for your future.

I think just about everybody can use a TFSA. If you have a lower income and an RRSP doesn’t make sense, then you definitely should have one! If you max out your RRSP, you probably have some extra cash that you can invest and the TFSA is a perfect vehicle for that. For most of us, this account is a winner and I highly encourage you to check out Wealthsimple if you are looking at getting started with a TFSA online.

So tell me: how are you doing with your investment and retirement planning?  How do you decide how much money to allocate to your designated retirement account (RRSP/401(K)) and how much money to invest through other avenues like the TFSA, Roth, or HSA?  Let me know in the comments!

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Weekly Roundup: Fantastic reads from this week

roundup

Sorry this post is coming at you a little late!  Being sick for the last two solid weeks has really thrown a wrench into my blogging schedule.  Luckily, there have been some absolutely kickass posts over the last couple weeks that I cannot wait to feature!

This week, I published a post about the Registered Retirement Savings Plan (RRSP), which includes some basic crash course information about the pros of this retirement savings vehicle.  Check out the full post here: Do I really need an RRSP? Some things to help you decide.

And now for some great reads from the last two weeks:

The Latte Factor, Economic Compassion, and Poor Shaming  (Bitches get Riches)

This gem of a post dates back a couple weeks now but it was too fab to not include in this roundup.  Seriously, go check out this article ASAP, it was one of the most real and refreshing things I’ve read in a long time.

Creating a Tangible Separation from Work When We Retire (Ms. ONL @ Our Next Life)

How do you make the transition into early retirement so that retirement doesn’t feel completely…well, like another regular work day?  Ms. ONL shares some stellar thoughts on the subject.  Even for non-FIRE folks, I think this post serves as an awesome reminder to create a healthy separation between your work and your personal life.

A Case Study in Financial Planning (Some Random Guy Online)

I love case studies and this was no exception.  SRGO looks at the case of a new physician making $600K a year and breaks down some next steps for this family of 4 to pay back debt, invest, and plan for the future.  Who doesn’t love a little number crunching?

Being a Wedding Guest on a Budget (Jane @ Cash Fasting)

As I just attended my first Bachelorette party of the season on Friday night, this post could not have been better-timed!  Jane shares some awesome tips about how to navigate the dressing, the traveling, and the gift-giving madness of wedding season (especially if you have multiple weddings coming up!).

Treating Yourself is not the Answer (Cait Flanders)

“When things were hard, I knew there was an easy way out. I knew there could be some immediate relief: a buzz brought to you by sugar, alcohol or new stuff. But doing the shopping ban and quitting drinking taught me those escapes were always short-lived, before I was dragged back to reality kicking and screaming. “Treating myself” was not the answer. The only way out was to feel my way through it.”

This incredible post also came out a couple weeks ago but since sickness sabotaged all my writing time, I didn’t have a chance to include it in a previous roundup.  Go read this immediately!

Thank you all for another fabulous couple weeks of reading and looking forward to what next week brings!  Have a happy Sunday!

Do I Really Need an RRSP? Some things to help you decide.

rrsp

Now that March 1 has come and gone, the RRSP March Madness has finally subsided. I’m talking about the onslaught of signs caps-lock yelling at you YOU THAT YOU NEED TO PUT MONEY IN YOUR RRSP NOW.  Like so:

download

Admittedly, the Tangerine advert was pretty nice.

Some of you might have thrown extra dollars at your RRSP somewhere around February 27th, because that’s what you were supposed to do?!

Some of you might have let March 1 come and go without a second thought about your retirement savings.

Some of you definitely don’t have an RRSP, and might be thinking: Ugh am I supposed to have one of those by now?

So glad you asked.

For your sake, I am not going to fully answer this question all in one post. This post is meant to give you a crash course on the basics of RRSPs- what they are and why they are great.   The next two weeks will help you sort out the difference between an RRSP and a TFSA, and whether you should have both, one, or neither!

But first things first:

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a super-fun account that you deposit your money into…then you cannot should not touch it again until you turn 65.

Not touching your money for the next forty years sounds awesome, amiright?

I know, I know. It’s not the most fun or sexy place to put your money. I definitely spent my 20s pretending RRSPs didn’t exist. Please. Retirement? I have all the years to save for that. I did not open one of these bad boys until I was 29, and that was through work, which means somebody pretty much forced me into opening the account.

But more so than a lot of other things in life, I wish I had opened that RRSP way way sooner. Because they are actually kind of awesome.

Some need-to-know things about RRSPs:

They can do all kinds of things with your money!

No matter what you want to do with your money, you can do it within an RRSP. Think of your RRSP like a pint glass. You can fill that pint glass with a local-brewed organic lager or an amber ale. Your first drink might be a dark chocolaty stout, then you might want a hoppy IPA. The beer analogy is pretty weak, but is anybody else ready for patio season?

beer.jpg

Mmmm…RRSPs.

Your RRSP is just the vessel (ie. pint glass). Inside it, you can hold whatever kind of investments (ie. delicious, frothy beer) you want: mutual funds, stocks, bonds, GICS, or exchange-traded funds (ETFs).

If you are not risky, that’s cool. If you are totally okay with seeing your money go up and down, that’s cool too. You have total control over how you invest your money in your RRSP. I promise, even the investing part is super easy and not intimidating.

 

They are tax-deferred!

Who loves getting out of taxes? Cause yea, the money you put into an RRSP does not get taxed. Sweet. Let’s say you make $50,000 a year and you want to save about 10% of your income: $5,000. For an Ontario resident, you would normally lose about $1,435 of that to taxes, leaving you with only $3,565 to save or invest.

If you decide to put that cash in an RRSP – ALL the money goes into the RRSP. If you already paid income tax on those earnings, you will get that nice juicy refund of $1435-ish come tax season. That is why everyone makes a big deal about contributing before March 1st – because then you can claim that contribution on your tax return for that year. Anything after March 1 will count as a contribution for the following year.

Another fun fact: you normally have to pay tax when your investments make money. Let’s say you buy shares of a stock, the stock goes up, and you then sell those shares and earn money from the sale. You normally need to pay tax on those capital gains. In an RRSP, you don’t.

You do have to pay taxes on money when you finally withdraw it from your RRSP but if you play your cards right, your money will have had about forty years to exponentially grow itself before you get dinged with those taxes.

 

They actually do let you take the money out early!

Exclamation mark aside, do not get too excited about this one. I think one of the greatest assets of an RRSP is that the money is hard to reach. The whole point is that you should not be spending these dollars now. Remember how future you is still going to need to have electricity and pay taxes and stuff? You need money for those things. And I freaking love electricity. But here are the circumstances under which you can withdraw money from your RRSP early:

Home Buyer’s Plan (HBP) – If you are buying your first home (or have not owned for 5+ years), you can withdraw up to $25,000 from your RRSP for a down payment. Then you have 15 years to gradually pay it back into your RRSP.

Lifelong Learning Plan (LLP) – Similar deal. If you go back to school, you can withdraw up to 10,000 a year for two years to cover your expenses. You have to meet certain criteria such as being a full-time student, and you would have ten years to pay back it back in equal instalments.

All Other Life Things – Just. Don’t. You will pay a hefty withdrawal tax between 10-30% on any withdrawals that do not fall under the HBP or LLP. Bonus: you are not allowed to re-contribute this money down the road. Once you take it out, you lose that contribution room forever. If paying for your wedding with a fat RRSP withdrawal seemed like a good idea, I can pretty much promise you that it is an awful idea.

If you need to take money out of your RRSP to pay for something, it means you cannot afford that thing.

That’s okay. But instead of decimating your retirement savings, you should start saving for that thing you want.

 

They let you put in up to 18% of your annual income!

You can contribute as much as 18% of your total income up to a limit of $25,270 in 2016. Tax break on 18% of your income? Yussss. What this means is that the RRSP makes a buttload of sense for high-income earners. If you are somewhere at the low to mid-salary range, an RRSP might still be awesome but it can take a bit more work to figure out if it’s your best option.

What if you have never opened an RRSP before, but you have been working for like a decade? Contribution room rolls forward every year. Yep, I totally got RRSP contribution room from working at the smoothie shop at the mall in high school. And it has carried over every year since 2003. Who knew?

No idea how much room you have in your RRSP? I didn’t either but then I signed up for an online account with the Canada Revenue Agency (CRA) and my life has been significantly more amazing ever since. You can check your RRSP and TFSA contribution room, the status of your tax return and notice of assessment, and if/when you will receive other tax credits. This handy infographic will walk you through the sign-up process: http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/gtnln/nfgrphc1-eng.html

That is my very bare bones crash course in RRSPs. I know I have totally sold you on them and you cannot wait to go open an RRSP online right now, but hold up. Does everybody actually need one of these accounts?

It’s a good question.

They have their perks, no doubt. But for some, it might actually make more sense to funnel your money into a Tax-Free Savings Account (TFSA). I am going to delve into the TFSA next week and offer more background to help you decide where your money should be going.

If you do not have a retirement fund through work and you are looking to open an RRSP ASAP, my personal favourite for investment accounts is Wealthsimple. If you do have a pension plan through work, go with whatever they are using, especially if you are getting an employer match (I turned down free pension money from an employer once, and it has sucked ever since). Another bonus of going through work is that you tend to get pretty rad discounts on management fees compared to normal mutual funds.

If you are super psyched about RRSPs and you just can’t wait to get started, you can open one online in about 15 minutes. Even if it is not the perfect investment vehicle for you and your individual circumstances, I am a big believer in just getting started. Go for it. Open it. Start transferring $20 or $50 a month into it. I can pretty much guarantee you will never regret opening a retirement account.

How are you doing with your retirement savings? Let me know in the comments!

 

 

Taking on the 1% Challenge: Increase your savings rate little by little

savingsrate1

One of the most remarkable things about the personal finance blogosphere is the number of crazy inspiring people who are banking half or more of their income.

A savings rate of 50% or more sounds absolutely insane to most people. I literally – and I don’t use the word literally lightly – did not know this was even possible six months ago.

My former savings strategy? If I had leftover money at the end of the month (and I usually didn’t), I would throw said leftover money into a regular savings account. More often than not, I would withdraw it a couple weeks or months later to pay for a vacation or something else equal parts awesome and ridiculous.

If you feel like reading more about my story, you will quickly understand why I am 29 and didn’t have a dime in savings until very recently.

Why is savings rate so important and so talked about in the personal finance community?  

For Financially Independent Retire Early (FIRE) folks, this magical percentage is one of the best indicators of when you will reach financial independence. Someone who can save 50% of their income would be able to retire after about 17 years of working. Amp up that savings rate even more and you can cut years off your projected retirement date. If that sounds pretty great to you, join the club.

For those not striving for early retirement, savings rate is still instrumental for financial wellbeing.

Your savings rate is arguably the most important aspect of building wealth.

Simply put, your savings rate is the percentage of your take-home income that you save. This counts money going toward your retirement, investment accounts, or regular savings. Some folks also include debt repayment. I am totally in this camp since paying off your debt increases your net worth.

If you are anything like me (i.e. a non-financial expert or seasoned personal finance blogger), you probably have no idea what your savings rate is.

That’s totally okay. I never actually sat down to calculate my own savings rate, either. Until today.

Despite coming to appreciate the significance of this value, I never calculated it. Because one of the most intimidating & jealousy-inducing things about the personal finance blogosphere is the number of crazy inspiring people who are banking half or more of their income!  I knew I didn’t measure up, and I felt irresponsible and unworthy. Why wasn’t I too saving 50% or more of my income? I didn’t know why, I just knew I wasn’t saving “a good enough” amount.

[Sidebar: if this is you right now, do yourself a favour and check out this post on HalfBanked where Des explains the real truth of how she is able to save half her income.]

So I didn’t want to calculate the number. I fell back into an old diehard habit – ignore the numbers you don’t like, pretend they don’t exist.

Except that they do exist. Those numbers are real, whether you choose to acknowledge them or not. Those numbers are real, and they can actually help you.

Figuring out my savings rate is a real first step to know if I’m on track to hit any of my life and financial goals in the next year. The next five years. The next twenty years.

So I sat down this morning with a cup of coffee and my Excel spreadsheet where I track every dollar that I earn, spend, and save. I calculated my savings rate from the last few months.

And holy shit, I am doing better than I thought!

My monthly savings rate is 29%. I thought I was hovering closer to 20-25% but it looks like the automated “send money to different bank accounts at the beginning of the month” strategy is actually paying off. This savings rate does include debt repayment, since I am still paying down a good chunk of student loan debt. Thank you, seven years of postsecondary education, thank you.

29% is good. Actually I think it’s pretty great.  It was also a nice surprise when I realized I did not include my employer contributions in the initial calculation.   When I do include it (as part of both my savings and income), my savings rate jumps nicely into 30-something percent territory.

Even so, I know I can do a little better.  I would love to pay down my loans more aggressively and see the number in my investment account creep up a little faster.

So I am revisiting an old challenge from Paula at Afford Anything                                                   (http://affordanything.com/2014/12/17/take-the-one-percent-challenge/) for the next six months. All you have to do is save an additional 1% of your take-home income with each passing month. What does this look like for me?

March – 30%

April – 31%

May – 32%

June – 33%

July – 34%

August – 35%

The beauty of this is that it is so achievable. There is no way I can ramp up my savings to 50% overnight. But finding an extra 1% a month?  For average earners, that’s somewhere between $20-50/month.

If you haven’t calculated your savings rate, I highly encourage you to do it now. It is so motivating and I can’t wait to bump my number up a few percent. Having this knowledge can be intimidating. It can be downright scary. But it is one of the best ways of knowing where you are at and where you need to go.

Calculating your Savings Rate

  1. Tally up the money you save in a given month:

Monthly savings = Your retirement contributions + employer contributions + tax-sheltered investment account contributions + regular savings/investments contributions + any debt repayment 

  1. Find your monthly income after taxes (basically whatever shows up in your bank account every month):

Monthly income = Gross monthly income – taxes + employer contributions

(sidenote: you do not have to include employer contributions, but if you do, include it in both your savings and your income!)

  1. Take #1, divide it by #2, and multiply by 100. Bingo – that’s your savings rate.

(Monthly savings / Monthly income ) x 100 = Savings Rate %

If you do the math and your number is where you want it to be, awesome (and for real, tell me your secrets in the comments).

If it’s not, how do you feel about taking on the 1% challenge? Is that something you would be willing to try?  How are you doing with your savings rate in general, and what have been your best strategies for increasing your savings rate?  Let me know in the comments!

First Ever Weekly Round-Up

roundup

Cause the PF blogs were that good this week. 

The personal finance world was on fire this week. Some of the posts I came across this week were such a delight, in fact, that I feel compelled to share them rather than publish my own post this week.

Also, writing your own stuff is hard. So win-win!

Without further ado, I present some of the great reads from this week:

 

The Real Truth about How I Save Half My Income (Des at HalfBanked)

For those of you following Des over at HalfBanked, you know she has been banking half her income. She gets real this week about how she is actually able to do that.

If you are somebody who is not saving 50% or more of your income and are feeling down and out because of it…head over to her blog. This week’s post will get you sorted out.

 

When 50% Isn’t Everything (Penny at She Picks up Pennies)

“It’s hard to prove to someone that their worth exists outside their income in today’s world.” 

This post was another thoughtful take on what it means to be able to save 50% of your income – especially what that means in a partnership when one of you is earning less, or not earning at all for a period of time.

 

Reflections on a year of home ownership (NZ Muse)

One of my future financial/life goals includes home ownership.  I loved the simple but sweet breakdown of feelings toward renting vs. feelings toward owning, and this post hit home because my renter’s exhaustion is real right now.  NZ Muse’s take on it is well worth a read.

 

Why I am a Working Mom (Ms. Steward @ How We Do Money)

“Honestly, the greatest guilt I have about being a working mom is that most of the time I don’t feel guilty about it at all.”

I loved this post.   I don’t have children yet, but I would like to in the next few years. I also enjoy working and think I would make a pretty terrible stay-at-home mom.  Kudos to Ms. Steward for the sheer honesty in this post.  Also, for all the people who continue to comment on women’s reproductive lives, pregnancy decisions, parenting decisions, etc. – just stop.

 

Can a person become too frugal? (Mystery Money Man)

This week, Mystery Money Man teases apart a question many of us have been faced with: where is the line when it comes to frugality and how do you know if you’ve crossed it?  I love the emphasis on the role that luxury should play in our lives, as this is a common refrain that guides my own frugality.

 

Thank you for an amazing and inspiring week, everyone!

 

Emergency Fund: Essential or Overrated?

ef_essential_overrated

I have a love-hate relationship with my emergency fund.

Some days, it feels oh so good to have that money stockpiled away, knowing that if something, anything happened, I would be okay. By the next morning, I am so frustrated with the snails-pace progress of my other financial goals that I want to immediately ditch any more contributions to my EF.  I think it might be time to do just that – even though I do not have 3-6 months of living expenses set aside.

Big or small, the personal finance world overwhelmingly advocates the importance of the emergency fund. I totally get that. Life happens. Shit happens. Emergency funds help.

Suze Orman recommends making minimum payments on your debt until you have 8 months of living expenses stashed away (Whaaaa?).  Dave Ramsey, on the other hand, suggests building a baby emergency fund ($1000), tackling your debt, and then building your 3-6 months of expenses emergency fund.  Gotta say, I’m with Dave on this one (although I actually think $1000 could be a little low, depending on your life circumstances).

So this goes back to the question of how essential is an emergency fund and how much do you really need?  Some PF bloggers argue that 3-8 months of living expenses in an emergency fund is not necessary for everyone and may be considered a lost opportunity since you could be investing that money instead of holding cash. I read these posts and they make my heart skip a beat. Like I really love these posts. A personal favourite that rethinks the emergency fund comes from Green Swan in “Rainy Day, Rainy Month or Rainy Year“.

Because 6-8 months of living expenses saved in a chequing account sounds bananas to me.  Some people really thrive on having this safety net. Yet I feel like a small part of me dies when I see important dollars getting funneled into that EF account every month only to sit there (I know, I know, that’s the whole point).  This begs the question:

Do I actually need to keep building my emergency fund right now?  

I think continuing to build my emergency fund right now is totally overrated, and here’s why:

  • I have no children or pets.
  • I have a (relatively) stable job. This, of course, always comes with some degree of uncertainty, but I work for a well-funded non-governmental organization. My chances of getting laid off are virtually nil and chances of getting fired also minimal.
  • I do not own a car.
  • I do not own any property.
  • I live in Canada, where medical emergencies are still a thing but our tax dollars pay for them.

And the current status of my emergency fund? $1770.87.

The money is stashed in a high-interest savings account, earning 1.95% interest. I have been sending about $100/month to this account to slowly build it.

I also have a small chunk of change invested in a tax-free savings account, which can be accessed anytime without penalty, as well as separate savings accounts for big household purchases, etc.

My main rationale for not continuing to build my emergency fund right now is that I am still paying down my student loans. Even with my debt, I was initially jazzed to see my emergency fund accumulating, but it’s hard to feel that joy when I am getting nailed with student loan interest every day. Don’t get me wrong – it is very comforting to know that I do have something set aside for an emergency, and I think everybody should have some kind of emergency fund.

But since potential emergencies in my world don’t include car repairs, pet surgery, or fixing the leaky roof on my non-existent house, my emergency potential simply seems much lower than the average bear.  I would hazard a guess that I am not the only Millenial in a situation like this, either.

What do you think – are big cushy emergency funds always essential or are they sometimes be overrated?  I think I am ready to stop building mine right now – how are you doing with yours?