Wtf is going on with my savings rate?

savingsrate1

I have been giving the 1% Challenge a go for the last eight months. For those who don’t know, it is a challenge to bump up your savings rate 1% each month – the idea being that if you increase your savings ever so slowly, you won’t miss that extra $20 or $40 or $70 getting funnelled into your savings each month.

Eight months in, and I’ve learned some lessons about trying to bump up your savings rate:

  1. Having side hustle or freelance income makes it pretty difficult to make projections about your savings rate with any kind of accuracy.
  2. My savings rate varies pretty wildly from month to month (see #1) – but I am becoming more okay with that.
  3. Tracking my savings rate – along with all of my spending and my net worth – has been hella helpful for getting my financial life together.

Why is tracking your savings rate so awesome?

It tells you, more or less, in how many years you will be able to retire. It is an easy-to-monitor number that tells you much more about your financial health than your income does.

You might earn 200K a year, but if your savings rate is 5%….YOU GON BE WORKING FOR A LONG TIME.

If you want to learn more about how to actually calculate your savings rate, check out my earlier post that walks you through exactly how to figure out this percentage.

Most run-of-the-mill recommendations advocate for putting somewhere between 10-15% of your income towards retirement. But in the online personal finance community, it is not uncommon to see savings rates well above 50%.

I tend to hover somewhere in between. Over the last eight months, my savings rate has fluctuated anywhere from 16-55% and it tends to land around 25-30% of my income.

I would never argue that this is possible for everybody.  I have a boatload of privilege that allows me to save that proportion of my income. But I do think that it’s possible for many of us – because there is nothing particularly extraordinary about my situation.

I am not a high earner. I still have student loans. I am not excessive in my lifestyle, but there are definitely some areas I could pare down. I love going out for the odd cocktail, buying a latte every Friday, and I recently broke down and bought a car (used, obvi, but still).

You can do some of those things, and still save a good percentage of your income.

So let’s take a look at how I have done with my savings rate over the last eight months.

Here is a recap of how I did during my first four months of the challenge.

  Goal (%) Actual (%)
March 30 29
April 31 33
May 32 31
June 33 41

 

And what happened in the last four months?

  Goal (%) Actual (%)
July 34 21
August 35 55
September 36 16
October 37 25

All I can say is….wtf is going on with my savings rate?

 

I fell short of my goal for three out of the last four months. In July, I took a vacation and absorbed most of the cost from my usual monthly expenses rather than dipping into my vacation savings account –my savings goals took a hit as a result.

August was nuts with a 55% savings rate. I received a windfall, and was able to redirect over half of my income to various savings and debt repayment goals including my emergency fund, my investment account, and my student loans.

September was a 3-paycheque month so I should have done really well here. What happened? Well…I bought a car instead. This was a purchase I had been contemplating for about a year and I wanted to only move forward when I knew that owning a car actually made sense for my budget.

My 16% September savings rate might look pretty abysmal on paper -but I bought a car in cash AND was able to pay down debt and save for my future all in the same month. That is a huge victory when looking back on where I was with my finances this time last year.

October was also hit pretty badly in terms of my savings goal. I was traveling internationally for the first 10 days of the month and like my trip in July, I wanted to absorb most of the travel costs from my regular budget rather than dip into my savings.

So what’s next?

According to the 1% Challenge, my savings rate goal for the month of November would be 38% and December would be 39%.

That is a huge stretch goal for me. I have only been able to achieve savings rates higher than that on months with unusually high income. But I am still going to pursue it and I will keep you posted on how November and December – what can be some pretty spendy months – end up looking.

The 1% challenge has been an excellent way to look for the small wins. To find the little ways of earning an extra $40 or saving an extra $20/month. These are the little things that you can start doing today that can snowball and make a big difference in the months and years to come.

The 1% challenge has also made me think long term, though. I can keep working on upping my savings rate each month, but I am going to keep hitting a wall — unless I make some big changes. 30-35% seems to be the ceiling on my savings rate, assuming that I maintain my current income and fixed expenses. So that’s my next move.

I am paying too much for rent right now and I should be able to find something in downtown Ottawa for $100-200/month less than what I am currently spending. I am also exploring some job moves that would come with a pretty significant bump in my annual income. I am beyond excited to see what some of these longer-term goals can do for my monthly savings rate.

How are you doing with your savings goals? Where do you typically land with your monthly savings rate and does it tend to fluctuate wildly each month? Let me know in the comments!

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When you don’t get the job

jobs

Not getting a job you really wanted sucks. Especially when you are surrounded by the success story background noise about people getting 5-digit raises overnight. About friends locking down their dream job.

Especially when you sink weeks into crafting your CV, writing a flawless cover letter, researching the organization extensively, and doing multiple interviews. To find out it was all for naught. It’s demoralizing and brutal.

This happened to me a couple months ago. I had been speaking with the organization for over a month, had several interviews, and submitted a writing sample of one of my peer-reviewed publications. I knew I had been shortlisted to the top three candidates…and then I finally got the dreaded “We’ve decided to go with another candidate” phone call.

One of the worst parts was that I had already started to check out of my current job. I had started mentally assigning tasks to my colleagues and was mid-thought about how great it would feel to resign when I got the news that oh yea, hey, did not get that new job after all.

The job hunt is integral to building a career and increasing your salary, and rejection is part of that. So let’s break down what to do when you don’t get that job you want. Forget the success stories for a minute and let’s go through some things that have genuinely helped me in the past.

As a jumping off point and for my own personal therapy, I asked the Twitterverse about how to handle a major job disappointment:

1. Believe it happened for a good reason

“I assume it is for a good reasons—not in a fate way, but as in they saw something in me that was not a good fit for that particular spot.” – Ms. Steward

This has honestly been an enormous help to me over the last couple months. The more I reflect on that particular position and the organization, the more I can see some red flags — things that would not have been a good fit for me or the organization. The research position was in a different field than I am used to, and one that I don’t necessarily know I would have enjoyed very much. I think I was romanticizing it in the moment, but I probably would have wanted to move on again in a year or two. I want my job moves to be more strategic now. The job I didn’t get would not have built toward the future positions that I dream of holding. So for many reasons, it was actually kind of great that this job did not work out.

 

2. Learn from it

“Learn what you can from it and apply these insights to your search. Main thing is not to let it discourage you and slow your search.” – Barnaby King

This one seems obvious, but I don’t know how many people actually do this.

A great example was when I applied for a research position back in March. Stage one of their interview process was completing a technical writing task. I was in Asia for work at the time, with a huge presentation and several work commitments during the week, but I managed to squeeze in a block of time to complete it. How did it go? It was a total shitshow. I was jetlagged, exhausted, and not at all focused. My mind was on other work obligations. But also, I just didn’t prepare. I knew more or less what the task would be, and I could have done research, taken notes, and had a gameplan for how I wanted to handle the task. But I didn’t.

Sure enough, I got the email when I got home that I had not made it through the first stage of their screening task. No surprises there. But here is where it gets good. I kept the PDF of the writing task and I still review it before I have interviews or skills assessments for other roles in my field.  It’s built-in technical practice for every interview or upcoming task I’ll see.

Another tip that never occurred to me before came from Finance Patriot Blog – “Watch YouTube videos on how to interview. This did wonders for me. I visited collegegrad.org, lots of good videos there.” I have done some mock interviewing with friends and mentors, but  never did much with online resources.  The Internet is a veritable gold mine of job searching material. Go take advantage of it.

3. Find out why you didn’t get it

“Ask for feedback on why you didn’t get it so you can improve for next time.” – Savvy in Somerset

All I have ever managed to elicit from any HR rep or manager are incredibly generic platitudes a la “We went with a stronger candidate.” But if you feel like the person interviewing you will be somewhat transparent, I am all for this.

 4. Take a beat and appreciate what you can about your current situation

I recognize this may not apply to everyone cause some people just loathe their jobs.  I am fortunate in that I do not hate my current job. Not getting the other job has actually been a really nice opportunity to re-evaluate my position, observe myself in my work, think about what I like and don’t like about my role, and apply this to my job search. I was going a little fast and furious with applications and interviews, but now I am being much more intentional with where I apply and what kinds of questions I ask during the interview process.

And for the time being, it’s making me much more appreciate and grateful for my day-to-day.  I like my coworkers, I get to work remotely one day a week, and the work is still fairly interesting.  Not a bad position to be in at all.

5. Channel the failure into motivation

I don’t know about you but there is nothing like not getting what you want to build a little motivation. Right now, I am pretty fortunate – not getting that job is not the end of the world. I am not trapped in a job I despise. But I could be in that position down the road, and I definitely don’t want to be trapped if that day comes.

Not getting this job was a good reminder not to bank on that one job as your ticket out. Do other things to ensure your freedom.

Build up your emergency fund, so that you can one day quit without something else lined up.

Give yourself a big savings cushion so that you can go back to school, change careers, or take a pay cut to take a job you love.

Not getting this job was a blessing in disguise because it has gotten me back on the “Build up a 6-month emergency fund so that you have options” train.

 

6) Keep the lines of communication open

You never know what will happen.  You don’t know what will end up happening with the candidate they select – what if they back out?  What if you are interviewing with the same organization two years from now?  After they’ve let you down gently, send a thoughtful email thanking them for the opportunity, and ask them to reach out if anything else comes up.  You never know how valuable those small gestures might be.

 

What are some things you do to learn from letdowns and stay motivated after disappointments in the job hunt?  Would love to hear from you in the comments!

Why I haven’t automated my finances

automation

Nearly every personal finance book or blog will advocate a handful of golden rules to build wealth.

Among them: automate your finances.

Most personal finances experts are big fans of this approach, and I can see why. I first learned about automation from Ramit Sethi in “I Will Teach You to be Rich.” The concept is simple: set up your financial life so that everything is going where it’s supposed to be going automatically as soon as your paycheque hits your bank account. You do not even really see the money available to spend and you don’t have to lift a finger.

Arrange automatic bill payments, student loan payments, and contributions to your RRSP/401K.

Set up a biweekly or monthly transfer into your investment account.

Have specific savings goals, like a down payment or a wedding? Make a designated savings account and automate contributions into those accounts, too.

You will be saving without even really realizing you are saving. No effort required. No time spent talking yourself out of contributing to your retirement fund if you are running short on funds after an online shopping binge. And the money just starts to accumulate.

I get how wildly appealing that is. Saving money can be a weird combination of boring and hard – at least that is how I felt about saving until recently. Humans function via the path of least resistance on most things that are good for us.

You will only eat healthy or work out if you remove as many barriers as possible that keep you from doing those things. Like sleeping in your workout clothes. Like meal prepping and stashing containers of healthy food in the freezer so you don’t eat an entire pizza when you get home from work.

Automating your finances is the equivalent to that. It removes barriers to saving and investing. That can be a beautiful thing.

Yet I have maintained the majority of my finances as a manual activity. This includes my student loan payment, most of my retirement and TFSA contributions, and saving for ma big goals.

The only real exceptions are my rent, which automatically gets withdrawn every 1st of the month and the 5% of my biweekly paycheque that automatically gets put toward my work pension plan.

That begs the question: Why have I kept everything so…unautomated?

Here are five reasons why I like keeping my finances at the press of my own button.

 

1. Saving is a privilege and I want to appreciate it.

Having an extra $50 per month to put towards your student loan balance? Or trimming your budget to find another $100 you can send toward your retirement?

That is a privilege, my friends.

I am fortunate that I can find the money in my budget to build up my emergency fund, finally start funding my retirement, and yes, save up for the fun stuff, too. Not everybody is well positioned to do that.  Many people work two jobs and cannot save for retirement.

All of this means that part of me likes taking the moment out of my day, out of my week, to sit down with my finances and set up the transfer myself. It has helped me to realize and appreciate how much I really have.  It has helped me recognize how privileged I am. Being mindful of this has also helped me visualize how and where I want to give money when I have more of it.

 

2. I want to be intentional about my savings right now.

 There are so many daily activities we automate now (check out this awesome post from Ms. ONL recently about convenience services and gadgets).

Some of them I find borderline obscene (like really, humans need these things?)

Some are downright amazing.

Exhibit A: dishwashers.

Exhibit B: GPS.

But I was bad with money for 28 years and I am still trying to un-learn a lot of ingrained money habits and behaviours.

Maintaining control over every bill payment, every transfer into my savings has been a good way to actively participate in putting my financial life back together.  I am still tracking every penny I spend. I want to be in the driver’s seat right now. This may change in the future when my financial habits have improved and I just want to set it and forget it.

This point may sound counterintuitive – I suck with money so I do not want to automate. A common argument is that automation can help people who are traditionally poor savers. But I am a control freak and now that I know what to do with my money (more or less), I like doing it myself. To each their own.

 

3. It does not take much time.

Going back to my earlier point about how awesome dishwashers are – so much yes. As a person living sans dishwasher right now, I can vouch for how much some automation is totally and completely worth it. Some automation saves you hours of mind numbing and possibly soul destroying work every week or month (I really hate doing dishes). Sold.

But paying my bills online? Sending money to my investment account? This takes five minutes out of my week. For some people, that’s too much. Cool. I am down for spending those five minutes though.

 

4. My side hustles ARE my savings money.

I earn a reasonable income and I usually have a small gap between my salary and my spending. My student loan payments alone take up about 31% of my monthly take-home salary. That’s huge.

Right now, the only way I have really been able to save for my goals at all is through my side hustles. And side hustle money, my friends, is unpredictable income.

In January 2017, I earned $0 in side income.

In June 2017, I earned $1863.95 in side income.

The idea of setting up automatic transfers when my side hustle money varies so wildly from month to month just doesn’t make sense right now.

 

5. I am a huge nerd and I like doing it.

Money is fun! Is there not some kind of strange satisfaction in moving a ton of cash into your investment accounts? Tell me there isn’t, I dare you.

 

So those are my five reasons why I haven’t gotten fully automatic yet.  Have you fully automated your finances? Tell me why or why not in the comments – I would love to chat!

Taking on the 1% Challenge: Update 2

savingsrate

As the six or so readers of this blog might know, I have been doing the 1% Challenge for the last several months. Put forth by Paula Pant over at Afford Anything, it is a challenge to bump up your savings rate 1% each month for a year or until you hit a target savings rate.

I have not set a target savings rate per se, because I am still in early days of getting my financial life together. Figuring out what my spending looks like from month to month is still a mission, making it super hard to predict a reasonable and regular savings rate for my income and lifestyle.

But I still needed some big time motivation to bother increasing my savings rate.

Why?

Because I have a thousand different things I am saving for right now. Seriously, count them. A thousand.

A down payment, a new laptop, a wedding, vacations (yes, plural), and a car. Oh, and I’m still getting rid of that last 10K of student debt.

This blog is called Making it Rain for a reason, folks. I work hard to earn money and I like to spend it on things I enjoy and people I love. Yes, some of my money goes to the necessary evils like retirement funds and investment accounts but that’s because future Kate is also down to make it rain.

Let’s be honest, though.  Saving is boring. IT JUST IS. And the only way I seem to be willing to increase my savings to reach my many goals is by finding an extra $30 or $40 a month to save here and there. Beyond that, I’m out.

Hyper-frugality is not for me, and I do not have a high enough income to save a significant portion without making big cuts to my lifestyle.  I have already made some compromises like not buying a car in a mission to pay down my student loans faster, and I am just not willing to trim down my lifestyle anymore.

So 1% at a time it is.

If you want all the gory details of how to calculate your own savings rate and what I include in mine, go check out the original post back in March here.

Two months into the challenge, my first recap saw me hit the following savings rate:

March Goal: 30%

March Actual: 29%

 

April Goal: 31%

April Actual: 33%

 

I fell a little short of my goal in March, only to jump past my target rate by a couple percent in April. Despite the numbers being a little wonky, I was pretty happy with this because it is still absolutely crazy to me that about one-third of my income is going toward savings and debt repayment.

While those numbers were a little uneventful, check out my standings from the last two months. Without further ado, my savings rates from May and June:

 

May Goal: 32%  

May Actual: 34%

 

June Goal: 33%

June Actual: 41%

 

Whoa! Fireworks! Champagne! I know, you are all very impressed with my 41% savings rate in June. How did she do it, you might ask?

-Pared down her grocery bill?

-Only ate at a restaurant once or twice?

-Miraculously negotiated cheaper rent overnight?

 

Not a single one of these, my friends.

In fact, June was one of my spendiest months of the year. I had a pricey trip to Toronto for a family visit that included lots of picking up the tab for a family birthday and Father’s Day and a round-trip Via Rail ticket.

You know what really helped me destroy my savings rate goal?

Earning nearly $2000 more in June than I usually do in a given month.

Thank you, side hustles.

In fact, my savings rate could have been much higher in June but between travel, birthdays, Father’s Day, and other summer shenanigans, it was not my first priority and I wanted to enjoy some of my hard-earned dollars.

Lesson of the day: saving more is way easier when you earn more.  June’s income was totally out of the ordinary (and May’s was actually quite high, too) making it way easier to crush those savings rate goals.  Even though my income is probably going to simmer down over the summer, I am still going to shoot for my goal of 34% in the month of July.

This is going to take a lot more finagling than when I was bringing in the big bucks, and it might not happen when I am earning numbers much closer to my regular salary, but let’s see how it goes!

How are you all doing with your savings rate goals?  What percentage are you saving right now and how have you been able to increase this over time?  Let me know in the comments!

 

How to pay off $7,000 of student loans in 7 months

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I hit an important financial milestone about a month ago. In early May I made a hefty transfer of $1000 toward my student loan, and this payment pushed my student loan balance comfortably below $10,000.  That means I have paid off $7,041 of debt in 7 months.

While getting my loan balance into 4-digit territory is an important milestone, I almost didn’t feel like it was totally worthy of celebration because I have totally been here before.

Let’s rewind three years.  By early 2014, I had spent the last four years working overseas and, even though I was making it rain just about everywhere except my savings accounts, I was still smart enough to be throwing money at my student loans.

I managed to get the balance of my student loans from my undergraduate degree to around $3,000. I was this close to getting it paid off in its entirety…

…and then I went to grad school. And guess who took out more student loans? This girl.

It has been crazy frustrating to be shackled with piles of debt again, but I am coming at it with a few more years of financial mistakes wisdom under my belt this time.

And I am paying back my loans on a pretty normal income. I do make a good living. Full disclosure, it is higher than the median individual income in Canada. But I do not have the luxury of earning six figures (or let’s be honest, anywhere remotely close to that). I do not have the benefit of having a high-earning partner, or living at home with my partners, or one of myriad factors that often help people destroy massive, intimidating sums of debt super quickly.

I toyed with my budget so many times, trying to figure out how to find hundreds of extra dollars that just didn’t seem to exist. I simply did not have the disposable income to make huge payments toward my debt every month.

Or so I thought. Since going into repayment last November, I have averaged just over $1000 per month toward my debt. Seem crazy? It might be, but I think it can be replicated if you are tenacious and have sexy dreams about getting rid of these monthly payments for good.

Let’s walk through a few of the ways I did it.

HOW I DID IT

Upped my minimum monthly payment immediately.

In Canada, the federal and provincial government wants you to pay back your loan for the next 9.5 years. No freaking way. I am getting this thing gone in a couple years, and you can too.

Go up your monthly minimum payment, even if it’s only by $20. Pay a little more than you have to. Your framework of how much you can really manage to pay back every month will slowly start to shift, and you may find that you can even throw a little extra at it every now and then. When I changed my monthly payment to $500, it was a stretch for my budget. I really wondered whether I would be able to make it work for more than a couple months, and I thought I would have to lower it back down again to $400 or less. As it turns out, I have not only been able to put $500 toward my debt every month but way more. Rock on.

Side-hustled my face off.

Side hustling is an effin grind. I know some people love their side hustles. I do not. I have about four of them, and they are all okay. I freelance write, I grade standardized exams, I write standardized test exam questions, and I also do contract-based research. P.S. I also spend about ten hours a day getting to and working at my day job. Suffice it to say, I do not have a lot of free time. This is not my first choice, but this is a compromise I am willing to make for right now to get this debt gone. With my side hustle funds coming in at $2,824 in 2017 thus far, they are a huge part of the reason I have been so successful with my debt repayment.

Did not buy a car.

This one was a killer. In case you had any illusions about Canadian winters, walking and taking public transportation to work through a six-month-long Ottawa winter is no joke. It involved multiple layers of pants and navigating over mountain-like snowbanks. It also means that what could be a 15-minute commute in a car is a 45-60 minute commute by public transit.

Needless to say, there were many moments I was desperate to buy a car. That bus ride to and from work certainly gave me plenty of time to daydream about car ownership.

But not buying a car is the reason that my transportation expenses average a mere 6.6% of my monthly expenses. That frees up a lot of extra room that would simply not be possible as a car owner.

Used my money for other things, too.

We all know the story about so-and-so who paid off a bazillion dollars of debt in 17 seconds, but that’s just not my jam. Those stories are amazing and inspiring and have played a major role in my personal debt repayment journey. But there are so many other things I want to be doing with my money right now, too. Listen, I haven’t just been paying off my loans and buying boxed wine over the last seven months. I have also:

-Contributed to my retirement fund.That’s right, I’ve transferred about $1,500 to my retirement account in seven months. This is less than impressive to many folks. For someone who did not HAVE a retirement account until seven months ago, I am unreasonably happy with myself about this.

-Built up my emergency fund. Yes, I have all the mixed feelings about my emergency fund. But there are some possibly imminent changes coming up in my life, including a potentially expensive move to Vancouver…and mother of God, I am so glad I have suffocated my spendy side for the last seven months and not run off to Cuba with this money. My current and future self, especially any future version of me living in Vancouver, are already thanking me.

-Built up a travel fund of $800. To appease my aforementioned travel beast, I have also been tossing some extra moolah into a travel fund. There are lots of potential trips on the horizon and it feels so awesome to know that when the time comes to charge a plane ticket or a hotel stay, I’ve got it covered.

-Saved $700 toward a new laptop. The one I am currently tapping away on makes legitimate crunching noises. If anyone else has had this happen with a 6.5-year-old Macbook, please let me know what my future holds. In any case, my baby is hanging on for now but it’s just a matter of time.

-Traveled.  I have lived in a bunch of different countries, and traveled to even more. Traveling is a huge part of my life and I knew it would be integral to continue prioritizing this even as I paid down debt. In the last seven months, I have covered Washington DC, Kuala Lumpur, Malaysia, and also made the rounds to the more local but lovely cities of Toronto, Winnipeg, and Quebec City.

Indulged in good beer, cottage weekends, and nights out. Cause you gotta enjoy life.  Nobody here is saying that you have to live like a recluse to pay down debt quickly.

 

Taking charge and paying down my student loans has been difficult. It has been all-consuming at times; I even went so far as to say that it has affected my relationship with my partner. So I hope you take my last point to heart and are using your money for other stuff, too.  Be kind to yourself, your family, your partner on your debt repayment journey. It will get paid off eventually.  

gotye

How are you doing with your debt repayment? Have you been able to pay it down quicker than you imagined or is slow and steady winning the race? Let me know what’s working for you in the comments!

May 14 Weekly Roundup: Sunday Morning Reading

roundup

I am terrible at getting these link roundups out (for real, I should change the name to monthly roundup) but I will blame it on the fact that I have spent 3 out of the last 5 Sundays either on a plane in transit for work, or working.  That being said, these roundups are some of my favourite posts to include on the blog and I love getting the word out about some of the great posts I’ve recently come across.

Last week, I wrote about how my scarcity mindset is seriously eating away at my relationship.  It was an emotional post about something I have been struggling with for months.  The support in the comments was amazing, so thank you to all those who stopped by and shared their personal experiences with a scarcity mindset and how it has impacted your relationships.

And without further ado, here were some of my main reads this week:

Worked to Death (Ty at Get Rich Quick’ish)

Want some scary stats on how many of your best hours you’re giving to your employer?  Yea, it’s 105,300 hours.  I am not a FIRE blogger but Ty has such a way with breaking it down to sound, well, awesome.  If someone is going to bring me over to FIRE, it might just be Ty.

The Meandering Path of a Financial Late Bloomer (Luxe Strategist)

I loved this post from Luxe Strategist for two reasons.  One, I love hearing more about people’s back stories – where they come from, what they’re about, and why they have the ideas about money they have.  But also, I am totally a Financial Late Bloomer as well and can personally relate to this post on many levels.  Do yourself a favour and go learn a little more about Luxe Strategist and some of the financial decisions she made in her early twenties.

Who Cares if Your Passions Cost Money? (Mixed up Money)

I am pretty much in love with this post.  I have been feeling so guilty for months about needing to go out and buy new canvas and acrylics.  I am trying to throw every last dime toward debt, and it has completely blinded me to the fact that uh yea, you still need to have hobbies and enjoy life and stuff.  Big thanks to Alyssa at Mixed up Money for this awesome reminder.

April 2017 Blog Traffic and Social Media Update (The Savvy Couple) 

Okay this post was from over a week ago, but I keep going back to re-read it!  It is so inspiring to see how these two are growing their blog.  I love the transparency about how much work they are putting into developing the blog and how they check in with the goals they set for themselves at the beginning of the month.  Keep up the great work, Savvy Couple.

Thank you all for another week of reads and happy Mother’s Day Sunday!

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!

Weekly Roundup: Fantastic reads from this week

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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.

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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:

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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?

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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

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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!