Good Habits for Financial Health – Part 1of 3

  •  What is financial success?

It’s about having the financial flexibility to make the choices you want in life. To do this you need to have good financial health.

  • How do you have good financial health?

You need to establish and maintain good financial habits so you can maximize the value of each dollar to improve your outcome. Financial success and health come in baby steps.

  • Why should you start saving when you’re young?

Start saving young and harness the power of compound interest.

  • What are the basic investment vehicles you should put your savings into?

Let’s say your goal is to have just over $600,000 at age 65 (see Figure 1). If you start saving at age 25 you only need to contribute $6000 per year, for a total of $246,000. But, if you only start saving at age 50, you’ll need to contribute over four times that amount – $27,000 – per year, for a total of $440,000, in order to reach your goal.

It’s not only the value of compound interest that you give up when you procrastinate in starting a saving program. The older you get, the more you get used to living a certain lifestyle, and the harder it is to create the discipline to change your spending habits.   In other words, it’s a lot easier to create good financial habits when you are young and haven’t become accustomed to living in a certain way.

When it comes to savings, what investment vehicles should I put my money into?

1. Take advantage of free money: RESPs and Group Plans

 An RESP (Registered Education Savings Plan) is an education-savings plan for your children’s education in which the Federal government provides a grant of up to $500 (at this time) per year.

A Group Plan is a savings plan offered by your employer, such as a Retirement Savings Plan (RSP) or a deferred profit-sharing plan. Generally, if you put a certain amount of money into it, your employer will match it.

The similar feature between these two savings vehicles is that they offer you free money. As a rule of thumb in life, if someone wants to give you money, you should always take it!

2. Retirement Savings Plans (RSPs) and Tax-Free Savings Accounts (TFSAs)

Traditionally, Canadians have focused on contributing their savings to RSPs, and only if there is money left over do they put that into a TFSA.

Julie Brough of Logan Wealth Management thinks we need to change our thinking. When Julie played with different numbers and ran different scenarios, she found that over the long term, putting savings into a TFSA beat out an RSP in almost every case.

We need to stop thinking of a TFSA as an afterthought. The lower your income is, or the younger you are, the more powerful a TFSA is relative to an RSP.

Most people cannot maximize both, so at the very least try to balance them. When you retire, having money in both opens up a lot of flexibility with respect to managing your income and keeping yourself in a low marginal tax bracket.

View Good Habits for Financial Health Part 2 and Part 3

In February 2019, Julie Brough hosted our first webinar. The topic was Good Habits for Financial Health. Video of the entire webinar can be found here.

Please note this presentation was designed to provide general information only. It should not be construed as advice or considered a substitute for personal advice. Please consult your adviser to determine whether the information in this presentation is applicable to your personal situation.