Save 10%
Posted by Gail | Filed under Saving
Now that everyone is done with debt and the focus is turning to saving I’m getting a lot of letters from people who want to know how much they should be saving.
DeeDee wrote: Hi Gail, My husband and I love your show! We use it as a dose of reality and a check to make sure we are doing ok. My question is about savings. Tons of advice recommend saving 10% of your income. Where I need some clarification is – should we save 10% of our gross income, or 10% of our net? We are currently saving 30% of our net, but that percentage is significantly reduced if we base it on gross. And from that savings, how much should be going into RSP’s? Thanks in advance for your advice!
I know the messages are mixed on how much to save. And it seems to be a moving target. As the pendulum has swung from spending every red cent to saving something, I’ve watched the number ratchet up to 15%, 20%, 25%. And then there’s the whole debate about whether you save based on your gross income or your net.
In my world, since you don’t get your gross in your hot little hands, it’s unrealistic to use that as your benchmark. So I base my savings numbers on net income — income after taxes.
As for how much to put towards retirement savings, it depends on a whole bunch of factors. Usually the save-10%-rule applies to retirement savings. If you and your partner belong to company pension plans, that’s part of the retirement savings so that goes toward your 10%.
If you’ve waited a long time to start saving – you’re in your 40s and you don’t have a nickel set aside for the future – then saving 10% may not be enough, depending on how much you think you’ll need when you retire. But if you aren’t saving squat now, aiming for 10% would be a big step in the right direction, dontcha think?
What you’re saving for also comes into play. If you’re accumulating money for an emergency fund, that’s separate from the 10% for retirement savings. Ditto if you’re setting aside money for your kids’ future schooling.
If you’re putting aside money you know you’ll be spending — let’s say for a vacation or to buy new furniture — that’s not savings at all, that’s planned spending.
So how much should go into an RRSP? As much as you can afford to save, while covering your other bases, and having a life too. If you aren’t saving now, start. As little as $50 a month will get you into the game. Get an emergency fund together and once that’s done, make sure you’re slapping as much into your long-term savings as you can afford without eliminating all the joys of life.
I’m working on a book right now about saving for the future. Never Too Late will be about taking control of your retirement savings and your future and it should be out in 2011. And it will deal with all the things you have to think about, whatever your age and whatever your current level of savings may be. It’ll also help those transitioning into retirement with what they have to think bout.
I was initially resistant to doing a book on retirement. So much has already been written. And how seriously are people taking this anyway? I mean to say, if we’re still spending more money than we make – and all the evidence says Canadians are still on a spending spree – am I just whistling into the wind?
And then I get a letter like this and I know that something fresh, straight-forward and to the point is absolutely needed:
When we are multiplying our monthly income by 100 and dividing by 5 to determine what we should put away for savings – Do we use our gross income or net income??
Where did this chick come up with this calculation?
If you’re trying to figure out how much of your net income is 10%, you divide by 100 and multiply by 10. That’s 10%.
Deciding how much to save for retirement when you have a bunch of competing goals can be tough, particularly when you also want to have a great life. That’s why it is so important to figure out what you really, really want. That can’t be pie-in-the-sky, gee-I-wish stuff. It has to be concrete. It has to be something you can focus on and use to keep you on track.
Erin wrote: Hi Gail! My husband and I earn approx. $46,000 per year. We have NO debt. We have 2 children, a lovely home. Nothing on line of credit, no consumer debt, etc. Bring in approx. $3573.12/month, all expenses approx. 2600.00, that’s food, mortgage, heat, hydro, gifts, clothing, kids allowance, cable, phone/internet, bank fees, etc. We have approx. $3000.00 in mutual funds now. How much on avg. would you recommend putting in RRSP’s or other, per month? We are thinking $100.00, so as to not be socking EVERYTHING away. May I happily add, living on a budget, we have been able to take our two wonderful kids to Disney world for 1 week. And are going to Myrtle Beach with my parents, brother, wife, and us, for March Break! Very Proud of ourselves. Anxiously awaiting your answer. Thanks so much.
So here’s a family that has it’s crap together. They’re living within their means. They’re saving a little something. And they’re accumulating money for big spends like vacations. No debt. I’m ecstatic!
Erin thinks $100 a month may be enough for the future. Based on their net income of $3573, the 10% rule would have them setting aside $357 a month. But if they’re both in company pension plans, she may be right. And if they’re also trying to save for the kids’ educations later, then having competing priorities – and wanting to have a life – may mean the $100 a month will have to do.
Based on her figures, Erin’s family has about $900 a month in extra money (income less expenses) from which they can save and have some fun. Now Erin has to decide how much savings and how much fun.
I’m not about to tell this chick what to do with her money. It’s her money. And it’s her life. So she needs to make the decision. If she thinks $100 a month is enough, then it’s enough. But she can’t turn around later and complain that she wishes she had saved more. She has to do some work now to decide if saving $100 and spending $800 every month is what she wants to do with her money.
It’s a decision we all have to make: weighing todays needs and wants against what we’ll need and want in the future. It isn’t easy. And there are loads of guidelines to make the process feel less complicated. That’s what The Save 10% Rule is: a guideline. You have to decide if you’ll save more or save less based on what’s important to YOU!
March 8, 2010 at 8:52 am
I’m not so sure Erin does have her crap together; according to her calculations, either she and her husband pay only $260 in income tax tax every month ($46K/12-$3573.12) OR she doesn’t actually know how much money they earn OR the $3573.12 is gross and therefore she doesn’t have an “extra” $900 a month at all.
Gail, since you didn’t notice this, please tell me; am I crazy or is this just basic math???
March 8, 2010 at 9:15 am
This post really makes me think. Although, the hubby and I are nearing 30 we really need to start saving for the future before we start to have regrets.
March 8, 2010 at 9:40 am
This other Erin sounds exactly like our family, that is approximately our income and the 100 is what we spend on RSP’s since my husband has a great pension plan. We spend the extra on RESP’s (200 per month), gymnastic fees (230), gymboree (65), preschool (150), vacation planned spending account (100), emergency (100) and World Vision Child (40). I feel that we have a good balance but a very tight budget to work with.
March 8, 2010 at 9:56 am
@Moms Charmed Life — if you start now, you won’t have to put as much away then if you start 5 or 10 years later. Even a little, will compound into a lot.
I have a hard time with the savings part — although I try to maximize my RSP each year, I generally have had to get a loan each year. It is still worth it due to the tax benefit… but it is difficult mentally to always have this debt, and trying to figure out what to do.
It’s nice to have it confirmed that the RSP counts as the 10% (silly I know!) — and that all I have to create outside my RSP is an emergency fund.
I never have had planned spending before, but it is amazing working with a budget. Feels really, really good.
March 8, 2010 at 9:57 am
I did okay from age 20-30. I saved about 7% into RRSP’s, plus a pension plan contribution of 6% per year.
From 30-43 yrs old, hubby and I saved a piddly .5% into RRSP’s, plus our pension plan contributions of 5% and 6% respectively.
In the 8 months since Gail entered our lives, we’ve been saving 5% into RRSP’s plus our pension plan contributions of 5% and 6% each.
We figure we’re behind in our retirement savings plan by at least a decade worth of savings, which, we hope to start making up for as we finish paying off our LOC next month. Between us, we have just over $100,000 of RRSP contribution room, based on our notice of assessments… One dollar at a time, we’ll start playing “catch up”!
March 8, 2010 at 10:27 am
I’ve been contributing religiously into RRSP plan, to the tune of 10% of gross (for the last 8 or so years). But guess what? I should have been putting it in a pillow case–I would have gotten better returns.
March 8, 2010 at 10:40 am
This post couldn’t have come at a better time for me! I am looking at a new job, moving 5 hours away and leaving my generous government pension behind (I’m only 28 and can’t imagine being in the government for the rest of my life . . . but giving up job security and a big pension are scary thoughts!). I was plugging in numbers to Gail’s spreadsheet just yesterday trying to make it all work out but couldn’t figure out whether the 10% sure be gross or net (BIG difference!)
Now that I know, I have a better understanding of where I stand!
Thanks Gail!
March 8, 2010 at 10:55 am
Jewel of Toronto: Mabye come tax time she has many deductables… mabye she does only pay 3122.00 a year in income tax..its not me to judge I applaude all those who have their stuff together or trying to with the help of gail.
March 8, 2010 at 11:01 am
Thanks for the clarification Gail. I asked our financial advisor about the gross vs net discussion and he said I should aim for 10% gross. It’s just not feasilble at this point in our lives, if we want to have any fun at all. Right now hubby and I save between 11 and 12% of our net in RRSPs and another 2.5% into the emergency fund. I hate feeling like a failure if I’m not doing “what I’m supposed to do”, but now I have a dose of reality that it’s my money and I make the decisions. Duh-this shouldn’t be a shocker, but you’re so right-there a million mixed messages out there. I’m tempted to only listen to the voice of wisdom and reason-you!
March 8, 2010 at 11:04 am
Jewel, if they each earn half that income, their average tax rate would be just 10%. With a pile of deductions, they could be paying very little tax.
March 8, 2010 at 11:10 am
I think a book on retirement is a great idea. Lots of us (myself included) are not where we should be if we want to have a decent standard of living in our golden years. We are living much longer than we used to, so we need to plan on working longer or saving more to make sure we don’t outlive our money. There’s a lot to consider and I’m sure your book would be a terrific resource.
March 8, 2010 at 12:47 pm
My 10% (and then some when funds are available) come off my gross as it gets taken off the top (it is a guaranteed 5% as my company matches up to max of 5% and I take them up on it). I really don’t miss it; you learn to spend only what lands in your ‘hands’ (bank account). I try (most years) to top out at full assessment amount since I don’t have a pension. I have to save for my own retirement. Retirement savings is my main goal at this stage of the game. Using Gail’s budget, I’m also including an EF, planned spending and various sundry accts (car maintenance/fees; house maintenence). Any increase in salary is usually rolled into the retirement fund (not a huge amt but every little bit helps). As budgeting is a fluid exercise, the numbers aren’t written in stone and are adjusted as need be.
March 8, 2010 at 1:06 pm
I think the upcoming book about retirement is a great idea too, Gail. My husband and I are far from retirement but we would like to get ourselves into tip top shape now and start preparing just so we’re not scrambling a few years before we have to stop working (or get booted) — I’ve seen this already happen with people my parents’ age and they are living below what they are used to.
Thanks for the calculation and clarification on 10% savings. Now time to readjust our figures a bit. We haven’t been doing that great of a job socking it away into RRSPs – usually sits in our savings account or TFSA because I’m paranoid we will need it for something or other.
March 8, 2010 at 1:09 pm
Okay, so I just created a graph to see what my 10% has actually done for me. I’ve always put away at least 10% of my gross salary. I graphed it from the start of my career (10 years ago) until now. Technically my annual rate of return has been 4% – judged against what I actually have in the bank. Yeesh!
Clearly 10% per year savings will not be enough for me. I’ve projected my salary out to age 65 (and really I was hoping to retire at 55). With a 2.5% salary increase each year and a dismal 4% return (this may improve – but I can’t count on it) I won’t even have 15% of my final salary generated in income from the principle.
Thank you Gail for that wake up call!!!
The 10% rule can only be used as a guideline for saving. It all depends on what your money is actually doing for you. Banks love to tell us about how much money we’d have if everything grew at 12%. Unfortunately, if there was some easy investment out there with a guaranteed 12% growth everyone would be in it. I would recommend working backwards – what do you want to have and what you need to do in the time you have to get it. For most Canadians – 10% savings will not be sufficient.
March 8, 2010 at 1:58 pm
I think a retirement book is a good idea because you can make it simple, easy to follow and point out that “yes, I mean you too” to people who have every excuse in the book not to save.
Might I suggest a small section on writing a will and estate planning?
March 8, 2010 at 2:15 pm
We never even saved 10% of our net income. Never thought about doing it because we figured that our work pension plans and the government OAP and CPP would take care of us forever. Now 35 years after when we should have started to take care of ourselves for ourselves we are hurrying to play catchup. The only reason we can even play catchup is because of watching Til Debt and taking Gail’s advice to get out of debt.
On Gail’s pie chart the recommendation is 10% for savings and 15% for debt repayment. With the debt gone that leaves 15% free to reassign.
We learned through recent experiences that you can never have enough of an emergency fund but you better have something and the more you have the less the emergency takes away from your future. I have yet to talk to anyone who has had an inexpensive emergency or had only one at a time.
Once our debt was paid off we took the 25% (10% savings plus 15% debt repayment) and divided it up into 3 sections. 10% for retirement, 10% for emergencies (and this has subsections of 5% for miscellaneous and 5% for a monthly back up fund in case of unemployment) and 5% for Planned Spending.
We will never have the secure future of those who were smart enough not to live with debts and to start putting money aside as soon as they started working but we will have some security. I am definitely not a money expert but having spent weeks doing my sums and years living with regrets I can now say with some confidence that if asked I would say that everyone should put aside 20% of net income into savings. 10% for the future and 10% for the unexpected emergencies. It isn’t easy and requires sacrifice but it does bring enormous peace of mind.
March 8, 2010 at 2:45 pm
If you’re trying to figure out how much of your net income is 10%, you divide by 100 and multiply by 10. That’s 10%.
You are still making it too hard. Just divide by 10. There’s no need to divide and then multiply.
March 8, 2010 at 4:20 pm
Funny, after all these years I had never computed what percentage of net is my work retirement plan. Happily it is at 15%. I started with the plan at about the age of 30 though so I have a bit of ground to make up. Thanks for the insight Gail.
March 8, 2010 at 5:20 pm
This is Erin (luckily we do have our crap together, as Gail said!) I enjoyed reading what everyone had to say. We just had our taxes done and we grossed 58,000.00 this past year. We did some home renovations, and actually got a refund of approximately $1006.00. Thankfully, we usually get a refund each year. We live on a tight budget, but are fortunate enough that we have everything we need and most of what we want. Debt scares the hell out of me, we have many friends living in HUGE EXPENSIVE homes, but can’t afford to go out for dinner or go see a movie, and they have proffesional careers, my husband and I work blue collar jobs, he 40 hours per week, and I, 28. I Luckilly, we do have company pensions, but I think my $100.00/month was too low. $200.00 would be better. Take care!
March 8, 2010 at 5:53 pm
I agree with the 20% recommendation – in this day and age, 10% is just not going to be enough, since we will likely be seeing lower returns over time from investments and the cost of living is going up faster than incomes. Right now I’m saving 30% because my expenses are pretty low, and I’ll reduce that to 20% in a few years when my salary goes down. I’m planning on having a fully funded emergency fund in place before my income goes down, so I’ll mostly be saving for retirement.
March 8, 2010 at 5:55 pm
I just spent the last little while trying to figure out how much I will be putting into my pension this year (an obscure calculation even a mathematician would cringe at!) and then adding the extra amount I invest and came up with 9.86% – that doesn’t include the lump sum I just put into RRSPs end Feb so now I’m sitting at… hey, 16.85% cool! If only I had been doing this consistantly over the past 20 years, rather than resting on my pension’s laurels… Better late than never I guess!
Unfortunately, just a couple days after giving my FA the lump sum for my RRSPs I read Gail’s blog about RRSP vs TFSA and it looks like I’m the type of person who should be maxing out my TFSA every year, based on my pension income… At least my LOC will be paid off in September so I can start throwing that money into my TFSA and on the never-ending car loan…
Money is soooo complicated! But I love fiddling with the numbers
March 8, 2010 at 8:27 pm
Interesting post. Unfortunately I have never had a work sponsored or supported pension plan and my hubby only for the last two years. We have a lot of ground to make up in this area but more importantly to continue with modest rrsp while getting rid of the debt monkey and then as I saw a previous comment say…add a good portion of the debt repayment to retirement savings…next on the list.
March 8, 2010 at 9:35 pm
ashby corner is quite right – if you had your money in mutual funds you had to have earned at minimum 4.5% annually in the last ten years just to cover the MERS and inflation. Banks and the financial industry were making out like bandits and with among the highest MERS in the world, we as investors have been taken to the cleaners. A 2% annual MERS means about 40% of your nest egg has been eaten up in fees after twenty years.
What to do – I don’t know. Socking it under the mattress sounds good to me these days. You can always invest directly in stocks but finding the good financial advisor is a crap shoot.
I have a defined benefit pension plan and am contributing 8% of gross into that, my employer another 8% so I think I’ll be fine. I’ll concentrate on building up the emergency fund and then move into maximizing TFSAs (better since I have a pension plan). Then I’ll see whether I can go back into RRSPs but I think I’ll just do dividend paying stocks instead of the scam mutual funds.
March 8, 2010 at 10:10 pm
Friends of our just did their taxes. Their incomes combined is over $100 000. They are in their mid 30’s, and have about $150 000 worth of contribution room, and are not taking advantage of his company’s pension plan, and contributing only a couple thouand dollars in total into their RRSP so far.
I wonder how they are going to possibly adjust when they are ready to retire with a significant reduction in income. The one advantage of people living in huge mansion is that, if they are actually paying it off, when they retire, it could be considered a bit of a nest egg. For them though, they have the modest under 1600 square foot home… wish they could see this wake-up call, but they prefer to remain disillusioned…
March 9, 2010 at 7:38 am
Mutual funds are a good investment…you can do better with them right now than a gic if growth is what’s important to you…yes, there are mers but that doesn’t make them a scam…that’s like saying that a grocery store is a scam because it doesn’t sell everything at cost…or a restaraunt…or a department store…etc…make an educated choice on the investment products out there…all mers and costs are disclosed up front, so you can make your decision from there…and for all of you thinking of the mattress savings plan…remember with a mattress it’s 0%…even a 1% gic is better than that!
March 9, 2010 at 8:35 am
There’s a lot of pressure on people in their 30s, like my wife and I, to save for everything. Pay down mortgage, pay down debt, save RESP, pay for your kid’s daycare (last year: $16,000 – one child, downtown Toronto), contribute to RRSP, participate in employee stock plan, build emergency fund, etc.
It’s virtually impossible to hit a home-run on all these criteria. So instead, my wife and I just do the best we can without obsessing that we’re saving 9.98% instead of 10.0%. Our main rules is don’t carry out any consumer debt. We do other things to – max out our matched rrsp contributions at work (we’re lucky to have that benefit) of 7.5% for her and 6% for me, do max out the RESP matched amount each year at $2500 but no more, and have a modest emergency fund. We are also aggressively paying down our mortgage and hope to have it paid off by 2022 (bought in 2007, and Toronto is pricey real estate). However, if push came to shove, the other investments/mortgage paydown would end before we take on consumer debt.
In a similar vein, I think it makes no sense to invest in RRSP accounts if you carry consumer debt – nor does an RRSP loan make a lot of sense to me, but it makes more than consumer debt. If you have a credit card debt, you’re paying at least 12% on that, while your RRSP even allowing for tax deducation benefits is probably earning you 6% tops.
March 9, 2010 at 9:02 am
We each save 12% of our gross income in RRSP.
We save $100 a week to go towards a new car so we will not have to finance one.
We save $100 a week for an annual vacation or two.
We still have about $5,000 in our chequing account at all times in case of emergencies.
I hope this is sufficient!
March 9, 2010 at 10:29 am
Steph:
I would calculate whether $5000 is at least three months of EF.
March 9, 2010 at 11:24 am
@Geoff re: RSP loan — I have had a few so I’ll give a variety of reasons why it made sense to me at the time.
1st RSP loan – useless – got a 2K loan, invested w/the bank mutual fund and lost money and paid interest. 2 years to pay off – 25 years old. I just thought I should have an RSP – didn’t really look into it.
2nd RSP loan – carry forward loan – got a 20K loan over 15 year period, payments were approx. $200 per month, received 7K in taxes back, paid off debt that was accumulating at higher percentage. Paid loan off in 7 years. I would collect my change, and any small amounts of money, and make several additional payments. Also would contribut to RSP from money I had earned over the year, and would apply extra $ in bank to the loan.
My favourite way of spending was to have a lean month and then a rich month. So the rich month I could go out to a restaurant or two, maybe a couple of movies… and in the lean month, I would apply those extras to the RSP loan.
3rd RSP loan – another carry forward loan – got a 22K loan over 10 year period, did not have to pay additional 8K in taxes. This loan is current still, but should be paid off in approx. 1.5 years (which would be in 6 years).
4th RSP loan – 4K 9 month loan, to maximize RSP limit. In a higher tax bracket, so saved approx 1800 in taxes, much more than the cost of the loan.
approx 7 years ago I turned my RSP into self directed, and have averaged a 7% return.
Also another reason why RSP loans make sense to me, is that I *will* pay off a loan of x $ per month — but have difficulty in saving x $ per month. It is always too easy to say, I’m tired, I’ll order in tonight, I already put some away in savings, next month I’ll catch up. etc etc — for me, it is FORCED savings…
March 9, 2010 at 11:27 am
@Geoff — sorry, I also was going to add that some credit card debt may be a balance transfer that you have at 3-5% interest once you calculate in fees.
And I just realized that you were saying credit card debt at 12% and RSP loan — so I definately agree to an extent with what you are saying — but even with 12% debt, it can still sometimes make sense — especially if you have RSP that you have not utlized (carry forward loans). I think all of the examples above, I made more than the 12% interest just from tax benefits and refunds.
March 9, 2010 at 1:40 pm
@Kat: I don’t disagree, however, the Gail-follower in me remembers what she has said in the past: you should only get an RRSP loan if the following three things are ALL true:
- you are in the highest (or top two?) tax bracket (so the deduction makes it worth your while)
- you can pay off the loan by the end of the year
- you can afford the loan payment AND an additionally to start directly making a monthly RRSP contribution so that you don’t have to get another loan next year. I think this is especially true for debt-junkies like me. Maybe not so much for @Kat, especially because of the forced savings part.
Me, I have a great pension plan and so am focussing on my consumer debt/emergency fund before I get serious about RRSPs. 14 months to go!
March 9, 2010 at 2:56 pm
@tlily At the time listed above for majority of those listed, I fell in the 37% tax rate for the monies discussed. And I paid the loans off early, and the last one I received was a 1-year loan that I paid off in 9 months.
I think especially with the carry forward loans and the low interest rates, that if someone can use up their RSP room and apply the monies to the loan (or other debt) — it will be a win/win situation.
I don’t have a great pension plan, except for the one I create myself, so sometimes I have to be inventive…
I think Gail would probably take a look at where I have been, and what I have done and grade me probably a B-
Actually, she’s really nice, so I think she would hit me upside the head at the past and say “What were you thinking?” and after she picked me back up the floor, she would look at my budget and hit me upside the head and say “What are you thinking?” and then she would look at me in the future 1.5-2 years and see me DFF, and give me slap upside the head and say “NOW you’re thinking! Don’t stop”
LOL
March 9, 2010 at 2:58 pm
Hmmm, that “really nice” sounds sarcastic… it’s not. I love Gail. I’m just think that people who are sincere and kindest are the ones that tell you the truth and say it in such a way that it sticks.
Love ya Gail!!!!!!!!!!!!!!!!
March 9, 2010 at 3:04 pm
@ Kat – yes I wasn’t saying that an RSP loan is by definition not a good idea, but simply that to me it still doesn’t make sense to carry a balance on your credit card but make RSP contributions. TFSA maybe, but not RSP.
Also, and apologies as I’m making some assumptions, but when I look at your numbers, here’s what I see. This makes an assumption that you didn’t have two rsp loans running concurrently, but basically:
By adding up what your RSP loans were, and including your saved taxes into these numbers, you have made an estimated $60,000 in contributions to your RSP over 15 years through loans. That’s equivalent to contributing $327 per month for 15 years; which is a lot but not a massive amount. Now you were probably not doing them concurrently but rolling them on top of each other, but this is just a simplified way of showing this data.
Now, what you are really doing is applying leverage to your investing strategies, which can be a great thing (ie buying March 2009) or a terrible thing (March 2007).
Alo, it sounds like you know what you’re doing. I’m saying that for most people, I’d be very wary of taking on debt that I can’t pay back within a year, for an investment that’s not very liquid (ie rsp account). I wouldn’t recommend buying and selling individual stocks, but I’m not really talking to Warren Buffet when I say that
March 9, 2010 at 4:36 pm
@Geoff Yup! Great number crunching…. ;-D
But one of the interesting thing in the calculation, and all this did pretty much occur in 15 years, and only the 4K overlapped – is that while the RSP compounded into more over the years, the loans would compound the opposite way as I was paying them down quicker than the terms – so while I was averaging a gain of 7% compounded over the years on the RSP, I felt that as long as I kept earning more than the interest in the year, I was a winner (based upon tax savings).
I would not recommend self-directed trading for most people, it is definately noteasy. I am simply a control freak, and after the bank lost money on the mutual fund, that I had thought was what I was supposed to do – I decided if I’m going to lose money, I want to be the one making the decision on what I’m losing it on. I also would invest in a Money Market account in the RSP for the amount of the loans as I did not like to lose money that wasn’t really mine.
March 9, 2010 at 4:38 pm
I know that I would definately not have put $337 in a savings account monthly… probably around $100 the first 5 years, maybe $200 the rest I would guess.
Thanks for the info Geoff!
March 9, 2010 at 6:36 pm
@ Kat – you’ve said before that you were paying $200 to repay the loans, so presumably you could pay at least $200 the first few years as well. Perhaps you mean you lacked motivation, but personally I find that hard to believe.
Also the reason why you’re up is because you leveraged your investing strategy, which can work or be a complete and utter disaster. Also I’m assuming when you say you’ve averaged a 7% return that you’ve taken out 7% in cash or gic’s each year, otherwise you have paper gains which can go away….
March 10, 2010 at 10:28 am
@Geoff Yes, well I did mention the need to do a loan to “force savings” — I know myself, and lack of motivation wouldn’t be the correct term, but a leaning towards self-indulgence? Definately! But I agree, after 5 years of that, I would probably have gotten the motivation/self-control a little more in check.
Re: Average return — true, gains on paper, but isn’t it all just capable of disappearing really? What would the correct terminology be then for a trading account within RSP to discuss the rate of return?
I love chatting with you Geoff! Have a great sunny day (before the rainy weekend).
March 10, 2010 at 1:03 pm
@ Kat – Thanks it’s been fun chatting. But I don’t quite understand what your saying. You have the motivation to pay off a loan quicker than you have to, but not contribute to rsps? I think you’re underestimating yourself.
Also, they are paper gains until you take your money off the table. IE Sell a certain % of your investments and put them in a GIC or bonds (inside your RRSP). There are many people in their late 50s – 60s who were full-on in equity markets in the past few years that shouldn’t have been. Not because the market happened to be very roller-coastery, but becasue they were in their late 50s – 60s!!!
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March 10, 2010 at 1:49 pm
@Geoff – laugh — it sounds crazy eh? But true, a loan is something that will come out of your account regardless of whether you want to take a vacation, weekend up north — keep in mind how easy $100 is to spend.
I think sometimes the trick to financial freedom is to know thyself. You, I’m sure, have the motivation to pay yourself first… and would rather save than pay a loan. Frankly, a part of me would too. But I have also attempted to do so, and found that it is very difficult for me to motivate myself as much to pay a loan as to save $ for myself.
The dialogue goes a little like this:
There’s a trip to Vegas…. well, I could contribute in a couple of months to savings.
There’s the Sushi dinner twice in the same month, no problem, I’ll add extra to next month savings.
Shopping trip to Buffalo? Sure! I’ll triple my contribution next month.
Christmas? Okay, I may miss the contribution, but I’ll pay next month and be BACK ON TRACK.
Instead my dialogue goes:
I have to make sure there is x$ in the bank so that I can cover the loan. Guess I’ll see if Crystal wants to come over for dinner instead of sushi, I don’t really need new clothes, Vegas can wait a year, probably nicer to go then anyways… US dollar might be at parity, and I need to make sure I start buying some of my Christmas gifts early so I don’t get hit all in december for it.
The loans have limited my options, and taken away temptation. I have saved outside of an RSP loan in the past 15 years (my guess is approx 15K) but I know I’m further ahead financially right now because of them. I do have a plan for making contribution for 2010 tax year completely without a loan — but if I fail in that endeavour — would I get a loan to make up the difference and avoid the money being taxed? absolutely!
Re: paper gains — that’s what I thought you meant – yes, I don’t understand people in the 60’s being full on in the market. People in their 50’s maybe, but they would have to be able to stomach risk and perhaps, not have everything to lose (ie home is paid off or something).
March 10, 2010 at 3:31 pm
Kat:
“Instead my dialogue goes: I have to make sure there is x$ in the bank so that I can cover the loan.”
Mine goes:
I have to make sure that is x$ in the bank so that I can cover the automatic deduction for my RSP contribution.
With the automatic set up, i treat it just like a loan. I can get charged if there is no money in the account when they go look for it. I set it up a day after the paycheck is deposited (just in case) and the money is gone out of sight. No interest fees and I get an average price for my MF. I’m sure it can be done in a similar fashion for stocks.
March 10, 2010 at 5:13 pm
@Marie Absolutely, and with 1 phone call the automatic deduction can be cancelled, and re-instated… very easy to postpone. But I think it’s awesome! that you have it set up that way and can stick with it…. that’s great!
March 14, 2010 at 4:40 pm
I contribute 12% off the top of my paycheck and my employer matches another 4% to my 401K. If our office has a good year then we also get profit sharing. I decided to load up on my retirement up front know down the road I can drop it to allow contributions to a 429 (or similar education savings) when I have children. I also have been adding a few extra bucks to my mortgage every month and I put money into my Emergency Fund account every month. I am right around 4 month right now. Since I have my retirement taken off the top of my check I don’t even miss it. In fact due to the resulting tax advantages when my salary went down 10% my take home only went down about 5%.