(As published in Smart BIZ February 2017)
After reading my enlightening columns in Smart BIZ, you sat down with a financial planner and have now guaranteed your income for life by committing to dollar-cost-average investing every month in a diversified and balanced portfolio. You put $400 a month into a fixed income bond fund, sheltered in your TFSA, and you are now ready to roll the $4800 over into your RRSP for a big tax refund. Your advisor says you should add that to your RRSP but after early January you may decide to use it to escape to Mexico instead. Go ahead, as a disciplined saver and investor you have earned it. The tax refund from your 2016 $4800 RRSP contribution will be $1596, even at your modest $60,000 middle class income. That will be good for two weeks instead of just one, at a pretty nice resort. And if you are up in bracket with $150,000 income, your refund will be $2227!!
Oh you say, you really tried to commit 10% of your gross to savings but so many other demands came along. You find you might manage more like $480 for your RRSP this year, but you are a little short of your financial plan $4800 goal. Don’t beat yourself up, you are just like the other 90% of us. Saving is just so damn difficult, with everything else claiming the all too meager pay cheque.
You may have heard a financial planner telling you to “Pay yourself first!” That is the core idea of David Chilton’s (from Dragons Den) advice in “The Wealthy Barber”. But decision making is a mind game. Economics is “behavioural”. Sometimes you need to trick your mind into doing what is good for you. My slant is: “Tax yourself first”. Pretend that $400 a month is going to the tax man and you really do not have any choice. After all, it is the government of “you” that is going to look after you in your third trimester, not Justin’s.
I recently came up with a similar mind-game analogy to help make your RRSP contributions. Many of the seasonal ads will offer special low rate RRSP loans so that you can maximize your RRRSP contribution and hence get a bigger tax refund. Here’s how it works. This month you can borrow your $4800 planned contribution. In March you get your $1600 refund and apply it to the loan, reducing the balance to $3200. You then set up pre-authorized payments of $350/month (covering the interest). The mind game trick is that instead of trying to save $400 a month, you now have a debt; you are required to make those payments. You know that paying your debt is more important than those other 55 things that seemed so important last year. You really won’t remember the concert and couple of dinners out that you miss in 2017 because you are paying off your RRSP debt.
One final idea: “punish” your 2016 financial delinquency by fining yourself another $100/month into your TFSA. By the time you get to this point next year, you will already have the $1200 saved for your Mexican vacation! Each tempting demand in 2017 will have to pass this mind game test: do I go out for dinner (or whatever the good idea of the time is) or do I go to Mexico next winter?
Fredrick Petrie, B. Comm. (Hons.), author of “THE END OF WORK: financial planning for people with better things to do”, practices financial planning at Mortgage Logic, 1793 Portage Ave., Winnipeg, MB. (204) 298-2900
“THE END OF WORK: Financial Planning for People with Better Things to Do” is available on Amazon Kindle