It's Friday my friends!
Hopefully you've had a great week. As the weather turns a little chilly here in Manitoba, we find ourselves soaking up every last minute in our backyard or at the park. Winter's pending gloom feels like it's just around the corner.
I've enjoyed putting together the first three issues of Toonie and I appreciate everyone who has made it this far or who is discovering Toonie for the first time. Each day, new ideas pour in for discussion, and I'm always shaking my head at something I read about on Personal Finance Twitter. Fodder for years to come!
If you'd be up for providing some feedback — whether you've learned something new these first three weeks, or if you're thinking about something in a new way, or if there's some honest critique of my written work — I'd love to hear from you. These are passion projects and the only way to get better is to pick and prod from those who may have helpful ideas.
If you have some feedback, shoot me an email: firstname.lastname@example.org.
Quick Thought of the Week
Be aware of tax bombs — the more deferred income you have (think pensions, RRSP/RRIF investments, depreciated buildings in rental properties, or retained earnings in a corporation), the more you have to bring into income in your years of retirement or risk paying a large sum upon death to Uncle Sam.
If you're a pensioned employee of any sort, look apprehensively at RRSPs — you already have a bunch of deferred income in your pension plan and you run the risk of paying more tax on those RRSPs down the road than you would now by paying the tax today.
When you're a pensioned employee, RRSP contribution space is better utilized for investment control than as a retirement savings account.
My Own Advisor is a great resource for learning about Canadian personal finance and investing. Mark Seed's advice is easy and two-fold:
In fact, the formula for any comfortable retirement is rather easy to understand:
- Continually spend less than you make.
- Save and invest the difference.
Pay close attention to the chart in the middle of this article (the chart concerning how much you need to save for retirement). I personally feel these numbers are a little low, but these numbers are great for understanding how much you'll need for your post-work years. The longer your working period, the more you have to consider inflation in that chart.
Also, number 1 above — "Continually spend less than you make." — is a great topic for discussion in the future. I think most Canadians actually "make" more money than they think they do.
And they are saving more than they think they're saving as well. Those CPP contributions do end up coming back to you at some point in the future, after all.
Using a Credit Card for All Your Spending
This is a quick and dirty tip I recommend to all folks starting out on their personal finance journey:
Do all your spending on a credit card.
(And pay the credit card bill in full at the end of the month.)
There are a variety of reasons to do all your spending on a credit card, but let's address the elephant in the room first.
This idea carries a huge stigma — credit cards have financially ruined people who can't control themselves. For some, the premise of spending up to a credit limit and not paying the credit card bill at the end of the month is like an addicting drug. When you're paying interest rates up to 24%, this can lead to incredible financial pain.
But I also think that very stigma is a self-fulfilling cycle — the negativity credit cards carry introduces all would-be spenders with an immediate stigmatic taste. And when you start out with a bad taste in your mouth, it's more likely you'll end up where you expect.
Put simply though, there are too many benefits to ignore when spending on a credit card. Rewards programs are too lucrative. Cash flow control is too great. And many of the insurances, price protections, and fraud protections offered by credit card providers protect purchasers at the till.
First, rewards programs. There are thousands of credit card rewards programs out there, and you'll have to do some research to figure out which one is best. Do you want to travel with your reward points? Do you want cash back? Do you want to redeem for free groceries? Whatever your taste, you'll find a reward program.
In my experience, cash back cards generally carry the greatest amount of cash-value rewards — in that you can redeem for cash back on any purchase of any product or service, and the rate of points for redemption value is quite high. Travel cards tend to give you great redemption rates on travel, but not so great redemption rates on everything else.
These types of credit card rewards programs often cost around $120-$150 CAD per year and I nearly always score about $1,000 in travel rewards per year.
Second, cash flow control and purchasing safety. This may be just me, but I tend to prefer using a credit card to do daily spending so I'm not constantly going in and out of my actual bank account. By using a credit card, you get a tab at the end of the month and only one single transaction out of the bank account can clean it up. Depending on your chequing account type, this may save you transaction costs. And you get to say whether you're going to pay that bill in full at the end of the month or if you want to pay less than the full bill (you 100% should pay that bill each month, but perhaps you're returning something and don't need to make the payment.)
It goes a bit further than this. When at the till, your debit or credit card can be ripped off by skimmers. A credit card carries fraud protections that are algorithmically watched from afar, and you can cancel fraudulent activity in an instant. Credit card companies have incredibly skilled fraud departments and I'm always grateful to see big transactions declined the first time when I'm purchasing something online.
And finally, insurances and price protections. Beyond rewards programs and fraud protections, credit cards also offer a vast array of insurances, such as price protection (when you make a purchase and suddenly the price drops on that same product the next day, or you find a lesser price at a different store), travel insurance (say, if you have a flight cancelled or if you lose your luggage while traveling), and other types of insurances.
My current card even offers a discount on foreign exchange rates — the Scotiabank Passport Visa gets rid of the 2.5% foreign exchange fee on foreign purchases, saving you a surprising amount of money if you do some shopping on Amazon.com or if you make online purchases in American dollars.
All in all, credit card spending has far too many benefits to ignore. If you can't handle credit, this method should be used carefully. Perhaps consider lowering your limit to as low as the credit card provider will allow ($500 or less, if possible), or insist on paying off the balance every single day so as to ensure you never become tempted to leave a balance owing. If you do have a balance owing and don't have the means to pay it off, open a personal line of credit to transfer the balance from 19%-24% rates to a lesser 6% or 7% rate.
But don't be afraid of using a credit card for everyday purchasing. You may be able to fly to Mexico for that hot vacation before you know it, and do it all on rewards points.
Thanks again for reading this far. (This one actually turned out a little longer than normal. I hope that's OK!)
If you feel you've learned something this first three weeks, I'd greatly appreciate it if you shared the link to this new Toonie Newsletter with a few friends. The newsletter has had a great first three weeks and I'm excited to see where it can get to.
Have a great weekend and a wonderful week ahead.
Subscribe to Toonie
Subscribe to the newsletter and unlock access to member-only content.