How Can I Get Ahead?Liam Hendrikse
Sorry it's been some time since my last article. I understand that it was a pretty difficult one to understand, as there were lots of topics covered, but the feedback has been similar, "How do you apply this knowledge?”
So I thought I'd address a particular concern for the majority of Canadians, and also work through a case study. How can I get ahead financially? Now, I know that most people dislike math (and maybe that's the reason why most people don't get ahead) so I'll try and keep it as easy-to-understand as possible.
I'm sure everyone knows someone who has a good job, makes good money, and yet has very little in the way of savings, investments or emergency funds. That's not surprising; debt, particularly bad debt like credit cards, may create a situation that many people can't, or won't, get out of. We tend to ignore debt, believing that if we pay a little bit off here, a little there, that eventually it'll go away. And, barring catastrophe, it usually does. But the time and money we spend while in debt, has long-term consequences with respect to our overall financial situation.
Let's define debt in 3 ways; Bad, Good and Best Debt. Bad debt is high-interest debt like credit cards, where you're paying for the privilege to stay in debt; good debt, like a mortgage, means you are paying for something that will increase in value over time; best debt, means you are paying for something that will increase in value over time, and provides tax benefits.
How does someone get ahead, financially? Well, I'm not always a fan of RRSP's, but they can be used effectively to reduce bad debt, and increase your net worth. Let's look at a hypothetical situation (remember – these numbers are made up to make the math easier and to demonstrate the strategy):
RRSP LOAN CONCEPT
Let's assume you are working and make $65,000 each year.
Take a $10,000 RRSP loan @ 4.5% to invest, and get a tax refund.
As you invest for the long term, you structure the repayment of the loan over 5 years so that you pay about $185/month to repay it.
Tax refund generated from RRSP contribution of $10,000 is $3,200.
You can either pay down bad debt with this $3,200 refund, or reinvest it further.
BUT
Remember your $10,000 RSP is growing – we use 6-8% as our goal.
End of year 1 with 6%, RSP is worth $10,600.
End of year 5 (when loan is paid off) RSP is worth about $13,400 – this is YOUR money. You owe nothing.
You can use this as a down payment for a condo, for example, if you qualify under the Home Buyers Plan.
If you chose to reinvest the tax refund of $3,200, after 5 years you actually have almost $18,000!
It's a pretty interesting way of looking at things, right? The fact is that the majority of people have never seen a basic strategy like this. It can be very powerful, long-term, to review your financial plan and see if you need a minor tune-up, a major overhaul or a brand new plan.
If you are willing to commit to a financial plan, then this is just one of many strategies that could be used to your advantage. If you have any questions about this, or any other strategy, drop me a line and I'd be happy to help!
Liam Hendrikse is an independent financial advisor, and a model with Sutherland Models. He provides 1st and 2nd opinions on new and existing personal financial plans. He's also a forensic scientist, but that's another story altogether...
email: liam_hendrikse@rogers.com
This is intended as a general source of information only and is not intended to provide any personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Liam Hendrikse is solely responsible for its content.
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