How old were you when you were introduced to the concept of owning investments? What was your reaction to this newfound knowledge? I was 20 and boy, was I stoked! On the contrary, I was also a bit mad. Why the heck hadn’t my parents or teachers taught me that anyone can make money by owning shares in companies instead of just trading hours for dollars?!?!?!
Immediately after my career in finance began, Junior Achievement asked me to teach middle school students about money. The thought of teaching 12 & 13-year-olds freaked me out, but I knew I had to do it. Fueled by passion to share my newfound knowledge about saving and investing, I was ready to change the world. Junior Achievement seemed like a great place to start. I had no idea what I was in for.
Before I tell the tale of my (terrifying) first time “teaching” a class full of grade eight students, I’ll share with you a bit about my financially messy twenties:
- Credit card interest.
- No emergency fund or savings of any sort.
- Self-employed hairdresser.
- Single mom.
- Used my home equity like a bank account.
- No clue how RRSPs or TFSAs worked, or the differences between the two.
“How did this financially messy hairdresser end up with the title ‘Financial Advisor’ at a large wealth management firm?”, you ask?
1. My ENORMOUS passion to learn EVERYTHING about managing money so I could clean up my finances and share how with as many people as possible.
2. Financial courses and exams.
3. A golden opportunity.
4. And last but definitely not least, my hairdresser “gift of gab”.
Back to my first time teaching grade eights about money….. I survived. I didn’t love it, but I knew I had to keep doing it so I could get better at it and actually make a difference in the world. I wasn’t going to be able to sleep at night knowing a bunch of grade eights had caused me to back down from my #1 goal: give as many kids as possible one of the most important "adulting" tools: money management skills.
Eventually, I did begin to LOVE teaching Junior Achievement’s financial programs to kids, which is why I donate $1 from every book I sell to Junior Achievement!
I promise I’m not treating you like a 12-year-old when I say this, but when it comes to investing in shares, bonds, mutual funds, gold, paintings or antiques…
The first step is having money to invest.
If you have no debt other than your mortgage, you’re ready. If you still have debt, hurry up and get debt-free! You are missing out on an exciting, fun way to (potentially) make money while you eat, sleep and walk your dog! If you need help getting out of debt, or don’t understand why I just said you shouldn’t invest until you’re debt-free, listen to Dave Ramsey‘s book The Total Money Makeover. It helped me realize that,
One should be debt-free and have an emergency fund before investing.
The second step is deciding where to invest.
Not which investments, but which type of account – RRSP or TFSA. RRSPs and TFSAs are not investments. I’ve met many non-12-year-olds who don’t know this. RRSPs and TFSAs are accounts in which you can own investments. Radio and TV ads say things like “Invest in a 2% TFSA!” It’s actually 2 separate things: a 2% GIC (guaranteed investment certificate) INSIDE a TFSA. These ads are everywhere during “RRSP season”, so let’s review the features of the RRSP and TFSA. You’ll soon see why I say “It’s Always TFSA Season”…
RRSP: Registered Retirement Savings Plan
To remind you how your RRSP actually works, I wrote a little song called The RRSP Promise. Here’s me singing it:
- When you contribute to an RRSP, the income tax you paid on that money is *LOANED* back to you.
- The RRSP portion of your “tax refund” is not a freaking refund. It is a loan. You will have to pay it back. The goal is to have the loan amount be less than what you will have to pay back to the government in the future. Who can be 100% certain they will be in a lower tax bracket at age 71? No one. Most people I work with guess-timate that they will not be in a lower tax bracket when they are forced to begin withdrawing from their RRSP at age 71. For more on what happens when you turn 71, click here.
- The key mistake I see people making with RRSPs is: not considering the future consequences of their RRSP contribution. They are strictly after that “tax refund” which is actually a —- what is it? Say it (or sing it :)……that’s right. A loan.
- RRSP contribution room depends on your income and can be found on your most recent Notice of Assessment.
- Withdrawals from your RRSP are taxed at your Marginal Tax Rate in the year you make the withdrawal.
- Read the complete list of RRSP rules at http://www.cra-arc.gc.ca/rrsp/
Now for my favorite part!
To get the full effect of the TFSA, let the music play while you read…
Why I’m a #TFSAFAN:
- Contributing to a TFSA is simple: contributions do not produce income tax deductions. This is why IT’S ALWAYS TFSA SEASON!!!
- You can withdraw both your contributions and the growth (if any) tax-free at any time. Beautiful, right?!?!
- *TIP: THERE IS NO BENEFIT TO HAVING CA$H IN YOUR TFSA. Invest the money in your TFSA people – but do your research first. Investments aren’t guaranteed to make you money.
- The TFSA contribution limit has jumped around a bit over the years, but as of January 1st 2017, every Canadian who turned 18 in 2009 or prior has $52,000 room in their TFSA (less any contributions over the years). Here's more on TFSAs: http://www.cra-arc.gc.ca/tfsa/
- TFSA contribution room can also be found on your most recent Notice of Assessment.
There’s much, MUCH more about RRSPs and TFSAs in my brand new book. It's available as an audiobook, eBook and an old-school paperback. Check it out at www.the39forevermom.com.
“If I have $20,000 to invest and I have $20,000 room in both my TFSA and RRSP, should I:
- divide it between the two accounts,
- contribute all of it to my TFSA, or
- contribute all of it RRSP?”
Yep. I’d choose #2.
Why? Because I’m one of those crazy people who believe I’ll need the same amount of money or more in my 70’s to do lots of cool things – some of which will MAKE money. This means I won't be in a lower tax bracket when I'm in my 70's than I am now. And it certainly means I won't get Old Age Security, but we'll save that topic for another time.
“What if I’m in the same tax bracket in my 70’s as I am now?”
The TFSA is still a gift from Go- I mean – the government. Don’t take my word for it. No one can explain this better than David Chilton did in his book “The Wealthy Barber Returns”. David proved that if you put $1000 in a TFSA and an RRSP today and you are at the same marginal tax rate when you withdraw the money as you are now, the TFSA is the clear winner. The key is to put your income tax refund in your RRSP because, sing it with me – it’s not a refund – it is a loan! See for yourself: http://www.theglobeandmail.com/globe-investor/personal-finance/the-wealthy-barber-explains-tfsa-or-rrsp/article1356709/?page=all
As you continue to max-out your TFSA every January, you may have years when it makes sense to put money in an RRSP – like if you received a bonus at work or sold a rental property. That’s why I wrote the song for you:
“I promise to put my tax refund in my RRSP.
I know the government will want it back
when I take that money.
It’s not a refund – it’s a loan!”
Promise you will NOT spend it on a vacation or an iPad.
As always, thanks for reading my article. And if you'd like to find out more about my crazy money success ideas, check out my book!