It's easy to fritter away money on daily expenses. If you fall into these money traps, learn to avoid them and pocket the savings.
1. Coffee
2. Cigarettes
3. Alcohol
4. Bottled water
5. Manicures
6. Car washes
7. Weekday lunches out
8. Vending machines snacks
9. Interest charges on credit cards
10. Unused memberships
1. Coffee -- According to the National Coffee Association, the average price for brewed coffee is $1.38. There are roughly 260 weekdays per year, so buying one coffee every weekday morning costs almost $360 per year.
2. Cigarettes -- The Campaign for Tobacco Free Kids reports that the average price for a pack of cigarettes in the United States is $4.54. Pack-a-day smokers fork out $1,660 a year. Weekend smoker? Buying a pack once a week adds up, too: $236.
3. Alcohol -- Drink prices vary based on the location. But assuming an average of $5 per beer including tip, buying two beers per day adds up to $3,650 per year. Figure twice that for two mixed drinks a day at the local bar. That's not chump change.
4. Bottled water from convenience stores -- A 20-ounce bottle of Aquafina bottled water costs about $1. One bottle of water per day costs $365 per year. It costs the environment plenty, too.
5. Manicures -- The Day Spa Magazine Price Survey of 2004 found that the average cost of a manicure is $20.53. A weekly manicure sets you back about $1,068 per year.
6. Car washes -- The average cost for a basic auto detailing package is $58, according to Costhelper.com. The tab for getting your car detailed every two months: $348 per year.
7. Weekday lunches out -- $9 will generally cover a decent lunch most work days. If you buy rather than pack a lunch five days a week for one year, you shell out about $2,350 a year.
8. Vending machines snacks -- The average vending machine snack costs $1. Buy a pack of cookies every afternoon at work and pay $260 per year.
9. Interest charges on credit card bills -- According to a survey released at the end of May 2007, the median amount of credit card debt carried by Americans is $6,600. Rate tables on Bankrate.com indicate that fixed interest rates on a standard card average 13.44 percent. Making the minimum payment each month, it will take 250 months (almost 21 years) to pay off the debt and cost $4,868 in interest. Ouch!
10. Unused memberships -- Costhelper.com reports that the monthly service fee at gyms averages between $35 and $40. At $40 per month, an unused gym membership runs $480 per year.
Source
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I don't know if I agree with everything on the list, but for the most part I can see how those little things can really add up. Some other considerations are:
11. A girlfriend - Eating out, entertainment, gifts and other miscellaneous expenses can really add up.
12. A car - For some, it's a necessity, but maybe not for all. Insurance, gas, maintenance, parking can be quite hefty.
Anything else to add to that list?
Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts
Monday, August 20, 2007
Wednesday, August 15, 2007
An Overview of RRSPs
What is a RRSP?
A RRSP is a Registered Retirement Savings Plan. It is a plan created by the Canadian government to encourage saving for one’s retirement as opposed to completely relying on the Canadian Pension Plan (CPP) and/or Old Age Security (OAS) when he/she retires. The RRSP can be a Guaranteed Investment Certificate (GIC), mutual fund, individual stocks or any other applicable investment as defined by the Canada Revenue Agency (CRA).
What are the benefits?
The two main benefits of starting a RRSP are: 1) the tax refunds and 2) tax deferred growth of your investments.
When you declare an investment as registered, you will get a tax slip from the bank or company you have the investment with when tax time comes. When you file your tax return, you deduct the amount invested in your contribution to the registered account that year from your income; effectively deferring your tax on that amount and getting a larger tax refund.
While your investments are registered in your plan, they will grow tax free. If you refer to my last article on the Tax Effect of Savings, you will realize that the government takes a lot of money from our savings. If they are registered, they cannot tax it until later on, thus allowing the compounding effect to occur at its fullest.
Can’t I just put all my money in a registered plan to protect it from tax then?
No. There is an annual limit to how much you can put into your registered plan and it is generally 18% of your income up to a maximum. The maximum for 2007 is $19,000 and increases every year as per the CRA guidelines. If you go over the amount you’re allowed to contribute, you will get taxed on the excess amount.
When you decide to use this money, the government will tax however much you take out based on the marginal tax rate you have that year. So, even if you can put all your money into a registered savings plan, you still pay tax when you take it out to use.
What’s the point if I still get taxed later?
When you have tax deferred growth, your money grows a lot faster. Even if you tax it later when you take it out of the plan, you will still end up ahead of a non-registered plan.
The second reason is that the purpose of a RRSP is for retirement income. Generally, during your working life your income is higher, resulting in more tax. When you retire, your income should be lower, so when you take out money from your plan, you pay less tax. The tax refund you get back from putting money into a RRSP during your working life should be more than the tax you pay when you take it out to use at retirement.
Another reason is that the RRSP has some options such as the Lifelong Learning Plan (LLP) and first time Home Buyer’s Plan (HBP) that many people can take advantage of. I will go into more detail of these two plans in future articles.
Should I start a RRSP?
The short answer to that question is yes. Everyone should have a RRSP plan. Whether or not it is the BEST plan for your situation will depend on a few things. One thing to consider is whether or not you expect an increase in salary in the next few years. If you do, it may be worth while to accumulate some RRSP contribution room for when you get taxed more, thus getting a larger tax refund. Whether or not this offsets the time lost in compounding will have to be calculated on an individual basis. However, as I suggested earlier, you should stil start saving ASAP even if it's not in a registered plan.
If you have any other concerns about RRSPs, please visit the CRA website for more detailed information at the CRA website.
A RRSP is a Registered Retirement Savings Plan. It is a plan created by the Canadian government to encourage saving for one’s retirement as opposed to completely relying on the Canadian Pension Plan (CPP) and/or Old Age Security (OAS) when he/she retires. The RRSP can be a Guaranteed Investment Certificate (GIC), mutual fund, individual stocks or any other applicable investment as defined by the Canada Revenue Agency (CRA).
What are the benefits?
The two main benefits of starting a RRSP are: 1) the tax refunds and 2) tax deferred growth of your investments.
When you declare an investment as registered, you will get a tax slip from the bank or company you have the investment with when tax time comes. When you file your tax return, you deduct the amount invested in your contribution to the registered account that year from your income; effectively deferring your tax on that amount and getting a larger tax refund.
While your investments are registered in your plan, they will grow tax free. If you refer to my last article on the Tax Effect of Savings, you will realize that the government takes a lot of money from our savings. If they are registered, they cannot tax it until later on, thus allowing the compounding effect to occur at its fullest.
Can’t I just put all my money in a registered plan to protect it from tax then?
No. There is an annual limit to how much you can put into your registered plan and it is generally 18% of your income up to a maximum. The maximum for 2007 is $19,000 and increases every year as per the CRA guidelines. If you go over the amount you’re allowed to contribute, you will get taxed on the excess amount.
When you decide to use this money, the government will tax however much you take out based on the marginal tax rate you have that year. So, even if you can put all your money into a registered savings plan, you still pay tax when you take it out to use.
What’s the point if I still get taxed later?
When you have tax deferred growth, your money grows a lot faster. Even if you tax it later when you take it out of the plan, you will still end up ahead of a non-registered plan.
The second reason is that the purpose of a RRSP is for retirement income. Generally, during your working life your income is higher, resulting in more tax. When you retire, your income should be lower, so when you take out money from your plan, you pay less tax. The tax refund you get back from putting money into a RRSP during your working life should be more than the tax you pay when you take it out to use at retirement.
Another reason is that the RRSP has some options such as the Lifelong Learning Plan (LLP) and first time Home Buyer’s Plan (HBP) that many people can take advantage of. I will go into more detail of these two plans in future articles.
Should I start a RRSP?
The short answer to that question is yes. Everyone should have a RRSP plan. Whether or not it is the BEST plan for your situation will depend on a few things. One thing to consider is whether or not you expect an increase in salary in the next few years. If you do, it may be worth while to accumulate some RRSP contribution room for when you get taxed more, thus getting a larger tax refund. Whether or not this offsets the time lost in compounding will have to be calculated on an individual basis. However, as I suggested earlier, you should stil start saving ASAP even if it's not in a registered plan.
If you have any other concerns about RRSPs, please visit the CRA website for more detailed information at the CRA website.
Monday, August 13, 2007
The Effect of Tax on Savings
Now that you understand the power of compounding and saving early from my earlier article, we can dive a little deeper and look at how much the government is actually taking from us on top of the 15-49% (in BC) tax they take from our pay cheques, the sales tax from our purchases, and property taxes on our land.
The best way to illustrate this is to use a VERY simplified example.
Suppose you find $1 on the ground outside a casino. You decide to try your luck on the roulette table inside. You place it on your lucky colour, red. The wheel is spun and the ball lands on red and you double your money. Since it isn’t your money to begin with, you leave the winnings and the original bet on red, for a total of $2. The ball lands on red and now you have $4. You keep repeating this for 20 times and end up with $1,048,576 (a probability of 3.23428E-7 chance of happening, but that’s not the point). The table below summarizes the winnings.
Now suppose that every time you won, the government takes 34% of your winnings. For example, you bet $1 and you win $1, so the government will take $0.34 of that, leaving you with $1.66 to bet with the next round. How much will you have left after doubling up 20 times with the government taking 34% of your winnings each time? Take a guess before you scroll down. I’ll give you a hint: it’s less than half of the amount above. Scroll down to the table after you have made a guess.
As you can see from the table, the government has taken over $1,000,000 from you! Of course this is an extreme example as you can never get a 100% return every year for 20 years, but it gives you an idea of how much the government takes from our investments and limits the compounding effect of money. In my next finance article, I’ll be going over RRSPs and how they can help with this tax problem. Check back soon!
The best way to illustrate this is to use a VERY simplified example.
Suppose you find $1 on the ground outside a casino. You decide to try your luck on the roulette table inside. You place it on your lucky colour, red. The wheel is spun and the ball lands on red and you double your money. Since it isn’t your money to begin with, you leave the winnings and the original bet on red, for a total of $2. The ball lands on red and now you have $4. You keep repeating this for 20 times and end up with $1,048,576 (a probability of 3.23428E-7 chance of happening, but that’s not the point). The table below summarizes the winnings.
Now suppose that every time you won, the government takes 34% of your winnings. For example, you bet $1 and you win $1, so the government will take $0.34 of that, leaving you with $1.66 to bet with the next round. How much will you have left after doubling up 20 times with the government taking 34% of your winnings each time? Take a guess before you scroll down. I’ll give you a hint: it’s less than half of the amount above. Scroll down to the table after you have made a guess.
As you can see from the table, the government has taken over $1,000,000 from you! Of course this is an extreme example as you can never get a 100% return every year for 20 years, but it gives you an idea of how much the government takes from our investments and limits the compounding effect of money. In my next finance article, I’ll be going over RRSPs and how they can help with this tax problem. Check back soon!
Friday, August 10, 2007
Saving Early: The Power of Compounding
One of the most important things I've learned in Finance and Accounting over the last few years is to start saving money early. The power of compounding interest is massive over many years, so saving early is a must to accumulate wealth. To demonstrate, I will be using an example with Rob and Tom.
Rob: Rob is a university student and loves to party. He goes out every night partying at the bars or a local bubble tea joint. He also likes expensive things and buys only brand name clothing. He doesn't save a single penny until he turns 25 and realizes that he should start saving for a house or retirement. Starting at age 25, he saves $2,000 every year until age 60.
Tom: Tom is also a university student, but understands the importance of money and starts saving $2,000 every year until he turns 36, when he starts a family and needs the money.
The following screenshot summarizes Rob and Tom's saving habits:
Looking at the table, you can see that Rob invested $40,000 more than Tom did. Even though it's $40,000 over 20 years, that's a lot of money that can be spent on other things such as an annual vacation!
Rob: Rob is a university student and loves to party. He goes out every night partying at the bars or a local bubble tea joint. He also likes expensive things and buys only brand name clothing. He doesn't save a single penny until he turns 25 and realizes that he should start saving for a house or retirement. Starting at age 25, he saves $2,000 every year until age 60.
Tom: Tom is also a university student, but understands the importance of money and starts saving $2,000 every year until he turns 36, when he starts a family and needs the money.
The following screenshot summarizes Rob and Tom's saving habits:
Looking at the table, you can see that Rob invested $40,000 more than Tom did. Even though it's $40,000 over 20 years, that's a lot of money that can be spent on other things such as an annual vacation!Now let's take a look at the earnings. To isolate and simplify the demonstration of the time value of money, the following screenshot is based on the assumption of a 10% return without taxes.
At the age of 60, Rob has accumulated $658,079 while Tom has $856,910, almost $200,000 more! This is with $40,000 less in investments too! This illustrates that saving early is very important and is something you can't buy back by saving more in the future to try and "catch up."
I am not advocating that you should just save for 10 years and stop, but rather to start saving as soon as you can!
So, when's the best time to start saving? YESTERDAY! Since we can't travel back in time, the next best time is as soon as you finish reading this. GO!
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