The difference between TFSAs and RRSPs

I recently gave a quick review of David Chilton's new book, 'The Wealthy Barber Returns'.  My recommendation for people struggling financially was summed up in three simple words, READ THE BOOK.

The lack of financial literacy in our society is mind blowing, with potential for serious ramifications down the road.  The time to become financially literate and to employ strategies to build savings is during our working years.  Obviously the sooner you start the better, but even if you only have ten or so years to go until retirement, there is still time to do something.  The alternative is to do nothing and to retire poor or keep working til they kick dirt on ya.

How illiterate are we?  Ask twenty people what the difference is between a TFSA (tax free savings account) and an RRSP (registered retirement savings plan) and I bet at least half won't have a clue.  People will know the ins and outs of the latest video gaming systems, the stats of every player on their favourite NHL team, who's sleeping with whom on a popular soap opera.  But the two biggest saving vehicles available to Canadians?  Huh???

A lot of good it'll do knowing Tyler Hall's plus/minus rating when you're too old to work and just barely scraping by.

RRSPs  have been around longer and are better understood, but still there are too many people who don't know the basics.  First of all many people put money into an RRSP because it reduces their taxes, resulting in a refund.  "I need to put some money into my RRSP so I can save on taxes and get a refund", some will say.  

Slow down just a second.  

Yes, RRSPs do provide tax savings in a fashion, but its more like tax borrowing. 

How's that?  

Well, eventually taxes will have to be paid on all the money in your RRSP, every dime....both the initial capital you put in AND on any growth.  So its not really tax saving, more like tax deferral.  Someone who put $5,000 into their RRSP every year for 10 years has to pay taxes on the $50,000 total that was sheltered in the RRSP, and if that amount grows to $100,000 in total ($50K invested + $50K growth), taxes will have to be paid on the full $100,000 once it is withdrawn.

Assuming a tax rate of 30% means that every year $5,000 was registered inside the RSP a tax savings of $1,500 was generated.  When the $100,000 is withdrawn, assuming the same 30% tax rate, $30,000 in taxes will have to be paid.  The government gives, then the government takes away, and more.  The gain, $20,000.  

A TFSA on the other hand offers no tax savings when the money is registered, but all the growth is tax free. So using our $5K per year for ten years example, with the money growing to an eventual $100,000 TFSAs will provide a full $50,000 net gain because as the name implies, TFSAs are 'Tax Free'.  Once the money is taken out there is zero tax hit, you get it all.

The TFSA came into being in 2008, and in my opinion it is the best thing the Harper government has done for Canadians during their tenure.  Just because RRSP has the word 'Retirement' in it, don't think that a TFSA doesn't have a role to play in retirement planning.  For those lucky enough to have a pension, a TFSA is a better option than an RRSP in most cases as I see it.

I'll have more to say on this in the weeks to come.  With demographic trends being what they are Canadians on average are getting older, and as recent polling suggests, we know its time to get our personal finances in order.  

Oh, and if you've forgotten already, pick up a copy of 'The Wealthy Barber Returns'.  

Can this advert make people drive slower?

Ever speed while driving?  I'm guilty, and I bet the vast majority of us are.  I don't speed often now, with age comes patience sometimes.  And after watching this PSA out of New Zealand I will make a conscious effort to keep an eye on how fast I'm driving.  

Nobody is perfect, we've all made mistakes behind the wheel.  I'll bet everyone has pulled into a lane they thought was clear, only to have someone come roaring along 30/40 km faster than the posted speed limit...if not more.

Anyway, if you haven't seen it, watch the ad.

All these train derailments making pipelines an easier sell....

Lac Megantic, Alberta, North Dakota, New Brunswick...it seems we can't go a week these days without a train tragedy happening involving rail cars carrying crude oil.  

A buddy of mine brought this up, given that I'm admittedly something of a conspiracy buff, but to that point it hadn't even occurred to me what a boost these accidents could have for projects like Keystone and the Northern Gateway pipelines.

Greenpeace has been advocating for updated and more stringent safety standards for transporting crude by rail (STORY HERE).  But if rail becomes safe and effective what happens to the seemingly beloved (at least by some) pipelines?

Struggling financially? Read 'The Wealthy Barber Returns'

I'm 47 years old, and if you're around my age or older you've probably heard of or read David Chilton's book 'The Wealthy Barber'.  I'm certain that Mr. Chilton is at least partly responsible for the boon in mutual fund investing that occurred during the nineties and early into this century.  "The Wealthy Barber" (TWB) was written in 1989 and it was a monster success selling somewhere around two million copies.

But TWB was written in a different era, before the internet, before TFSAs, before the great financial crisis and before Canadians went from a nation of savers to a country that has gorged itself on debt.  

The author's first book harped on the theme of 'pay yourself first', taking roughly 10% of your income and putting it toward long term saving.  He extolled the virtues of dollar cost averaging, buying equity investments with a fixed amount on a regular basis so as to even out the ups and downs that come with the equity markets.  Dollar cost averaging means buying more when prices correct and less when valuations soar.  

Over the long haul (20 years or more) equity markets have outperformed just about every other investment vehicle; savings accounts, government bonds etc, but its not a ride that goes straight up, there are many bumps along the way.

The Wealthy Barber Returns is true to the original in this sense, the need for long term retirement saving, but David Chilton bemoans the fact that Canada has become a nation of spendthrifts.

The original book centred around a rich barber who dispensed financial wisdom to his customers in a narrative form.  The author has abandoned that device in this book however, and speaks directly to the reader, and its a wise choice.  Too many people are struggling and need to be spoken to directly, not via a kindly older gentleman cutting hair.  Our problems typically boil down to hedonistic desires trumping simple common sense.  'The Wealthy Barber Returns' has one key theme that is obvious and simple.  

You can't spend more than you earn.  

If you think saving is impossible, read the book.  If you're convinced you can't spare a single dime to put toward an RRSP, RESP or TFSA, read the book.  If you don't understand what those acronyms even mean, definitely READ THE BOOK.  

I'm lucky, I didn't even have to buy the book.  In fact I have two copies, one in English the other in French. My financial institution was giving them away, and living in Québec they only had French copies the first time I saw it available, so I struggled through.  On a later visit they gave me the English version.

Mr. Chilton, if you ever chance to read this, votre français c'est excellent.