2014 The year of spending, saving or paying down debt?

Polling indicates that the number one issue for Canadians is paying down debt, (STORY HERE).  While it was the choice of only 16% of respondents, if you add in the next top selections:  building savings, managing day to day spending, getting current bills paid and retirement planning...well. 

Its pretty apparent, we Canadians are focused on improving the state of our personal and family finances. For some that will mean getting rid of high interest consumer debt, for others it will mean building a nest egg, among numerous other choices.  

That's the problem with writing about personal finance, there are no one size fits all solutions.  We all have different goals, different circumstances, different incomes, different expenses.  WE'RE ALL SNOWFLAKES, UNIQUE.  Seriously though, even people with the same goals will have at least a few differences that will affect how they might go about achieving a financial goal.

There is one thing we do have in common however, and that is we all share in the weaknesses of the human condition.  We are all programmed in much the same way.  Human beings are wired to seek pleasure and to avoid pain.  

I want to stress that point, we all  SEEK PLEASURE and try to AVOID PAIN.

Think about someone with a toothache, maybe its happened to you.  A trip to the dentist is seen as too painful so sufferers will pop pain killers until they don't work anymore, only then will they go to the dentist. When the tooth hurts too much, only then is a painful appointment made at the dentist. Why?  Because the patient seeks the pleasure of a pain free mouth.  

When it comes to household finance, spending is a lot more pleasurable than saving, and with credit so easy to obtain, taking on debt has become basically painless....unless total debt grows so large it can't be paid back.  Then debt can become like a chronically bad tooth.  

Understanding this basic motivation though (seeking pleasure and avoiding pain), is the key if one hopes to make a meaningful change in anything, be it in personal finance or another endeavor.

My advice is that whether the goal is debt reduction or to put some money aside for a nest egg...find some way to make it pleasurable.  Build a graph, or some type of visual representation so you can see your money growing or debt decreasing, other than by going on line or checking a balance statement.  Its not easy and our entire society is geared towards convincing people to live for today, without mentioning that its often at the expense of tomorrow.  Maybe find a picture of a beautiful resort, with saving and debt reduction moving you closer to that destination, versus a dingy retirement home the result if you don't eliminate debt and start to save.  

I'll have more on this topic later, specifically on the different saving vehicles available and on strategies to reduce the cost of debt.

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?