Happy New Years, friends! Welcome to 2014 and a fresh start here at Cents! Here are some of my thoughts coming into 2014.
This will not be surprising for any of my regular readers but I did not come to blogging about money because I was good at it. For most of my life, money was a magic number of points that appeared in my bank account after I showed up at a place and did some stuff for a few days. I would then trade my mystical points for things – like food, rent, and bills. Sounds fun, right?
Then I discovered that I could go to school, learn some other things, and then “win” more points per hour when I went to a different place and did different
stuff (my ‘career’). Naturally, I also figured out that I could borrow magic points from a bank to buy a thing right now and they would charge me twelve separate payments of points with a few extra charges a month called interest for that privilege.
Then I combined that school notion with that borrow notion and that was my downfall.
In this case:
1 + 1 = negative fifty thousand.
Now that’s a special kind of math, isn’t it?
It took me a long time to realize my predicament but when I did, I was determined to right my financial wrongs and pay off my debt. I became a connoisseur of all things thrifty – I tracked finances, I reduced and reused, I sold stuff online, I mystery-shopped, and I got creative in a hundred other different ways. And all in the name of scraping together pennies to pay down my debt faster.
Then I started reading personal finance blogs and realized there’s a whole financial world out there that I hadn’t considered. Balancing my budget, tracking my expenses, and learning how to stretch a dollar were only a small part of the equation.
The other half of the equation was figuring out what else I can do with my money besides buy shit I didn’t need and get into debt. Why not figure out how to make my money work for me instead of against me?
While I understood compound interest on a conceptual level, I didn’t fully appreciate the importance of it until I looked at the numbers. I mean, really looked at the numbers.
For instance, one of my goals for this year was to start my social work degree. My work benefits package includes a flex spending account that I could put towards paying for my schooling – up to $2300 a year. The thing is, I’ve already put $50,000 towards a Criminal Justice Diploma and a B.A. in Psychology. Do I really want to spend another $20,000 and take another three years getting yet another degree? Granted, I would be able to advance in my career and qualify for a higher pay than I do with my current credentials. Maybe there was something else I could do with that $20,000.
The other option I had was to put that $2300 towards RRSP contributions. I signed up for my employer’s ‘group savings and retirement plan’ with Standard Life. I built a portfolio comprised of 65% ‘Equity Funds’ (Exchange Traded Funds and Foreign junk) and 35% ‘Fixed Income Funds’ (Money Market, Bond Funds etc.) which yielded an 11% return. And I don’t have to give the government anything.*
Investopedia defines Capital Gains as “[an] increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.” So you buy a hundred stocks in Acme Widgets at $20 per stock and then come tax time, they’re worth $24 per stock – that $400 you made is considered a Capital Gain.
The beauty of Capital Gains is they’re taxed at half the “marginal tax rate” here in Canada. So, I make $100 from working and I will pay $25.00 in taxes (25% on the first $43,000 income). However, I only pay $12.50 in taxes (12.5% on the first $43,000 income) on Capital Gains income. For simplicity’s sake, I didn’t include provincial tax rates. Also, there are a myriad ways to sidestep taxes on these kinds of earnings – more on this later.
Let’s also consider that I don’t have to do anything extra while my money makes money. Unlike having to show up at a certain place at a certain time and do certain things for my money, I could stand there and make money. I could start a lint collection and make money. I could perfect a recipe for a tuna fish milkshake and make money. This is something worth learning more about.
So,in summary, debt is still a big priority for me but I think the days of mindlessly throwing money at my “balance owing” are over. The time has come to consider my money decisions within the larger context. Paying down credit card debt is still the priority but I still have to funnel money towards my retirement. I’m in my “upper thirties” so it’s important for me to capitalize on the magic of compound interest as soon as possible.
So, coming back to my decision about getting my Social Work degree, I am going to take a semester off and think about it. That twenty thousand can do a lot of things, paying for a degree is only one of them.
*The tax is deferred until you withdraw from your RRSP. I’m not sure what the tax rates are like when you finally do withdraw – I’ll have to research that one further.