First of all, I hope everyone had a great Valentine’s Day! That’s February’s bright spot, a kernel of contrast to the general malaise of the season. And certainly a contrast to the disdain for the February antics of the financial predators I wrote about last week.
First, a brief recap of last week’s post:
RRSP’s can be a good way to save up for retirement when one is not otherwise motivated to, or has better options. They may be good for you if you meet the following criteria:
- You need a strong incentive to save;
- You believe the tax rates won’t increase between now and when you withdraw those funds;
- You plan to make less after you retire, enough less to move into a lower tax bracket;
- You think the gains made in the meantime more than offset RRSP costs and inflationary devaluation.
If you don’t fit those criteria, then they may not be such a good thing, especially if you limit yourself to those investments designed to be broad in scope and minimal in returns, such as mutual funds.
I mentioned that the financially savvy avoid mutual funds and many avoid RRSP’s altogether. Why? Because they don’t subscribe to the above criteria. They don’t plan to make less when they retire. They don’t need to pay someone else half their returns to manage their funds for them. They develop the skills to save without government incentives and financial industry bullying.
So what do they do?
1. They educate themselves financially. They read books; there are many out there to help anyone educate themself. They follow investment trends: the stock market, real estate, commodities, local developments. They attend financial seminars, many of them for free. And they interact with others who are doing the same and thus expanding, not contracting, their horizons.
2. They manage their own investments instead of paying someone else to do so. Many people don’t even know that you can self-manage your RRSP’s, that it does not require a financial advisor or fund manager. (If you weren’t aware of that, then you’ve already begun your financial education.) With even a little education, anyone can manage their own investments. Create your own basket of funds from the stock market—call it “my very own personal mutual fund” if you like, and avoid paying all those upfront and hidden fees to someone else.
Or, better yet, in the opinion of many, invest your RRSP’s as second mortgages. They are very safe investments and typically generate returns of 8% or more. Compare that with the best mutual funds at 6% (if you’re lucky enough to have had one of the top 0.1% performing funds—see last week’s blog post). The few RRSP’s I have are in a second mortgage at a fixed 8% annual return.
3. They invest with discipline so that they will have a higher, not lower, income stream in the future. They invest in such a way as to see their funds’ growth accelerate, similar to the principle of compound interest, which Einstein is attributed to have declared as “the strongest force in the universe.”
4. They spend their money on assets, not liabilities. An asset is something that puts money in your pocket; a liability is something that takes money out of your pocket. If you buy a boat to have fun with at the lake all summer long, you may have fun, but it is a liability. By contrast, I bought a houseboat last fall that I will rent out for 50 – 100 days this summer. Those rentals will put money in my pocket (and I will still get to use the boat myself, too).
5. They avoid “dead equity.” Equity is that part of an investment that you actually own. For example, if you “own” a home valued at $300,000 and you have a $200,000 mortgage on it, then you have $100,000 equity in the home. That equity is a valuable asset because it can be used to put money into your pocket. But it is “dead equity” if you do nothing with it. You could, for example, get a home equity line of credit (HELOC) on that home of $40,000, bringing your total indebtedness to $240,000 (80% of $300,000, the maximum allowed.) The interest on that loan would typically be between 3.2 and 4%. Then you could take that $40,000, place it into a self-managed RRSP account as a second mortgage on someone else’s property (there are clear rules about this) at, say 8% interest. Essentially, you have just printed money for yourself, legally, of $1600, or more, per year (8% – 4% = 4%; 4% x $40,000 = $1600).
But, the bottom line is the first point above. You need to educate yourself, at least a little, to avoid getting into trouble. Read; listen to audio and video presentations; attend seminars!
At least, that’s how I see it . . .
Too often we give children answers to remember rather than problems to solve. – Roger Lewin