This is the first in a series of posts of the basics of investing.
A Registered Retirement Savings Plan, or RRSP, is a common way Canadians save for retirement. It was introduced by the federal government in 1957 as a measure to boost the savings rate of Canadians.
As we close in on the deadline for RRSP contributions, many people wonder if they should contribute to their RRSP, and if so, how much they should contribute. I am hoping to equip you with the information you will need to make an informed decision and get the most out of your retirement savings.
What is an RRSP?
An RRSP is a vehicle you can use to get an immediate tax deduction and defer tax on the income and gains earned on your investments. It is not until the funds are withdrawn that you pay tax on the amount withdrawn. An RRSP is not investment in and of itself. Most investments available at your financial institution qualify for RRSP purposes. You have to choose which investments you want to hold when you make an RRSP contribution, whether it be stocks, bonds, mutual funds, GICs, or just hold it in cash.
The idea with an RRSP is that you contribute to your RRSP when you are in your peak earning years and get a deduction when you are in a high tax bracket. Then when you retire and withdraw the funds from your RRSP, at which point they are taxable, you may be in a lower tax bracket. For example, if you earn $80,000 during the years you contribute to your RRSP (36.5% marginal tax rate based on 2008 combined Federal and BC rates) and have a retirement income of $50,000 (30% marginal tax rate), you will have a net tax savings of approximately 6.5%. In addition, you defer the taxes you pay on the growth earned within the RRSP.
Contributions made to an RRSP are tax deductible. Any contributions you make between March 1, 2008 and March 2, 2009 can be used to offset your 2008 income for tax purposes. If it is not beneficial for you to deduct all of your contributions in that year, you can carry them forward to a future year to reduce your income.
How much can I contribute?
RRSP Canada Revenue Agency, or CRA, sends you a Notice of Assessment each year once they have taken a look at your tax return. The amount you can contribute to your RRSP is on that notice. If you have previously contributed to your RRSP and did not deduct the amount in prior years, you cannot contribute as much as it tells you (subject to a lifetime $2,000 overcontribution limit). If you overcontribute to your RRSP and put more money in than CRA says you can, you have to pay penalties and withdraw the funds.
Your RRSP room is calculated as 18% of your earned income from the prior year, subject to various adjustments, such as pension adjustments if you are a member of your company’s pension plan.
Should I contribute to my RRSP?
For the average person, it makes sense to contribute to your RRSP. Keep in mind that even if you are in a low tax bracket, if you expect to earn more money in the next few years, you can still contribute to your RRSP, but you do not have to deduct it from your income. Any contributions made to your RRSP will grow tax-deferred whether you deduct them from your income or not. Keep in mind that if you want the tax deduction now but don't want to think about how to invest your contribution, you can keep it in your RRSP then decide what to do later.
Monday, March 2, 2009
Monday, February 16, 2009
Planning a Wedding On Budget
Being engaged and planning a wedding should be an exciting time in any bride or groom-to-be’s life. However, it is so easy to get caught up in all the details that you lose sight of why you are having a wedding in the first place – to marry the person you love and want to spend the rest of your life with. Here are a few ideas on how to pull off a wedding on budget and with as little stress as possible.
Step 1 – Book an officiant and get a marriage license
If all else fails on your wedding day, if you have a marriage license and an officiant, at least you will be married!
Step 2 - Determine who you want to witness your special day
This is a discussion you and your fiancé need to have to figure out how many people you want to attend your wedding. Your special day can bet at city hall with two witnesses, in Mexico with a smaller group of family and friends, at a fancy downtown hotel or in your parents’ backyard. The number of guests directly affects the cost of your wedding.
Step 3 - Budget, budget, budget, then add 15%
The last thing you want to fight about with your spouse is how much your wedding is costing after you’ve booked your location and vendors (when it is too late!). Think long, hard and realistically before you do any concrete planning about how much you and your fiancé are willing to spend or can afford. Talk to married or engaged friends about how much they spent on various wedding must-haves and you can get a really good idea of what certain items will cost. Set a hard budget but know you will probably go over it in certain areas. I went over budget by just under 15% and I worked really hard throughout the planning process to keep within my budget!
There are lots of online budgeting tools that help itemize your total wedding budget into categories (i.e., catering, décor, photography, etc). Use an online budgeting tool like the one at http://weddings.theknot.com/budgeter/Budgeter.aspx once you’ve come up with your wedding budget total. You can customize it by including or excluding various line items depending on the type of wedding you want. Keep in mind that there are some areas where you will want to splurge and other areas to cut back depending on what is important to you and your fiancé.
Take your budget with you when you go to meet vendors. Many of them have different packages to choose from and if you are clear on your budget right from the beginning, you will have better bargaining power to cut back on certain services or get them to step up for your business.
Step 4 – Save Up
Most couples are engaged for a year or more so use this time wisely to start tightening your money belt. Set up an automatic deposit from your chequing account to a high interest savings account. Any interest you earn (net of taxes, of course) can be for wedding splurges like a manicure or an additional gift for your parents. Just knowing that you have the money set aside for your wedding will be a huge relief when you and your new spouse are embarking on your life together without the burden of wedding debt!
If your parents want to help contribute to your wedding, welcome it with open arms. Be sure to set ground rules to determine whether there are any strings attached to the money (i.e., will your parents be inviting their friends whom you hardly know). The key here is to communicate and make sure everyone is aware of your budget and your plan, after all, it is your (and your fiancé’s) day!
Step 5 - Choose a theme and stick to it
My sister-in-law gave me a really great piece of advice when I started planning my wedding. She told me to come up with one or two “theme” words and every time I was making a decision regarding the wedding, ask myself whether it falls within my theme.
My words were “timeless” and “classic.” So, when I met with my decorator or browsed at bridesmaid dresses, I always asked myself whether it was timeless and classic. It really helped me stay on track and not go overboard with unnecessary details that detracted from my theme.
Above all, remember that it is just one day
Our wedding day went by so fast that even now I’m not sure whether it happened at all! I have the pictures and the big blank zero where my savings account used to be as my only reminder that it actually occurred. Just remember that it is just a day. Life does go on the day after the wedding, and the day after that as well. So think about the bigger picture when you are trying to convince your fiancé that you really need an ice sculpture at the reception!
Step 1 – Book an officiant and get a marriage license
If all else fails on your wedding day, if you have a marriage license and an officiant, at least you will be married!
Step 2 - Determine who you want to witness your special day
This is a discussion you and your fiancé need to have to figure out how many people you want to attend your wedding. Your special day can bet at city hall with two witnesses, in Mexico with a smaller group of family and friends, at a fancy downtown hotel or in your parents’ backyard. The number of guests directly affects the cost of your wedding.
Step 3 - Budget, budget, budget, then add 15%
The last thing you want to fight about with your spouse is how much your wedding is costing after you’ve booked your location and vendors (when it is too late!). Think long, hard and realistically before you do any concrete planning about how much you and your fiancé are willing to spend or can afford. Talk to married or engaged friends about how much they spent on various wedding must-haves and you can get a really good idea of what certain items will cost. Set a hard budget but know you will probably go over it in certain areas. I went over budget by just under 15% and I worked really hard throughout the planning process to keep within my budget!
There are lots of online budgeting tools that help itemize your total wedding budget into categories (i.e., catering, décor, photography, etc). Use an online budgeting tool like the one at http://weddings.theknot.com/budgeter/Budgeter.aspx once you’ve come up with your wedding budget total. You can customize it by including or excluding various line items depending on the type of wedding you want. Keep in mind that there are some areas where you will want to splurge and other areas to cut back depending on what is important to you and your fiancé.
Take your budget with you when you go to meet vendors. Many of them have different packages to choose from and if you are clear on your budget right from the beginning, you will have better bargaining power to cut back on certain services or get them to step up for your business.
Step 4 – Save Up
Most couples are engaged for a year or more so use this time wisely to start tightening your money belt. Set up an automatic deposit from your chequing account to a high interest savings account. Any interest you earn (net of taxes, of course) can be for wedding splurges like a manicure or an additional gift for your parents. Just knowing that you have the money set aside for your wedding will be a huge relief when you and your new spouse are embarking on your life together without the burden of wedding debt!
If your parents want to help contribute to your wedding, welcome it with open arms. Be sure to set ground rules to determine whether there are any strings attached to the money (i.e., will your parents be inviting their friends whom you hardly know). The key here is to communicate and make sure everyone is aware of your budget and your plan, after all, it is your (and your fiancé’s) day!
Step 5 - Choose a theme and stick to it
My sister-in-law gave me a really great piece of advice when I started planning my wedding. She told me to come up with one or two “theme” words and every time I was making a decision regarding the wedding, ask myself whether it falls within my theme.
My words were “timeless” and “classic.” So, when I met with my decorator or browsed at bridesmaid dresses, I always asked myself whether it was timeless and classic. It really helped me stay on track and not go overboard with unnecessary details that detracted from my theme.
Above all, remember that it is just one day
Our wedding day went by so fast that even now I’m not sure whether it happened at all! I have the pictures and the big blank zero where my savings account used to be as my only reminder that it actually occurred. Just remember that it is just a day. Life does go on the day after the wedding, and the day after that as well. So think about the bigger picture when you are trying to convince your fiancé that you really need an ice sculpture at the reception!
Coupling Your Finances
As a new couple, or a couple who has been together for a while but looking for a financial change, you may be wondering whether you should embark on the adventure of combining your finances.
My husband and I went through this exercise when we first starting sharing expenses, soon after we moved in together. This article addresses some of the pros and cons you may face in making this decision. The key to each of the options is to communicate with each other. This is one of the hardest parts of being a couple, whether it has to do with money or not! Don’t they say that the majority of divorces are caused from unresolved money issues? If you keep some of these tips in mind, you can have a healthy relationship and a healthy pocketbook!
There are a few different ways to combine your finances:
Combine It All
Set up a combined chequing and savings account, and close your old accounts. Both of your pay cheques are deposited into the joint chequing account and all bills are paid out of that account. This means that Jane’s $200 haircuts are paid from the same account as Paul’s $20 haircuts! Okay, that sounds really bad, but this option can work really well. You can start thinking about your finances as “us” rather than “me and you.” It is ideal that you know how your money is being spent. Each person in a couple should be responsible for knowing what’s going on with their cash.
Contribute 50/50
Each of you would keep your individual accounts, then put a set amount in each month in an equal proportion ($500 each if you want to contribute $1,000 per month to pay joint bills). You are each using half of the utilities or groceries so you should contribute equally, right? Keep in mind that this approach works better for couples who have similar incomes. The lower earning spouse may not appreciate having only $100 after the monthly joint contribution when the other person has $1,000 to blow.
Contribute Based on Income
When couples make significantly different salaries, this is the happy medium option. For example, one spouse makes $34,000 and the other makes $50,000. If you want to put $1,000 each month into your joint account, the first spouse should contribute around $400 and the other spouse should put in around $600. This means each person has the same percentage of money left over for their own personal use.
There are many reasons to combine your finances, other than the reasons described above. In general, it may be cheaper and less of a strain on your relationship to combine your cash. You are brushing your teeth with no makeup on in front of this person, so how hard can it be to talk about money!
Bank fees – It is difficult to find a no-fee chequing accounts in this country. If you combine your bank accounts, you will only have to pay one set of bank fees. Keep in mind that many banks charge by the transaction, so if you are going to have more transactions each month with the two of you, you should look into the different banking packages offered to see if you can increase the number transactions per month (with a small increase in the monthly fee – but it’s better than paying two fees!). Check with your banker – they may waive the monthly fee if you hold more than one account with them.
Paying Bills – Many couples who have not combined their finances have to deal with the “I’ll pay this bill and you can pay next month,” or “I’ll pay the grocery bill and you can pay the utilities.” This can end up straining your relationship in ways you may not foresee. For example, if one spouse pays the utilities and the other pays the groceries, you may be living in a freezing cold house in the winter (the person paying the utilities keeps turning down the heat) or you may end up eating Ramen noodles for dinner (the person paying for groceries refuses to buy steak!). By combining your finances, all of your joint bills come out of the same account so you don’t have to worry about who is paying for what. The key is communication so you can compromise; turn the heat down a notch and wear an extra layer, or have a chicken breast for dinner instead of steak. This will ensure there is no resentment between spouses.
Joint Savings – It is so important for couples to be on the same page with their goals. Sit down with each other and write up a list of what you want to save up for. Is it a flat-screen TV or some upgrades around the house? Set up an automatic amount to go into your savings account (any amount will do – just do it!) and keep your list somewhere handy to remind yourselves what you’re saving for. I can tell you from experience that you feel way less guilty when you purchase something you’ve saved up for!
After all of those amazing pros, why wouldn’t you want to combine your finances?
Privacy – This is more than just knowing what your spouse bought you for Christmas by looking at your bank statement! There are some couples out there who may be concerned about privacy or trust when it comes to money. We have all heard the horror stories where one spouse cleared out the bank account and took off, or bought something ridiculous with the other spouse’s hard-earned cash! If you don’t trust your partner with your combined finances, are there other aspects of your relationship you don’t trust him or her? I am not a shrink and don’t want to delve too deeply into this issue, but it is something to keep in mind. Communication and openness are key when it comes to your money, and if you have to give up some privacy with your loved one to get ahead financially, it may bring you closer together!
Different Goals – Many couples are made up of a spender and a saver. One person only spends money when it is absolutely necessary (like when there are holes in his pants) and the other person spends money when he or she sees something on sale in the mall. The key to any relationship is balance, and the best way to this is communication. I know it sounds wishy-washy, but it is really important! Sit down with your spouse and discuss your goals. Maybe you haven’t actually thought about what your goals are. Try to align your goals with your day-to-day habits. For example, if the spendthrift spouse’s goal is to look trendy and fabulous, maybe you can compromise by shopping at a high-end consignment store, or saving up to buy the latest Manolo Blahniks without compromising the other spouse’s goals.
Overall, if you are comfortable and in a committed relationship with your spouse, I think it is a great idea to combine your finances. Of course, complete combination may not work for you but there are other great options to try as I’ve outlined above. You might even find your own combination that works just for you. The more you work together on creating common goals and communicating about your money, the easier it will be in the future. Once the money issues are dealt with, you only have to deal with your spouse leaving his socks on the floor (the laundry basket is RIGHT THERE!).
My husband and I went through this exercise when we first starting sharing expenses, soon after we moved in together. This article addresses some of the pros and cons you may face in making this decision. The key to each of the options is to communicate with each other. This is one of the hardest parts of being a couple, whether it has to do with money or not! Don’t they say that the majority of divorces are caused from unresolved money issues? If you keep some of these tips in mind, you can have a healthy relationship and a healthy pocketbook!
There are a few different ways to combine your finances:
Combine It All
Set up a combined chequing and savings account, and close your old accounts. Both of your pay cheques are deposited into the joint chequing account and all bills are paid out of that account. This means that Jane’s $200 haircuts are paid from the same account as Paul’s $20 haircuts! Okay, that sounds really bad, but this option can work really well. You can start thinking about your finances as “us” rather than “me and you.” It is ideal that you know how your money is being spent. Each person in a couple should be responsible for knowing what’s going on with their cash.
Contribute 50/50
Each of you would keep your individual accounts, then put a set amount in each month in an equal proportion ($500 each if you want to contribute $1,000 per month to pay joint bills). You are each using half of the utilities or groceries so you should contribute equally, right? Keep in mind that this approach works better for couples who have similar incomes. The lower earning spouse may not appreciate having only $100 after the monthly joint contribution when the other person has $1,000 to blow.
Contribute Based on Income
When couples make significantly different salaries, this is the happy medium option. For example, one spouse makes $34,000 and the other makes $50,000. If you want to put $1,000 each month into your joint account, the first spouse should contribute around $400 and the other spouse should put in around $600. This means each person has the same percentage of money left over for their own personal use.
There are many reasons to combine your finances, other than the reasons described above. In general, it may be cheaper and less of a strain on your relationship to combine your cash. You are brushing your teeth with no makeup on in front of this person, so how hard can it be to talk about money!
Bank fees – It is difficult to find a no-fee chequing accounts in this country. If you combine your bank accounts, you will only have to pay one set of bank fees. Keep in mind that many banks charge by the transaction, so if you are going to have more transactions each month with the two of you, you should look into the different banking packages offered to see if you can increase the number transactions per month (with a small increase in the monthly fee – but it’s better than paying two fees!). Check with your banker – they may waive the monthly fee if you hold more than one account with them.
Paying Bills – Many couples who have not combined their finances have to deal with the “I’ll pay this bill and you can pay next month,” or “I’ll pay the grocery bill and you can pay the utilities.” This can end up straining your relationship in ways you may not foresee. For example, if one spouse pays the utilities and the other pays the groceries, you may be living in a freezing cold house in the winter (the person paying the utilities keeps turning down the heat) or you may end up eating Ramen noodles for dinner (the person paying for groceries refuses to buy steak!). By combining your finances, all of your joint bills come out of the same account so you don’t have to worry about who is paying for what. The key is communication so you can compromise; turn the heat down a notch and wear an extra layer, or have a chicken breast for dinner instead of steak. This will ensure there is no resentment between spouses.
Joint Savings – It is so important for couples to be on the same page with their goals. Sit down with each other and write up a list of what you want to save up for. Is it a flat-screen TV or some upgrades around the house? Set up an automatic amount to go into your savings account (any amount will do – just do it!) and keep your list somewhere handy to remind yourselves what you’re saving for. I can tell you from experience that you feel way less guilty when you purchase something you’ve saved up for!
After all of those amazing pros, why wouldn’t you want to combine your finances?
Privacy – This is more than just knowing what your spouse bought you for Christmas by looking at your bank statement! There are some couples out there who may be concerned about privacy or trust when it comes to money. We have all heard the horror stories where one spouse cleared out the bank account and took off, or bought something ridiculous with the other spouse’s hard-earned cash! If you don’t trust your partner with your combined finances, are there other aspects of your relationship you don’t trust him or her? I am not a shrink and don’t want to delve too deeply into this issue, but it is something to keep in mind. Communication and openness are key when it comes to your money, and if you have to give up some privacy with your loved one to get ahead financially, it may bring you closer together!
Different Goals – Many couples are made up of a spender and a saver. One person only spends money when it is absolutely necessary (like when there are holes in his pants) and the other person spends money when he or she sees something on sale in the mall. The key to any relationship is balance, and the best way to this is communication. I know it sounds wishy-washy, but it is really important! Sit down with your spouse and discuss your goals. Maybe you haven’t actually thought about what your goals are. Try to align your goals with your day-to-day habits. For example, if the spendthrift spouse’s goal is to look trendy and fabulous, maybe you can compromise by shopping at a high-end consignment store, or saving up to buy the latest Manolo Blahniks without compromising the other spouse’s goals.
Overall, if you are comfortable and in a committed relationship with your spouse, I think it is a great idea to combine your finances. Of course, complete combination may not work for you but there are other great options to try as I’ve outlined above. You might even find your own combination that works just for you. The more you work together on creating common goals and communicating about your money, the easier it will be in the future. Once the money issues are dealt with, you only have to deal with your spouse leaving his socks on the floor (the laundry basket is RIGHT THERE!).
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