In my last post I introduced the idea of the RRSP. In this video, financial educator Jim Yih shares with us how to use a RRSP properly to get the best tax advantage.
When I ask my friends and family members what the interest rate on their RRSPs are, they'll typically quote me whatever the bank has advertised (e.g., 2.1%). The problem with this answer is that RRSPs are not actually an investment you can buy. They don't produce a rate of return or have an interest rate. They are government created tax shelters into which you can place investments.
In the video below, Brad and Andrew from Bumstead Financial Services in Vancouver explain very well what a RRSP is. It's a very important concept, so below the video I will highlight some of the points that I think make the RRSP such a great savings tool but that I also think are misunderstood by most Canadians.
1) It costs the Government of Canada BIG money when people can't take care of themselves during retirement. As a result, it started giving Canadians a "tax loan" so that there would be an incentive for them to save some money on their own. When you put money in to a RRSP, the government loans you back the taxes you paid on that money until you take it back out of the RRSP, at which time they tax you at whatever rate you are at that time.
2) My father once purchased a GIC for me. He did not register it in a RRSP. Rather, it was left as an open or "unregistered" investment. Every year I had the GIC, the government would send me a T5 that said how much intrerest my GIC had earned that year. I then had to register that amount on my income tax form and pay the appropriate taxes on the growth of my investment. It wasn't very nice. However, if my father had put it in a registered tax shelter (like a RRSP) the government would not have taxed me on the growth of the GIC while it was in the RRSP.
Furthermore, some mutual funds trigger various additional taxes depending on what happens inside the fund. These are charged to the fundholder (i.e., you), but not if it is in a RRSP. This tax sheltering feature is a major advantage of saving inside a RRSP.
3) When people think their RRSP returns 2.1%, it's not the RRSP that returns 2.1%, it's the GIC or savings account the bank put inside for you so that it could make a lot of money with your money, but tricked you into thinking was actually just what RRSPs make. As Brad explains, you can put almost any kind of investment, including a mortgage, into a RRSP and it will return whatever that investment returns.
Come to think of it, what's a bear market too? If you've tried even briefly to understand the stock market you've probably heard one or both of these terms. To expain it as simply as possible I've engaged the help of the following YouTube video from Motley Fool co-founder, David Gardner.
I remember in College when an instructor taught us the "actual cost of education," factoring in lost earning potential, etc. He never included the interest on that student loan. In the eye-opening post by Bridget at Money After Graduation, that I linked below, we see just how much a $25,000 student loan really costs.
Yesterday we learned what it means to purchase stock in a company, today we'll discuss another common aspect of a diversified portfolio - bonds. This is a very short and simple video so as always, if you have any questions, post them in the comments section below and I will be sure to address them in future posts.
We're going to be talking a lot about investing and the stock market in this blog, so I thought it would be useful for everyone to understand what exactly happens when an individual or a mutual fund buys shares of a company (buys stocks). There doesn't seem to be a simple way to explain this completely, but this video by MIT and Harvard business school graduate, Salman Khan, is the best explanation I could find.
I hope that video was helpful. If anything wasn't clear, or you have any questions or comments, please write them in the comments section and I will try and find a different video to address the concern.
Dave "The Money Guy"
Since we're going to be talking about money, we might as well start with the fudamental rule that governs how all money works: The Rule of 72. We'll be discussing its applications and significance in future posts, but in the mean time enjoy this brief introduction to the Rule from Bobby Lee.
When I was seventeen I was merrily going about my life training to have a white picket fence lifestyle with my 2.3 children. Then a friend of my father introduced me to a book called Rich Dad, Poor Dad by Robert Kiyosaki. Now I'm well aware that there is a lot of controversy surrounding Kiyosaki, and my Chartered Accountant friend would question some of his accounting principles. However, he did open my eyes to the need for financial education at an early age, and that book Rich Dad, Poor Dad was written in such a simple and easy to understand way that even a foolish, seventeen year old could read it and get started on the path to financial success. In honour of Richard and his book that changed my life, my first ever blog post on Finding North is a clip from a presentation Richard made on the need for financial education. If you enjoy it, check out other videos and books from Robert Kiyosaki, and also consider enjoying my Facebook and Twitter feeds.