Personal Finances, Revisited

2014-01-01

Four years after starting my career, in tax season 2013, I wrote this note explaining basic personal finances including RRSPs, TFSAs, stocks, mutual funds, etc. Four more years have since passed, and I’ve opened accounts, made investments and decisions, and saved much faster than I did previously. I thought it could be helpful to break down why.

This graph begins with my pension I’d been contributing to for four years already, my major assets (just my car), a chequing account which I’m just starting to float some extra savings in, and a little rotating credit card debt which is paid off in full every month.

March 2013

Set up an account with Mint, a great personal finance tool that works with most major financial institutions. Most banks have similar services, but Mint can combine data from multiple banks, brokers, etc. Using data from Mint allowed me to produce this graphic.

Open a TFSA, just a savings account with tax-free earnings. I left enough in chequing to maintain the minimum balance and still pay bills, and moved the rest there immediately. I also set up pre-authorized purchases every paycheque, automatically investing the money in market index mutual funds.

Get the best credit card I was eligible for, and set up pre-authorized payments for it. When paid in full, there’s only benefits: 4% cash back on gas and groceries, 2% on recurring bills, 1% back on everything else, along with extended warranty, travel insurance, etc.

October 2013

I switch jobs, saving money each month on travel expenses, and allowing me to boost my TFSA with some accrued vacation time I was paid out.

January 2014

Invest in the shares of my new employer, with cash from my TFSA. Each employer is different, some with automatic pensions, some with employee matching on RRSPs, some with company stock or profit sharing opportunities. Try to take advantage of whatever opportunities you have.

Febuary 2014

Open an RRSP with money from my TFSA, incurring an income tax refund. I expect to buy a house eventually and can use RRSP money through the Home Buyer Plan to do that. I mostly buy more index funds, but gamble on a few stocks too. Amazon and Netflix did well, Under Armour didn’t! Don’t buy stocks unless you like stress and know an industry better than expert investors! Remember, every time you buy a stock, someone on the other end thinks it’s time to sell!

January 2015

Staying with my new employer for a year, I earned the right to resell shares instead of returning them to the company at cost, causing a jump in their value to me. This is a one-time change unique to my circumstances.

February 2015

Again shift money from my TFSA to my RRSP. I also transferred my old pension into a LIRA account, where I could control the investments directly, with less management fees. The value of the LIRA previous to this point was only an estimate, but I start collecting monthly data now.

February 2016

Top up my RRSP for the last time, since there’s a limit to how much money you can take from your RRSP to buy a house. I keep the rest of my money in the TFSA until I need my down payment.

Key Points

A TFSA has no downsides and simply saves you from paying income tax on anything you earn there. It’s a bit of free money.

An RRSP cuts all the income tax from anything you invest, which will typically be something like 30% instant cash back. As long as you are using that money for a home purchase, education, or retirement, this is a whole lot of free money.

A good credit card has points or cash rewards - more free money, when you pre-authorize payments so you never pay a late fee.

By maintaining the minimum balance in my chequing account, I pay no monthly bank fees. More free money.

Employers typically have incentives like employee-matching on pension funds (my first job) or company stock (my second job). Not always free money, but almost always a good idea.

Stock market-tracking index funds have very low management fees, which saves you money. These funds do have risks, but there are lots of ways to control these risks. Talk to a financial advisor (or me!) about what’s right for your circumstances.

Of course, all of the above have one thing in common: “it takes money to make money”. The silver lining here is that once you climb out of the hole, it gets easier and easier to rise above it, so cut corners early if you can, and leave yourself more time to reap the rewards.

The last four years in review.