The 45 best ways to grow your money
1. Pay yourself first
This is the single best money tip of them all and it’s easy. Just set up an automatic payroll deduction that will whisk away 5% to 10% of your paycheque before you ever see it, and deposit that amount in a good, low-cost mutual fund. Soon, with no effort on your part, you’ll have a healthy nest egg. Why does this trick work so well? Because most people find it hard to save money by sticking to a budget — it’s just too tempting to spend what’s left over. But if you make saving an automatic first priority, you quickly adjust to living on the cash that remains.
2. Mark it down
Use the calendar to your advantage, says Barb Garbens, a fee-only financial planner at BL Garbens Associates Inc. in Toronto. By contributing to your RRSPs at the beginning of the year rather than at the end, you can enjoy an extra year of tax-free compounding. And by paying your mortgage weekly or bi-weekly instead of monthly, you can pay off your mortgage years faster than someone who sticks to a monthly schedule.
3. Get real
About your expectations, that is. Advertisements depict a world in which everyone makes a six-figure salary, retires at 55 and earns 15% a year on their investments. The reality is different. Most Canadians make under $50,000 a year. The typical man retires at 63, the typical woman at 60. The median return of balanced mutual funds over the past five years has been a meagre 5%. What do all these numbers mean? That you shouldn’t stress if you’re not on track to retire in your mid-fifties — and that you should be very suspicious of fast-talking brokers who promise you 20% annual returns.
4. Think twice
Before hiring someone to take care of a job you could do yourself. Why? Because you earn money in pre-tax dollars, but you pay bills in after-tax dollars. Thus, many middle-class earners will discover that paying an $800 landscaper’s bill (in after-tax dollars) really costs them nearly $1,500 in before-tax salary. Think about it: if you do the landscaping yourself, you’re giving yourself the equivalent of a $1,500 raise.
5. Pick a date
New Year’s Day, for instance, or Canada Day — and draw up a net worth statement on that day every year. Begin by listing your assets at their current value. This includes your house, your car, your RRSPs, and anything else you own. Then subtract your liabilities — the amount you have left owing on your mortgage, your credit card and other loans. What remains is your net worth. If it’s going up every year, that’s great. If not, start asking questions.
6. Repeat after us: time is money
Literally. Every dollar that you invest now will double in 12 years, assuming a 6% annual return. So even if you don’t feel particularly wealthy in your 20s and 30s, try to put away what you can, either by investing or by paying down your mortgage and other debts. You’ll be pleased you did when you look at your net worth in your 40s and 50s.
7. Learn the virtues of standing still
The biggest single mistake that people make in trying to build their wealth is being too active — they flip in and out of investments and chase yesterday’s hot mutual funds or stocks. Problem is, yesterday’s winners are often tomorrow’s losers. What’s more, the transaction costs of jumping in and out of investments can eat up profits. So avoid frequent trading. Never buy an investment — whether it’s a house,a stock or a fund — if you’re not prepared to hold it for the next 10 years.
8. Spend less than you make
This is still the only way to build wealth — and it’s easier than you may think. Just promise yourself not to increase your spending when you get a raise at work or a windfall of some other type. Instead, bump up your automatic payroll deductions by the after-tax amount of the raise, and soon you’ll be soaking away barrels of cash, without having to give up anything you currently enjoy.
9. Distinguish between bad debt and good debt
Bad debt is money you borrow to purchase something that quickly declines in value — a vacation, clothes, restaurant meals. Good debt is money you borrow to buy things that can go up in value or increase your earnings potential: an education, stocks, bonds, mutual funds, a house.
10. Pay it off
Pay off your credit cards and mortgage before beginning to invest. Chances are you’ll earn a higher rate of return from erasing loans than from playing the stock market. Paying down your credit card, for instance, guarantees you a risk-free after-tax return of about 18%. To achieve a similar return through investing, you would have to earn more than 25% before tax and you would have to take on risk.
11. Attack debt
Attack debt systematically rather than trying to pay the same amount to everyone. Start by paying off your highest-interest debt — credit card debt is usually the worst.Then move on to car loans and your mortgage. If you’re carrying a lot of high interest rate debt, talk to your bank about the possibility of taking out a lower cost consolidation loan, backed by your home, and use that money to pay off your most expensive debt.
12. Forget the fees
No one should pay a fee to use a credit card when there are better cards out there for free. For instance, the TD Gold Select Visa offers purchase protection, extended warranties, travel accident and car rental insurance, emergency travel assistance and preferred rates at Budget — all for an annual fee of zippo. If you want rewards, the Citi Enrich MasterCard and Capital One 1% Cash Rebate Platinum MasterCard give you 1% of your money back, the TD GM Visa card gives you up to 3% back towards a GM vehicle, and the President’s Choice Financial MasterCard hands you a break on groceries. Best of all, none charge an annual fee.
13. Don’t lease cars
When you lease, you’re paying a premium to drive a new vehicle, plus you’re essentially financing almost the entire cost of your new car. That’s fine if you absolutely must have a new car every three years, but not a great strategy otherwise. You’ll almost always save money by buying a car and driving it for five to 10 years.
14. Hire a fee-only financial adviser
For a truly unbiased look at your finances, hire a fee-only financial adviser that you pay by the hour. These folks don’t have a conflict of interest. In contrast, most conventional advisers earn their incomes from selling you mutual funds and other products and have a built-in bias as a result. While fee-only advisers charge $200 to $300 an hour, they can be cheaper in the long run than conventional advisers. And they’re certainly more objective.
Never accept your bank’s first offer without asking if a better deal is available. Whether you’re buying a GIC or negotiating a mortgage, bank reps usually have a bit of room to negotiate. If you’re a good customer, point out that fact — and suggest you’ll look elsewhere if you can’t get a slightly higher interest rate on your GIC or a lower rate on your mortgage.
16. Use professionals
Use mortgage brokers and insurance brokers to help you shop for the best deal in their respective areas. Unlike salespeople who represent just a single bank or insurance company, brokers can show you products from several firms and steer you to the best deal. An insurance broker can compare features of policies from competing companies; similarly, a mortgage broker can offer you deals from dozens of small lenders that you would otherwise have missed.
17. Open a president’s choice or ING account
Both these banks operate primarily through websites and over the phone with only a limited number of ATMs and physical locations. The benefit is that they offer higher interest rates on your savings and lower fees than the Big Five banks. What’s not to like about that?
18. Know when to renew
Pass up your adviser’s pitch for expensive whole-life and universal-life policies and buy a renewable term-life policy instead. Such a policy typically covers you for either 10 or 20 years and is far cheaper than the alternatives. When the policy expires, you’re guaranteed to be able to renew it, so you can extend your coverage if you wish.
19. Compare policies
Term-life policies can vary hugely in cost, so check out quotes from rival firms at Term.ca or Term4sale.com before you buy. An insurance broker can help steer you through the competing choices.
20. Increase deductibles
Raise the deductible on your car or home insurance and your premiums will plunge by as much as 40%. For instance, simply raising the deductible on your home insurance from $500 to $5,000 could cut the insurance bill for a three-bedroom Toronto home to $420 from $700. While you’re at it, find out how much you could save by insuring both your car and your house with the same company. Most insurers offer a discount to people who give them all their business.
21. Don’t buy life insurance you don’t need
The only good reason to purchase a policy is if someone will suffer financial distress from your death. So if you’re single, you probably don’t need insurance. And if you’re married with kids, you don’t need policies on your kids’ lives. (If — heaven forbid — anything were to happen to your children, you would be grief-stricken, but you wouldn’t suffer a financial loss, would you?)
22. Put extra money toward your mortgage
Your return will beat anything you could get on a GIC or mutual fund. For instance, if you have a $250,000 25-year mortgage at 5% and you pay $200 a month on top of your regular payments, you’ll save $40,000 in interest and pay off your home five years sooner, says Andy MacDonald, president of MortgageBroker Inc. in Mississauga, Ont.
23. Consider Manulife One
A product which merges your mortgage with a line of credit and a chequing account. Any cash you deposit immediately reduces your mortgage total; any cheque you write adds to your total owing. Result? You never have idle cash lying around.
24. Become a landlord
If you’re sending junior off to university, consider buying him a house. That’s right — if you buy a home at the right price, and your teenager acts as the property manager and rents out rooms to other students, you can often turn a profit when you sell the house upon your child’s graduation. Even if home prices don’t go up, you can usually count on housing your offspring for free for four years.
25. Negotiate fees with your agent
Insist on a better deal from your real estate agent when it comes time to sell your home. Especially if you’re listing a pricey property in a hot market, ask your agent to discount the standard 6% commission. Alan Silverstein, a Toronto real estate lawyer, says you can often get an agent down to 4% or lower if he or she thinks your house will sell quickly. Saving a couple of percentage points will mean $6,000 more in your pocket on the sale of a $300,000 home.
26. Keep receipts
Take advantage of the small stuff, says Lee Bernstein, a tax accountant in Toronto. You can write off the cost of a safety deposit box, for instance. Two-income families can also deduct the cost of kids’ after-school lessons and summer camp if those expenses allow the parents to work and earn money. Moving expenses incurred to take a job elsewhere in Canada are deductible; as are tax preparation fees in some cases. And don’t forget medical and dental expenses — you can miss out if you don’t keep receipts.
27. Invest right to avoid taxes
The key is to remember that capital gains and stock dividends enjoy tax breaks, while interest payments from bonds and GICs don’t. So keep any bonds or GICs you own in your RRSP. If you run out of contribution room, your stocks and stock-based mutual funds can remain outside your RRSP without inflicting too much tax damage.
28. Contribute to your RRSP
The biggest, best tax loophole is contributing to an RRSP. Yep, we know it sounds mundane — but it’s also true. So stop whining and make that contribution.
29. Beat the taxman by re-arranging debt
In general, interest on money you borrow to invest is tax deductible, but interest on money you borrow to spend isn’t. So rather than using your savings to buy stocks and borrowing to buy furniture, switch it around: by borrowing cash to buy stocks and using savings for the sofa, you turn the interest into a tax deduction.
30. Get help
If you find a tax accountant you like, stick with her — she can suggest ways to minimize your taxes. Software can also make your return a snap. QuickTax, TaxWiz and UFile each cost less than $50, but save you hours of tedium.
31. Split income with your spouse, both now and in retirement
By making your incomes as equal as possible, you’ll minimize the overall tax that both of you will pay. One strategy is for a high-earning spouse to contribute to a spousal RRSP for his or her stay-at-home partner. If you run your own business, you can cut your family’s overall tax bill by employing your lower earning spouse — or kids — to perform some tasks you would otherwise have to do yourself.
You’ll be glad you did. Holding a varied portfolio ensures that no single disaster can blow a hole in your nest egg; it also guarantees you’ll have a part of any good news going. To ensure you’re diversified, make sure that your holdings include both stocks and bonds. Your stocks should span several industries, rather than being concentrated in a single sector. They should also be geographically diversified, with Canadian, U.S. and international firms in the mix.
33. Think in terms of your portfolio, not individual stocks or funds
About 90% of the difference between the returns of different portfolios comes down to broad decisions about which types of assets to buy, rather than narrow decisions about which specific stocks, bonds or mutual funds to hold. The classic blend is to put 60% of your holdings in stocks and 40% in bonds. Conservative investors may want to reverse those proportions, while aggressive investors may want to drop the bond component to 20%.
34. Steal other people’s ideas
Unlike students writing a university essay, investors get rewarded in their portfolios for copying the work of the smartest people they know. One of our favorite sites is Gurufocus.com, which tracks the commentary and holdings of more than 25 great investors, including Warren Buffett.
35. Follow our couch potato strategy
It beats 80% of the money managed by professionals over the long term and requires only 15 minutes of your time each year. For step-by-step instructions on how to become a Couch Potato, click here.
36. Cut your costs
This is the single best way to juice your returns. Despite what you may think, paying more for money management doesn’t improve results. So look at low-cost index funds or exchange-traded funds (ETFs). If you truly want an active manager, pick a fund with a below-median management expense ratio to ensure profits stay in your pocket.
37. Be realistic
About how much you can withdraw from your retirement portfolio each year. Many new retirees assume they can spend 7% to 10% of their nest egg every year.That’s fine in a rising stock market, but if the market slumps and you keep taking out that much, you’ll quickly run down your savings. Studies agree that to make your money last you should count on withdrawing only about 4% a year.
38. Count on a government pension
Most of us will get more from Ottawa than we think. A married couple with no savings or company pension can expect $24,000 a year from all government sources when they retire; the average combined payout from just the Canada Pension Plan and Old Age Security is now almost $11,000 per retired person a year.
39. Protect yourself
Protect yourself from stock market slumps in retirement by keeping five years’ worth of living expenses invested in a “ladder” of safe bonds, with one fifth of your holdings maturing each year. That way you can live off the money from your maturing bonds during a market downturn, and you won’t end up decimating your portfolio by cashing in stocks when they’re down.
40. Make a will
Making a will doesn’t take a lot of time, it doesn’t cost much, and it can save your heirs thousands in taxes and legal fees as well as legal squabbles. If you can avoid all that by hiring a lawyer to draft a will for $200 to $300,why wouldn’t you?
41. Talking about wills
Our advice is to talk about wills. Most feuds over wills come about because parents don’t communicate their decisions to their kids while they’re alive. When the will is read, heirs are surprised, feelings are bruised, and nastiness ensues as sibling turns on sibling. So, before you make a will, talk it over with everyone involved. Then, after you have the will, keep on talking — the best will is one that surprises no one when it comes time to use it.
42. Make use of registered education savings plans (RESPs)
After you open one of these plans at your local bank, you can contribute up to $4,000 a year per child to a lifetime limit of $42,000. The money grows tax-free until it’s withdrawn for your child’s education. But here’s the even niftier part: the federal government gives you an immediate top up for each contribution. The amount of the grant varies according to your family income, but it’s worth a minimum of 20% of the first $2,000 per child you contribute — in other words, $400 a year for free. Sounds like a deal to us.
43. Live closer to work
Many of us underestimate the true cost of commuting, both in terms of stress and in terms of dollars. Case in point: The Canadian Automobile Association calculates a husband and wife can spend $140,000 over five years making the one-hour commute from Hamilton, Ont., to Toronto in separate Chevy Cavaliers.
44. Money isn’t everything
Switching to a new job where you have more trust in management brings you as much happiness as a 36% pay raise, according to a recent study by economists John Helliwell and Haifang Huang at the University of British Columbia. Switching to a job that offers more variety is like getting a 21% pay raise, and getting a position that requires a high level of skill is worth a 19% raise.
45. Give your kids part of their inheritance while you’re still alive
A bit of cash when your kids are in their 30s could save them a fortune in mortgage interest — and you’ll enjoy being around to see the difference your money makes.