Simple habits can make the difference between scraping by and living comfortably
Written by Glen Korstrom
Vancouver’s high cost of living likely has many millennials believing that achieving the financial security necessary to one day retire will be nothing more than an elusive dream. The key, according to some financial advisers, is to adopt financial habits that become second nature.
Vancity credit union wealth advisor John Vermeulen has helped many clients become financially stable with simple rules to live by.
First, he recommends that clients pay off debt.
“It doesn’t make sense for some to carry debt on a credit card and paying 20 per cent interest if they are paying money every month into an RRSP (registered retirement savings plan) that is likely to return a five percent gain,” he says.
“Simple math would tell you that the opportunity cost there is fairly high.”
When debt is necessary, the key is to pay as low an interest rate as possible and to pay off the debt as soon as possible. Consolidating various debts into one that carries a lower interest rate could be one strategy.
Regardless, it is important to realize that it rarely makes sense to have debt when you are saving money because the interest rate on debt is almost always going to be higher than what someone might reasonable expect to achieve from an investment.
Once debt-free, the best way to generate long-term growth is to pay yourself first each time you get a paycheque, Vermeulen says.
He then refers to how that lesson is drilled home in inventor and philanthropist David Chilton’s 1989 book The Wealthy Barber: The Common Sense Guide to Successful Financial Planning, which is one of the best-selling Canadian books of all time.
Chilton recommended that readers take 10 percent of their salary and put it towards savings before they pay any other bills.
Vermeulen says that this target may be unreachable for some people but that the important lesson is to put something away each time a paycheque arrives.
“Saving is a habit, just like going to the gym.”
“Saving is a habit, just like going to the gym,” he says. “You’re only going to be successful over the long term if you’re disciplined and you make it a habit. The nice thing about being able to automate your savings is that you don’t have to lift a finger. With going to the gym, you have to get up and motivate yourself and make sure that you’re eating properly and hydrated and all that. Saving is easy because you have somebody at your bank or credit union set up an automatic transfer every payday.”
To maximize available income, Vermeulen suggests that clients read their workplace benefits manual or have a chat with the company’s human resources representative to ensure that they understand what benefits they are entitled to.
Because some workplace health plans cover massages or chiropractor visits, it would be silly to pay for a massage if one could be covered by a health plan.
Vermeulen adds that some workplace health plans allow employees to select a plan for a number of options. If an employee needs only a basic plan and will not need some the extras that are covered in a deluxe plan, opting for the basic plan may mean extra dollars added to his or her paycheque.
Once the money is saved, the key is to understand what you are saving it for.
Someone who is saving for a down payment on a home with the aim to having money saved in five years is going to have a different investment strategy than someone who is socking the money away for retirement decades from now, Vermeulen says.
Long-term investors, he suggests, are able to take more risk because they have a longer time period to recover and they can ride out volatility that can take place if the stock or housing markets crash.
Stock markets and the Vancouver housing market have historically far outperformed bonds and term deposits, so those investments might be worth investigating for those seeking more risk and more reward, he says.
“Real estate, more than anything else, is about commitment.”
“Real estate, more than anything else, is about commitment,” Vermeulen explains. “If you believe that you are going to live in one area for an extended period of time, that you want to put down roots in an area and that you are comfortable with the responsibility of being a homeowner, compared with fewer responsibilities associated with being a renter, then owning a home is something you’d want to consider.”
Renting however, may financially be the most feasible option if you believe that you will move frequently, he adds
Smart investing in the stock market could mean picking a hot stock that soars, but given that stock picking is very risky, a smarter way to guarantee long-term returns is to buy exchange traded funds (ETFs). Those funds carry a small management fee but are attractive to many investors because they are invested in a basket of stocks.
Vermeulen suggests that investors seek professional advice. For those who want to cut the cost, there are many discount brokerages that enable customers to buy a stock for a nominal amount less than $10 and sell it for the same amount.
There is also the question of what account to use to buy that stock or ETF. If the person earns more than $46,000, each dollar more than that amount carries a 28 per cent tax. If the person buys $5,000 worth of Royal Bank of Canada stock, for example, and the investment is in their RRSP, they get immediate tax relief in that the Canada Revenue Agency would tax them $1,400 less ($5,000 times 0.28) in that year. They would then pay tax on that money later in life, when they remove the money from their RRSP.
Another option is to buy the shares with money that is in a tax-free savings account (TFSA). In this scenario, the person pays tax on the money to be invested in the year that it is earned and does not pay any future tax on that money.
Investing in a TFSA makes particular sense for those earning less than $46,000 because they are in a lower tax bracket and can therefore justify paying tax up front instead of years into the future, when their income may be higher.
Other tips that could result in a healthy financial future include investing in education or training. That spending has potential to make a person more valuable to employers and could ultimately lead to a higher salary.
Keeping a diary of spending is another option. Writing every expense down could provide the psychological incentive not to spend money in frivolous ways.
Another option for those who do want to go over all expenses at the end of each day is to put all spending on a debit card, or a credit card that provides cash back or points. That way each transaction is visible for future reference.
“There are many online tools now that can aggregate someone’s spending from credit cards into different categories,” Vermeulen says. “You don’t need to record as much on your own today as you did years ago.”
Originally published in Business in Vancouver New Investor 2018 Magazine