Just one last reminder that Canadian Wealth Advisor is offering Boomer & Echo readers their one-year subscription for $39.  This offer expires at the end of the month.

On Moneyville this week I wrote about where to find the best GIC rates for your RRSP this year.  I also explained how home closing costs can add up.

Here are a few more interesting personal finance articles from this week:

1. My Own Advisor explained how to close your DRIPs and SPPs
2. Retire Happy Blog said that financial planning is a road map to financial freedom
3. The Blunt Bean Counter asked does money bring happiness?
4. Passive Income Earner said goodbye Scotia iTrade, hello RBC Direct Investing
5. Beating The Index said beware of declining natural gas prices
6. Million Dollar Journey explained the joys and pitfalls of downsizing your home
7. Money After Graduation asked what should your net worth be at 30?
8. Young and Thrifty gave the low down on the RESP
9. Michael James said OAS remedies should not just be about cost containment
10. Money Mamba explained why cash return on invested capital is his favourite metric

We were also included in the following blog carnivals this week:

• Canadian Finance Carnival
• Carnival of Financial Camaraderie
• Carnival of Personal Finance
• Festival of Frugality
• Carnival of Wealth

Have a great weekend everyone!

• What’s New Around The Blogosphere: February 17th, 2012
• What’s New Around The Blogosphere: February 10th, 2012
• What’s New Around The Blogosphere: February 3rd, 2012
• What’s New Around The Blogosphere: January 27th, 2012
• What’s New Around The Blogosphere: January 20th, 2012

Can this actually work?

I don’t know if they actually managed to not spend any money but, personally, I think it would be next to impossible.  I’ve heard of no spend days, or frugal weeks, which would be manageable, but not a whole month.

Groceries:  While you can purchase a month’s worth of groceries (in fact, I do a big grocery shop once a month) and eat what’s in your cupboards and freezer, what about fresh milk or produce that don’t last that long?  Yes, you can get by with canned and frozen fruit and vegetables and the dreaded powdered milk, but I still like to eat fresh.

Monthly bills:  You can of course pre-pay these, but I don’t really consider that not spending.  You still use electricity and water, heat your home and probably use cable and Internet.  This also includes your mortgage or rent payment, and possibly taxes and insurance.  Also note that if you have a credit card balance, even though you might make a large payment one month, they still require at least the minimum payment each month.

Driving:  It’s very commendable to walk everywhere, or ride your bike but not always practical if you live in the suburbs, work more than a mile or so from where you live or have to haul kids around with you.  One of my children didn’t like to walk, wouldn’t sit in a stroller and always wanted to be carried.  (It wasn’t easy lugging a 30-pound child around everywhere.)

Miscellaneous:  It’s hard to anticipate every expense that may arise during the month.  Relying on family and friends to pick up the tab is just plain wrong.  It’s like the person who “quits” smoking yet bums cigarettes all the time.

I think this family is missing the point of Frugal February.  The goal is not to stop spending altogether.  I think the point is to reduce impulse spending.  For one month you can eliminate:

• Your daily latte
• Eating out
• Shopping for clothes, household items, toys and other “extras”
• Going to movies, the pub, or other paid entertainment
• Buying any gadget related to your hobby
• Using your credit card for anything
• Excessive long distance phone calls
• Pay-per-view movies and sports
• Any little impulse item, from a pack of gum to a magazine.

The purpose is to eliminate mindlessly thinking that little things don’t count.  If you put aside the money you would normally spend on extras you’d be surprised at how much is actually flowing through your fingers.  It doesn’t mean doing without.  It means to think about what you buy.

This exercise could probably change your spending habits (and they are habits).  You could even save enough money to actually pursue something you really want.

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I’m sure many Canadians will identify with this story as it guides you through all of life’s major events – like getting out of credit card debt, buying your first home, having children, changing careers, learning how to invest and knowing who to trust with your money.

Findependence Day

Findependence Day is short for Financial Independence Day, or the day when the income from your investments and all other sources exceed your income from full-time employment.  It’s the day that you no longer need to work for the man.

The premise is to pick some date in the future when you believe you’ll achieve Financial Independence.  There’s great power in drawing a line in the sand and saying this is the day.  If you fall behind, take steps to speed it up.  If you think you’ll overshoot, you can take a few more days of vacation.

The Story

After being humiliated about their credit card debts on a national TV show the hero of the story, 28-year old Jamie Morelli, declares his personal Findependence Day will be the day he turns 50.  Jamie’s wife Sheena is slow to buy into the “guerilla frugality” mindset needed to save and invest.  Jamie ignores her wish to buy real estate and jumps into the stock market just before it crashes.

Shaken, but not undaunted, Jamie looks for multiple streams of income.  He aims for the big score when his hobby blog attracts interest from venture capitalists and a major Internet site.  After he is betrayed by a business partner, Jamie’s world falls apart, threatening his dream of early financial independence.

Rather than simply preaching some personal finance rules to follow, this book gave an honest portrayal of a typical Canadian family struggling to balance their financial priorities.  It showed the importance of not only having a financial plan, but keeping your plan updated as you move through life’s major events.

What’s Your Findependence Day?

This book made me think about my Findependence Day.  I never really latched on to the idea of early retirement.  I’m on track to retire and collect my full pension at 57, which is 25 years away.  But I enjoy my job, so getting paid to do something I like is definitely a bonus.

That’s why the concept of Findependence Day is so intriguing because it doesn’t necessarily mean retirement.  When you reach Financial Independence, you can keep doing the things you’ve always done – but now you’re doing it because you want to, not because you need to.

In order to reach Financial Independence we will need our mortgage paid off, have both of our tax free savings accounts fully funded, and ensure that our kids are financially prepared for post-secondary school.  I think we can reach Findependence Day by the time I turn 50.

What about you – what’s your Findependence Day?

Leave a comment below for the chance to win a free copy of Findependence Day.  I’ll announce the winner of the book on Friday March 2nd.

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Plenty of economists believe we need to get the consumer confident and spending again and people who don’t spend money contribute to the recession.  Poor spending got us into this mess.  The hyper-consumerism of the last few decades has wreaked havoc on our economy, the environment and our way of life.

I see a lot of finger pointing and blaming everyone else, but we each have to take responsibility.  The average North American is carrying a huge debt load and saving very little money, while contemplating a future with fewer entitlements, longer working lives and smaller pension cheques.

Developers borrowed money to build office and apartment complexes when there was no market for them.  Confident consumers bought electronics and snowmobiles on their credit cards, overspending and borrowing more while refusing to deal with the consequences of their actions

We’re fortunate that we are not experiencing severe austerity measures and food riots.

It’s time to turn the economy around

By trying to accelerate a recovery artificially, by going into debt on a personal, business and government level we lose economic efficiency because a larger and larger percentage of our money has to be siphoned off to pay interest on our debts.

Our governments need to reverse reckless fiscal and monetary policies.  They can’t “create” jobs through military buildup and expanding their own bureaucracy.  Instead they need to eliminate the percentage of government that is useless and dead weight.  They need to stop bailing out poorly managed companies and devising artificial stimulus programs.

They need to stop printing money to maintain social entitlements.

Can we fix the economy?

In August, 2011 the United States was forced to raise its debt ceiling.  Standard and Poor questioned the fiscal capacity of the world most powerful and wealthy nation and reduced the country’s credit rating.

Canada also lost it’s Triple A rating in the mid 1990’s.  Then finance minister, Paul Martin, initiated a two-part plan.  First, reduce the deficit to 3% of the GDP from 8-9% and, secondly, balance the federal budget within 5 years.

We were regularly updated on the progress and there was nationwide satisfaction when the targets were achieved and the federal budget was balanced in 4 years, not 5.

Canada went on to record 10 successive debt reducing annual surpluses, each of which was applied to paying down the national debt.  These actions stood us in excellent stead when the global credit crisis struck in 2008 and 2009.

If in Canada, why not the U.S.?  Their finances could surely be salvaged if they put their mind to it.

The time is now

Clearly, some spending is essential for the economy.  We all enjoy a higher standard of living because we understand the benefits of trading goods and services.  But it has to be sustainable over the long term.

Our elected representatives need to step up to the plate and consider how their policies will affect the long term instead of cozying up to special interest groups and thinking of how to get re-elected.  If they are not doing the job, we need to get off our butts and vote in people that will.  A voter turnout of less than 50% does not give us fair, honest representation.

A strong economy is made up to economically healthy citizens who know how to invest and save.  A healthy, efficient economy is better positioned for more competitive and long-term growth and the accompanying job and wealth creation.  Funds always flow to areas of best opportunity.

If you make choices that are financially sound for you they will probably be financially sound for the economy in the long run?

The question is – are we up for it?

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There’s some confusion around the RRSP over contribution limit and RRSP carry forward rules.  This post explains both of these rules.

RRSP Over Contribution Limit

You are allowed to over contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax.  An RRSP over contribution is not deductible from your current year’s income, but the advantage is that you can add extra cash into your RRSP, where it can grow on a tax-deferred basis.

RRSP over contributions can be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed.

A penalty tax of 1% per month applies to the amount of an RRSP over contribution exceeding $2,000.  If you think you may have over contributed to your RRSP, contact an accountant to determine the steps you need to take.

The calculation of the penalty tax and filing of forms to withdraw the excess amount is not part of the normal personal tax return process.

An RRSP over contribution can be an effective tax strategy; however you are usually better off paying down non tax deductible debt first, like your credit card or mortgage.  If you decide to over contribute to your RRSP, work with your accountant or financial advisor to ensure you stay within the allowable limit.

One of the reasons the government allows an RRSP over contribution is to provide you with a cushion against possible errors and unforeseen events, like a pension adjustment (PA).

Consider using your $2,000 RRSP over contribution when you quit working.  The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year.

RRSP Carry Forward Rules

For most Canadians, it’s not always possible to make a full RRSP contribution in any given year.  If you don’t contribute the maximum allowable to your RRSP in any year, you can carry the unused portion forward indefinitely.

This means that if you were eligible to contribute $10,000 each year from 2001 to 2010, but you only contributed $5,000 each year, you will be able to contribute an additional $50,000 over and above your annual maximum limit.

If you are expecting a change in your income in the near future that will bump you into a higher tax bracket, it might make sense to delay your RRSP contributions until then.  In this case, it’s important to consider the loss of tax-sheltered investment growth by putting off your contributions.

To accumulate RRSP contribution room, you must file an income tax return.  If you have earned income for RRSP purposes, but you are not required to file an income tax return, you should consider filing anyway.  While an RRSP may not be a significant consideration at this point, there will likely be a time when you have enough cash to make a contribution and can benefit from the deduction.

If you had low taxable income in 2011 and enough cash to make an RRSP contribution, consider making the contribution before the RRSP deadline but don’t claim the deduction for 2011.

As long as the amount isn’t claimed as a deduction, your unused contribution room remains intact.  You can still claim the deduction in a future year, preferably when your taxable income is higher.  In the meantime, the investments inside your RRSP will grow on a tax-deferred basis.

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With RRSP season in full swing, Brighter Life has come out with an RRSP toolkit to help you figure out all your options.  Check it out!

And just a reminder that Canadian Wealth Advisor is offering Boomer & Echo readers their one-year subscription for $39.  That’s $80 off their regular price, and just $3.25 per issue!  This offer expires on February 25th.

Here’s a look at some other interesting personal finance articles from this week:

1. Cash Money Life shared some thoughts on losing $50,000 on our house
2. Dough Roller listed 75 ways to make money on the side
3. Canadian Finance Blog ranted about the generation gap
4. Free From Broke asked is a used car really a better value?
5. Couple Money explained what new parents need to know about taxes
6. Financial Uproar looked at the problem with no spend days
7. Money Smarts Blog explained who controls withdrawals from RESP Account?
8. Million Dollar Journey listed the top 5 asset allocation strategies
9. Retire Happy Blog said paying lower fees directly can be tough on investors
10. My Own Advisor asked what would you do with $1,000?

We were also included in the following blog carnivals this week:

• Carnival of Personal Finance
• Canadian Finance Carnival
• Self Directed Investing For Retirement Carnival
• Carnival of Financial Camaraderie

Have a great weekend everyone!

• What’s New Around The Blogosphere: February 24th, 2012
• What’s New Around The Blogosphere: February 10th, 2012
• What’s New Around The Blogosphere: February 3rd, 2012
• What’s New Around The Blogosphere: January 27th, 2012
• What’s New Around The Blogosphere: January 20th, 2012

What are friends for?

Payday seems an eternity away and you only have two loonies in your wallet.  All your credit cards are maxed out and you need some quick cash.  What do you do?

Just ask your friend to loan you some money.  Assure him that he will be repaid on Friday.  Of course, when you receive your pay cheque you’ll have less disposable income because you have to deduct what you owe from what you have.  Or you could ask your friend if you could pay him back later when you have more money.  After all, this is your friend.

Some parents (and siblings) will also lend out money – and they don’t seem to mind if you take a while to pay them back(!).

Or get a temporary cash advance

When you run out of friends, you can get a temporary cash advance loan.  As long as you prove you are working by producing a pay stub, you issue a cheque and you’ll have the cash in your hand in no time.  The cheque won’t be cashed until your pay goes into your account.  Unfortunately, this puts you on a revolving wheel of cash crunches that you may never get off.

Or get a bank loan

If all else fails, go see your banker.  She can offer you a great solution – the consolidation loan.  This type of loan allows you to get out from under all your debts while having only one smaller payment to make each month.  It’s designed to help you make a fresh start and it feels good.  But guess what someone who is financially challenged does when they’ve paid off all those debts?

You guessed it – they apply for a new credit card, go shopping and start all over again.  The problem was fixed but the behavior didn’t change.

Borrowing from ourselves

Savings are meant to be saved – for the long term.  In fact the government encourages us to save with RRSPs and TFSAs.  Withdrawing money from these accounts on a whim – buying a new computer or a weekend getaway – will deplete our assets and leave us with a net nothing!

You can have good reasons to borrow

There are plenty of good reasons to borrow money as long as you can afford to make the regular payments and as long as you view the loan as a shorter-term plan to assist in a longer-term goal.  Loans, like credit cards, carry with them a promise you make to yourself and to the lender.

The obligation you sign up for is what they used to call “a matter of honour.”  Your lender wants to help you make a fresh start.  You’ve made a decision to borrow and a promise to pay back.  That’s a legal agreement.  That means fixing what’s not right.  It means budgeting, changing your spending habits, looking to the future, and changing the past.

Borrowing can be a good thing, but don’t make the mistake of using it poorly.

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Canadians do have some options to help them buy their first home.  This post will explain the benefits of a first time home buyer using the Home Buyers Plan (HBP) or TFSA for a down payment.

First Time Home Buyer: Using the HBP

The Home Buyers Plan allows you to withdraw up to $25,000 as a loan from your RRSP without paying tax.  Under the HBP, only a first time home buyer is eligible to participate, unless special rules for persons with disabilities apply.

You are considered a first time home buyer if neither you nor your spouse owned a home during the four calendar years prior to the year of withdrawal, and up to 30 days before the withdrawal.

Loan repayment under the HBP must take place over a period of 15 years, or less if desired.  The repayments begin in the second year following the year of the withdrawal.  If the required repayment is not made, an amount will have to be included as income in the year of the shortfall.

If you have previously participated in the HBP, there are certain situations in which you may be able to participate a second time.  First of all, the full amount previously withdrawn must be paid back into your RRSP before the beginning of the year that you want to participate a second time.  Also, you must still qualify as a first time home buyer.

If you contribute an amount to your RRSP, you can’t make a withdrawal under the HBP within 90 days of that contribution, or your ability to claim a deduction for the contribution may be restricted.

As a general rule, you should make your RRSP contribution more than 90 days before the withdrawal.  After a waiting period of 90 days or more, your deduction may generate a tax refund, which can also be applied toward your down payment.

As a first time home buyer, if you have money on hand for a down payment and have accumulated some RRSP contribution room, consider opening an RRSP.  You can deposit that money, wait 90 days, be eligible to participate in the HBP, and at the same time use your tax refund to add to your original down payment amount.

Each spouse or common-law partner can withdraw eligible amounts from their RRSPs under the HBP.  This also means that each person may withdraw up to the $25,000 limit, or $50,000 total (if purchasing the property jointly).

First Time Home Buyer: The TFSA Solution

The TFSA is a registered plan like the RRSP, but differs from the RRSP because contributions to the TFSA are not tax deductible.  The flip side is that withdrawals from the TFSA are not taxable, and that includes any gains earned in the plan.

The TFSA is ideal for saving up for a down payment for a house, and can even be a better solution than the HBP for a first time home buyer.

Unlike an RRSP, you don’t need earned income to create room for the contribution – everyone gets $5,000 per year starting at 18.  For example, a 22-year old new graduate with a starting salary of $40,000 will only create $7,200 in RRSP contribution room for next year.  With the TFSA, he already has $20,000 in contribution room by 2012 ($40,000 when combined with a spouse).

The other issue with the HBP is that when you first start out in the job market, your income is likely to be low.  Since you’re in a lower tax bracket, your RRSP contributions will result in a lower tax refund.

Final Thoughts

The Home Buyers Plan is a good option for a first time home buyer if they have already invested in RRSPs and don’t have any savings outside of their RRSPs.  You can withdraw up to $25,000 ($50,000 when combined with a spouse) tax-free, and repay the amount over 15 years.

For young Canadians just entering the workforce without any savings inside their RRSP, it makes sense to use the TFSA from the beginning to save for a down payment on a house.  The TFSA offers a more flexible solution for the first time home buyer.

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To promote my thrift I like to read books or articles with money saving tips but I’m invariably disappointed with the advice.  Suggestions to turn out the lights, pack your own lunch, buy bulk or generic products are so old as to be meaningless – it’s amateur stuff.

In my quest to save money I have recently come across The Tightwad Gazette.  Originally a monthly newsletter, they have now been compiled into one book, so I’m ready to soak it up.

Consider the source

Most of these types of articles are written in the United States.  Like finance books, a lot of the information is not really relevant to Canadians:

• Stores in my area never have double or triple coupon days.
• Likewise, my stores never offer coupons for meat, dairy or produce.
• I will never again see chicken at 69 cents a pound so I can’t produce a $5 meal for a family of six.
• I have yet to find a store or manufacturer who will let me have their discards for free.

Some tips are just weird

I would not be too overzealous to save a few cents:

• Turn a used envelope inside out and refold it to use again.
• Scrape the crumbs out of your bread bag and save them for a crumb topping.
• Use my coffee grounds for two or three more pots of coffee.
• Turn worn socks into dishcloths.
• Rework a stained T-shirt into underwear.
• Dig out the last bit of solid antiperspirant, microwave and cool it for many more uses.

Some ideas are just not worth the trouble:

• Sew a strip of cloth over the top of a shower curtain and make buttonholes so it doesn’t tear and lasts longer.

Some things I’ll never do!

• It would have to be a life and death situation (and maybe not even then) for me to drink reconstituted powdered milk.
• Dumpster diving.  I know that North Americans are a wasteful society and people find some good stuff in the garbage, including food (gag!) but I’ll leave the pickings to others.
• Fashion a lamp-shade out of a coffee can.
• Save up egg cartons, toilet paper rolls, meat trays and bread tabs in case I have a future use for them.   Isn’t this the way hoarders start out?

Bread-tab earrings? You can’t be serious!

A talented person can make terrific gifts for others, but some homemade items are just plain tacky:

• Jewelry made from paperclips, buttons or hardware items.
• Toys made from cardboard, milk jugs or tin foil.
• Home décor items made from egg cartons, margarine containers or anything else you can hot glue and paint.

I know I’m in trouble when I read:

• Take a scrap piece of sheet metal (huh?)
• Turn your old cable spool into a planter.
• Use your barbed wire to make a wreath.  I live in cattle country but barbed wire is still not that easy to come by.

A couple of good ideas

I have discovered a few things that I might try:

• Price book.  I’ve heard of this before and thought it would be too much trouble but apparently people who use this swear by it.  You simply enter the prices of the things you buy in a little notebook so you will know when the items are at an exceptionally good price to stock up.  It perhaps would be a bit easier with a smart phone.  Is there an app for that?
• Recipes for homemade mixes such as Shake ‘n Bake, Worcestershire sauce, seasoned salt and onion soup mix.
• Use cut up Styrofoam meat trays to put in behind electrical outlets to stop cold air leaks. (I did try this tip but found the Styrofoam was too thick so I ended up having to buy the little package of ready made)

I’m still working my way through this 960-page tome.  In the meantime, if you have any great money saving tips I’d love to hear from you.

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The consumer society and the changing demographics also mean that people are saving less now than ever before in the history. 401K plans and RRSPs are solid ways to encourage citizens to save for their retirement. And while everyone should take advantage of the tax advantaged saving options that are available to them, it alone may not necessarily guarantee a financially secure retirement for the reasons below.

1. People are living longer

A few decades ago, retirement on average meant about 10 years after leaving workforce. Today, it can easily be 20 to 40 years. By the time the generation that is entering the work force today retires, they may be facing as much as 50 years of retirement on average, which will be longer than the amount of time they spent working and saving. This of course assumes that the average retirement age stays around 60 years.

Now when you consider the aging populations in North America, and the financially tenuous nature of the Federal programs such as Old Age Security, it suddenly starts painting a bleaker picture of the golden years than what we are used to watching our parents and grand parents.

2. Job security does not exist

Globalization has changed the way our economy functions. As a free marketer, I do believe that free trade is ultimately good for the society overall, but the benefits take a long time in coming. In the meanwhile though, there are disruptions that if not properly managed can create societal problems. It is now much easier for the employers to shop around the world for lower costs, and they are doing precisely that.

Technological advances and rapid changes in lifestyle and tastes also mean that old jobs are becoming extinct much faster than before and jobs that replace them often require new skill sets. Today, a job is just a contract between the employer and the employee, which either side can easily get out of for better opportunities.

3. You and I will eventually have to pay the Federal debt off

Whether it is in the form of higher inflation, bigger taxes and rapid devaluation of the currency or reduced social and welfare benefits, the debt situation will take its toll. If you have a million dollars saved for retirement, it may not mean much when you retire if the dollar loses its value.

The upshot of all this is that your 401k or RRSP savings will not be enough for you to retire on and it is foolish to expect the government to be able to support the retirees with social programs. Our kids will be too busy with the financial burdens that our generation are placing on them to be of much help to support us in our retirement years. It is completely upon us to take control of this situation and do something about it.

There are 3 possible options I see and we will have to use a combination of all these three options.

a. Prepare to work longer, years into “retirement”: Every year that passes by, this becomes more of a reality for the new retirees. Becoming a Wal-Mart greeter is not pleasant, and is not even necessary, if you plan ahead. There are many opportunities to work part-time, or do freelance work if you keep up with the technology, to allow you to generate income and at the same time enjoy the benefits of retirement to a large degree. Fortunately, with the modern medicine and healthier lifestyle, it is also physically and mentally possible to virtually extend our retirement age when necessary.

b. Invest aggressively: In addition to the tax deferred retirement programs, you should invest on your own. It does not have to be risky but I think now is the time to move past the traditional “100 – your age” allocation to the stocks that is recommended. The fact is that these recommendations worked when the average life expectancy was in 70s. Now you need to plan to live to be 90-100 years old and these kind of allocations will turn out to be very conservative and will not serve you well. Find some good solid stocks to buy, maintain proper diversification and invest with discipline. Use the research and the low commissions that a broker like Zecco provides.

c. Reinvest in the community and our neighbours: I am all for supporting local small businesses and farms to the extent we can. It not only keeps the wealth in the community, but stronger community bonds are necessary to strengthen some of the social structures that will suffer as the budgets for social programs are stressed and slashed. This way we can help create more jobs for older generation when they do break from the corporate jobs.

The future may turn out to be just great and rosy. Or it may not. Are you willing to chance it?

About the author: Shailesh Kumar owns Value Stock Guide, a popular site for stock recommendations focused on small undervalued stocks. Subscribe to his free stock newsletter for new investment ideas.

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