Thursday, February 22, 2018

Doing What’s Right Has to Be Right for You

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Good or Bad


No surprise here. February is often associated with Valentines’ Day.  Financial advisors and planners generally look beyond this day to the March 1st deadline which requires clients to make their RRSP contributions.

But what if you don’t have the money for the contribution? Do people consider borrowing money for their RRSP investments?  Curiosity caught up with me. I quickly searched the Internet.    Most articles leaned towards the negative.  Headlines blurted out harsh warnings, “It’s not the smart-money thing to do” and “Why you shouldn’t borrow for your RRSPs.”  

I did. I borrowed money for my RRSP investment.  As a single mom, there wasn’t extra cash to make a lump sum investment.  When you are in your mid-thirties, reality stares at you reminding you the clock is ticking down to your retirement years.  If you don’t start saving, you might not have enough.  I can attest the tax refund certainly helped pay off my loan quicker. 

I agree for the most part on the points made in the articles. But I trust you know yourself best and can demonstrate whether a strategy is the right thing for you.  My rebuttal is, “If the shoe fits, wear it”. When applied to whether to sign up for an RRSP loan, “If the strategy works, use it.”
   
Sometimes doing what’s right has to be right for you.  When you can’t get into the routine of saving regularly, borrowing the money for an RRSP might be one way to get you started.  First, let’s understand one thing. I am all in favor of an “anti-loan strategy”.  I probably sound hypocritical except for this additional piece of advice: this strategy is only encouraged to eventually wean you from making  RRSP loan payments into making regular RRSP contributions.


The Battle between “If” and “But”   


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Here’s the war-on-words.

If you do this, you achieve success. But when you do that, you will be defeated.

If you borrow the money to invest into an RRSP, you begin saving for your retirement. 

But when you neglect your loan obligations and are unable to make your loan payments, then you have defeated your purpose and destroyed your credit in the process.

If you invest the borrowed money into an RRSP, you save on income taxes and the investment income compounds and the savings grow.

But when you withdraw money from your RRSP savings prior to your actual retirement date, you have lost sight of your retirement goal. 

To win the battle, you have to understand the commitment and consequences before you apply for the RRSP loan.  


An Impressive Balance Sheet


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Borrowing money is the very thing many people are currently doing.  They are willing and able to set money aside for loan payments to buy vehicles and pay for their vacations {among other tangible and intangible things}.  Often loan payments are seen as a form of “forced savings”.  Borrowing money rather than saving is often considered the only way to acquire an asset. If we are willing to borrow, then let’s make a play for an important need. Why not implement this forced savings strategy as a temporary measure to build your RRSP savings?

The ultimate goal is to forge ahead and pay off your loan. When you do, your Balance Sheet will look impressive.  Eventually your Net Worth increases because you will still hold your investment asset once your loan is paid.   


Balance Sheet
Assets
Liabilities
RRSP Investment  $1,000
RRSP Loan          $1,000



Net Worth            $       0


Balance Sheet
Assets
Liabilities
RRSP Investment  $1,000
RRSP Loan          $1,000



Net Worth            $1,000   



Behind the Scenes


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In essence, we are trying to instill a new habit. When you create room for a loan payment in your budget, the intent is to eventually ditch the loan payment for a regular RRSP contribution.  When you also pay attention to the amount of interest paid on the borrowed money, you will ultimately be driven to avoid using a loan strategy as a means to build your retirement savings.  The overall plan is to kick start your retirement savings.  According to the 2016 Statistics, two-thirds of households are setting aside money for retirement.  The question is whether it is enough.


Your “Why”


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Being aware of your circumstances, limitations and weaknesses, helps you make sound financial decisions that are right for you.  One piece of financial advice, from either this blog or anyone else’s, does not necessarily trump the other.  The financial strategies and advice are designed differently because peoples’ needs are different.  
Borrowing money for an RRSP investment might not be the ideal long-term plan.  The goal is to transition regular loan payments to monthly RRSP contributions.  The underlying motive is to plant a habit of investing a consistent amount of money to replace the income you currently earn. A small sacrifice today means a secure income for the future. 
How can we make this easy for you?  Children often ask the “Why” question. “Why do I have to do this?”  “Because” might be the answer which works for them; however, it might not work for you.  Understanding your “why” will cement your conviction to save when you are tempted to do other things with your money. Definitive SMART goals, whatever they may be, allow you to maintain your focus.
·       I want to work full-time until I am 55 years and then retire.
·       I want to be able to live my retirement dream with an annual income of $60,000.


Problematic Hurdles


Even before considering a loan strategy, you have to determine whether you would qualify for a loan. Borrowing money can often be equated to jumping hurdles I believe the important question which begs an answer is, “How much of a monthly payment can your income handle?  

Pushing through temptation to strive towards your goal might require a trade off.  You may need to make room for the payment by nitpicking through the details of your spending habits. What can you possibly give up that will help you meet your goal?


The Promise


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When you embark on the strategy of borrowing money for an RRSP investment, you must pinky swear to make your loan payments on time and never-ever withdraw any money from your RRSP investment until you retire.

This strategy, like any other, is a way to achieve your retirement goal.  Your attitude and commitment determines the most appropriate fit for your financial plan.    When you rationalize borrowing money as a short-lived strategy to secure your retirement, you will meet success.

The real goal is to do something.  When you begin to shift your thinking to “this-must-be-done”, you will discover there are no shortcuts and quick fixes. Remember, you are doing this for your family and you. Once you make the connection, there’ll be a willingness to follow through consistently.  “It’s just the way it has to be because it is right for me.”   


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