Ideas

This is one of the most important sections on this site. This section provides information on questions that are very basic and of common interest. However, we request readers to treat the answers as suggestions from us rather than going ahead in implementing them. Contact us for clarification.

These ideas have been put together based on our own experience. We think that they make sense since they have helped us manage our finances very well. We think that these ideas have given us control over our lives and we want to share with everyone and sincerely hope that they will help our readers as well.

RRSP versus TFSA

There are number of advisors who believe that TFSA is a better vehicle than RRSP. We think that both have equal role to play if used properly.

The Primary objective of an RRSP is to save for future. Therefore, one has to exercise control when withdrawing from RRSP. Also, we have seen that there are very few individuals who put the tax savings from RRSP contributions back into the RRSP. This is where RRSP starts to loose its importance when compared to other investment vehicles. The tax savings from RRSP should either be put back as part of contribution to the next year and in case one can contribute to the maximum then the savings should be used to build TFSA. In this way TFSA is getting build from the tax saving dollars.

We do think people should ignore RRSP. We think everyone should start RRSP contributions as soon as they are eligible. We also suggest that young people who are not eligible to start RRSP contributions should file income tax as long as they have income to build RRSP contribution room for future.

TFSA is a investment vehicle where contributions grow tax free. We do not think there is any other vehicle that allows growth within the plan or account to be tax free. Therefore, everyone should also have a TFSA account.

Treat RRSP account for future or retirement. Therefore, one should create the portfolio for RRSP with long term in mind. Focus we believe should be on growth oriented investment instruments. TFSA on the other hand should be treated as an account for short term or long term. TFSA can be used as a savings account when looking to pay debts. Therefore, portfolio for TFSA must be constructed with short term in mind.

Stocks versus Bonds

This is the most common questions people ask or want to know. We will give our opinion based on our own experience. Therefore, please free to take help of others or check by reading from sources that are readily available over the web.

Stock s and Bonds are 2 different type of investment instruments. Bonds usually provide risk free investment and stocks risk oriented investments. Think of this way. If one likes to own a business and has confidence to manage it properly then stocks are the right instruments. On the other hand if one likes to protect initial capital but would also like it grow risk free then Bonds are the way to go. As explained under Investments, stocks give one the ownership in the business and Bonds act as money loaned from the investor to the business. We think that playing stocks or investing using stocks is like gambling with better odds of winning. Therefore, when one deals with stock should keep in mind that there may be a situation when all invested capital can be lost. If one takes this approach then it will be easy to assign money in stocks. We think one should put that money in stock related investments which one can afford to loose. Also, when one deals with stocks should decide beforehand the profit margin. People have lost huge amount of money by not showing discipline. Discipline is the most important factor in dealing with stocks. Invest what you can afford to loose and then decide before investing what profit margin you are looking at and as soon as you hit that margin get out. Greed will always kill your investments in stocks.

Self versus Advisor

Should one take help of a professional or do it on its own? It is a great question but has no great answer. If one can exercise discipline and willing to educate then doing on its own might work. However, with market changing every day and number of unknown factors creeping up every day it is very hard for the individuals to manage investments properly.

Studies have shown that people who have advisors feel very confidant about their future source of income. We think working with advisor is a better option. Individual investors tend to work with very limited investment options like investing in only GICs or Bonds or Stocks. This approach helps in saving the MER (Management expense ratio) but it limits the growth potential. Think of this way. We pay condominium maintenance fee irrespective of its usage. We assume that this fee will protect our condominium. In the same way we should think about MER. We are paying the fee to someone who is putting the effort in managing our money so that it grows. If the advisor is not providing the service then it is waste but if the advisor is doing a good job then it is worth it. Do a research before selecting the advisor. Advisor should be knowledgeab le, experienced and willing to work with you as your trusted friend only then one should work with advisor. It is true that such advisors are hard to find but they are available if you spend time or contact us. We will help you.

Investments versus Loan Payments

This is not easy to answer. It is dependent upon personal situation. However, there are some general guidelines that can be used to make the right decision. Investment and loan payment both are for future therefore, both must be managed properly. We think paying the outstanding personal loan is a better option even some advisors may disagree. We think by taking this old fashioned approach one gets better peace of mind therefore, can think better. Developing a plan to pay the loan is not easy. One has to carry out the detailed review of the finances before creating the plan but, it is doable. Lets look at an example. Say one has $1000 loan at a interest of 5% per annum. If one has $1000 and market can give 7% rate of return then what is better option. Logically option to invest is better since one can get 2% but one should also keep in mind that there is never a guarantee on investment. Most risk free investments are designed on a conservative outlook therefore, it is safer to pay the loan first and then invest. One may decide to do both that is to pay part of the loan and invest the rest which is still better then investing the whole amount and carrying the loan. Please note we are not considering credit card loans as personal loans. Personal loans include car loans, student loans and similar small loans only. Read the Mortgage and Loan section for credit card loans.

Investing by taking out a Loan

This is another interesting but important concept. We all know that interest paymens on loans taken for investment are tax deductible (not RRSP). For an average person this is not a good option. This is a good option for those persons who are disciplined investors. We have seen a number of people accumulate a huge amount of debt using this option. Our site is geared mainly to help the average income family, therefore accumulating loans to build future income is not a good approach. We think that one should first develop the habit of saving for the future using existing income and then take this route not before. We know lot of people will not agree with us but we strongly believe one must first develop the habit of leaving within own means.

Using a Loan for an RRSP contribution

This is another interesting situation. First remember that interest on loan taken to make RRSP contribution is not tax deductible. Therefore, one must think when this loan will be paid off. If one can pay off the loan early then it is advantageous to use loan for RRSP else no. We think that this approach is good for people with good income and who are seasoned investors. For an average person we think that living within means is the right approach. Take small steps but take them regularly without creating stress.