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Simple Wealth Creation

Sitting with people and hearing their stories, reading many books on wealth creation, it seems creating wealth is simple.  Many high net worth people have average incomes, and a great lifestyle.  The story seems to always be the same, saved money while quickly paying down their mortgage and avoid other debt.  It never seems to take very long for things to really start to grow for them.

It always amazes me how common this story is how simple it is and yet how hard it is for many to get there.  I guess it is no surprise with all the marketing to buy, the need to keep up and maintain an image, and the general desire for stuff.  The most ironic part is that for those who wait to get what they want, life has more for them and it is much easier to get what we want.

RRSP to Pay Down Credit Cards

Often once you get behind on a credit card it is hard to catch back up at the often high interest rates.  In some circumstances an RRSP (Registered Retirement Savings Plan) can help. If you are making a credit card payment each month at a high interest rate, it is often close to the payment required for an RRSP loan.  Let’s say you were at a 40% tax bracket, if you were to take a $10,000 RRSP loan, you would likely get $4,000 back in taxes.  You could use the $4,000 to pay off your credit card and the RRSP loan would usually be at a much lower interest rate.  Replacing a credit card payment with a payment on an investment and wiping out the credit card debt can be a good option.

The key to any plan that involves paying off credit cards, is keeping the credit card balance at zero.

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Tackling debt

Managing debt has become an essential in creating a strong financial future.  I have written a short eBook on how I would tackle most debt.  The link to download is below.  We encourage any feedback on any of our strategies, so please let us know how it worked for you.

Debt Repayment Guide

Should I take money out of my RRSP?

Taking money out of your RRSP (Registered Retirement Savings Account) can cause create a tax bill and loss of that RRSP room.  So it is important to consider carefully before taking this step, however if done right it can be beneficial.  RRSP is a tax deferral tool, eventually you will have to pay tax on the money, so if it makes sense to pay the tax now it can be a big win.  Some of the reasons you may want to take money out or your RRSP and pay the tax now are;

  • Home buyer plan, if it for a down payment on a home you may qualify to take the money from your RRSP, you will need to pay it back, however this is a way to get the funds without the tax issues.
  • Life long learning Plan, if the funds are for your schooling this may offer an option to borrow the money without the negative tax implications.  You will need to repay the funds once you are finished school.
  • Low income year.  If you have a low income year you may wish to take the funds out of the RRSP.  This should be carefully consider as you give up that RRSP room, tax deferred growth of the funds and could owe taxes on the money.  With all the drawbacks it can often make sense and leave you with more money long term.
  • Just need the money.  RRSP’s are not ideal for short term saving.  If you choose to take money from your RRSP you may face fees, loss of retirement savings, and a tax bill.  With all this if you need the money and the RRSP is the best place to get it then it may be necessary.  To prevent this we should all have savings to draw from when unexpected expenses strike.
  • Preparing for Retirement.  Once you hit retirement you not only have income tax, but pension claw backs.  For many moving from the RRSP.

When looking at making a withdrawal for your RRSP it is important to consider the negatives before making your decision, and discussing with a professional that understands your situation and the implications of the withdrawal is the best way to ensure you make the right choice.

  • money out of the RRSP before retirement can make sense.  This is usually the case when your income will be higher in retirement, or you have an offsetting deduction in the years you make withdrawals.

 

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