One of the world’s best personal finance writers—Jason Zweig of the Wall Street Journal—has said there are only a handful of real personal finance columns to write. The trick, he said (and I’m paraphrasing here), is in being able to “reissue” these columns in a way that the public (or editors) don’t notice. Of course, you could go further and say that the news business in general revolves around a few fairly standard memes: if it bleeds, it leads.
In personal finance, however, we’re not in the business of covering disasters and personal tragedies, unless of course the market does a repeat of what it did in 2008. It’s a sad fact that, as investors in Bernie Madoff’s ponzi scheme found to their regret, that when the market tanks we discover who was swimming naked.
The June issue of MoneySense contained 42 items billed as being the Best Tips Ever. That issue is a “keeper.” I’m not going to reprise the tips here but instead have come up with a list of seven “personal finance chestnuts” that I hope may be useful to readers and perhaps other PF journalists.
#1: Live below your means
This is the granddaddy chestnut of personal finance. If you keep spending your fool head off, you’ll forever be on a treadmill to oblivion. The only way to become financially independent is to consistently spend less than you earn, year in and year out, decade after decade. The difference between what you (and your spouse) earn becomes your capital and it must be invested wisely.
#2: Pay yourself first
This is closely related to living below your means. The surplus between a higher income and a lower level of spending needs to be directed to savings and investments. Just like your employer takes your income tax off your paycheque before you even see it, you should set up a pre-authorized chequing (PAC) arrangement with your financial institution (“automatic draft” in the U.S.), so another chunk of your paycheque is siphoned right off the top to savings and investments. Yes, you may feel a bit “broke” after the double whammy of paying tribute to the taxman as well as paying yourself first, but as the years go by and your wealth steadily mounts, you’ll be glad you roasted this particular nut.
#3: Get out of debt
Get out of debt, starting with non-tax-deductible consumer debt (such as credit card debt), then student loans and finally any lines of credit and ultimately your mortgage (see Chestnut #4). No investment pays off as well as eliminating high-interest debt and it’s more tax efficient to boot.
#4: Buy a home and pay it off
I’ll keep saying it: the foundation of financial independence is a paid-for home. If you rent, you’re still paying a mortgage: your landlord’s! In that case, your rent will never stop and will keep getting hiked as inflation rises. When you own your own home and the mortgage is gone, you get to live rent-free and you won’t worry about your rent going ever higher in old age. Plus you don’t have to pay capital gains taxes on the sale of your principal residence (see Chestnut #7).
#5: Be an owner, not a loaner
This means owning stocks (or equity mutual funds or ETFs), instead of interest-bearing vehicles like cash or bonds. You’ll never get rich loaning money out, which is what you do when you buy a GIC (or CD in the U.S.) from a bank. If you want to grow your capital and keep up with inflation, you need to own stocks. Better yet, dividends are taxed less than interest and capital gains taxes can be deferred as long as you don’t crystallize profits. You will want some cash or bonds in an emergency fund and as a prudent part of your portfolio once you’re near retirement age.
#6: If your employer offers you free money, take it
Duh! This means you should join the company pension plan, especially if they “match” whatever you put in. And if they give you a discount on the company stock, take them up on that offer too. You wouldn’t say no to a bonus or a raise, would you? Then why wouldn’t you grab the rest of the freebies when they’re on offer?
#7: If the government offers you free money, take that too!
This is along the same lines, except of course the government seldom really gives you money, unless you’re among society’s most disadvantaged. For more affluent folk, there’s no escaping taxes (or death) but you can minimize the outflow to the taxman by taking advantage of whatever few tax breaks he permits. No capital gains on the sale of a principal residence is a huge tax break. Apart from that, this means maxing out your RRSP (or your IRA in the U.S.) and don’t forget the Tax-Free Savings Account (or the Roth in the U.S). With an RRSP, you get a tax deduction upfront on contributions whereas with the TFSA you get no upfront deduction but never have to pay tax on investment income generated, even when you withdraw it in retirement. Not quite free money, since you were taxed upfront on the income needed to generate the capital, but almost!