Things Financial - 05 Where does my money go? – Canadian Account types

Once you get the flow your money under control. Once you’re spending less than your take-home pay, you will need something to do with that extra money. Every financial advice book will tell you build an Emergency Fund. I’m telling you to do the same thing. Put away some money. But where? You’ll need a place to put it.

There are more than a few choices of places to park extra money. And there are more than a few people who would be glad to take your extra money for themselves. Beware of people who offer plans to get-rich-quick or who offer easy money. Many such ideas are scams that result in you getting-poor-quick.

The first place you should think of putting your money is in a bank.

Banks get a bad rap. (That’s Old-People-Speak for “nobody like them.”) There are some expressions that show how people feel about them. I’m sure you’ve heard a few. Expressions like, “Arctic winters are as cold as a banker’s heart.” And the true statement from my-mother-the-farmer, “The only way a bank will lend you money is if you can prove to them that you don’t need it.”

The above refer to a bank lending money (and wanting it back). But if you have money on deposit at a bank they will guard it zealously. And if they fail in their duty the Canada Deposit Insurance Corporation (CDIC) will cover deposits & interest up to $100,000 per depositor. If you have less than $100,000 your money is safe in any CDIC insured bank. If you have more than $100,000 you can probably skip the rest of this Post.

Ask if the bank of your choice is CDIC insured.

If you prefer a Credit Union over a bank, they have ‘Credit Union Stabilization Funds’ which function in a similar way to the CDIC. These funds seem to be province by province rather than national. I’m not as familiar with credit unions so be sure to ask for details at the Credit Union of your choice.

Once you’ve picked where to put your money, then WHERE do you put your money?

This next bit can get confusing because some investments are also referred to as ‘accounts.’ (The English language isn’t always the best for communicating ideas.) I’ll use a capital “A” (Account) for a bucket that has special tax rules & a small “a” (account) to indicate an investment type.

There are different types of Accounts and different kinds of investments available inside those Account types. I like to think of the the Account types as buckets that you can put different kinds of investments into. I haven’t used every type of Account that’s available so I won’t talk about all of them, I’ll only talk about a few of them here.

There are Registered Accounts and Non-registered Accounts. Non-registered doesn’t mean that nobody knows about them or that they aren’t safe, it just means that there are no special tax rules when you use one.

The main purpose for using a Registered Account is that, if you use it correctly, you can pay less Income Tax. There is a lot of information on the Canada Revenue Agency (CRA) website about various Registered Accounts including their requirements, benefits and restrictions. Check the CRA site for the most current information.

Some Account Types:

Most people have Non-registered Accounts. This is the sort of thing that you’ll be offered when you walk into a bank as a new customer. Unregistered Accounts are the usual kinds of accounts like chequing accounts or a savings accounts by various names. You may also get offered a Market or Trading account if you ask about getting into the financial markets (stocks, bonds, mutual funds and such). Don’t do that yet.

Your bank can also offer Registered Accounts (see the CRA site). Common ones are Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), Tax Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and Registered Disability Savings Plan (RDSP). If you or anyone in your family has a disability I hope you already know about that last one, most banks aren’t quick to suggest it.

These different Account types (buckets) have different tax rules as well as rules about who, when & how much can be contributed (deposited) and who, when & how much can be (or must be) withdrawn. In many cases you swap restrictions on your money for a lower Income Tax bill.

Of these Registered Account types my favourite right now is the Tax Free TFSA. I think every adult should have one. There are very few Government Imposed restrictions on your money. You can have more than one as long as you don’t exceed your maximum contribution limit for all of them combined. (As of 2025; $102,000 for most Canadians. If you turned 18 in 2010 or later your contribution room will be less.) Use a TFSA for any money that you don’t have a plan to use in the following 90 days. Use it for your Emergency Fund. Use it for your Hard Times Fund. Use it for any long term savings that wouldn’t be better in a different Registered Account.

There is no special deduction when contributing to a TFSA but any growth in you investments are tax free and withdrawals don’t count towards income. To compare; interest earned in a Non-registered Account is taxed at the Ordinary Income rate, which is the worst (highest) tax rate most people pay.

Some Investment types:

There are many kinds of investments plus many other places to put your money that people will call “investments” but that don’t fit the dictionary definition.

When you are just starting out and don’t have a lot of money the first investment you should have is a Savings account. It’s just a place to park your money where you can get at it quickly & easily and that pays (usually) a small amount of interest. Your bank may offer more than one kind of Savings account. Read the pamphlet or website before choosing an account. Banks may limit withdrawals & transfers in exchange for higher interest. There may be fees for things that you don’t expect. The fact that a Savings account pays interest is what makes this an investment.

You might also use a Chequing account but in these days of low inflation many don’t pay interest, so they don’t really meet the definition of an investment. Many times a Chequing account is just a convenience.

Your bank will also deal in Guaranteed Investment Certificates (GIC’s). These normally require a you to ‘lock in’ your deposit for a given period of time in order to receive the highest interest rate. The bank may also have GIC’s that don’t require a ‘lock in‘ period (“cashable,” “redeemable” or “pre-encashable” GIC’s). They will pay less than a ‘locked in’ GIC and should pay more than a Saving account.

If you invest in a GIC be sure to specify where your money should go at the end of the contracted term. If you don’t give instructions many banks will automatically lock it in for a further year at the then-current interest rate. Don’t ‘lock in’ your Emergency Fund or Hard Times Fund. That money should be available on short notice. You don’t want it where you can’t get it. Using an analogy: You don’t want your plunger locked in the neighbour’s safe while your toilet overflows, you want it where you can get your hands on it immediately.

And that’s about as far as you need to go until you’ve paid off any non-mortgage debt: Savings & Chequing accounts plus a TFSA for your Emergency and Hard Times Funds with those 2 funds in cashable GIC’s.

In future articles I’ll give more detail on some of the Account types; the advantages and disadvantages of the different buckets. I’ll also talk more about different types of investments (bonds, mortgages, some stocks, etc.) and things that are sold as investments that don’t quite fit the dictionary definition (metals, options, crypto, collectibles, etc.).

Things Financial - 04 Have a Plan for Your Money

Whether you’re making it, spending it, saving it, investing it, giving it away; you should have a plan for your money. Without a plan money tends to drift away from people. It seems to evaporate. So make a plan.

Make a realistic plan.

It’s easy to imagine fabulous wealth or abject poverty. But most people will never have one and will work hard to avoid the other. Try to come up with a realistic plan for that middle ground that so many people occupy. - A lot of people end up in the middle ground so you should have a plan to make the best of it.

I may be able to help frame things with a little bit of math.

If you work 40 hours a week and 50 weeks a year (2 weeks holiday, yipee!) that’s 2,000 hours a year. If you’re ambitious and start working from your 15^th birthday to your 65^th you’ll work 100,000 hours. As I write this (near the end of 2024) a tradesman in my area can expect to make about $32 per hour and could make $3.2 million in a life time. Try figuring how much you might make in a life time.

It may look like a lot when you see it written like that but the number needs paring down. First, you’re unlikely to work 100,000 hours. You’re unlikely to start working full time at age 15. You could start at 18 and work until you’re 68, but good paying, steady employment for 50 years will be hard to find. Even the most employable people have down times. There will be economic downturns and lay-offs and down-sizings. Unemployment will cut into lifetime pay. Or you might go to university and not start working until you’re 23 or 28, perhaps graduating with substantial debt.

Whether you go to university or straight into the workforce you can expect to fall short of the 100,000-hour mark. 80 to 90,000 hours is more realistic and 70,000 wouldn’t be out of the ordinary. I’ll say 85,000 hours for this example. (Which is pretty close to the number given at moderngov.com.)

With the reduced hours our tradesman makes $2.72 million in his lifetime. Of that he can expect to hand 20% or so over to the government for income- and various other withholding taxes. Now he’s left with $2.17 million with which to live most of his life. This amount is about 2/3’s of the first number that we worked out, $3.2 M. How much is 2/3’s of the number that you worked out for yourself?

We can toss in a little over $200,000 for Canada Pension and Old Age Security during the expected 16 years of retirement. The tradesman now has $2.4M has to last him from 18 to 81 years old (Eighty one years being the average life expectancy in Canada; but half of all Canadians live to 90).

The money has to stretch out for 63 years (or 72 years for half of Canadians). It has to cover food, heat, light, phone, housing (rent or buy), transport (vehicle + fuel + maintenance + insurance or public transit), clothing, entertainment (restaurants, movies, vacations, toys, electronics, hobbies), raising the kids, charity (if he can afford it) and geriatric care when he gets old. If you just divide out the numbers it comes to around $3,800 per month. It’s better than minimum wage but still not very much in today’s economy. The tradesman needs a financial plan to make sure that he won’t run short of money.

Everyone needs a financial plan. It doesn’t need to be elaborate or be cast in stone but you need some sort of a plan. The oldest and most basic is the “pay yourself first” plan. It’s been around, in some form, for centuries.

“Pay yourself first” is just another way of saying that you can’t spend every cent that you make as you make it. You have to save something for the future. Hold back some amount from every pay-cheque. Ten percent has been the recommended amount for many years. Recently some folks are calling for 15 or 20% but I don’t believe that is possible for most wage earners. When I started saving I started at about 4 or 5%. It was hard but got easier. And the percentage went up over time.

Once you have some money put aside some portion of that (but not all) should be invested for long-term growth. This is also a system that has been around for some hundreds of years. If done properly it can lead to a better life for you and Generational Wealth for your descendants.

Start by thinking about a plan to put some money aside. Plan how you’re going to get it. Plan how you’re going to keep it. Your future self will thank you.

Things Financial - 03 Standard advice – Everybody says the same things

Most financial advisors and financial advice books will tell you same thing and I’m pretty much going to repeat it in this article. If you already know to spend less than you take home, if you already know to build an Emergency Fund if you already know to pay off debt if you already know to build a Hard Times Fund, all before you look to longer term goals, if you already know all of that then you might want to skip this....but you may not.

First, a story.

The very first thing you need to do, before you can save a dime, is figure out what you have spent your money on in the past. And don’t ‘fake yourself out.’ Be honest.

When I was 20ish I spent more than I earned. I had no money and had bills coming in. I guess that made me pretty normal for my age. The first time a bill came in that I couldn’t pay immediately, I just delayed it. Made a partial payment and went about my business of being young.

The next month the bill was larger and there was an interest charge that I didn’t like the look of. I felt I had to do something about this. I mean, I was spending money and getting nothing for it! That’s no fun.

I was short on funds, again, and made only a partial payment, again. I realized that I didn’t have a clear idea of where my money was going...except for that interest charge.

I guess I knew that I paid rent & heat & light & groceries but those things didn’t add up to my whole pay cheque. I needed a system of tracking my spending. It turned out to be pretty simple.

I put a basket on top of the fridge and got a paper receipt for every dime I spent. I tossed the receipts into the basket every night....Well, that’s not perfectly true but it was effectively true. I did have to make some receipts myself if I bought something from the ice cream truck or such like. I’d jot a number on a piece of paper with a one-word note for what I’d bought and toss that into the basket.

And going to the bar was a special case. Since I was unlikely to keep perfect track of my spending as the beers flowed I devised a slightly different system. Before going out I’d count the money in my wallet and write the amount on a scrap of paper (Usually the torn off corner of an envelope that a bill came in.) and put the paper in my wallet. In the morning, after I’d had enough coffee, I’d recount the money in my wallet and subtract it from the number on the paper. That told me how much I’d spent, even if I didn’t have a clear memory.

I’d write the new number on the paper scrap along with the word “bar” and toss it into the basket. Oh so easy.

At the end of the month I totalled the receipts in broad categories; home expenses, groceries, transport, bar, restaurant, cloths, etc. I found the physicality of going through the actions and seeing the pile of receipts in the basket made the exercise more real for me.

What was the result? I was really quite surprised. I was spending about a quarter of my take home pay at the bar and another big chunk eating lunch at cafes.

The bar was the big expense and I didn’t want to give up drinking. Fortunately I never thought of the bar as a place to meet women (there are better places for that) I went there to socialize with my friends. A work-around turned out to be easy. It turned out to be cheaper if I just bought a case or two of beer, cooked up a big pot of spaghetti and invited anyone who wanted to come over to my place every Saturday evening to watch Hockey Night in Canada.

It worked out well. I got to socialize. I got to drink beer. I didn’t have to drive home. Everybody thought I was a great guy (at least as long as the beer lasted). And I saved money.

I would still go to the bar on special occasions. I’m not a monk.

I also knocked off the cafe lunches. That was harder. My supervisor called me “cheap” in front of some of the other guys because I wouldn’t go for lunch with the crew. There was social pressure to conform but after a couple of weeks of eating bag lunches it went away.

It took about 4 months to catch up on my bills but after that things got easier. I kept up the receipts-in-the-basket thing for a couple of years, just to keep myself honest.

Society is going mostly cashless these days so counting money in the wallet may not be practical any more. If you buy with a charge card you should be able to reconstruct your spending form the bill, it lists where you spent. If you shop with a debit card you may not know where you spent the money. Get receipts or write notes. It may take a couple of months to get the hang of it.

So here comes the standard advice:

Track your spending. Don’t fake yourself out. Every dime that leaves your hand needs to be accounted for. Sometimes the mere act of tracking is enough to get you to spend less.

If you have money left at the end of the month, great! You’re on the way. If you’re short of money then look for places that you could reasonably cut down. If you spend all that you make you’ll never ‘have’ money. And paying interest charges is like taking a pay cut.

Now put aside an Emergency Fund. Most people will tell you $1,000 is what you should have. I’m going to say that if money is so tight that it will take you months to save that much then aim for $500. Keep your Emergency cash in a place that you can get it reasonably quickly. Don’t lock it into a GIC or Retirement Account. Don’t buy Options or Crypto (more on those later). Put it in a bank or credit union savings account, a high interest one if possible but in a savings account. A Tax Free Savings Account (TFSA) is best.

Next pay off any non-mortgage debt that you have. No taking on new debt. Stop using your charge cards. No new loans from the payday loans place. No new rent-to-own contracts. No new debt.

For paying off existing debt there are 2 systematic methods. The common names are ‘snowball’ and ‘avalanche.’ Both methods involve making a list of all of your debts.

To ‘snowball,’ list your debts from lowest to highest. Make minimum payments on them all then take every spare cent and pay down the the debt at the top of the list, your smallest debt. Do that every month until it’s gone. Then do it with the next debt on the list. You’ll be making larger payments than you made on the first because now you are free of that first minimum payment. Pay off the second debt. Now you have eliminated 2 minimum payments. Move onto the third and keep going. Each paid off debt releases more money to deal with the next. It’s like getting a small raise every time you pay off a debt.

To ‘avalanche,’ list your debts from highest interest rate to lowest rate then follow the same pattern as the ‘snowball,’ making minimum payments on all, then putting every spare cent against the debt on the top of the list.

Psychologically the ‘snowball’ is more satisfying and probably the most successful. ‘Avalanche’ is slightly faster and slightly cheaper but too hard for many people to stick to because progress may not appear as obvious.

Once you’re out of debt you can start on truly saving for a better future.

Pump your Emergency fund up to $1,000 if it’s not already there. Then build your Hard Times Fund to carry you through job loss, lay offs and economic down turns.

Lucky people might make it this far in a year of two. Others may take 3, 4 or 5 years. Or, like my friend in a previous post, 20 years. But I haven’t met anyone who told me that the effort wasn’t worth it.

Things Financial - 02 Getting Started; the Hardest Part

I’m sure you’ve heard it said that “it takes money to make money.” But for most people that isn’t true. For most it takes work to make money. And for many of those people their money is gone by the time the next cheque arrives.

Why is it so hard to save money?

Well, for some people there is no money to save. Some folks truly live hand-to-mouth with no wiggle room at all. It’s a hard situation to be in. For these people the only advice that I can give in a financial advice blog is to invest any free time that you might have into yourself. Study, ask about, research and practise the things that will help you improve your employment situation - anything that will help you get a raise or a promotion or that will make you more valuable to your present employer or to the next one. Or the one you hope to have.

Good luck.

There are other people who aren’t in this hand-to-mouth situation but think that they are.

Bloomberg did a study in 2023 among people who each made at least $175,000US per year, placing them all in the top 10% of earners in America. They were asked to rate their personal financial situation. About one quarter of them rated themselves as “Poor,” “Very poor” or just “getting by.”

Are these people really living hand-to-mouth?

If this group of people, who make more than twice the median income in America, see themselves as suffering financial hardship what does that suggest about people’s spending habits and their ability to save? Clearly the possibility or ability to save isn’t just a matter of income. For perhaps a quarter of the population it is a matter of psychology, discipline and self image.

It’s hard to be a saver. It’s an unnatural act. Our human instincts tell us that having something now is better than having it later. There is uncertainty in waiting to get that ‘something later.’ It’s natural to think, “What if it’s not there? What if someone else gets it first? What if I miss out?” Why delay gratification?

Human beings, by nature, are not inclined to save for a rainy day.

There are no songs that go, “Hey, big saver!”, but there are lots about big spenders. Western culture celebrates spending. Big gifts, new cars, monster houses, pool parties, exotic vacations. Whatever is new & trendy gets screen time and the new & trendy is shown as coming with social validation. Advertising would have you believe that if you drink the right beer, the Beautiful People will love you. What an ego boost that would be!

People who are not willing to spend as much money as their friends can sometimes be socially ostracized. Sometimes they remove themselves from their group for fear of being ostracized. Have you ever been called (or called someone else) cheap? It’s deflating to the ego.

If you’ve ever bought an impulse item at the supermarket checkout, bought a lottery ticket, drank a pop instead of water when you were thirsty, bought a luxury car or taken an all-inclusive holiday then you have the capacity to save money. Fear-Of-Missing-Out (FOMO) or absent-minded consumption drains the money from your wallet and from your future self.

If you’re going to start saving you don’t have to give up all of your small or pleasurable purchases. You should just spend consciously and with purpose.

Saving is the conscious act of waiting until later and trusting that when ‘later’ arrives the thing that you will have in the future is at least as good, and probably better than, what you could have today.

Without the realistic belief that saving will make your tomorrow better, there is little purpose in saving.

No one can predict the future no matter what they may tell you. The best anyone can do is study the past and try to make an educated guess about what the future may hold. Using the past as a guide we can say that hard times are coming. Hard times always come. Historically, saving (and investing) money has generally been a better plan than not doing so. Cash on hand won’t prevent every hardship but it can help you weather the storm.

So why is it so hard to save money? It goes against human nature. It goes against social norms. It’s a conscious decision to pass up today’s opportunity when FOMO is screaming “Grab it!” It is a conscious decision to believe that a better future doesn’t just happen, you make it happen.

I have an eight word saying that seems to apply to most things in life: “Hard now, easy later. Easy now, hard later.” Remember that, if you choose to save for a better tomorrow.

It takes work to make money but it’s hard to save. The reasons why include:

Truly living hand-to-mouth.

Psychology, discipline and self image.

Saving is the unnatural act of trusting in the future.

Saving is socially awkward. No one wants to miss out.

Advertisers know how to push psychological buttons.

Absent minded consumption. (We all do it.)

https://www.cnbc.com/2023/08/22/fewer-americans-consider-themselves-wealthy-report-finds.html