Nothing warms the cockles of my heart more than being guaranteed something. When I buy a laptop I like to pay a little extra for a guarantee. Usually what’s guaranteed is that two years down the road I get to endlessly haggle over who’s responsibility it is to fix a broken part. When I’m driving my car I have a big smile on my face because I know that I pay a fortune each month for a guarantee. If I get into an accident, I am guaranteed to be drawn into a lengthy legal battle over what my insurance is covering. Even death’s guarantee can be cheated with some stem cells. Luckily for my cockles, the world of finances has concrete guarantees, such as the Guaranteed Investment Certificate (GIC). Also know as Certificate of Deposit (CD) in the United States.
GICs are products offered by your local bank in order to “encourage” you to invest. Bankers aren’t entirely delusional, they understand that sooner or later people will wise up to the fact that high-interest bank accounts are slowly draining away at their savings. So for those smarty pants, GICs offer a better return than a savings account. There’s a variety of GIC options out there but they all boil down to the same principal. When investing in a GIC, you lock up your money for a specific time period. The return will depend on your initial investment and how long you are willing to let the bank hold it. For a 5-year GIC, you will get a return every single year but it will be greatest for the 5th year. Withdrawing the money earlier will incur a penalty and likely wipe out any gains.
Here are some Canadian GIC comparisons: http://www.redflagdeals.com/features/canadian-mortgage-gic-rrsp-savings-rate-comparison/canadian-gic-rates-annual/
Here are some American CD comparisons: http://cdrates.bankaholic.com/
The bad news for the consumer is that GICs barely beat the returns of a savings account. Even here it seems guarantees aren’t all they’re hyped up to be. Why should you use GICs? If you have the risk-tolerance of a retired librarian, keep your kids in a giant bubble or wear a bulletproof vest while shopping for sofas, then this option is for you. Similarly, if you want to keep a certain amount of money safe (down-payment on a house) you can stuff it into GIC until you are ready to use it. Just remember to load your GICs into a TFSA because any return earned on them will be taxed.
And for God’s sake let the kids out to play!
What’s the point of saving money? Being debt-free is nice and it’s always rewarding to see a growing number on your ATM receipt. What’s the point of spending money? Getting to drive stupidly fast cars, having breakfast on an enameled lava counter-top and wearing a Gucci jockstrap (yet it’s still uncomfortable). Unless you have a juicy inheritance coming your way, keep driving that KIA, eat breakfast off those disposable plastic plates (which you keep reusing) and kiss that jockstrap goodbye (not literally I hope). Mo’ money can only be made from an an initial investment (savings), which then begets Mo’ money and after that you might start seeing Mo’ problems.
The basic way to earn steady cheddar is also the most sombering because of the pathetic returns. A high-interest savings account will immediately pay you a monthly sum just for being a good boy/girl and putting away money for a rainy day. The vig on these cash cows? As of today, 2%. Here is the proof: http://www.redflagdeals.com/financial/savings-accounts. Nevertheless, anything is better than nothing, things could be worse, right? And they are, for two very simple reasons. Inflation and taxes. Historically, the inflation rate is right around 3.25%, which means money is slowly losing value even if it is sitting in a savings account. Luckily if you’ve managed to beat the inflation rate and get a measly cash return, you actually get taxed on it! After all your hard work the government wants a piece of the action, it’s no wonder people are more interested in spending then savings.
I can’t help you with inflation because I don’t control the monetary policy. But, there’s a good way to avoid tax on savings and keep the mounties away from your pockets. A tax free savings account (TFSA) works the same as a savings account, except you do not have to pay taxes on any of the money earned. The account was invented in 2009 and since its inception Canadians are allowed to deposit up to $5,000 a year into it. If you open an account today, you will have a limit of $20,000 to deposit until the end of the year. This account is ideal for anyone starting to save. If miraculously you earn $1,000,000 from your initial deposit, you won’t pay a single cent upon withdrawing the cash. This is one of the few “breaks” we get, take full advantage of it and put all your savings into it. Next time you go to a cocktail party, tell the gal next to you that you’re working on topping up your TFSA for the year…stand back and prepare to get lucky!
If you’ve ever had to pay for cheques at the bank or needed to keep a minimum balance on your account to avoid being penalized or had to pay fees if you used your debit card too many times… STOP reading this post. Instead, gather up your jeans, khakis and short shorts, get a drill at your local hardware store and proceed to put holes in all of your pockets. At least now when you slowly lose cheddar, you can hear the sweet sound of jingling coins hitting the concrete as you walk around your neighborhood. The homeless will certainly get a kick out it.
Why bother trying to save money if you end up losing it to bogus fees? A bank account is nothing special these days, banks should feel privileged you’ve allowed them to keep your money safe. The second you deposit money into your account, 90% of it is loaned back to the public at a hefty vig. Without even asking you, the bank can gamble with your money for it’s own benefit. And they do, big time. What happens when they lose? Nothing, they get more money. The world is insane!
I’m not suggesting that you wake up tomorrow, march down to your branch and start spitting out coffee as you berate the ditsy teller with your complaints. No… just call them, offer up your concerns and expect fair treatment. Pick a bank that knows its place and has no banking fees, no minimum balance requirements and free personal cheques.
If you’re Canadian here is a great starting point: http://www.redflagdeals.com/features/no-fee-chequing-accounts-comparison/chequing/?page=3
If you’re American then this is a good resource: http://www.bankrate.com/checking.aspx
Learn to take advantage of the bank’s options. Use a high-interest savings account to get a taste of passive income, no matter how minimal it may be. Over the next few posts I’ll cover RRSPs, GICs, TFSAs and other nonsense acronyms put in place to befuddle the general population.
The vig, the juice, the interest rate; that’s whats feeding the kids of your local bookie or mortgage broker. When a degenerate gambler loses his car and house, he still needs to keep up with child support payments. Unless he decides to sell a kidney to the black market, his only choice is a visit to the loan shark. When a borrower accepts money from a lender they end up repaying the principal (original amount) along with an additional sum (interest rate). The vig is usually a percentage of the principal. So if our gambler gets a good tip on a horse and borrows $10,000 with an interest rate of 10% a month, at the end of the month he owes $11,000 (if the horse loses he owes 2 kneecaps).
The sharks at Mastercard and Visa will spot you some cheddar at an average rate of 17% per year. If your credit is good (or you show some cleavage) your friendly neighborhood banker can provide you with a Line Of Credit (LOC) at a rate anywhere from 3% to 10%. If you can qualify for an LOC, it is an ideal tool to minimize the amount of juice that you will pay on your debts. Strap on those high heels and put on that sexy black dress, go interest rate shopping!
Borrowing more money to pay off debt? Yes! That’s not crazy that just modern economics. Bring a suitcase to the bank and load it up with cash from your LOC. Go home and literally swim around in money (make a profile pic while your at it). After washing the shame off in the shower, put the cash towards paying off your loans. Start with credit cards that have the highest interest rates and move onto those dreaded student loans.
Learn to use credit cards as a tool to record transactions rather then a gateway to uncontrollable debt. And if are already in debt, strive to pick the lesser evil with the lowest interest rate.
The only things free in this life are smiles from the cute McDonald’s cashier and prostate exams at the doc’s office. Everything else comes with a catch. You know that nice “gift” you get from the government each year after filing your taxes? The one that feels like the government is finally giving you a break? If you contribute regularly to a Registered Retirement Savings Plan (RRSP), have child care or employment expenses (or have a great accountant who can make it seem like you have all of the above) then there’s no gift at all. The mounties should be the ones thanking you, after all they did keep your money as an interest-free loan for a year.
Imagine yourself being Macaulay Culkin, after making all those “Home Alone” flicks you are just drowning in cheddar. Each Christmas your parents return home from whichever vacation you were funding, they then “spoil” you with a great big gift (bought with your own money). And you have to say “thank you” or you will be grounded for a week. The Canadian government is indebted to you because your RRSPs are funding their Aruba getaways. Of course there is a neat trick to avoid getting a lame non-gift at the end of the year and just getting the money steadily with each paycheck.
Step 1: Download and fill out the T1213 form in order to “request to reduce tax deduction at source for tax year”. You can find the form here: http://www.cra-arc.gc.ca/E/pbg/tf/t1213/. Ask your accountant to perform their trickery and document all of the tax deductible expenses.
Step 2: Go and see the nice lady at HR and put her at ease by letting her know that you are NOT there because of the rampant sexual harassment going on at your workplace. Once she’s relaxed, explain that after years of abuse you are finally standing up to the mounties and kindly asking them for instant cheddar. After this heartfelt conversation don’t forget to drop off the form.
Step 3: Wait 8 weeks. It’s absurd that you even found out about this method let alone bothered doing it. The mounties will need 8 weeks to comprehend the situation.
Step 4: Free money!!! Or at least extra cheddar each month that you won’t need to wait a year to see.
Taxpayer beware, you will not be receiving a big bonus at the end of the year (plan ahead). In fact, if you overshoot on the eligible deductions you might end up having to pay the government. Also, this nice chat with HR lady will have to be done yearly each time you want your hard earned money back.
Don’t feel bad for the Canadian government (which taxes first and asks questions later) they should be just fine. Enjoy the extra cash!