What You Lose When You Think You’re Doing All the Right Things with Your Money
Friday, June 26th, 2009I had a conversation with a man who exemplified how deceitful and gimmicky marketing messages, when disguised as good financial advice, can have harmful effects on someone that does not have the financial education to know the difference. I have these conversations all the time. The situation is so common it could easily be called a pandemic.
With this economy, it’s just as bad to have savings sitting idle, as it is to have a lot of debt. While the savings account may seem not to be ‘losing’ money, in reality it might be a major problem. In Canada, the government retirement savings program for personal savings is set up so that when you put money into the plan, you get a tax deduction for the amount you put in. This is a good thing because it means you save taxes right away. The money that you put in the plan gets invested and your investment earnings are not taxed as long as the money stays in the plan. However, in the future, you will start taking out the money which will then become fully taxable at whatever your tax bracket is at the time. In other words, if you start to save at young age, and you take money out years later after you have your career set and making good income, you actually lose more money because the money you are taking out is at a higher tax bracket than when you were first saving when you were younger– yikes!
So here’s the problem: If you think you’re doing all the right things saving money by keeping it in a ‘low risk’ plan, or are doing other seemingly solid financial strategies such as not ever paying interest on your credit cards or paying off your mortgage early, think again. You may in fact not know these strategies are costing you thousands of dollars.
Your ‘savings’ are actually NOT set up to be tax efficient at a time when you need it to be most. The money you put into savings hasn’t lost any market value however, because it also hasn’t done anything more than simply be ‘saved’, it has indeed many times gone backwards compared to the purchasing power of your money.
Likewise, the no interest you pay on your credit cards can in fact be a detriment to your credit score and because the only aspect of credit you see as being valuable is the free points, you miss the opportunity to use your credit to leverage your current assets and income to create more wealth, to get your money working for you, and to earn more income – like for example what happens when your mortgage is eventually paid off - there is a lot of equity sitting idle that requires an income to maintain. Also, the extra money that was previously going to pay the mortgage is now going to additional savings which is also not tax friendly, or income efficient and so you work harder and harder and longer and longer just to seemingly stay ahead of the game when in fact you are getting further and further behind.
The secret is to use your current income to get your money working for you by using powerful tools like access to credit to create more income and wealth which creates even more income to go to work for you to create more wealth and so on and so on…
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