In the first half of the Wealthy Barber plan, we looked at a simple savings strategy, estate planning and insurance. This week we’ll be exploring the strategies that Dave Chilton recommends for retirement planing, owning a home, investing and more.
Thanks for reading, next week we’ll be looking at modern pyramid schemes and how to identify them before they trap you. As always, you can find more about me, Toronto’s only non-biased financial literacy coach here.
Roy’s Third Lesson – Retirement
In this lesson, Roy discusses how many Canadians lack a comprehensive retirement plan. All too often retirement income is too low, limiting their desired lifestyle. However, individuals can help alleviate this stress with a little foresight.
While many current financial advisors recommend that retirees save 60-80% of their pre-retirement income, Roy recommends that they save 100%. His main explanation is that upon retirement, our expenses may just be as high as they are now. Children are staying at home longer and an increasing amount of retirees have mortgages.
The best way to fund retirement is usually through RRSPs. The main benefit is that your money will grow tax-free until you withdraw the funds. The chosen investment should be a long-term equity mutual fund that is preferably diversified and has low fees. These investments should then be moved into safer investments when you’re about 7-8 years away from retirement.
Families may also benefit from spousal RRSPs, where a higher earning spouse contributes the funds to the lower earning spouse RRSP. The higher earning spouse then gets the tax savings while the lower income spouse withdraws the funds out at a lower tax rate in retirement.
Roy’s Fourth Lesson – Home Ownership
Roy starts this lesson off by stating that home ownership isn’t for everyone and that it’s a myth to believe that rent is throwing your money out the window. However, homeownership offers many benefits and is essentially a forced savings plan. Also, another big benefit is that primary residences are not charged capital gains tax.
One of the biggest warnings to homeowners is to not borrow so much that you heavily limit your cash flow. Putting oneself in this situation can reduce your standard of living and prevent you from achieving other financial goals.
If you do decide to get a mortgage, Roy recommends that you try to start with a 15-year amortization. This will cut back on total interest paid and he claims that the monthly payments will not be much more. It’s also recommend that you try to set-up weekly payments and never extend your amortization.
Roy’s Fifth Lesson – Cash Management
As long as you’re reaching your financial target then you should be able to spend your money as you please. One of the hallmarks of a strong financial plan is that it should not heavily affect the recipient’s lifestyle. With that being said, it’s also important that individuals live within their means and try to make thrifty choices.
Roy’s sixth Lesson – Investments and Taxes
Investors must have discipline and an eye for value. Investors can maximize their returns by finding value, ex. following the age old wisdom of “buy low and sell high”. They also need to have discipline to battle through all the opposing market views that come with investing.
One must also recognize which investments are best for achieving their financial goals. For example, if one has a short-term goal then they should be investing in safe and guaranteed investments. This way, the funds that are being used to achieve your goal will not be compromised.
Also, one should pay off all of their debt before they invest. Debt usually has a higher interest rate than investments, especially after taxes are taken into account.
As for taxes, one should actively try to minimize what they need to pay. One of the best methods for households to reduce their income taxes is income splitting. The idea is that the lower income spouse pays the income taxes at a lower tax bracket. There’s many ways to achieve this, like Canadian Pension Plan splitting and so on.
Another way to reduce your taxes is through tax shelters. As with income splitting, there’s many ways of doing this. A more recent method is using Tax Free Savings accounts to reduce taxes paid.
And that’s it for the Wealthy Barber Plan! As always, thank you for stopping by and if you have any questions you can contact me at firstname.lastname@example.org or 647-289-0012. Also, please sign-up to our beautiful newsletter below!