Dale Jackson

Personal Finance Columnist, Payback Time

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I am fortunate to be retiring at 55.

I know the financial struggles many face just making ends meet every day. It’s much easier to make money if you already have it, but many of us start our adult lives where my wife and I began with nothing but student debt – or as the finance industry puts it – “negative net worth.”

We live in a country where social mobility is still a cherished value and a decent degree of fairness is instilled in our financial system. Circumstances are different for each of us, but here are nine general rules I have followed that can help anyone reach their financial goals:   

1. Try to avoid debt: Debt sucks the life out of savings. The bigger the interest rate, the more it sucks. Avoid borrowing to make any purchase. If you must, have a plan to pay it back beforehand and stick with it. Most of us can’t avoid debt if we want to own a home. If you take on a mortgage, fight for the best rate. A few basis points can translate into tens of thousands of dollars over the long run and allow you to pay off your home early. Once you have accumulated enough equity in your home, establish a home equity line of credit (HELOC) to get the lowest interest rate for emergencies or investment opportunities in the future.   

2. Own the roof over your head if it makes financial sense: Homeownership is a point of pride but it’s arguably the best long-term investment for most Canadians on a risk/return basis. According to the Canada Mortgage and Housing Corporation (CMHC), the average Canadian residential property has appreciated in value by over five per cent annually over the past 30 years. Some markets in Toronto and Vancouver might be overvalued, but residential real estate values tend ebb and flow. Owning a home can also free up rent money to diversify your investments.

3. Always keep your money working: Avoid holding cash that generates little or no interest. The big banks got big by lending out money at a higher rate than it costs them to borrow. The most conflicted advice they give is to keep cash in an emergency fund – likely a savings account that pays almost no interest. Imagine how much money the bank makes lending out your free money over time. HELOCs or non-secured lines of credit work best for emergencies provided they are payed back promptly.  

4. Always re-invest your RRSP refund: Although a tax refund from a registered retirement savings plan contribution might seem like a windfall, it’s actually your money held by the government. Re-investing that refund will not only generate a further refund but also compound over time if it is invested in your portfolio. Don’t contribute too much in your RRSP, though. If it grows too much it will get taxed in a higher bracket when it is withdrawn in retirement. If that’s the case, invest your refund in a tax-free savings account (TFSA) where it can be withdrawn tax free.

5. Get a professional advisor: It’s a common misunderstanding that the only function of an investment advisor is to tell you to buy investments that go up. That’s part of it, but it’s also an investment advisor’s job to develop a long-term diversification strategy that tells you when to sell those investments if they go up or sour, and put the money in other investments that go up. That requires skill and research. It also costs money in fees. Since fees are usually based on a percentage of assets invested, young investors with modest savings often get the cold shoulder and find the only way to diversify their investments are through actively-managed mutual funds or passive exchange-traded funds. Mutual funds can be expensive but a full-service advisor should be able to help you choose good ones and eventually steer you away from them into individual stocks as your assets grow. Good advisors recognize fees eat into investable assets and should work to keep them low. They also implement tax strategies to ensure more of your tax dollars are invested. Most importantly, advisors need to be there to ensure your savings are efficiently drawn down in retirement and properly managed upon the death of a spouse – real personal stuff.      

6. Buy U.S. stocks in U.S. dollars: Canada just isn’t diversified enough to make up a diversified portfolio. The United States is, however. Over the past 10 years the resource-heavy TSX Composite has advanced 55 per cent while the S&P 500 has more than tripled in value. The government allows U.S. dollar trading in RRSPs and TFSAs. Keep an eye open for a CAD spike – like when the loonie topped the greenback back in 2011– and plough then into U.S. dollars. You will also thank yourself when you travel abroad.      

7. Don’t turn down free money: If your employer is going to match your pension contribution, make that contribution as big as possible. If possible, take advantage of government-subsidized savings programs such as the registered education savings plan (RESP) or the registered disability savings plan (RDSP).   

8. Income matters over time: A portion of your retirement investments should be in fixed income. Yields are dismally low but it’s a great way to squeeze out income while providing a cushion when equity markets are down. Dividend stocks can also provide a steady source of income and allow you to buy more shares through a dividend reinvestment program (DRIP). All that income might not seem like a lot at first, but it compounds over time. 

9. Never take advice from people who claim they know the future: The media is swamped with people claiming to know which investments are heading up. Those people are often what is termed “talking their book.” That means their primary objective is to make money off of you. People who know their stuff don’t tend to pound on tables. They articulate what they know and qualify it by mentioning their limitations, such as not being able to know the future.