November/December - 2009
Because this communication is to thank you and to wish you a MERRY CHRISTMAS AND A HAPPY NEW YEAR, I'm enclosing the current issues of LIFE LETTER and LIFE LETTER MATURE without my regular commentary.
LIFE LETTER MATURE
THE STOCK MARKETS - What a difference a year can make! In my Christmas letter of November 30, 2008, I refered to the severe beating that all the major indexes, including our own S&P TSX, were taking.. As of November 30, 2009, the year-to-date gain of this index is touching +30%!
If you're not on the internet, please call me and I'll personally get the Annual Review Check List to you.
Please, allow me to say it once more: MERRY
CHRISTMAS AND A HAPPY
NEW YEAR TO YOU AND YOUR LOVED ONES.
The quick-start RRSP
Maureen, age 20, figures she can save $325 each month; or she can keep frittering it away at the mall. She lives with her parents and they think she should save it. Dad says, "Put it into an RRSP and get a tax break as well." Her friends think RRSPs are for old fogies and she doesn't need to start thinking about retirement savings until she's 30.
If Maureen at age 65 could come back and influence the decision of her 20-year old self, she would point out that by starting at age 20, her $325 monthly savings, at 8% compounded annually, could build up to over $1.5 million by age 65. Putting it off until age 30 reduces this figure significantly. Starting at age 20 about doubles the amount she'll have at 65.
Let's put it another way - if Maureen postpones the start of her RRSP until age 30, she'll have to save about $725 monthly to reach $1.5 million by age 65. Though the total cost to her of this huge future sum of money is only $304,500 ($725 monthly for 35 years), it would have been much less - only $175,500 - if she'd started ten years earlier.
Regardless of when she starts, if all Maureen can save is $325 monthly, she'll do better by starting at age 20 and stopping at age 30 than by starting at age 30 and stopping at age 65. If she saves $325 a month for only 10 years, then leaves it to accumulate at 8% compounded annually for the next 35 years, she'll have $835,342 at age 65. If she waits until she's 30 to start saving the $325 monthly, and saves it every month for the next 35 years at 8% annual compound interest, it'll build up to only $672,036 at age 65. This means that her savings from age 20 to 30 will provide over 24% more cash at age 65 than her savings from age 30 to 65!
Okay, Maureen has a bit of an advantage because she still lives with her parents. What have others done to free up some RRSP savings? Consider:
Kurt and Karen went to the movies every Saturday night. Admission and snacks cost about $40 every week. By simply cutting their movie going in half, they are able to put $1,040 per year into RRSPs.
Terry had a large latte every day. At four and a half bucks each, it didn't seem like much. He decided to have one every other day instead and put the difference aside. By putting the $820 yearly into his RRSP instead, he also picked up a nice tax deduction.
Deanna bought her lunch at restaurants every day. When her favorite eatery raised their prices, she reviewed her budget. By making her own lunches, but still treating herself on Fridays, she was able to free up about $3,000 per year.
Lifestyle expenditures are the easiest place to find the "extra" money to start or increase RRSP savings. Here are some tips to help get on track:
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Money saving mortgage strategies
Mortgages today are not like they were when our parents or grandparents bought their homes. As most of us don't have the cash to buy a home outright, we need to borrow from a lender. There are a number of strategies you can use to get the best deal, pay it off more quickly and pay off the debt in the event of premature death. Consider:
Using a mortgage broker - The days of walking into the branch of one of the big banks to get a mortgage are over. There are now dozens of lenders competing for your mortgage business. A mortgage broker gets constant updates from all lenders and can get you the best deal at the time. And it doesn't cost you anything to use them. It makes sense to spend your time on more important things than shopping for a mortgage.
Choosing the right house - Many houses today are a lot bigger than they used to be. It's easy to get caught up in the biggest-we-can-afford trap, rather than the as-big-as-we-need approach. Remember, the bigger the house, the bigger the mortgage and other ongoing costs. Factor in property taxes, utilities, cleaning and upkeep, and yard work when buying a home.
Letting it float - According to Dr. Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, you will likely come out ahead about 85% of the time if you let your mortgage rate float rather than locking it in. To protect yourself from interest rate fluctuations, it makes sense to base the mortgage payment on a higher rate. For example, Jack and Diane just got a $300,000 mortgage with an interest rate of prime (currently 2.25). A competitive five-year fixed rate is about 4.50%, so they based their monthly payments on a 5.00% mortgage rate. At prime, their monthly payment would be about $1,308 (based on a 25-year amortization). At the 5.00% rate, the monthly payment is about $1,754. That means they pay down the principal by almost $5,400 in the first year alone. If interest rates stay low, Jack and Diane will pay off their mortgage sooner. If interest rates go up, they will already be used to a higher payment. By the way, if the rate were to stay at 2.25% and they kept making the payments based on 5.00%, they would lop about 8 years off their mortgage and save more than $30,000 in interest.
Applying tax refunds to mortgage principal - Even if Jack and Diane leave the mortgage payment alone at prime, and assuming it stays at 2.25% for the entire period, they can save three years of mortgage payments by slapping their annual $2,000 tax refunds toward principal. They can keep almost $14,000 in their pockets instead of giving it to the lender.
Taking control of your mortgage insurance - A person's debts shouldn't last longer than they do. That said, it makes sense to acquire life insurance on your own rather than through the lender for a few reasons. First, the benefit gets paid to someone you choose, not the lender. They can decide whether to pay off the mortgage or keep making mortgage payments. Second, lender-provided insurance only pays out the mortgage balance which may be reduced if using any principal reducing strategies. Third, the survivor of a joint plan can continue their coverage.
Copyright © 2009 Life Letter. All rights reserved
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