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August/September 2008

Commentary - Hans H. Mathisen

I want it all and I want it now - Good debt supports an asset and bad debt supports a gratification, says LIFE LETTER for September. Maybe it's time for many of us to run our finances the way the very rich do?

A great new opportunity - The September edition of LIFE LETTER outlines the Tax-Free Savings Account (TFSA), which becomes available January 1, 2009. This is an opportunity we should take advantage of, starting in the new year.

LIFE LETTER MATURE - recommends that we Take a retirement test drive. It would also be prudent to look into a new investment vehicle named The Guaranteed Minimum Withdrawal Benefit.

THE STOCK MARKETS - Yes, the markets are declining. On Sept. 30 - at the end of the 3rd quarter of 2008, the major indexes had this performance year-to-date: S&P TSX stood at -15.04%; Dow Jones was -18.20%; S&P 500 was down 20.68%; and NASDAQ fell 21.49%. And in Europe, the situation was worse: Germany's DAX is down 27.72%; France's CAC 40 declined 28.18%; and England's FTSE 100 fell 24.07%.In Asia, Japan's NIKEI was down 26.44%; Hong Kong's Hang Seng Index declined 35.22%.India's SENSEX plumeted 36.55%.

So, where should we invest our money? Going into a money market fund is hardly an alternative. If we do that, we're engaging in market timing, and this strategy never works for investors. We end up selling low, and buying back in at a higher price. Now is the time to invest if money is available. And don't try to guess.

Hans Mathisen





I want it all and I want it now

The neighbors have a shiny new sport utility vehicle to tow their travel trailer. They take a two week tropical vacation every winter. Their family room is equipped with the latest large screen TV and surround sound stereo system. Many people believe this is a sign of wealth. In fact, this is usually a sign of consumption. More often than not, the above lifestyle is funded with huge amounts of debt.

Fewer and fewer car ads list actual vehicle prices. Instead, they advertise supposedly low monthly payments. Often these payments are for a lease based on a minimal annual usage. If the vehicle is driven more, then the monthly lease payment will be higher.

Lenders have made it easier for borrowers to access the equity in their homes to fund lifestyle expenses. Many merchants offer financing on larger purchases, and some may even defer payments for many months, even years. Make no mistake; these purchases will eventually have to be paid for.

Many consumers today forget that they have to make their purchases with after-tax dollars. For example, a $700 taxes included monthly vehicle lease payment will require $1,076.92 of earned income for someone in a 35% tax bracket. This four-year lease will gobble up $51,692.12 of employment earnings.

Using a credit card to finance a consumer purchase can be extremely expensive. For example, a $5,000 purchase financed for three years at a typical credit card interest rate of 18.8% would total $6,579.72 in payments. Using the same 35% tax bracket, it would take $10,122.65 of employment income to pay for the $5,000 item.

Consider that the more things you have, the more time and money it will cost to manage them. We have all seen the self storage facilities dotting our landscape. RV storage yards take up dozens of acres around our communities. Don't forget to factor in the monthly storage fees, paid for with after-tax dollars, to the cost of ownership. A $200 a month storage fee may cost more than $300 a month in earnings.

Do without the nicer things in life? Of course not. We can, however, take a lesson from the rich on how to actually pay for some of our lifestyle expenses. There are two types of debt; good debt and bad debt. Good debt supports an asset and bad debt supports a gratification. The rich further define an asset as something that generates an income. Banks may define your house, a vehicle or recreational vehicle as an asset because that's where they make their income if you have financed it.

Another strategy the rich use is save from employment income, invest from savings and delay gratification purchases until the investment income is sufficient to cover their costs.

Tom and Claudette decided to use this approach for their lifestyle expenses. They borrowed $25,000, deposited it in an investment fund and paid the loan back over three years. Assuming a 7% withdrawal rate, they now have $1750 of gross annual investment income. If the full $1750 was taxed as a capital gain and assuming a 35% tax bracket again, they would have $1443.75 to spend as they wish. If they used employment income, they would only have $1137.50 after taxes. Tom and Claudette also make monthly deposits to their investment fund account to increase their future lifestyle income. By delaying their gratification, a $5,000 expense now only costs $6,060.61 of investment income.

Want help with your financial independence planning ?

Call Hans Mathisen today at (306)242-7042.
or email -


Copyright © 2008 Life Letter. All rights reserved

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A great new opportunity!

The Tax-Free Savings Account (TFSA) was introduced in the February 2008 Federal Budget and will be available January 1, 2009. It is touted by the Government of Canada as "the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)" in 1957. As always, there are some rules:

  • Must be a Canadian resident aged 18 or over.
  • Deposit up to $5,000 per year (inflation adjusted in nearest $500 increments going forward).
  • TFSA deposits are not deductible for income tax purposes, but investment income will not be taxed while accumulating or upon withdrawal.
  • Unused TFSA contribution room can be carried forward and used in future years.
  • Funds can be withdrawn from the TFSA at any time for any purpose. Withdrawal amounts are added back to the contribution room.
  • Withdrawn amounts can be deposited back to the TFSA at any time.
  • Eligibility for federal income-tested benefits (like the Guaranteed Income Supplement and Child Tax Benefit) will not be affected by investment growth or withdrawals from the TFSA.

The TFSA will give Canadians an opportunity to accumulate more future dollars with the same today dollars. For example, Larry saves $5,000 per year of after-tax income. Assuming a 4% annual compound return and a 40% income tax bracket, he will accumulate $55,760.54 in ten years outside a TFSA. In a TFSA, he will have $60,030.54 with the same annual savings commitment.

Both an RRSP and a TFSA have tax advantages, but there are also two key differences:

1. RRSP contributions are deductible from your income to reduce taxes. Deposits to a TFSA will not be deductible.

2. RRSP withdrawals will be added to your income and fully taxed at then current tax rates. Withdrawals from a TFSA are tax-free.

RRSPs are intended for retirement income and TFSAs are like an RRSP for everything else in your life. However, for those of modest income, a TFSA may be an effective way of providing a better income in retirement. Consider that $2,000 of RRSP income for someone who would qualify for the Guaranteed Income Supplement (GIS) would see a $1,000 reduction of this government benefit. The same income from a TFSA would not reduce the GIS at all.

The ability to earn investment income tax-free can be very valuable. For example, Jill saves $4,000 annually for ten years in a TFSA. She withdraws $50,000 (her deposits plus some growth) to start a small business. The full withdrawal amount is tax-free and she can return the full amount to her TFSA to continue earning tax-free investment income.

Withdrawals can be for any purpose at all. You can finance home renovations, a new vehicle, financial emergencies, a recreation property down payment and anything else you can think of with a Tax-Free Savings Account.

Want help with your tax free savings plan?

Call Hans Mathisen today at (306)242-7042.
or email -

Copyright 2008 Life Letter. All rights reserved

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