To try and ‘budget’ is near impossible. To first give the government their bite in income taxes, and then pay your mortgage, your utilities, groceries, gas and whatever else will leave little left over.
To try and save from what’s ‘left over’ is a very difficult task, considering that those funds need to last you until the next payday.
The one, and ONLY solution is to Pay Yourself First. I recommend; as soon as your income (be it from paycheck or otherwise) is put into your chequing account, that 10% be taken off the top to pay yourself. After all, that is who you work for, right?
Consider this – you earn $50,000 per year. The government takes their 30% right away, leaving you with $35,000 take-home. Your thousand-dollar a month mortgage accounts for $12,000 of that. Food is an easy $500 a month, as is gasoline. You now have $11,000 left over from your $50,000 salary to live off of. But you haven’t even factored in the cost of your utilities, clothing, or any unexpected bills.
The reality in Canada, is that the average person uses that $11,000 towards daily living, dining out, and various forms of entertainment. Considering that you only have $11,000 to do this, (just over $900 a month, or $30 dollars a day) there probably won’t be a whole lot left over to save for your future.
The only solution is to pay yourself first. To allocate either a fixed dollar amount, or a percentage to savings, each and every month, BEFORE you pay anyone else. You may think you can’t afford it, but I guarantee you can find a $20-a-day expense, and cut it out of your life. You then take that $20 (about one hours pay) and put it into savings.
Congratulations! You now spend one hour a day working for YOURSELF
So you’re now allocating $100 a week to savings. That doesn’t sound like much, but consider this; if at 25 years old you put away $250 a month, ($150 less than our target of $400) and you earned 10% per annum over 35 years, then you would have more than 1.6 million dollars. This number is considerably higher when saving $100 a week.
Here is my 5-step plan to a comfortable retirement before I’m 50:
1. 1 - Transfer $100 from your chequing account into your savings account each and every Friday. It takes 2 minutes to set-up an automatic re-occurring transfer online
2. 2 - Transfer the $400 to a brokerage account (I like Qtrade) on the last Friday of each month. (Or wherever your Tax Free Savings Account is held)
3. 3 - Take the $1,000 (every 10 weeks) and purchase a 12 month GIC, or Money Market Fund (Something liquid and short term) inside of your TFSA, where it will grow, completely tax sheltered)
4. 4 - Now at years-end, you have maxed out your yearly TFSA contribution room of $5K. Here; the funds will now grow, not only 100% tax-sheltered, but also free to withdraw tax-free at any time
5. 5 - Final step is to withdraw $50,000 as soon as you reach it (again, these funds are 100% capital gains tax free) and allocate those funds towards larger investments of your choice. I prefer raw land, or cash-flow producing housing. Maxing out RRSPs is also a very wise choice – considering the tax breaks and further tax shelter. If you want income now; a high yield ETF should net you at least $5,000/year in extra income.
WWhatever you do; just make sure to get OUT of dollars and into real assets.
There you go! Repeat 1 through 5 every 7 years, and you’ll have 4 properties to sell and more than fund your retirement at 50
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