It’s now mid-April, which signals exams, the end of the school year, and springtime (unless you live in Ottawa, in which case you’re still wearing your winter coat). April is also the dreaded month for taxes, as the deadline to file your taxes is April 30.
There is a variety of online software out there that can help you calculate and file your tax return. Although some of the software (like turbotax.ca which I use) advertise themselves as being “free”, they are not really free. Sure, you can use the software for free to enter your information, but you actually need to pay in order to complete and file your taxes.
While doing some research, I stumbled across this website here – www.simpletax.ca – which is completely free to use to prepare and file your tax return. This website was created by a start-up based out of Vancouver made up of 3 people including a former tax lawyer. So if it’s free to use, how do they make their money? You can pay whatever you want (including nothing) after using their service. Hey, if Radiohead can use a Pay What You Want model for their albums, why can’t a tax company? I haven’t had an opportunity to use www.simpletax.ca yet, but if you have and like it, spread the word. It’s always great to support small Canadian companies.
I actually look forward to tax time. As I usually maximize my RRSP’s every year, tax time is usually accompanied by a nice tax refund. It’s like a gift from Santa, but way better.
Ever since I was young, I’ve been a good saver. I think that as a kid, I would have done well in the Marshmallow Experiment. If you haven’t heard of it before, the Marshmallow Experience is a study in delayed gratification that was conducted by Stanford University in the 1960s and 70s. In this experiment, kids were given a marshmallow and were told that they could eat the marshmallow right away, or they could wait and receive two marshmallows. Here is the absolute cutest video where they recently replicated the Marshmallow Experiment (my favourite parts of the video are when the blond kid says “good!” and when the kid with the skeleton outfit pokes the marshmallow with his finger):
So how can you be a better saver? Every person’s financial situation is different, but here are some tips and strategies that have worked for me:
1. Pay Yourself First
This tip is mentioned in so many financial articles that it has almost become a cliché. However, the reason why it’s mentioned so often is because it works. Basically, “paying yourself first” means that instead of spending all your money and saving what is leftover, you save first and then spend your money afterwards. I find it helpful to think of savings as another “expense”. So every month, you would pay money for savings, just like you would pay money for rent or mortgage payments, car payments, utilities, groceries, etc.
For example, let’s say you set a goal of saving $3000 per year. That means that each pay check, you would immediately allocate $120 into your savings. In a year after 26 pay checks, you would end up with $3120 saved. And if that doesn’t seem like a lot of money, as I discuss in point #3, $3120 saved every year can grow to being over a $1 million dollars at retirement, as long as you start early and invest it properly.
2. Apply the Rule of 72
I think that one of the reasons why people are so averse to saving is because there is no immediate benefit, and there is the perception that it will take decades before it has an impact. That’s where your rate of return makes all the difference. In this regard, it’s helpful to apply the Rule of 72. This is a mathematical formula whereby you divide your annual rate of return by the number 72, which will give you the number of years it will take for your money to double. So if your money is sitting in a savings account at your bank earning 1% annual interest, then it will take 72 years in order for your money to double. Um, not very exciting. However, if you manage to earn 7% annually on your money, then it will only take slightly over 10 years for you to double your money. Increase your annual rate of return to 8%, and your money doubles in 9 years. Do that a few times during your lifetime and you can see how your money can grow exponentially.
Here is a handy chart on the impact the annual rate of return will have on the amount of years it takes for your money to double:
The beauty of the Rule of 72 is that it shows that you don’t need to invest in a hot stock or win the lottery to build wealth. All it takes is consistent saving and investing. And although earning 8% every year might seem impossible, remember that the historical average annual return of stock markets in the developed world over the past 100 years has been slightly over 8% (albeit with a lot of volatility during those years). That’s where it can be helpful to work with a financial planner or advisor. When choosing an advisor, it’s important to understand how your advisor is compensated. For example, are they paid based on commission when they sell a particular stock or fund? I would recommend a fee based advisor (one who charges a percentage of assets under management, or who charges on an hourly basis) to avoid the risk of conflicts of interest (e.g. an advisor recommending a particular fund because it’s the one with the highest commission, not because it’s the one that is best for you).
3. Start Early
When it comes to saving and investing, the earlier you start, the better. This is so that your money can reap the benefits of compound interest.
For example, let’s say that you and your friend both plan to retire at age 67. After graduating from university at age 23, your friend decides to invest $120 every pay check ($3120 each year) until age 40, at which point, she stops saving. By contrast, you decide to wait until age 40 to start investing, and you save $3120 each year until age 67. She has saved $54,000 over 17 years, whereas you have saved $84,000 over 27 years. You both earn an average of 8% annually on your investments. So what happens when you both retire at age 67? Her $54,000 invested will have grown to over $1 million, whereas you will have less than $300,000 even though you saved $30,000 more money than her.
Here is a picture of a chart showing the math:
That’s the difference that compound interest and starting early can have.
4. Use the Marshmallow Experiment
Going back to the Marshmallow Experiment, the interesting thing about this study is not the experiment itself, but what happened afterwards. In follow-up studies, the researchers looked at the kids again, and found that the kids who delayed gratification and received the 2nd marshmallow tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index, and other life measures.
Now, I have no idea how valid this experiment is. Nevertheless, you can apply the marshmallow experiment in your own life.
Based on points #2 and #3, you can figure out that $1000 invested with an annual 8% rate of return can be worth $4000 in 20 years, or $8000 in 30 years. So do you want to have that marshmallow now and spend $1000 on that new suit today, or wait 20 years and have more marshmallows and $4000 instead? I find it helpful to think of money this way when making purchases, as it’s a way to make sure that you’re buying things you really want. It’s also why I prefer to spend money on experiences, as opposed to material things.
5. Donate to Charity
It may be odd to think that you can save money by giving it away. However, I think that donating money to charity can help us save more money by making us more grateful for what we have, to stop buying the next big thing, and to help us realize that we don’t need to keep spending money on stuff we don’t need to be happy.
I hope these tips have been helpful.
Thanks for reading!