Let’s be blunt, you can likely sum up personal finance into a few principles:
Pay yourself first.
Spend less than you make. You can add in “invest the difference” if you really want to.
The golden rule of personal finance is easy to understand but actually hard to implement consistently over many years for many reasons. Life throws some curves at you, things change and your financial plan needs to change with it. In general though if you can get a handle on investing that difference I mentioned above then you might be questioning how you should invest the difference. Based on my readings and experiences over the years I’ll provide a few more personal finance rules below; consider those rules in the silver and bronze variety after you follow the golden rule of paying yourself first.
1. Debt (general)
- Kill high-interest debt first (i.e., credit card debt, loans).
2. Debt (mortgage)
- Mortgage prepayments are a guaranteed rate of return. You can kill debt while doing #3, saving.
- Consider savings to maximize registered accounts (Tax Free Savings Accounts (TFSA), Registered Retirement Savings Plan (RRSP), and Registered Education Savings Plan (RESP)) before non-registered accounts.
- Once debt repayments are done and all registered accounts are maxed out consider investing in a non-registered account.
- Wherever possible, in whatever the account, keep your money management fees as low as possible for as long as possible (i.e., avoid pricey financial products and people who promote them).
- On the subject of tax-efficiency consider this approach:
Tax-efficient Canadian content
- Keep Canadian dividend paying stocks like Bell Canada, Royal Bank, Enbridge and many more in non-registered accounts (to take advantage of the dividend tax credit).
- Keep Canadian Real Estate Investment Trusts (REITs) like RioCan, H&R REIT, Calloway and more in registered accounts (to avoid tax computations associated with income distributions, return of capital and other income).
- Keep Canadian bonds or bond ETFs like VSB, XBB and more in registered accounts (since interest income earned is taxed at full rates and is not a tax-efficient source of investment income).
- Keep Canadian broad market Exchange Traded Funds (ETFs) like XIU, XIC, VCN and more in registered accounts (for long-term tax-free (TFSA) or tax-deferred (RRSP) growth).
Tax-efficient U.S. and International content
- Keep U.S.-listed dividend paying stocks like Johnson & Johnson, Coca-Cola, Wells Fargo and many more in your RRSP (to avoid a 15% withholding tax on dividends paid to foreign investors).
- Keep U.S.-listed ETFs like Vanguard’s VTI and more in your U.S. dollar RRSP (again, to avoid U.S. withholding taxes).
Putting U.S.-listed stocks and U.S.-listed ETFs inside your TFSA withholding taxes will apply (15%) and you can’t get that money back. Worse still, a U.S.-listed ETF that holds international stocks has another tax applied. You can read more here about withholding taxes in this excellent PWL Capital white paper here.
Spend less than you make, invest wisely then have lots of fun with money that is leftover. The golden rule of personal finance is your starting point but there are many more good rules to follow thereafter.
What saving and investing rules do you follow and why?