Friday, September 2nd, 2016
Have you ever read one of those articles about how much money you could save every year by making your own coffee at home and skipping the stop at the coffee shop before work? Or by bringing your lunch to work rather than eating out?
Well, here's the thing – brown-bagging it and skipping coffee with colleagues isn't going to dramatically increase your wealth. I'm not saying these habits aren't good ones. I have a lot of respect for people who are budget-minded with things like this. But the reality is that there are more effective ways to build wealth.
Reducing investment fees
Canadians pay some of the highest mutual fund fees in the world. And most investors don't know how much they're paying. Thankfully some new rules around disclosure and performance reporting are going to bring more visibility to this.
Most disclosure around mutual fund fees – specifically the Management Expense Ratio (MER) associated with your funds – is in percentage terms. And what makes percentages tricky is that it's difficult to immediately equate a reduction in percentage to an actual dollar figure. So if I said the MER on your mutual funds was 2.00%, that doesn't immediately translate into a dollar figure in most peoples' minds. And telling you that you can reduce that 2.00% to 1.00% also doesn't seem like much. It's only a percent, right? But that 1.00% savings, over a lifetime of saving for retirement, can add up to tens of thousands of dollars and can be the difference in your retiring a year or two earlier.
Reducing your fees is easy. There are lots of low-cost investments out there. But it starts by knowing what you're currently paying.
Negotiating a lower mortgage rate and accelerating your payments
This is one of those "no-brainers" that can have a significant impact on your wealth. If you can negotiate a lower mortgage rate, not only would that result in lower annual carrying costs, but over the life of your mortgage, the interest savings can be enormous. You may also be able to accelerate your mortgage payments. Accelerating your payments is the single smartest thing you can do to pay off your mortgage early, literally cutting years off of your mortgage. Who doesn't want to be mortgage-free sooner?
Taking advantage of employer RRSP matching programs
I'm often asked to help friends and colleagues with their personal investments and the thing that I tend to scratch my head about the most is that so many people leave so much money on the table. Not opting in to pensions or group RRSP programs is literally saying “no" to free money. Rule #1 – never say no to free money. Some employers have graduated scales of amounts you can contribute to a group RRSP. For example, 3%, 4% or 5%. What I see all the time is people weighing the options. My advice is to always take the highest amount. Always.
The hesitation for many people is that they're worried their paycheque will go down and they need the money for expenses. I get that, 100%. But my advice is to still go with the highest amount. The tax deduction and resulting tax refund alone are reasons enough. The biggest benefit to taking advantage of these types of programs is one that's actually hard to see immediately: The benefit of compounding. With investing, time in the market is what's important, so taking advantage of employer-sponsored matching programs is a must.
These are just three ways to increase your wealth over time. There are others, of course, but these are probably the ones I come across the most. If you've managed to get ahead of all three of these, then by all means, enjoy your lunch and coffee guilt-free.