I've been reading Dave Ramsey's The Total Money Makeover: A Proven Plan for Financial Fitness. I don't agree completely with his philosophy (for example, I think it makes a lot more sense to pay off a loan with a higher interest rate first, rather than the loan with the smallest balance), however, overall, I think it's a great book! I track with him easily for the first eight chapters. Get out of debt? Yep, I dislike debt and it's pretty simple to make extra payments to a lender. Save up an emergency fund? Yes, I'm a big believer in emergency funds--I think I'd have trouble sleeping at night without one. Find a good high-interest savings account and sock money away until you meet your goal.
But then comes chapter 9: Maximize Retirement Investing. I know this is important, but when I start reading words like Large Cap funds, S&P Index Fund, Equity funds, well, it starts to make me anxious! I know it's not good to be too conservative in investing due to the effects of inflation. But it's scary to be too aggressive and risk losing a lot of money. And yet, I think rather than just let a financial advisor recommend something we don't completely understand, it is time to demystify investing. Dave Ramsey recommends that people NOT factor in government programs like Social Security and Canada Pension Plan into their retirement planning--hopefully they will be there but it's best not to count on them. It is all the more intimidating because I have to understand how our expat status affects everything. Remember, US citizens need to file taxes every year on worldwide income. Eric has an RRSP (like an American IRA) and I know US-Canadian tax treaties shelter this from US taxation, but I still need to understand how it will be taxed if we retire in the US. Canada has just started offering something called a TFSA (similar in many ways to a Roth IRA) but as of yet, the IRS has not announced whether it will recognize the TFSA's tax-exempt status. Then again, because we file our US taxes using a foreign tax credit for all our Canadian income, any TFSA gains may be covered by this. Do you see how complicated this can be? I have to be on top of it, lest we make financial decisions that trigger excess taxation, either now or down the road.
Still, reading Dave Ramsey's book is quite motivating! Look at this example he gives:
"Would you dream with me for a moment? Dream that a twenty-seven-year old couple with average to below-average income commit to a Total Money Makeover. They get gazelle-intense, and in three years, by age thirty, they are at Step Four (all debt gone except mortgage, and fully funded emergency fund). They invest 15% of their income in four types of growth-stock mutual funds with five to ten-year track records. The average household income in America is $40,816 per year, according to the Census Bureau. Joe and Suzy Average would invest $6,000 (15%) per year or $500 per month. If you make $40,000 per year and have no payments except the house mortgage and live on a budget, can you invest $500 per month? Follow me here. If Joe and Suzy invest $500 per month with no match into Roth IRAs from age 30 to age 70, they will have $5,882,386 tax-FREE! That is almost $6 million. What if I'm half wrong? What if you end up with only $3 million? What if I'm six times wrong? Sure beats the 97 out of 100 sixty-five year olds who can't write a check for $600!
I would submit to you that Joe and Suzy are well below average. Why? In our example they started at the average household income in America, and in forty years of work, never got a raise. They saved 15% of income and never raised it by one dollar. There is no excuse to retire without financial dignity in the United States today. Most of you will have well over $2 million pass through your hands in your working lifetime, so do something about catching some of that money."
Of course, you may be older than that, or make a lot more or less than that, or not be able to invest that much per month, or not be an American so a Roth IRA isn't an option. We do have Roth IRAs sitting in the US, but if we were to contribute to them, they wouldn't be sheltered from Canadian taxation. But still, I find the above example inspiring because it shows the power of compound interest, whatever your specific circumstances. We are now in our mid-thirties and have some strikes against us when it comes to retirement savings: long years of schooling leading to careers that aren't terribly lucrative, these years of living on one income, and our expat status which makes it trickier to know how it's all going to play out. However, we do still have time on our side, which is why I'm determined not to shy away from learning more about investments. I'd rather face my anxiety about investing at 36 rather than 56. And I welcome any insight or advice!
"The plans of the diligent lead surely to plenty." Proverbs 21:5
Doing the impossible
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