I was recently catching up with an old friend (we’ll call him Gary) discussing life, family, our careers, and then inevitably.. money. Perhaps it’s because I think about money a lot, but if I have a conversation with someone long enough, it will almost always lead to finances in some way or another.
Gary in particular has always been open about numbers, and told me that he makes about $150,000 per year, and a total annual family income of about $220,000. Income wise, they are doing very well, combined with a modest mortgage, and a couple of rental properties their financial situation is bright.
While most aspects of his finances were good, there were some concerns that I had, which gave me the idea for this post. My friend wasn’t taking advantage of significant FREE money available out there.
Take Advantage of Free Money
Employer RRSP Matching
Most non-government employers will offer some kind of RRSP plan with a matching option up to a percentage of your salary. My previous employer offered 4% matching. So if my salary was $50k, for every dollar I contributed into the work RRSP up to $2,000 ($50,000 x 4%), my employer would match. This would result in $4,000 total contributed to my work RRSP. In my mind, that extra $2,000 is free money and shouldn’t be turned down. Also with very little market exposure, this is a way for my friend Gary to diversify his exposure to real estate.
While I realize that Gary is risk adverse, and has little faith in the market, it’s hard to argue the evidence on the long term returns of the market. To easiest way to replicate long term returns with very little involvement in the market is a simple index ETF/index mutual fund portfolio through a cheap discount broker. Even easier still is the Tangerine all-in-one balanced mutual fund solution. With employer RRSP pensions, there will likely be a limited set of mutual funds to pick from. Here are my thoughts on how to pick the best mutual funds for your employer RRSP.
Registered Education Savings Plan (RESP)
With two young kids, Gary has yet to start an RESP. Under the RESP program, the government will give you an extra 20% on your contribution for each child. The government matching portion (CESG) will max out at $500/year, which means a $2,500 contribution annually to take full advantage of the RESP program. In addition to the government top up, the account can be invested in the market and grow tax free.
Even though Gary may be a bit behind in his contributions, the RESP program has flexibility that allows for some catch up. That is, if you are behind in your contributions, you are eligible to receive up to a maximum of $1,000 in CESG per year. In other words, you can contribute up to $5,000 annually per child until you catch up on your contributions. For a real world example, here is a post on catching up on RESP contributions.
RESP’s do not need to be complicated and can be setup with a simple indexed portfolio as described above. We set up our family RESP via the TD e-series mutual funds which offer relatively low MER index mutual funds. If you’re interested, you can read about our detailed RESP strategy here.
Cash Back Credit Cards
While chatting about travel and strategies that I use to save money on vacations, Gary admitted to me that he usually uses a debit card and cash for his expenses. Staying out of consumer debt is great, but if you have the financial discipline, I think it’s more efficient to funnel spending through a cash back credit card (my favorite cards) for the points/rewards, then pay off the balance on a monthly basis. At least that’s what we do and we collected over $500 in cash back rewards last year.
Overall, I think that my friend Gary is doing great financially, but I also think that he’s missing out on some key freebies that he should be taking advantage of. Namely, he’s missing out on at least a couple thousand from his workplace RRSP matching, $1,000 per year from the government towards future tuition; and based on his family spending, around $1,000 per year in cash back rewards. That’s almost enough savings for an annual TFSA contribution – but that’s for another post.