I have these conversations all the time – the situation is so common it could be called a pandemic. As far as the economy goes, it’s just as bad as having too much debt – too much savings sitting idle seeming to not be ‘losing’ money – but in reality heading for a time bomb. In Canada, the government sponsored retirement savings program for personal savings means you contribute money to your plan and get a tax deduction for the amount you put in. That money is sheltered from any tax until you are forced to start pulling it out after a certain age. The amount you are forced to pull out is fully taxable at your marginal tax bracket – yikes!
People who think they’re doing all the right things by saving money, keeping it in something ‘low risk’ and work hard to pay no interest on their credit cards and to pay off their mortgages early are in fact many times inadvertently costing themselves thousands of dollars.
Their ‘savings’ isn’t actually set up to be tax efficient at a time when they need it to be most. The money they put into savings hasn’t lost any market value but because it also hasn’t done anything more than simply be ‘saved’ it has indeed many times gone backwards compared to the purchasing power of their money. The no interest they pay on their credit cards can infact be a detriment to their credit score and because the only aspect of credit they see as being valuable is the free points, they miss the opportunity to use credit to leverage their current assets and income to create more wealth, to get their money working for them, and to earn more income – like for example what happens when the mortgage is eventually paid off – now there is a lot of equity sitting idle that requires an income to maintain. And the extra money that was previously going to pay the mortgage is now going to additional savings which is also not tax efficient, or income efficient. And, so our hard working couple works harder and harder and longer and longer just to seemingly stay ahead of the game when in fact they are getting further and further behind.
The secret is to use your current income to get your money working for you to create more income and to wealth which creates even more income to go to work for you to create more wealth and so on and so on….