#41 Personal Finance

Hi Art.

Hi Steve.

How are you this morning?

I'm great. And yourself?

Not to bad. I guess we're what, just about past the RRSP deadline? We are just past the RRSP deadline. That was February 28th.

And of course in the life of most Canadians that's a hectic time of year. Do most people not plan early enough? Or what happens?

I suspect a lot of people just do not have the funds to put into RRSP's. And like, personally, I just budget it and I have the money come out, a thousand dollars a month, out of my account so that it's just taken out and it's more painless that way. So it's not like come February you're scrounging around trying to find the money for the RRSP. What does that mean? Does that mean that you instruct your bank to put the money into a separate account, or do you yourself?

Actually the bank takes it out of my account: just like a pre-approved withdrawal like you would for the cable company or the Visa card or whatever. It's just a standard thousand dollars the first of the month comes out of my account. And where does it go?

It goes into my self-directed RRSP.

Oh, so you are putting money into your self-directed RRSP every month of the year?

That's right. And of course you know ahead of time what your maximum is and that determines how much goes into that.

That's correct. Yes.

And I guess you're a believer in people putting money aside every year. Should people take full advantage of the RRSP?

I certainly do and to the extent that you have the money I would say "yes". It's I guess the concept of The Wealthy Barber: pay yourself first. Oh yes, pay yourself first. Now of course not everyone can afford to put that much money into an RRSP every month.

Well, that's right, it will also depend on their tax situation how much the government would allow them to deduct. But having said that, the government tells you, when you file your tax return, how much you can put in the following year. So, it's always a year behind so you should always, sort of, be fairly close to knowing what that number is. And do you think most people's savings are limited to the RRSP? Is that basically kind of the extent to which most people do put money aside?

I wouldn't say most people. I think it just varies so much on individual circumstances.

Yeah, because if you put money into an RRSP that is for your retirement, but you still need to put money aside to save up for a house or for another major purchase.

Well, that's right, although there are some things now with RRSP's that you can actually use some of that money to make a down payment on a house. There's a whole list of technical ramifications, but it can be done to a certain extent. I know you used to be in the car business. People who buy cars, do they tend to put money aside towards a car, or do they tend to buy on credit? Or how does that work?

Well?Let's say?The big thing right now is leasing. A lot of people lease cars. Leasing years ago, used to be what companies did, but now more and more individuals do leasing as well.

What's the advantage to the individual? Well, they get to drive a more expensive car than they could probably afford to if they paid cash.

But they're paying for that privilege? Oh they do pay for that privilege. Yes, to the extent that you can put some money into this car then that makes sense to do that.

So leasing is not necessarily a most cost-effective way of owning a car?

Not necessarily. Again it depends on your circumstances. I guess it depends if you can write part of the cost of your car off for tax purposes if, say, you're self- employed or whatever. But for the person who just tends to drive for their own personal pleasure, being a conservative individual, I think you should be trying to pay for your car as much as you can up front. Because let's face it: cars are depreciable assets. They don't become more valuable over time, they become less valuable over time. But then if it is a depreciable asset that you are owning, I guess to some extent the attraction of a lease is that you don't own this asset. You don't own the asset, but you pay for it. Because part of the lease calculation is allowing that they are also depreciating the value of the car. I guess to the extent that you have a car that is not going down in value or you take care of it then you can come out even on the lease. But most lease clauses have mileage clauses in them or value clauses in them so that if you beat up the car or you drive it a lot more than the average based on how they have depreciated it, then you can have this ugly looking little bill facing you at the end of the lease if you say have very high mileage. And they want to get some of their money back. Because let's face it, a lease payment has to cover the cost of the car or i.e. the amount it depreciated during your ownership. They also have to pay interest on their money which is being passed on to you the customer, plus they have an administration fee for administering the lease and of course their normal profit.

So you think a potential person who wants to lease a car should be very careful and read the lease agreement very carefully?

Oh definitely read their lease agreement and just understand it's like any long-term contract, understand what you're signing and what it's really going to cost you. And for a lot of people it's the only way to go because they don't save up the money, or they can't save up the money but yet they can make the normal monthly payment. And a lot of car dealers see it this way: just look at their advertising. They don't tell you how much it costs anymore - it's so much a month. I guess caveat emptor: buyer beware.

Does this tend to encourage people to live beyond their means?

I guess it depends on the individual but yeah I think there is. If you look at the stats and how much debt there is per person in Canada and, or the United States. There are a lot of people living very ratcheted-up lifestyles.

Right, OK, thank you very much, nice chatting.

Take care, Steve.