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August 31, 2012
If you are anything like me, the first time you heard the phrase “pay yourself first” followed by “even before you pay your creditors,” you wouldn’t have been able to wrap your head around it. I’m constantly reading about financial concepts and strategies, yet this idea caught me off guard.
However, I began to understand what many authors such as David Bach (The Automatic Millionaire) and David Chilton (The Wealthy Barber) are saying. They aren’t encouraging people to not pay their bills, but rather to pay themselves first and pay their bills with what is left over. Seems simple enough, right?
The underlying concept of “pay yourself first” is to take 10% of your pre-tax income and invest that for the long term. You can accomplish this through RRSPs or numerous other investment vehicles. The primary objective for long-term investing is to earn tax-deferred interest throughout the lifetime of your investment.
For example, when you invest $1,000 in an RRSP, you can use this amount as a deduction against your annual income. Not only are you not paying tax on that $1,000 investment, but the interest you earn on that money is also not incurring any payable taxes.
Many people believe that in order to invest for their retirement, they need large sums of money. The truth is that most mutual funds companies and banks will start an investment program for as little as $50 per month. You may ask how much of an impact $50 per month will actually have. The good news is, quite a bit.
Albert Einstein once said “the power of time and compound interest should be the eighth wonder of the world.” If you were to invest as little as $50 per month for 30 years, you will have invested a total of $18,000 out of pocket, but you will end up with an RRSP balance of $70,482. The numbers are even more drastic if you start early enough to invest $50 per month for 40 years. You will invest $24,000 out of pocket and end up with $161,054. As you can imagine, the numbers only get bigger and bigger the more you invest. The key is simply to start with something.
I’m confident that the “secret” to wealth is not trying to do big things once in a while, but rather to focus on doing little things consistently. I have seen in my practice that the people who simply start doing something are the people who reap the most rewards. A good friend of mine once told me “the smallest deed is bigger than the largest intention”.
Cheers to you and your financial freedom!
Chris Karram is a Financial Consultant with SAFEBRIDGE Financial Group. Chris specializes in unique investment, insurance and retirement strategies and has provided financial solutions for many families throughout the GTA. He can be reached at 416.466.5858 or firstname.lastname@example.org.
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