The Dilemma of Financial Freedom
In a free society we expect the ability to make our own decisions, and as long as we don’t break the law we can do as we please. Nobody is going to tell us what to do, how to live, or what life choices to make. That’s all fine and well as long as we don’t make poor decisions. When it comes to managing our money, retirement planning and tax avoidance we unfortunately have too much financial freedom and not enough knowledge. And that combination inevitably leads to poor outcomes.
The Educational Gap
Why do most people lack financial knowledge? Well, our education system has traditionally not focussed on financial planning but rather mathematics, grammar, and reading. Preparing young people for the financial challenges of adult life is a critical skill that needs to be learned. Since most people never learned these skills, as parents they have little ability to teach their own children how to manage money.
Learning from Peers: A Risky Path
Typically a young person learns money management by watching their peers, and usually the most destructive behaviours develop; credit card debt, loans, lease payments, and little savings.
Without financial knowledge most people fail to utilize opportunities that are readily available to them. Believe it or not, our government actually wants us to save for retirement. It gives us opportunities to reduce paying taxes, provides opportunities for a tax refund, and even allows us to shelter some earnings from taxes …. forever. Sadly, these opportunities are freely offered to the masses but there is absolutely no obligation to explain how they work. And the government certainly feels no obligation to force people to take advantage of them. This is the price of living in a free society. We have the choice to do as we please even if that means ignoring programs available for us to prosper.
So what is out there?
RRSP: A Path to Tax-Efficient Retirement
The Registered Retirement Savings Plan (RRSP) allows every working Canadian the opportunity to save money for retirement and the earnings will not be taxed. When you retire and withdraw from your RRSP you’ll have to declare the money as income. Hopefully, you are in a lower tax bracket so you’ll be taxed less than when you put the money in. Also, by contributing to the RRSP you’ll be able to lower your income in the tax year and set yourself up for a nice tax refund. That refund can be used for next year’s RRSP contribution allowing you to invest more money earlier in life. More money invested early is the foundation to compound growth.
TFSA: Shielding Earnings for a Tax-Free Future
The Tax Free Savings Account (TFSA) allows you to put money aside in a registered account. If you invest that money the earnings will be protected and never be taxed. Further, if you need money from your TFSA you can simply withdraw it as needed. It won’t be added to your yearly income and increase your tax rate. Starting in the following year after your withdrawal, you can repay it at your leisure.
Government Promotion Dilemma
There are some obvious advantages to these programs so why doesn’t the government promote them to the masses? Well as mentioned there’s no obligation to do so. More importantly, these programs reduce the amount of tax revenue our governments collect so there is little incentive to promote them.
The Power of Personal Choice
Nobody can force you to take advantage of these opportunities and sadly, there’s no obligation to teach you about them or learn about them for yourself. Ultimately the decision is up to you.
In my E-books (“Water Barrel” & “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.