Financial Friday #63: Offence or Defence – Which one Wins the Game of Wealth Building?

Offence or Defence – Which one Wins the Game of Wealth Building?

It’s NHL playoff season and Canadians across the country are debating whether it’s offensive fire-power or a stingy defence that will bring home the Cup. Your finances can be viewed in similar terms: are you going to focus on offence and work like a dog to pile up income? or, are you going to take a defensive stance and focus on clamping down on expenses?

The fact of the matter is just like hockey, focusing on only one dimension of your finances will not lead to success. You are going to have to combine both offensive and defensive strategies to significantly build your wealth.

On the offensive front, we prioritize quality of life and aren’t big proponents of working yourself to the bone. Working extra hours or a second job to feed a savings account is never going to build much wealth anyways, and you may never be able to stop working!

Rather than focusing solely on more work and a bigger paycheque, make sure to divert some of that focus to building passive income. For example, if you have a side hustle, receive overtime pay or work a part-time job and have an extra $500 month, put that cash straight into a TFSA and max out your annual contribution limit. You’ll be glad you did, because doing that for 25 years at 5% will leave you with $300K in your jeans and no taxes to pay.

Don’t worry if you can’t max out your TFSA contribution, just get in the habit of contributing regularly and start as early as possible. You can open a TFSA at 18 (remind your teenagers!) and the annual contribution limits carry over, so you can catch up in the future if you are a little short today.

Switching to defence, the first thing to note is that a dollar of extra income  will only put 75 cents or less in your pocket after tax. On the other hand, we all know that saving a dollar on laundry detergent will leave a dollar in your pocket. So... if cutting expenses is such a complete no-brainer, why is it so hard to do?

What it really comes down to is expense tracking and budgeting. If you ever wonder where your money goes, step one is to track every expense for a month or two and solve that little mystery (make sure to include any interest on credit cards or a line of credit).

The only issue with relying too much on an expense cutting defence is there are limits. After all, when was the last time you saw milk on sale in the weekly grocery flyer? Regardless of how lean you think your monthly budget may be, you owe it to yourself to evaluate your expenses and do it on a regular basis – expenses have an innate ability to creep upwards!

One final point is that not all expenses are created equal. Some just keep on giving and giving, like that credit card balance. If you fail to control your urge to splurge and finance a monthly $100 habit for dinner & wine at the local bistro with your credit card, you are quite literally compounding the problem.

That’s $1200 a year, and paying the minimum with annual interest compounded daily at 19.99% will require 12 years and another $1200 in interest before you digest that financial meal - Bon Appetit!

For a more in-depth look at optimizing both offensive and defensive financial strategies, our resident expert and Head of Financial Coaching Alanna Abramsky will be offering a free, live webinar next week.

Alanna has helped hundreds of our clients get their financial life in order. She practices what she teaches and combines basic investment strategies with a practical, livable approach to managing expenses. Join her next week to find out how she once saved 40% of her $50K salary to go on the travel adventure of a lifetime!

Resources

Myth busting RRSPs vs TFSAs: Where best to put your money?
Maxing out both is the best option, but that's a lot of cash up front and many of us have to make some hard choices. Don't let those immediate tax savings from RRSP contributions blind you to the real winner when it comes to retirement savings.

Is your teenager ready to take on the markets?
How about a bank account that lets your high-schooler save money as well as invest in stocks and funds? This one is only south of the border, so make sure to also check out our Enriched Start Program for any of your Canadian teenagers in need of a little financial savvy.

New mortgage stress test starts June 1: Will it cool the housing market?
Concerns about rising household debt have forced the federal government to bolster the so-called stress test used to ensure Canadians can afford their home when interest rates (inevitably?) rise. Whether this measure tempers the current buying frenzy remains to be seen.

6 Tips to prepare yourself for the home buying battlefield
Bidding wars, skyrocketing prices, limited inventory and the need to move quickly have all combined to turn buying a home into all-out warfare. It can be an emotionally draining practice and you might want to bolster your strength with some of these realtor recommended tips.