FINANCE 101

Why Do Asset Prices Keep Climbing?

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One of the strangest phenomenon for many people was watching various asset prices break new records while the world grappled with a global pandemic. How on earth could these assets be worth more now, than they were in 2019, given the economic carnage we suffered in 2020?

 

While there are many different reasons for this, and I do not claim this is the only reason, interest rates are surely to blame.

 

You see, when the economy stalls, governments around the world slash their interest rates in an attempt to get their citizens and businesses to borrow more money to either invest or spend. Let’s look at an example:

If you owned a local restaurant and you were looking to purchase new tables and chairs for your restaurant, maybe you could only get a loan at 9% to finance this. When you sit down and do the math, borrowing the money at 9% doesn’t end up being a profitable option for you as the expected increase in customer spending doesn’t offset the 9% interest rate. Now, if the government comes along and slashes interest rates to stimulate the economy, maybe now you can borrow at 4%. For some people, this shift in interest rates means that what was once a risky or non profitable option, has become less risky and more profitable.

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How to Escape Credit Card Debt

Blog featured image how to escape credit card debt

 

Let’s start by being completely honest. This isn’t going to be easy. It’s going to take hard work, on your part, and dedication to following a strategy.

 

Credit card debt is pretty much the worst kind of debt you can have. This is due to the exorbitant interest rates, and the ease of continuing to add to the burden.

 

A lady holding a credit card downing in debt

 

With that said, how can you actually go about addressing credit card debt?

 

First Step

 

Stop spending money you don’t have. If you are trying to pay down this debt, adding more to the card is only putting you in a worse and worse situation.

 

Second Step

 

Apply for a balance transfer credit card. What is a balance transfer credit card? Well it’s another credit card that will often charge you 0% interest or at least a much lower interest than your current card for a promotional period. This period is often six months to one year. The benefit of this is it allows you to focus on paying down the principal, without accruing additional interest.

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Why the rich pay lower tax rates

Why the rich pay lower tax rates

 

In case you haven’t heard, the rich get far more tax breaks then middle class Canadians. The problem is twofold, that tax deductions are based on your marginal rate, and how different sources of income are taxed differently.

 

Neither of these seem fair to most people, but it’s not my job to decide on what is fair and what isn’t. Rather my job is to understand it and educate anyone willing to listen.

 

To start, let’s look at why the rich get better tax deductions.

 

When you deduct anything off of your taxes, it saves you tax based on what your marginal tax bracket is. What this means is that someone who earns $70,000 will save 28.20%. While someone who earns over $220,000 will save 53.50%.

 

Let’s just assume Bob earns $70,000 and Sarah earns $220,000. They both have $10,000 in deductions they are going to claim on their taxes. Bob’s claim of $10,000 saves him $2,820 in taxes, while Sarah’s claim saves her $5,350 in taxes. Whatever deduction you have, saves you taxes based on your marginal tax bracket. Since Sarah is paying higher tax on her income, she also saves more by reducing her income through a deduction.

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RESPs, How do they work?

 

If your goal is to save to help a child get an advanced education, there is no better method than the RESP.

 

The RESP, or Registered Education Savings Plan, is a tax-deferred investment account that the government will deposit grants into based on your contributions and income.

 

 

That sounds great, but it may not make sense to everyone, so I’ll explain it a bit better.

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What is an RRSP?

What is an RRSP?

The RRSP, also known as the Registered Retirement Savings Plan, is the primary retirement savings account for Canadians. The main benefit of the RRSP is the ability to defer income tax and grown investments tax free as a way of saving for retirement. In other words, money you put in today is not taxed, it grows tax free, and you only have to pay that tax when you withdraw.

 

RRSP Deposit chart

 

Just like the TFSA, an RRSP is not an investment. It is rather, a type of account that can be used to hold different types of investments. It is not uncommon for people to believe that the RRSP itself is an investment, as they are unaware of what they are invested in within the RRSP. You can hold a variety of different investments inside an RRSP.

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What is a TFSA?

What is a TFSA

 

 

A TFSA, or Tax Free Savings Account, is a type of savings account able to hold a wide variety of investments. The primary benefit of a TFSA account is that any income generated by the assets within the TFSA grow tax free. That is, if you put $100 into the account, and it grew to $200 you wouldn’t have to pay any taxes on this growth.

How a TFSA Works image

One of the most often confused parts of a TFSA, is that it isn’t actually an investment itself. I often hear people talk about how they have invested in a TFSA and are confused when I ask what it is invested in. A TFSA is not simply a savings account where you are paid a small interest rate on the value of money within it. You can however hold a high interest savings investment vehicle inside a TFSA and this is a very common option at the bank and is the reason for the common misconception.

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