RRSP Season – Chloe’s Story

I met with a new client the other day; let’s call her Chloe – not her real name.


(Not really a picture of Chloe)

Chloe is 23 years old, $0 debt, $10,000 in the bank and a full time career making over $40,000 a year.  That last number might not seem all that impressive until you put in context with the other 3.  We set up a small RRSP for her with a continuing monthly contribution that will translate to about 5% of her annual income, even though she could probably afford to put more in she didn’t want to compromise her emergency fund and since she’s saving to buy a house in the next 3 to 5 years she didn’t want to be too stretched.  A wise decision for now but one we will revisit after she moves into her dream home.

At the end of meeting this smart professional young lady looked me in the eye and asked shyly; “do you think I’m doing a good thing here?” I laughed, I couldn’t help myself.

Then I told her my own story.  When I was 23 I couldn’t even spell RRSP, by the time I was 35 I had racked up over $40,000 in credit card debt and was carrying a mortgage of over $100,000.  I had no spelling DEBT but I still couldn’t spell RRSP.  I was forced to declare bankruptcy and start over.  I’m 41 today and if Chloe keeps this up she will surpass my investment balance in no time.  Hell with the right advice, the right planning and the right amount of patience she could be a millionaire before she turns 50.

Yes Chloe is doing the right thing!

During RRSP season in Canada, (mid January to the end of February), that time of year when everyone scrambles to make their annual contribution to their various retirement accounts in time to have it count against their taxes for the previous year, I average 2-3 appointments a day.  By the first of March I’m exhausted and I usually plan to take a few days off to recover.  When I’m meeting with clients I ask a lot of questions.  I’m trying to figure out what people can afford to contribute and how much of a tax credit they can expect to receive from the government as a result.  I’d like to say, most of clients are like Chloe but unfortunately my own story is far more commonplace than I would like to admit.

According to a recent survey the average Canadian’s debt load is 164% of their annual income.  That means if the average person were to stop spending money completely, even for the necessities of life, it would take them over 18 months to be debt free.  In reality, even the most aggressive savers, living on next to nothing and throwing everything they have at their debt take an average of 4 years to pay it off.  That’s a long time to wait without making any contributions to your savings plan.

Now if you are in debt, like most of you no doubt are, I’m not saying stop saving completely but you have to keep things in perspective.

It’s all about the interest rate.   On at 7%, doubles about every 7 years but at an interest rate of 14% it doubles in less than about 4.  So if you are paying 14% on your credit card like I am, pay that off first but if you are paying 5% on a line of credit that can wait.

Bottom line is this, whether you’re paying off debt or making payments into a savings plan, you need to be very aware of the interest rates and how they are either working for you or against you.  The Chloe’s of the world have a great advantage over the rest of us, they only need to look at what interest they are earning and let the compounding work in their favour.  As a result they can be far more aggressive with their planning and stomach a bigger drop in earnings should there be a market correction in the future.  The rest of us need to look at how compounding is working against us and take a more conservative approach with what we do in order be sure we are getting out of debt as quickly as possible and still saving for retirement.

I wish we were all like Chloe, but with the right advice, the right planning and the right amount of patience we can all strive to be debt free and in a cash positive situation before we try and retire.

For more information on the Meekonomist approved method for getting and staying out of debt or the Meekonomist approved savings and investment programs go to “The Meekonomist Manifesto” above or write to themeekonomicsproject@gmail.com

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