Saving money may seem like a very stressful endeavor and “not for me” strategy, because why should I save if I can earn more. Well, most of people have jobs that are capped with certain salary; others have job that correlates with hours that they have to put in. This means that there is a limit of your potential to earn money, because there is only 16 hours a day that you can work, right?
There are 2 ideas that are worth your consideration:
1. To earn $1, you have to actually earn $1.61. First, all the money you make are taxed. We will take 25% as the total tax percentage for this example. (this is a percentage after taking into consideration provincial and federal tax brackets which we will talk a little bit later) And then, you pay HST, which is another 13% in Ontario. So, you are taxed 38% right there, and in order to take home $1.00, you have to make $1.61 ($1.61*(100%-38%)=$1)
2. Second point I want to make is understanding the idea of compound interest. Let’s take the same $1, which was saved and put into the stock market under 9.8% annual return (This is an average return of S&P 500 in the last 90 years – we will talk about it later). What will be your nest egg after a long period of time of keeping your investments without any additional contributions, with a steady return of 9.8% reinvested back into the market? After 30 years it will grow to $17, and after 50 years it will be just over $100!!! Isn’t it mind-blowing?
Yes, there is a number of assumptions in these calculations, but that is not the point. The point is that to buy a pair of shoes, that cost $50 in store you have to actually spend $81 and you are stealing $8600 from your own retirement!