The seven eternal truths of personal finance

No matter the business cycle or the trends, there are some things that never change when it comes to saving, building and managing money. Long-time Financial Post columnist Jonathan Chevreau presents the sixth instalment of the seven eternal truths of personal finance.

I’m wary of any scheme that promises something for nothing. Blindly entering such transactions is a good way to get scammed. However, when it’s your employer offering you free money, I think it’s safe to say you should take them up on any such offers.

If your boss gave you a big raise or an annual bonus, you wouldn’t say no, would you? Then why say no to one of the best freebies employers may offer: membership in the company pension plan? This is particularly a good deal if they still offer an old-fashioned Defined Benefit pension or if they “match” your contributions for group RRSPs or Defined Contribution pension plans.

The beauty of company pension plans is they take advantage of some of our earlier eternal truths. If they take your contributions right off your paycheque at source, as they do with income tax, then you’ll hardly miss what you never saw. Such an automatic savings plan simultaneously forces you to live within your means and to pay yourself first, and over time takes advantage of tax-free compounding.

And remember, just as in the case with personal lump-sum RRSP contributions, regular pension payments should be accompanied by slightly less tax deducted at source: in effect, you get your tax refund with every paycheque. If this doesn’t happen automatically, ask your HR department to help: you may have to sign a form informing the Canada Revenue Agency of your circumstances.

Another big source of corporate free money is discounted stock, assuming your employer is a big publicly traded company. Here again, you can arrange to have some of your paycheque directed to the stock purchase plan, yet another way you can pay yourself first. A typical arrangement is a 20 per cent discount the first year, a 30 per cent discount the second year and 50 per cent thereafter. If the stock in question also pays a dividend, that will be a welcome source of investment income down the road.

What I like about such arrangements is the built-in “margin of safety” that value investors often talk about. You’re getting a price that the general public cannot get, so even if the stock does not appreciate in price, once you’re free to sell

Eternal Truth No. 6 Never say no to free money from the boss

(some months may be required before you’re permitted to sell a portion of your holdings), you really have an instant profit.

For example, say your company stock trades at $100 a share on the open market but you received a 30 per cent discount. That means it cost you just $70 for something that’s worth $100. If you sell on the open market, you will receive $100, less brokerage commissions, for a quick $30 profit. That’s free money!

However, the taxman will be your silent partner, so I’d advise letting your stake build over time and reinvesting the dividends in still more shares. Unfortunately, the CRA will probably view the discount as a taxable benefit, and if you do sell at a profit, you will also have to pay capital gains taxes when it comes time to file your annual income taxes.

And don’t forget the smaller freebies that may be on offer. Subsidized cafeterias or coffee or soft drinks can add up to substantial savings over time, as can subsidized corporate gyms if available. The latter is a great almost-free perk, and consider the health benefits of exercising while you’re still at work. You might even rationalize that “hey, they’re paying me to exercise,” even if your workout occurs during your lunch break.

Still another source of corporate free money is discounts on whatever products or ser- vices your company is in the business of providing to the public. My last corporate job had, in addition to everything discussed above, half-price employee offers on cable TV, Internet service and magazine subscriptions. These days we’re all so connected to our various devices, you don’t need me to remind you of the great savings made possible by these deals.

Finally, while it may not be clear that there are savings and discounts involved, you should investigate the value of the company medical/dental/drug and insurance plans. Even if you have to pay for some of these as deductions on your paycheque, there may be some matching by your employer. If you need these perks anyway, what your employer offers could well be a better deal than what you’d be able to obtain on the open market, but you might want to shop around or consult an insurance agent or benefits consultant before blindly signing up to everything.

Your HR department can provide an annual summary of the true value of your employment contract, above and beyond the basic salary. Your basic attitude to offers of free money should be “I’m in!”

If your boss gave you a big raise or an annual bonus, you wouldn’t say no, would you? Then why say no to one of the best freebies employers may offer: membership in the company pension plan? — Jonathan Chevreau, on why saying ‘yes’ should be a no-brainer