We all want to make the best decisions for our future, but it’s hard to know how choices we make today could impact us tomorrow, or 25 years from now. What if some of these choices meant losing a million dollars?  

Here are seven simple choices that could cost you a million dollars over 25 years (that’s $40,000 a year!)

-You can find the assumptions and calculator used here at the bottom of this post.-

1. Spend $15,000 more on a car every 6.5 years: -$67,693

Too often, we make car purchase decisions based on monthly payments. The monthly payment for an extra $15,000 may not change that much when financing variables like the term of the loan are adjusted. However, most Canadians purchase a new car every 6.4 years. In order to afford a better car, many are stretching out their payments. Committing to this extra amortization could cost you!

Stat: Did you know Canadians are 5 times more likely to take out long-term car loans?

2. Spend $50,000 more on your next home: -$87,241

That monthly payment trick doesn’t only apply to car loans—spending a little more to get a home you’re thrilled with doesn’t always feel costly! For example, an extra $50,000 will only cost an additional $250-$300 a month. Not so bad, right? However, over-extending your mortgage payment makes you more susceptible to growing credit card debt, or other types of expensive debt.

Tip: The mortgage you’re approved for and what you can comfortably afford is probably not the same amount.

3. Wait 10 years to start investing: -$237,303

Are you waiting to build-up leftover cash before you start investing? Parkinson’s law states that “work expands to fill the time available for its completion.” When applied to personal finance, Parkinson’s law means that expenses always match income, implying that when income increases, expenses always increase to the same level. By waiting just 10 years to start investing $500 a month, you’ll reduce your possible nest egg by nearly $200,000. Time is money!

Stat: Did you know that 53% of Canadians don’t know if they’ve saved enough for retirement?

4. Using a TFSA as a “savings” account: -$41,392

It sure sounds reasonable to use a Tax-Free Savings Account (i.e. TFSA) for savings! However, it’s probably costing you compared to other, long-term investment opportunities.

Let’s imagine you chose a high-interest TFSA account and earned 2% on your yearly contribution of $4,980 ($415/mo). After 25 years, the total balance would be $161,234 and the overall interest earned would be approximately $36,734. If you are taxed 25% in retirement, cashing out the whole account would only save you $9,183.

Alternatively, if you made the same contributions into long-term investments and earned an average of 7%, you’d have $326,800 after 25 years. That’s $124,500 in original contributions and $202,300 in interest. If you cashed out the entire account and had the same 25% tax rate, you’d have saved $50,575! That is 5.5x more than what was saved with the TFSA.

Tip: While we can’t force the Canadian Government to change the name of a TFSA, you can expand your mindset by thinking of these as a TFIA, Tax-Free Investment Accounts.

5. Living without a personalized cash flow strategy: -$330,000

Budgeting isn’t compatible with human behaviour. In our modern financial environment, there are too many microtransactions and automatic payments to keep track of easily. Behaviour-based cash flow strategies created using CacheFlo Advise and accessed by clients through Winton, free up households an average of $1,100/mo, assuming an after-tax median household income of $59,800.

Tip: There are many apps out there that will track your spending, but they all assume that you’ll know what to change and how to change it. In reality, this approach can cause feelings of guilt and frustration. Look for solutions that give you more structured and personalized advice.

6. Passing on your employer-matched group RRSP: -$196,867

Let’s assume you put $250/mo into your group RRSP for 25 years. If your employer matches that amount (for a total of $500/mo) at a 7% rate of return, their contribution alone would be almost $200,000. It’s literally free money!

Stat: An estimated 40-50% of matched funds available from employers go unused each year.

7. Covering small emergencies with your credit card: -$106,159

Growing your credit card debt by $20/mo for 25 years due to emergencies would cost over $100,000 to repay. The time value of money can work for you with investments. Still, it has an equal and opposite impact on debt, and typical credit card interest rates make the cost even more devastating.

Stat: Nearly 40% of credit card users are uncertain about the importance or benefits of paying more than the minimum payment.

Total money lost: $1,066,655
...that’s $42,666/year gone!

Check out your own finances to see what your choices are costing you 25 years from now!


 Based on a blog post originally published on April 7, 2011, by The Money Finder Blog.


Assumptions

I kept things simple so you could compare apples to apples.

  • 25-year period
  • All rates compounded annually
  • 19% Credit card interest
  • 5% Car loan interest
  • 6.5 Car loan term
  • 5% Mortgage interest
  • 7% Investment growth
  • 2% Interest for high-interest savings
  • Simple tax rates are listed in any relevant examples


Disclaimer

Everyone’s financial situation is different. Any article on the internet shouldn’t be considered personal financial advice. Still, it does give you context with which to find your own options. Any financial professional or institution you work with should be helping you manage all seven of these risks of losing $1M shared in this post.


References

Alini.E. (2019, August 20). 40% of Canadians largely use TFSAs as simple savings accounts: Ipsos poll. Retrieved from https://globalnews.ca/news/5783278/tfsa-savings-accounts-cash-rbc-ipsos-poll/

CMHC & SCHL National Report. (2019, May). Mortgage and consumer credit trends. Retrieved from https://eppdscrmssa01.blob.core.windows.net/cmhcprodcontainer/sf/project/cmhc/pubsandreports/mortgage-consumer-credit-trends/2019/q2-2019/mortgage-consumer-credit-trends-canada-69149_2019_q2-en.pdf?sv=2018-03-28&ss=b&srt=sco&sp=r&se=2021-05-07T03:55:04Z&st=2019-05-06T19:55:04Z&spr=https,http&sig=bFocHM6noLjK8rlhy11dy%2BkQJUBX%2BCDKzkjLHfhUIU0%3D

Evans.P. (2018, October 23). Long-term loans: The fuel that's powering Canadian car sales. Retrieved from https://www.cbc.ca/news/business/debt-car-loans-long-term-1.4863737

Financial Consumer Agency of Canada. (2016, March). Auto Finance: Market Trends. Retrieved from https://www.canada.ca/content/dam/canada/financial-consumer-agency/migration/eng/resources/researchsurveys/documents/auto-finance-market-trends.pdf

Investment Executive Staff. (2019, January 8). 53% of Canadians live paycheque to paycheque. Retrieved from https://www.investmentexecutive.com/news/industry-news/53-of-canadians-live-paycheque-to-paycheque/

Lovett-Reid.P. (2018, February 8). 32% of Canadians are nearing retirement without any savings: Poll. Retrieved from https://www.bnnbloomberg.ca/32-of-canadians-are-nearing-retirement-without-any-savings-poll-1.991680

Shecter.B. (2014, May 19). 'Leaving money on the table': Many Canadians not taking advantage of defined-contribution pensions. Retrieved from https://business.financialpost.com/personal-finance/retirement/leaving-money-on-the-table-how-many-canadians-arent-taking-advantage-of-defined-contribution-pension

Transunion. (2017, February 22). Four in 10 Canadian Credit Card Holders Uncertain About Importance of Paying More than Minimum Due. Retrieved from https://newsroom.transunion.ca/canada-creditvision-research/


Calculators

Debt

Savings/Investments

Cash Flow