Inflation and New TFSA Limits

Happy New Year! I apologize for not writing lately. I've been busy and had not had time to write anything. Also, there hasn't really been much news to report so I haven't had anything to write about.

However, I want to inform you of two things today which would be important going forward. Inflation and new TFSA limits.

Inflation

Inflation is defined as a general increase in prices and fall in the purchasing value of money.

As I have discussed before, the biggest risk we all face since the financial crisis of 2008 is going to be inflation.

We all know now that market risk is there (up and down of the stock market). But for the longest time, we've never really had to deal with a lot of inflation since prices were quite stable from 1990 to 2002. We started seeing inflation after gold and oil went up in price. Most of us ignore it, but now it's impossible to ignore.

Everything cost a lot more and most things feels like it cost double what it was 10 years ago. That's a lot. Some examples are home prices, gas and milk.

If you take the bus, you'll notice that starting January 1, 2013. Fare prices have increased.

Adult one zone fares increased from $2.50 to $2.75, a 10% increase
Adult two zone fares increased from $3.75 to $4.00, a 6.67% increase
Adult three zone fares increased from $5.00 to $5.50, a 10% increase

For monthly passes

A one zone pass increased from $81 to $91, a 12.34% increase
A two zone pass increased from $110 to $124, a 12.72% increase
A three zone pass increased from $151 to $170, a 12.58% increase

Meanwhile, salary increases are probably only in the range from 2 - 4% and the government's reported inflation is in the range of 2 to 3%. Very far from reality.

Another sign of inflation is the phasing out of the penny starting Feb 4, 2013.

While they say that they are phasing out the penny due to the rising cost of production, in reality, when small denominations are being phased out, it's because they are no longer useful due to inflation. How do I know? That's exactly what happened in the Philippines between 1980 to 2000. We used to have 1 centavo coins in the 1980s. Now, you're lucky if you can even see a 5 centavo coin. I remember when my grandmother used to have a stall in a fish market, she would come home with a heavy bag of coins from selling fish. It was so heavy, it was like carrying barbells.

Then the bags got lighter in weight, not because the amount were lower, but the materials used for the coins were of lesser value which ultimately started feeling like they're made of plastic instead of metals.

The 5 centavo coin even has a hole in it to reduce the materials being used.


The 10 Peso went from being a paper bill


to a coin


The biggest denomination used to be a 100 Peso bill. Now the biggest denomination is a 1,000 Peso bill.

The reason is because things cost a lot more due to inflation that it's easier to carry one 1,000 Peso bill than ten 100 Peso bill.

Just look at Canada, when I first came here, it's hard to find a store that easily has change for $100 bills. Now, every store can easily give you change for $100 bills.

That's inflation for you.


TFSA

The TFSA or Tax Free Savings Account started in 2009. Each year, you are allowed to contribute up to $5,000 per year and the growth and any money invested in the TFSA will always be tax free.

The $5,000 TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500.

Starting January 1, 2013, the new limit will be $5,500.

So if you've never contributed to a TFSA. Here is how much you can contribute as long as you are over 18 years old and a resident of Canada.

2009 - $5,000
2010 - $5,000
2011 - $5,000
2012 - $5,000
2013 - $5,500

Total of $25,500 since 2009. It's one of the best ways to invest your money.

Generally, the types of investments that will be permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP). This would include:
  • cash;
  • mutual funds;
  • securities listed on a designated stock exchange;
  • guaranteed investment certificates (GICs);
  • bonds; and
  • certain shares of small business corporations.

Take advantage of the TFSA, it's one of the best savings vehicle available.

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