Imagine having an entire year to do what ever you want and still get paid. If you want a convenient way to take a year away from your job, you may want to see if they offer a deferred salary plan (DSP). Sometimes called a deferred salary leave plan or DSLP. Many workplaces offer DSP as part of their employee negotiated benifits. The Government of Canada outlines some of the guidelines to how they work.
First off, a deferred salary plan is the easiest way to save money. I don’t know about you but I would never have the sock away enough on my own. I just wouldn’t have the discipline. My workplace offers is a 5 year DSP with the sixth year being the year away. This will garnish 16% of my wage over 5 years, providing me with 80% of my wage on the 6th year. You need to check far in advance what your business offers because the prescribed plan is often not very flexible. My wife’s DSP is a seven year plan so she has already filled in the paper work.
How to deal with the shortfall
Now 16% less money for 5 years seems daunting. I have brainstormed a few ideas that I think will help. I will be personally garnishing 6% of my wage in the fall to make up for the shorfalls when I am in the DSP. My strategy is to have 3% per year saved up to bring the pay cut down to 13%. This means placing that money in a low risk ETF with dividends to supplement my wage. I think it is important to build in a cushion in case I am struggling with the 16% pay cut. If you are a riskier investor you could always try to build that investment in stocks or higher risk ETFs.
To actually have enough money for food there are going to have to be some sacrifices.
- Recording all your expenses and have a look at where you can make some adjustments
- Meal planning can actually be a great way to save on wasted food costs
- Buying bulk unprepared food can be a big money saver. Prepare lots of portioned meals at a time from raw ingredients.
- Make a list of your priorities and trim down on expensive hobbies
- You are likely going to have to cut off the cable TV. The children still need Netflix and Disney+ but that will be kept for your sanity.
- Takeout and eating out will become less frequent.
- Cell phone data plans will be cut
- Make smart investing choices.
- If possible, cut down to a one vehicle family (We will not)
There may be tax benefits
One major benefit is that the 14% going towards my DSP is in a higher tax bracket. When my workplace deducts that money, it is not taxable till the year off. That places the deductions that would normally get taxed at lets say 35-40% ( I really don’t know) into the lower tax brackets. Now when I am only getting 80% of my salary, I am actually netting more than I would if I would just garnish on my own. In the first scenario, I am only getting taxed on 80% of my salary over 6 years. If I chose to garnish myself, I would end up paying tax in a higher bracket on the money that I put away.
Depending on what time of year the DSP kicks in you will likely end up with a tax credit because you made less than your employer assumed. Make sure to take that credit and invest it. Want to know more about possible tax benefits click here to read a globe and mail article from 2008 on the subject.
Unless you are swimming in money, a deferred salary plan is going to be difficult to pull off. Make sure to start saving sooner than later. I suggest if you are ahead of the game you should start saving before the prescribed DSP starts garnishing for you. Saving early will make the hit not seem as a hard. You will need to prioritize your expenses and keep the end goal in mind at all times. Remember you are saving for what may be the best year of your life.