Thursday, July 4, 2013

Wealth Through Doors

I haven't posted here in awhile as I'm sure you may (or may not) have noticed. This will however be my final posting in this blog.

I thought this blog would be helpful to people that found finances confusing and wanted a more straightforward explanation. In reality though I don't think most people are all that interested in taking control of their personal finances. The people that do take the interest spend the time reading over the subject at length and would find little value in my blog.

So, I have decided to focus on my real estate investing passion instead. This is the year that I will buy my first investment property, and I have decided to create a new blog Wealth Through Doors to focus on that instead. The challenges, the research, and the experiences, as I build my wealth "one door" (investor lingo) at a time.

I haven't changed anything on here, so I imagine this message will end up on my Facebook page. I decided for the new blog, not to force the posts in your face, so if you are not interested in my blogging, you will be happy to hear this is the last blog announcement that will appear on my wall!

Wednesday, March 30, 2011

Corporate Tax Cuts vs Spending

I try not to get too political and focus on personal finances, but a lot of my personal finance thoughts are up in the air at the moment. Also, this ad playing in the background is driving me nuts. I've recently begun to take a more active interest in politics, but at this moment I haven't chosen my desired federal party. So I in no way mean this as a pro-conservative rant.

The Liberal party (and previously the NDP party) were accusing the Conservative government of spending billions on corporate tax cuts. Taxes are income for the government, not an expense, so to say the government is spending more money is clearly just wrong. I equate this to saying you are "saving" money by buying a TV on sale. You aren't saving money, you are spending less. The distinction is important, because instead of buying the TV you could instead buy a mutual fund or put it into a high interest savings account. That is saving money.

The real question is why a government would chose to receive less income. I don't think anyone (a corporation or an individual) is excited to pay any taxes. Although, I think most of us realize that they are a necessary to provide the services ourselves and our fellow citizens rely on. We're both upset when services are cut and when taxes are raised. We want our government to do as much as it can with as little funds as it requires. Its a bit of a balancing game as our spending decreases and taxes increase and vice versa. The country lives on our gross domestic product (GDP) and our taxes.

Corporations differ from individuals because they actually provide jobs. A corporation spends its money on new technologies, human resources, expansion, etc. while individuals buy consumer goods. So it stands to reason that the higher the corporate taxes are the less growth and hiring a company will do. Less jobs in turn means less individual taxes to be taken from the government and less purchases and therefore less sales tax. So if a government can produce more income with a tax cut, it would be in their best interest (and ours) to do so.

Another thing to keep in mind is that a corporation, like an individual, can move. While not easy to do, it can (and has) been done. So lower taxes may draw corporations here, while higher ones can send them south.

These proposed cuts are designed to lower unemployment and boost GDP which would help pull us out of this recession. I tried to find evidence one way or the other to see if these tax cuts have been proven to actually do that, but the information is hard to come by. I believe mostly because these tax breaks are always discussed when the country is already struggling and the effects don't happen over night. Also there would be some limit to where these breaks would be efficient. If the economy was hot and employees were scarce, then the tax cuts would raise wages and increase inflation without actually improving the GDP. However, at least theoretically, in a slow economy these breaks just make perfect sense.

Regardless though, we're not talking about spending more money. We're reducing taxes to induce more business to come here or start up and give more people jobs. You should then have the exact same amount of money to spend on services as you did before if not more. Not giving the tax breaks doesn't mean you have billions more to spend. You have the same or less. Much less if the corporation shuts down or moves.

Thursday, March 17, 2011

BC Minimum Wage Increase

I guess in my excitement to have completed my exam, I guess I forgot to post last week. I'm sure you are all dying to know how I did. Well... me too. Two more months before I'll get the results. I think I passed, but at the moment I'm just enjoying having some time off.

I'm sure I've made it quite clear about my feelings on minimum wage in the past, so it won't be a big surprise that I'm not ecstatic about Christy Clark's recent announcement. It appears that it will be increasing by 75 cents every 6 months starting May until it reaches 10.25 by May 2012. As well the training wage will be abolished.

Minimum wage is always such a political topic, but I don't understand who it truly helps. I don't know a single person earning minimum wage so I don't understand who exactly is shouting for an increase. We always hear it is to help the poor people, but are there people truly starting at minimum wage and then waiting for it to go up? I always thought you worked hard and you are given raises. Generally we start young and gain experience and trade that experience for higher wages, but maybe I'm wrong.

What I do know is that I haven't had a raise in over 4 years. I also know that higher wages means higher costs, which means my expenses are going to go up accordingly. Having run a business (although admittedly for a very very short time), I also know that businesses have limited resources and can only afford to hire so many people. The higher the cost, the less individuals get work.

I guess one benefit (or downside depending on your view) of a higher wage is that it makes replacing people with technology more feasible. I'm sure you've noticed the self-check out lanes and pay at the pump gas stations. Sure, the low skilled workers will be without work, but these technologies provide more jobs for the skilled and highly educated work force like engineers.

Not only are you getting an increase if you make $8.00 an hour, but basically anyone earning less than $10.50 an hour will be getting an increase by law. Hopefully the companies can afford to give the people above that a raise too. Imagine the people that have worked hard to earn that $11.00 an hour, only to see a 16 year old just hired at $10.50 an hour with no experience.

Everything has consequences, and this is so obvious to me that it will increase everyone's costs to the point that the raise is meaningless. In the end, cost increases will follow the wage increases until $10.50 buys the same that $8.00 did and everyone is back in the same situation all over again.

Why are we rewarding those that don't gain skills or experience? Wouldn't it make more sense to provide incentives to go to school, learn a trade, to work harder?

I'm sure there are some exceptions. A mother, suddenly single, with no skills, forced into the work force for the first time perhaps. However, these groups are identifiable, unlike the masses receiving minimum wage including 16 year old boys and girls. Wouldn't childcare assistance for single parents be more cost effective in this situation? I have no issues with a lot of these ideas.

Maybe I'm wrong. There do seem to be a great deal of people that agree with a minimum wage. I just find it frustrating that it is used for political purposes, when I don't know who it is that we are truly helping.

I'd love to hear your views on this, especially if you disagree. What I really want to hear is who these people that we are supposedly helping are. Do you know any poor earning this wage personally? Is there a reason they need this help? Is raising the minimum wage the only way to help them?

Update: On my search to see who these people are I stumbled across these stats:

  • Just over 6% of workers in BC earn minimum wage.
  • The lower the minimum wage the less people earning it or less.
  • The average hourly rate is much higher than the minimum.
  • Over 56% of those earning minimum wage are 19 or younger.
  • Almost 25% of those earning minimum wage were part of a couple with the other earning more than minimum wage.
  • For most it is a transitional period.

Well there are clearly some people who truly need the money and are earning minimum wage will be struggling. However, does it make sense to raise the amount for everyone involved when most don't need to live off of that money. Choices have consequences, so should we as country take away those consequences? Approximately 2.6% of BC's population chose not to get a post secondary degree, chose to work in the service industry, and haven't been able to excel in that industry to achieve pay raises. Why should small businesses be forced to pay higher wages to 16 year old kids because of this small group? If the average wage is $19/hours, why are they earning $8?

Friday, March 4, 2011

Random Thoughts

OK, another final exam is coming up yet again, and I'm totally not ready for this one. I've obviously burnt myself out, by taking too many semesters in a row without a break in an already accelerated program. So I'm looking forward to taking the next semester off! So I haven't really had any time to think about some of the topics I planned to write about. So, instead of slapping something together or writing nothing, I thought I'd just update you on some things I've been thinking about.

First, I really appreciated the comment about the unexpected expenses from FieryCanuck77 last week. I have started to budget $100/month to go into a contingency fund that I'll max out at about $2000-$3000. I don't think I really need to build it faster because the car and tires are new, the TV and appliances are fairly new (plus I plan to move soonish), and I'm prepared for most expenses. Lets face it, most expenses are predictable. Just because we ignore them doesn't mean we didn't know the tires would die one day. Rather than putting money aside for each individual item though, I decided a group contingency fund would work just as well.

Second, soon after writing about having all the expected items covered, I got a letter saying I owe my Water and Sewer bill. I was a little embarrassed to admit that I totally forgot about this one yet again. Actually I added a monthly amount to the budget, but when I noticed we never paid it, I assumed it was a mistake and removed it. Oops! However, we are okay, due to another mistake I made, which brings me to...

Third, while I was trying to determine where the money was going to come from when I take a pay cut, I noticed I had under estimated my wife's salary. Now, that was a happy mistake, I was glad to find. Before you question my math skills, let me explain. When I set it up, I didn't know what her deductions would be, or how the pay works. She gets night time premiums, weekend premiums, overtime, etc, etc. You need a math degree just to calculate an average. So until I had some real data to go on, I purposely budgeted the numbers lower. Now that I have 6 months of data to base this on, I have a much better picture of what to expect and thankfully it should be enough to cover my pay cut.

Finally, I'm looking into buying an investment property and I've come to the conclusion that buying in BC is not going to happen anytime soon. However, I did join the Real Estate Investment Network and there are a lot of investors that invest in properties of the province (or country). I'm still short the funds to make an investment anywhere, but at least this gives me a lot more options and will require a lot less time to come up with the funds.

Wish me luck on my exam! Now.... time to study hard!

Friday, February 25, 2011

Flipping the Spending Circle

In the old days, or so I'm told, people used to save up for something before they bought it. Sometime between the good old days and now though, society has shifted to a buy now pay later model. Don't pay for 3 months, credit card use, etc, etc. Unless you have at least a quarter million lying around, you probably still need a mortgage for a home, however, I believe its possible to save first and spend later.

The problem with all our borrowing is that there is a cost to it called interest. Even if you don't see it, its there. For example, I'm paying for a car with 0% financing. However, if I had paid cash for it they would have taken $2,000 off the price. So, that tells you even at 0% I'm going to pay $2,000 in interest over the 5 year loan.

Not only is there a lot of self-satisfaction in having the money to buy something outright, there are also a few extra benefits. One, you earn interest instead of spending it. Don't think of it as just what you're making, but also what you're saving. Getting 2% instead of spending 6% gives you an extra 8% in your pocket. Less taxes of course, but that is what I'm using the TFSA for currently. Another benefit is that you think about what you are going to spend your money on. It may turn out that when you do this you don't actually need it. I'm sure there are other benefits, but the biggest one for me is that you'll always be able to afford your payments this way. If you lose your job or some other financial difficulty strikes you'll have savings to pull from and won't have debt to pay other than a mortgage.

I've talked about it before, and this wasn't exactly a new goal, but is one that I've been working on for awhile. The frustrating thing is that there always seems to be something new coming up. Something that I hadn't budgeted for that forces me to search for ways to get the money together. The most recent example of that was my wife's CRNBC dues coming due this month. The good news is that it becomes easier and easier to do as time goes on. The only real challenge left in this goal is to figure out how to pay cash for the next car, but I'll discuss that more later.

The biggest challenge I faced was trying to catch up. Using credit cards meant I was using this months income to pay for last months bills. Which also made the budgeting a much more challenging process. We eventually got caught up by using our tax return, which alleviated a lot of my stress.

So now I look forward to Christmas and vacations knowing, the money is already in the bank waiting. It was a tough goal, years in the making, but I think we're basically there. Things still crop up, and they probably will continue to do so, but they happen much less frequently now. So hopefully this is encouraging to anyone else trying for the same goal. I definitely think it is worth it.

Tuesday, February 15, 2011

The Retirement Goal

OK, time for the far into the distant biggest goal... retirement. It is easy to say I don't want to take a pay cut when I retire, but how much is that going to cost me now. After some number crunching, the news seems better than I expected.

I've gone back and forth over the RRSP vs TFSA and while still struggling with the concept, I've decided at least for now to continue to contribute to RRSPs. I'm using the TFSA for other investments and savings so if I used it for retirement as well I'd quickly run out of room and be taxed on my savings interest (mind you not a lot). Also, with my current tax bracket vs predicted future bracket calculations I've done, the taxes will end up being pretty much the same whether I pay them now or later. I may change my mind yet, but that is where my head is at currently.

Rather than trying to figure out what I need and working back from there, I decided to start with what I can afford. At first, I came up with $400/month. Given that I'm using an RRSP vehicle though, I have the advantage of getting a tax break now. After crunching the numbers for a bit, I found I could drop $200/month from my savings and replace it with the tax return. That was the perfect number and any more than that and I ended up increasing my expenses. So time to see what $600/month does to get me to my retirement goal.

Anyone that has ever tried to do retirement planning knows that it is full of assumptions, so here are mine:
  • I'm going to retire at age 65. I could aim for earlier, but I'd rather just get a job I love to do.
  • I want the funds to last at least until I'm 85. More about this below.
  • I'll receive 10% on average on my funds up until retirement. The funds I've selected are so far on track with this.
  • I'll receive 8% on average on my funds after this. Actually I expect to continue to earn 10% on much of the funds while earning much less on the funds needed immediately. No calculator I've found accounts for this though.
  • Inflation will increase on average about 2% per year and my contributions will increase with inflation.
  • Income required using today's numbers is $60,000. I don't actually know what my income at retirement will be and maybe I should be using a higher number, but my contributions will also increase as my income increases. So for now I think this is a fair assumption.

According to the Service Canada site I should have $13,017/year in my OAS and CPP income. Assuming I don't have additional income above my RRSPs (which I hope is a bad assumption). I'll use that number for now though and I'm already almost a quater of the way to my goal.

That site also tells you the income from the RRSPs, but it presumes I'm going to die at 78 and won't need any funds after that point. With that assumption, I'd have over 95,000/year. Assuming I do have additional income and I'm less mobile at 78 I probably could use their number, but I'd hate to be at 78 with increased medical costs and be forced to lower my income. I'd rather error on the high side and leave money to my family though than to out live my funds. I realize I could do an annuity, but I'd hate to give my money to an insurance company if I die early.

Using Mackenzie Financial's calculator I see that with my assumptions my funds will actually last until I'm 100 (more than enough!) with me drawing out $60,000/year (in today's dollars). So I could probably give myself a raise and still be OK. I'll discuss this more as the day approaches, but my best bet may be to use a combination of an annuity and a RRIF. That way I can draw more from my RRIF expecting it to last until I'm 85 and if I live longer I'll have the annuity to fall back on, and if I die sooner I won't give all my money to an insurance company.

Not bad considering it was just a first pass with only what I can afford now. There is a little room to play with too in case some of my assumptions go sideways.

Wednesday, February 9, 2011

Worldmark Points and the Goal Making Process

Part of me feels like I should have it all together before I start writing a particular article. I want you to feel like I'm at least informed on the topic of which I felt inclined to communicate to the world about. On the other hand, I never implied that I knew it all and I'm in fact just a student trying to learn as I go. So, the other part of me doesn't mind fumbling along and sharing my experiences with the learning process. If you have an opinion on this though, I'd love to hear it.

The reason I stated the above is that I'm really seeing the benefit to writing out my goals and coming up with a plan to achieve them. One of the biggest lessons I learned so far in this process is that something I may have initially desired and set as a goal may become less important as I write out what that goal truly is and what it will cost to get it. That became very apparent as I sat down and tried to figure out how to reach my WorldMark goal.

For those of you that don't know, WorldMark is a vacation ownership company. I can practically hear you groaning now, but this is different than a time share in several ways. Time shares generally give you one location, one property size, and one time of year. Also when you die (or even after some time period like 20 years) you lose access. WorldMark has many locations, beautiful properties, you can will it, and choose the time and number of rooms as you need them. My parents are members and I've gone with them several times and the rooms are just beautiful.

To get started you need to buy credits which are not cheap. The maintenance cost after that is about the cost of a normal hotel room a year (depending on the number of credits). Instead of a normal hotel room, though you get a beautiful home away from home. Washer and Dryers that allow you to cut down on the luggage you bring on a plane (expensive nowadays) and a fully equipped kitchen so that you don't need to eat out every night.

We love to travel, so this seemed like a good fit. I figured I needed about 10,000 credits/per year in order to book a 1 bedroom at most places. However, at the prices that WorldMark was charging I didn't think I could ever justify it. That is until I found Vacatation Credits; a site that people are selling their credits at a reduced rate. So I came up with the plan to use our vacation budget to buy the credits and use them to go somewhere local next year.

Here is where the planning process started to change my mind. First I noticed that even with our healthy vacation budget and the cheaper credits we could only afford 7,000 credits after 1 year of saving. So that means delaying the next vacation as well or borrowing more money. Second, it means giving up on a trip now when we're without kids and are more easily able to travel. The savings won't be recognized for some time, so its hard to justify giving up that trip just now. Especially when my parents so graciously invite us along occasionally and we can also buy credits through them for some short getaways.

Once we have children, I think the credits make more sense as we'll need a larger place and the hotel rooms and dining will start to get more and more expensive. In fact I don't imagine we'll be doing a lot of vacationing at all while my wife is pregnant or the baby is young. I can't believe I'm talking about kids I don't have yet! So, why not put the vacation money away at that time when we can't travel, so that when we're ready to go again we'll have the option of staying at these gorgeous condos.

For now though, this goal has been postponed, but hasn't disappeared. If you're interested in my experience with WorldMark, or want to comment on anything I've written here, please ask away.