Straightforward Finances

Corporate Tax Cuts vs Spending

2011-03-30T13:32:00.000-07:00

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.

BC Minimum Wage Increase

2011-03-17T23:11:00.000-07:00

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: http://www.statcan.gc.ca/studies-etudes/75-001/comm/5018829-eng.pdf

Summary:

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?

Random Thoughts

2011-03-04T12:59:00.000-08:00

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!

Flipping the Spending Circle

2011-02-25T12:49:00.000-08:00

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.

The Retirement Goal

2011-02-15T13:02:00.000-08:00

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.

Worldmark Points and the Goal Making Process

2011-02-09T12:14:00.000-08:00

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.

My Mortgage Goal

2011-02-03T21:05:00.000-08:00

OK, finally got that second assignment out of the way! What a relief. So many formulas swimming around in my head and I'm feeling slightly nervous about the fast approaching final exam. So calculating my mortgage plan seems like a break in comparison.

Looking at the difference between a $315,000 town home and a $350,000 town home, I couldn't really see that much of a difference. So I've decided to modify the goal a little bit and shoot for $315,000 in 2 years instead of $350,000. The goal should be much more easily attainable. Even if I could afford the $350,000 place, I'd prefer to still buy the $315,000 place and have that much smaller of a mortgage.

Currently I have a 20 year amortization with a variable rate and I'm making approximately $800 in monthly payments. For these calculations, I'm going to assume that the variable rate will remain unchanged. I realize that is unrealistic, but I have no idea when the rates will increase and by how much, so I need to make some simplifying calculations in order to come up with some reasonable estimates. I'm also going to assume a 3% increase in value per year, in both the home I have and the one I want to buy. Finally, I'm going to assume about $10,000 in realtor fees based on some guidelines found on the web.

Given the above assumptions, the current home will be worth approximately $220,000 and the desired home will be worth about $334,000 at the end of year 2.

If I was to leave the payments as they are, at the end of two years, I should have approximately $143,000 remaining on the mortgage. Leaving a difference of $69,000 (less realtor fees) as the down payment for a new home. Which would be a 20% down payment on a $295,000 home ($59,000/20%). So, that doesn't quite get me to my goal.

I think I can comfortably afford to increase the monthly payments to $1,350. So, let's see how that changes things.

The mortgage at the end of 2 years now becomes approximately $129,000. That leaves $73,000 for a down payment after realtor fees. Assuming that is 20% of the purchase price, the price of the new home is $365,000. That leaves a bit of a cushion for rate increases and possibly renovations of the new home.

This may look pretty straightforward now, but I had to do a lot of re-working on this article to come to this conclusion. I'm definitely seeing the need to have a plan in place to get to where I want to go. I struggled with several aspects of this, but I'm now pretty happy with the result. According to conventional wisdom I should be able to afford $2500 a month on the mortgage, but I'd have to change things drastically to make that happen.

OK, another goal set in motion and the payments are already increased. Onto the next goal.

Love to hear your thoughts and stories.

First Net Worth Update

2011-01-26T23:44:00.000-08:00

OK, here's the first of my net worth updates. I'm thinking of posting this annually to see how I'm doing.

First, some comments about the information given:

I'm including my home because I plan to use the equity to buy up and to eventually borrow against for investing. The value is somewhat subjective until we sell, but is based on the mortgage approval I recently had done. It is above the assessed value, but not by much and other apartments in the area have sold for about 10,000 more than what I have listed.

I'm excluding the car both as an asset and a liability because I have no intention of selling the car or borrowing against it. Recording the loan without the asset doesn't truly represent my net worth, because if I was unable to make the loan payments a very large portion of the loan would be repaid with the sale of the car. Mostly though, it is because I don't want to have to constantly check the blue book value of the car to see what it is worth in comparison to what is owed.

I'm also not going to include things like Jewellery or savings that are earmarked for future purchases. I have a TFSA to save for Christmas gifts, vacations, etc. It would be misleading to include that in my net worth statement to see how healthy my finances and retirement planning is doing. I do have some investment money in it at the moment though until I can figure out a better place to put it.

Finally, my wife's pension, if she works until 65 is 70% of the average of her 5 highest earning years. I'd just be guessing if I included an accumulated amount in her pension, so I'm excluding it as well. Although, I'm not too worried about her retirement plan due to this. We may decide to supplement it with RRSPs at some point though.

OK, enough chat, let's get to it.

Assets:

House: $200,000
RRSP Savings Account: $800
RRSP (as of Dec 31, 2010): $1000
TFSA: $200

Total Assets: $202,000

Liabilities:

Mortgage: $155,500
Student LOC: $8,100
BC Student Loan: $6,200
Canada Student Loan: $9,600
Scotia BC Student Loan: $500
Scotia Canada Loan: $1000

Total Liabilities: $180,900

Net Worth: $21,100

Even with all the student loans I'm happy with that number. At least its positive. So now I have a yard stick for measuring against. Now its time to work on achieving my goals and hopefully boosting this number up for next year.

If you have any questions about my calculations or think I missed something or just generally have a question, please let me know.

Time to get Serious

2011-01-19T12:44:00.000-08:00

Its fun and interesting for me to discuss what is going on in the rest of the world, but its time to get serious about my own financial life. To start with, I need to set some goals, make sure they are measurable, and most importantly actually measure my progress. I've read and believed in the importance of writing down your goals, but I've never actually gone to the effort of actually doing it... until now.

I'll start with my goals this week, and over the next few weeks I'll post my debt levels, my net worth, and so forth so that I'll have a benchmark to mark my progress with. I'm not doing it to be boastful (and at this point I don't have much to boast over). So hopefully no one takes it as such. Perhaps it might help someone else to see the progress and be willing to take the same steps. Share your advice and perhaps we can help each other make this journey together.

My Specific Goals:

Apply for at least one job every day and hopefully be working as a full time accountant by the end of 2011. Starting this after this semester is over.
Buy 8000 WorldMark Credits by the end of 2011.
Increase mortgage payments in order to pay down the mortgage enough to have enough equity to put at least a 20% down payment on a $350,000+ town home by the end of 2012.
Invest $200/month for 4 years in order to start a home-based (non-accounting) based business when I'm done school.
Flip the spending circle, so that I save first and spend after. Including unexpected car maintenance, vacations, property tax, Christmas presents, etc.
Pay cash for my next new car.
Have no student loan debt by the end of 2014.
Have a single detached home by 2017 without selling the town home purchased in 2012.
Have the detached home above fully paid for by 2022.
Create enough passive income and wealth, that working becomes optional by the time I turn 45.
Retire at the age of 65 with 100% of my last years salary.

My Generic goals:

I believe that goals need to be specific to be successful. I have a few goals though, that I still need to nail down the details. So rather than leave them off the list entirely, I thought I would write them down here and recognize that some more work is required.

Write an accounting software package. For obvious reasons I can't go into a lot of details here. However, I still should come up with a reasonable time line. Is this just a hobby, or can this make money?
Travel the world. Go to places I've never been before, and revisit some of my favourites. I'm not talking about at the age of 65 either!!
Start a family.

I'm sure these goals will be tweaked and added to over time. I may also need to make some adjustments after I do some number crunching to see if these are all feasible. Any advice? Questions? Thoughts? Care to share your own goals?

Financial Vocabulary

2011-01-13T12:57:00.000-08:00

The author of the Rich Dad, Poor Dad series, Robert Kiyosaki, states the importance of expanding your financial vocabulary on the journey to becoming rich. I tend to agree with him on this point, even though, ironically he misuses words like assets and liabilities (at least in a financial sense). An asset is a past event that has a future economic benefit, while a liability is an obligation arising from a past event. So to say that a home is a liability because it costs you money rather than making you money is incorrect.

A home contains many components that would end up in a financial statement. The mortgage is a liability, the home itself is an asset, any rental income received would be income, and maintenance would be considered an expense. Even if the home decreases in value and you spend money maintaining it, it is still an asset because it has a future economic benefit. Either you can borrow against the equity (home value less the mortgage) or you could sell the home.

That isn't to say that all assets are good investments though. I think that was the point Robert was actually trying to make. With the amount of interest spent, repair costs, etc, and if you're not planning on selling the home or using the equity for other investments, it may not be a very good investment after all.

Another term used in the financial world is an "investment vehicle". I like to use that term just because it drives my brother nuts! He insists that it is a bad term because it is clearly not a vehicle. No tires, no steering wheel, etc.

The Free Dictionary defines a vehicle as:

A medium through which something is transmitted, expressed, or accomplished: His novels are a vehicle for his political views.

So to me, the term investment vehicle makes perfect sense. It is a vehicle designed to accomplish your financial goals. You put your investments in your vehicle and hopefully move that vehicle closer to your financial freedom. I also like the term just for the analogies you can draw from it. Just like you wouldn't take a sports car the same places you'd take an all terrain vehicle, not all investments are used to accomplish the same goals.

A common misconception with the Tax-Free Savings Accounts (TFSA) is that they are just savings accounts. A TFSA is an investment vehicle, just like a Registered Retirement Savings Plan (RRSP) is. You can choose what investments you want to put inside that vehicle, including stocks, bonds, saving accounts, T-Bills, etc.

Any misues you'd like to share? Any other terms that bug or baffle you? Have I misused any? Love to know what you think.

Art Connoisseur

2011-01-05T12:35:00.000-08:00

Every now and then I like to day dream of a day when I'm very wealthy and don't need to worry about where my next pay cheque is coming form, or how much dinner is going to cost. Also, from time to time, I like to wander into an expensive art gallery in Whistler or Vegas and imagine that I could actually afford to purchase one of the pieces without needing a second mortgage on my home. The problem though, is that I guess I'm not that imaginative as I can't even bring my imaginary future self to make such an outrageously priced purchase.

I realize art isn't exactly a practical purchase, but I don't think all our purchases need to be. There is some worth in having a piece in your home that lifts the heart and makes you proud of the home that you live in. I have a sculpture in my home that we purchased in Mexico that instantly reminds me of those beaches and the great times we had spending it with friends, as some great friends came together in marriage. I have another that my sister-in-law painted that always reminds me of her and her family that we don't get to see as often as we'd like. Other pieces we bought (probably at Sears or something) that just make me smile and I couldn't even tell you why. However, even though I don't think it is a wasteful purchase, and I've seen some beautiful art in those show rooms, I can't imagine myself ever spending tens of thousands of dollars on a single item.

That got me thinking, that I'm surrounded by a lot of talented people. I'm not truly an art connoisseur, and I couldn't even tell you the name of the artists galleries that I was in. However, it did occur to me that they must have started out as my artist friends and family are now. One day very much unknown, but sometime in the future they may very well be recognized for their brilliance.

Because I don't care about keeping up with the famous Jones, I don't need to tell people I have an original of Charles Burton Barber. In fact, I take pride in saying, "my cousin painted that", or I picked that up in a bazaar in Cancun. Besides art speaks to people differently, and I think it is more important to have a piece you find beautiful and speaks to you, than just to have a piece because it is expensive or made by someone famous.

So next time you're thinking of decorating a new room, why not ask your artist friends and family what they have available for you to purchase. You can help them out and get a beautiful work of art at the same time. If you're not as blessed as I am to have talented artists in your inner-circle, here are a couple of links for you to check out:

http://www.redbubble.com/people/amandagwright
"http://walterhelenaphotographycatalogue.blogspot.com/

If anyone wants to send me some art just because you love me, this is one of my favorites.

Reading the Fine Print

2010-12-31T13:51:00.000-08:00

Here is a money saving tip I just learned the hard way: Read your contract closely before signing!

My wife really wanted an iPhone for a long time now. I had grown tired of Bell for several reasons and when I got my Blackberry I did so through a friend of mine at Rogers. I figured I'd save some money by getting a couples plan, but because we signed a 3 year contract with Bell, I knew getting out of it was going to be expensive.

I was told that canceling even 1 day early was going to cost me the minimum cancellation fee. So I waited until the contract expired (November 27th) before getting a couples plan and an iPhone at Rogers. Rogers took care of the phone switching which is supposed to cancel the contract, so you can imagine my surprise when I got notice that my phone was cancelled on December 27th.

I called to ask what this was about and it turns out that after the 3 year contract expired it automatically went into a month to month contract. To get out of the month to month contract I needed to give them 30 days notice. As hard as I tried (maybe threatened a little) I realized I wasn't going to get out of paying 2 phones in one month. Even though I couldn't use the Bell service if I wanted to because the number was switched over.

I'm usually pretty good at reading my contracts before signing, but in my defense it was 3 years ago that I signed. Plus this was the second contract with them, so I didn't read the second one as close as the first. Also, it just didn't make sense to me that if I transferred my number the number after the contract expired, I'd automatically be in a new contract.

I knew a year before the contract expired that I wasn't going to renew with them, so I guess I should have double-checked what I needed to do to end the "expired" contract. Still boggles the mind, but lesson learned!

My Whereabouts

2010-12-23T13:00:00.000-08:00

OK, I suppose I should explain why I stopped writing, so here goes my list:

1. Running out of post ideas.

Intermediate Financial Accounting I & II didn't really lend themselves to topic ideas that I could share with the general public. Calculating the future value of bonds is fun for me, but I doubt any of you really care. I was also hoping to feed off of the comments, but I wasn't receiving as many as I had hoped for.

2. Tougher courses.

I'm no longer into level 1 courses and it is obvious to me. About the time I stopped writing a final was approaching, I had fallen behind on studying, and was seriously close to failing that exam. I dropped everything and even took a sick day to buckle down so I could pass. For the other reasons I'm mentioning I didn't pick it up again after the exam was done.

3. Lack of comments.

I realize this is mostly a one-sided conversation, but I was hoping for a little more participation. When I stopped writing it felt like no one was going to notice, so I didn't bother to explain myself then. I was pleasantly surprised to receive a lot of verbal communication to continue writing. So thank you all very much, and I will try not to take it personally in the future.

4. Depression.

After 8 years of schooling, my wife was finally about to graduate as an RN. However, it appeared that the best she could hope for was going to be part-time work. From what I was hearing from her and all her classmates, was that there was no work to be had. That meant I was stuck at my job indefinitely! Writing about becoming an accountant didn't seem to be all that important anymore.

Now she is working full-time and they call her on every day that she has off asking her to come do another shift! I'm still at the same job for now, but at least we're not solely reliant on my income.

---

So hopefully you can forgive my absence. I probably won't write as regularly anymore, but I'll aim to have one of these a week (less around exam time).

If you ever have any financial questions you'd like me to try and research and tackle, please send me a comment or e-mail. If you ever disagree with anything I write, I'd love to hear that too! Honestly!

Thanks again to everyone for the support. Merry Christmas and happy new year everyone!

Stop the HST

2010-12-09T11:22:00.000-08:00

I've had a lot of people ask me where I've been and to urge me to continue, so here I go. I'll explain where I disappeared to shortly, assuming anyone is still listening. Before I do though, I have to throw out a quick blog on something that has been bothering me.

I made it pretty clear before that I was pro-HST. That still hasn't changed, but recently I've taken a greater interest in our political system now. Its a very interesting time to do so with two leadership races on the way here in BC. So, I now have a better understanding on what the anger is all about, and I honestly don't think it has anything to do with the actual tax being a good or bad idea. I know its not a political blog, but it is hard not to discuss politics when trying to discuss the HST. Please bare with me and we'll get to my point at the end.

The government is supposed to be our elected representatives. Meaning they should represent what we want. When the premier of BC decides unilaterally to introduce a tax without MLA approval it violates how the system is supposed to work. Gordon Campbell lied to get elected, but that isn't surprising for a politician. What is surprising is his disregard for the democratic process. I'm sure if it had been taken to a vote it would have been struck down.

I still insist it is a better system, and I'm not trying to say that the general public is stupid for fighting it. However, no one can expect the general public to just take a politicians word that something is good for them. Or for that matter, any salesperson. I'm convinced that if the public was educated first and then asked to vote for it, it would have gone through.

Regardless, a wrong has been done and needs to be corrected. Is remove the HST really the best solution though?

Something just dawned on me today though. I think the Anti-HST movement is asking for the wrong thing. HST is just a harmonizing of the PST and GST taxes. We could reverse the HST, but without adding back the PST exemptions we had before the HST was introduced the changes would be irrelevant. Imagine how happy you'll be when the HST is reversed and now you pay 7% PST and 5% GST at the restaurant instead of 12% HST. Woo hoo!

In reality, I assume if the tax is reversed, these exemptions will be put back. However, what we really care about is paying more tax on services (maybe a few other things). A lot of companies have gone to a lot of work to get the HST introduced (the software company I work at for one). So, is it fair to penalize them for the Premier's mistakes? We already have a few exemptions on the HST, and adding a few more will leave a lot more people happier overall. I mean, do you really care what they call the tax?

Curious on your thoughts.

IPad Contest

2010-05-27T10:32:00.000-07:00

OK, sorry again, but I haven't had time to get anything ready for today. So instead I will just send you a link for a chance to win a free iPad. I do not see myself buying one anytime soon, but I would not complain if I got one for free. So here it is: http://wheredoesallmymoneygo.com/im-giving-away-an-ipad-enter-contest-here/

My Whereabouts

2010-05-20T16:56:00.000-07:00

On the off chance that anyone noticed I didn't post anything in awhile, I thought I should let you know what I have been up to. The Intermediate Financial Accounting course was a little rough given the introduction course was over ten years ago for me. That and this last assignment, while worth a measly 5%, was massive and in depth. I got it in only just in time and have no delusion of high marks for it. Also, because of this assignment, I fell behind on my reading and now need to catch up on that. That and prepare for my final which is in three weeks.

I am taking Monday off for the holiday and I am going to enjoy my long weekend. Having said, all that I should be back on my regular programming schedule starting next Thursday.

Spelling Assume (Ass-u-me)

2010-05-06T09:00:00.000-07:00

On a personal note I just got my Economics grade back and thankfully I passed with 83%. One less thing to stress about!

I'm sure you've all heard the cute saying that "Assuming makes an ass out of you and me". While I think this is a great way to remember how to spell the word, it is not all that helpful in life. Sure, wrong assumptions can be embarrassing, but you couldn't get through the day without assumptions. You assume the power is still going to be on at work, that you still have a job, and so forth. Webster defines assume as "to take as granted or true".

I think speculate is another one of those words that has gotten a bad wrap. Speculating in investments is considered a no-no by many investors. In fact the latest CMHC rules were done in part to try to reduce the amount of speculating in the housing market. So what does it really mean to speculate? Webster defines this as "to assume a business risk in the hope of gain". Notice the word assume in the definition.

So just like you can't make it through the day without some assumptions, you can't invest without speculation. After all you wouldn't start a business that you speculated would fail. You wouldn't invest in a stock unless you assumed it was going to increase in value.

So why has speculation received such a bad reputation? It has to do with how it is used. Some investors invest all of their available funds on a risky speculation. Buying a condo before it is finished with funds that they can't afford to have tied up for long periods of time and can't afford to lose. This can be a profitable venture, but what happens if the market slows before the building is finished? What happens if the project is delayed? Really, it is bad assumptions and risky speculation that are the problem, but they've both been thrown around in generalities.

The reason this came up is I'm getting ready to start investing for my retirement. While I was thinking of some ideas, I began to worry that I was speculating too much. I have always been frustrated with how assume is misused, so it didn't take long for me to draw that connection. Now that I have that clear in my head, it is time for me to continue to speculate. Hopefully I'll have something to share next month.

I think it is necessary to research your investments and have at least a semi-active role. Do not be so concerned about wording, but make sure you're comfortable with the investments and are prepared if things do not go quite as planned. I would love to get into real estate, but I know I do not have the funds to make that happen right now. I will probably be looking at RRSPs or TFSA for now.

Anyone have any speculating experiences? Any investing ideas to throw to the pile? How about just an experience with people misusing the English language?

Not Always Frugal

2010-05-03T09:00:00.000-07:00

While I was filling up at the gas station the other day I was thinking about how I'm not very frugal with certain items. How I spend my money and time is very important to me and I don't want to waste very much of it. However, there are a few things where I won't search for a bargain and will even sometime intentionally pay more.

I've heard a lot of people complain about the price of gas. Some people make the trip down south whenever they can to fill up and others drive out of their way to save a few cents a litre on gas. To me it has never made much sense. If you calculate the savings on a 2 cent difference, you end up saving 80 cents on a 40L fill up. Yes, I admit that adds up over time, but my time is also valuable to me and I don't want to spend it stressing about saving a few cents. Granted, I also have a pretty fuel efficient car, so I'm not filling up that often anyhow. When there are price wars, I typically go to the more expensive station just so I don't have to wait in line.

Don't get me wrong, I do believe in saving in the small things. In fact I think it is the small things that you have the best potential for reducing your spending. You could save more cutting out your coffee purchases at Starbucks than reducing your mortgage payments for example. However, I do have to draw the line somewhere. The cost benefit has to be there.

Also, this shouldn't be confused with quality. I believe in buying quality items, but not wasting money on things I don't need. I research my bigger purchases so that I know I'm going to be happy after I spend the money and so that I get it at the best price.

So what are the things that you don't worry about saving a little on?

Missing the Beautiful Beaches and Sunny Days

2010-04-29T09:00:00.000-07:00

Last December we went to Mexico for a wedding. It was absolutely beautiful there and I loved every moment. Great friends, great food, and lots of tanning. I still look pasty white though by the way. However, there were a couple of culture shocks. First, the policemen with machine guns on the side of the road. Second, the expectation of tipping. That got me thinking more about tipping. How did I get from sun and sand to tipping!?!

I have to admit, I have always hated the concept of tipping. However, I give in to the social pressure that it is expected of me. Essentially it is a self-enforced tax. A tax under the honour system you could say. However, I'm not really sure who determines the amounts and what jobs are included. After all no one tips the cashier at Shopper's Drug Mart or Save-on Foods. Aren't they in the service industry too?

In Mexico, it is more than just supplicates income though, in some cases it is their entire income. While this really made me appreciate how good we have it here, it also made me wonder if tipping was part of the problem.

Waitresses have told me I don’t understand how hard it is to work in a restaurant. That they need those tips to survive. They are right; I don’t know what it’s like, because I didn’t want to work in the restaurant business. Well that’s not entirely true, they just didn’t hire me. Regardless, the reason they put up with what they do is for the money in the form of tips. If the tips stopped, they’d look for work elsewhere. Restaurant owners would be forced to pay more money to keep the good employees and they’d pass the cost on to us. The food prices would increase, but the tipping would stop. Essentially we're telling restaurant owners and bars that it is OK that they pay their employees less, because we'll take care of it ourselves.

Maybe it is because we don’t want to see those higher prices and can somehow justify the food tax (tips), but can’t pay a little more for food and drink. You might even pay less. I wouldn’t have fun on a resort in Mexico with no Margaritas, no servers, no cooks, and making my own bed. I’m going to pay for it all anyhow, so you might as well put it in my bill. It was all-inclusive after all.

Those are my thoughts on tipping. Any one care to fire back?

Debt Snowball

2010-04-26T09:00:00.000-07:00

OK, my wife got offered a casual postiion as a nurse. So it's finally time to speed up the debt repayment. Don't worry, we plan to enjoy a little of the extra funds too ;). So how do I plan to dig out of this hole? I'm going to use a little technique called a debt snowball. A debt snowball is actually better than it sounds. Don't blame me, I didn't come up with the name.

I've heard it discussed several times with different names. The first time I heard it was several years ago in a free budgeting program offered at our church. It was more recently discussed by Primerica when I chatted with them and since then I've read it in several books.

So, what is it? It's a debt reduction strategy used to pay down multiple accounts. If you only have one debt to pay down then, this isn't going to help, but good for you! However, if you have multiple credit cards or student loans, or lines of credit with amounts owing, this could be a good strategy to help you out.

I'm sure you've heard people say that paying the minimum on a credit card balance is just stupid. The reason for that, is because you're paying almost all interest and have no hope of paying the card down. So, you might currently be paying more than the minimum on multiple loans. This can get quite discouraging as the debts never seem to go away.

With this strategy though you will be paying the minimum on all of your debts except for the smallest one. Anything extra that you were putting towards the other loans, or any other money you were planning to use to pay down the loans, should now be put towards this smallest loan only. You can see how this loan would get paid off fairly quickly.

Once this loan is paid off the payments are then applied towards the next smallest loan. Only this time the debt repayment has grown because it includes the minimum payment from the first loan and the minimum payment from the second loan. Like a snowball rolling down hill (hence the name). By the time you get to the larger debt you're applying a much larger payment.

Not only does this help to pay off the loans more quickly, it also give you a much greater sense of achievement as each loan disappears. I think the emotional response is the most important aspect of this concept. After all if you lose motivation, even your best intentions will fall by the side. So while you're technically better off paying the highest interest rate loans first, it is no where near as satisfying. However, if two debts are similar in size, you probably want to pay the one off with the higher interest rate first.

This only works if you can afford to pay more than the minimums though. If you can't afford to make all your minimum payments, then you need to fix that problem first. Hopefully you can do that on your own by adjusting your budget and sticking to it, or getting help by a professional if need be. I reached this point a few years ago and consolidated the loans into a home equity line of credit. This eased the burden, but now left me with a big loan to pay off. I'm saving this one for last.

Debt Snowball Example:

Let's say you have the following debts and for simplicity we'll ignore the increase with interest:

Visa - $225 balance - $25/month minimum
MasterCard - $1000 balance - $30/month minimum
Car Payment - $3000 balance - $175/month minimum
Line of credit - $5000 balance - $250/month minimum

Assuming you have an extra $200 to use above the minimums, you put that towards the Visa and it's paid off in one month. Yes, I made that simple on purpose ;)

Then the next month you apply the extra $225 towards the master card (note it's now $25 more already). Four months later the MasterCard is paid in full. Fast forward 14 months and everything is paid in full.

I'm going to put up my net worth as soon as my wife starts full time. Then if you're interested you can see a real life example of the debt snowball. Although, my balances are much higher than in the example given.

Anyone else tried this or willing to give it a try? Love to hear your experiences.

Dollar Cost Averaging Part II

2010-04-20T00:07:00.000-07:00

In part I I discussed putting money away every month for investing. Dollar Cost Averaging in this case is just a side note, as really you don't have a lot of other choices other than not investing at all. Given the choice, I'd always recommend investing. In this part I'll discuss what to do when you receive a large amount of money that you want to invest. A problem I'm sure we all wish we had.

In the Wealthy Barber, he suggests that you use the same dollar cost averaging technique. Rather than putting the money in one lump payment, you can avoid the instability of the market by spreading it out over the year or longer. Again this just made sense to me and until recently it was what I was planning to do if money ever happened to fall into my lap.

However, in my search for real number, rather than the make believe ones always given as an example, I stumbled across a few interesting articles. This method has been taught for a very long time, but in reality it is not as effective as you might think. First off every transaction you make has fees associated with it. So multiple transactions is not in your best interest, if you can avoid it. Second, if the return on the investment is greater than your banks interest (which it almost always is), then you're losing out on potential income.

Just like a fixed rate mortgage there is some piece of mind associated with dollar cost averaging. Also, just like the fixed rate mortgage you're paying for that piece of mind. Almost every time you're better off investing in a lump sum amount.

The suggestion for this post came from the comments on here. I'm sure it's not exactly what he was hoping for, but unfortunately it's all I have time for right now. If anyone else has any suggestion, feel free to drop me a comment or e-mail.

Dollar Cost Averaging Part I

2010-04-19T09:00:00.000-07:00

Doesn't help to stay up late to make sure I have a post for Monday and then not set the date correctly. Sorry for being late again.

Markets have ups and downs and its near impossible (if not impossible) to predict the swings. People often panic when the markets crash like they did in 2008. In fact if not for panicking and greed there probably wouldn't be very much money to make on the stock market. So with this volatility, how can we safely invest in the market.

When I first heard about Dollar Cost Averaging (DCA), I was impressed with the simplicity and power of it. For simplicity I'll talk about stocks, but I'm more likely to hold mutual funds myself. What you are investing isn't that important when discussing this technique. By investing a set amount every month, you buy more stock when the price is low and less when the price is high. You don't need the stock to rise above what you initially paid. It only needs to rise above your average.

Here's an example (modified example from the Wealthy Barber):
Let's say you decide to invest $100 a month in XYZ company.
Month 1 the stock price is $10/share, so you buy 10.
Month 2 the stock price is $5/share, so you buy 20.
Month 3 the stock price is $7.50/share, so you buy 13.33 (Yes, you can actually buy 1/3rd of a share).

So, even with the share lower than your original purchase price you have 43.33 shares at 7.50/share. You spent $300 and your stocks are now worth approx. $325. Even with the share price down, you've still made money.

The theory sounded great, but I wanted to know how it works in real life. I found an online calculator for dollar cost averaging and ran it against several different stocks and they all came out ahead in the end. I should have bookmarked it, but it didn't really interest me because I don't invest in common stock and it didn't work with mutual funds. My personal funds are doing OK, but I don't have any numbers for 2008 as I wasn't investing at that time due to limited funds.

The biggest benefit to knowing this method is the piece of mind it brings. When the market goes down, you're picking up stocks for a bargain. While others are panicking, you're profiting off of their sales. If you're investing though, you really don't have much of a choice other than to invest in a small fixed quantity. We're not going to come up with our retirement money all in one deposit, so we have to do it in small increments. You can tell people you're dollar cost averaging, but really you're just investing the only way you can. Just keep your head and stick to the plan and you'll come out fine on the other end.

Keep in mind we're talking long term investing here. If you need the money in the next 5 or so years, this probably isn't the best place for you and it's time to move at least what you need, into something less volatile.

Next I'll talk about dollar cost averaging when you come into a larger sum of funds.

Anyone continue putting money in through the recent crash? How are your funds doing now? Did Dollar Cost Averaging work for you?

Tithing

2010-04-15T09:00:00.000-07:00

I mentioned in my last post that I ran into a problem with the Ten Percent Solution. Well the problem, I encountered is that while 10% is quite easy to do (providing I use it for debt right now), 20% is quite out of the question. So I have to make tough decisions about where that money goes. That is where the discussion with tithing came up between my wife and I.

I wasn't planning on writing about my religious beliefs, but I think it's going to become unavoidable. It's not that I'm embarrassed about it, or don't want to discuss it, but I just wanted to keep the posts and discussion accessible/applicable for everyone regardless of their beliefs. However, it is a big part of my life and I was pretty naive to think it wouldn't come into the picture. So perhaps some of you may find this only as a curious glance into the finances of my Christian life.

If you're Jewish or Christian, you've probably seen the 10% recommendation before, but in another context Tithing. As a Christian I believe that God is the ultimate owner of everything I own. In fact Christian often refer to this as stewardship, which I was recently reading about in my accounting book. A steward is responsible for the careful and responsible management of something entrusted to his or her care. So we believe the money isn't truly ours, but it's only in our care. While many people think a discussion of money is almost un-Christian, I think the mismanagement of funds would be considered more so.

Many non-Christians I talk to seem to think that religion is all about rules. So to clarify this is not a requirement about being a Christian. Its a decision I choose to make because of the impact God has had on my life. The specific amount to tithe is not a rule either, but 10% is often used as a guideline. In fact though, we're encouraged to give much more than that. I'd love to say I'm doing that, but sadly that's not the case.

Just like I've post-poned building wealth until the debt is repaid, I've also post-poned tithing until that same time. I'm sure some would disagree with that concept, but I feel that having the debt for longer than necessary would also be a mismanagement of funds. The plan is to be out of debt in 2 years at which point I'll need to make a decision of what to do with that 10%.

I suppose the decision should be obvious, but I must admit here is where I struggle. While I do believe God provides for us, I'm also a strong believer that he gave us brains to use as well and we can't expect things to be handed to us. I believe it's important to use the skills that we've been given and I believe mine is financial aptitude. My struggle is that I know it's the starting out that is the hardest part and by giving 10% in tithes, my wealth building then becomes extremely difficult to accomplish.

So this is my struggle and in the end I think I know what I'm going to do. I'm going to put my trust where it belongs and rely on God to take care of the rest. If He does want me to be wealthy, then it will happen regardless. However, I just wanted to share in the hopes that maybe it will help someone else with similar struggles. God said that we can only serve one master, either Him or money, and it feels like this depicts that dilemma clearly.

Anyone else with the same struggles? Any tithe levels greater or less than 10%?

If you're interested in any of my other beliefs feel free to comment or send me an e-mail.

The Ten Percent Solution

2010-04-12T09:00:00.000-07:00

In The Wealthy Barber, David Chilton suggests a solution to building our wealth. He calls it the Ten Percent Solution. The concept is actually quite simple. Invest ten percent of all you make for long-term growth and you'll wake up one day very wealthy.

Most people of course react to this with sceptism. The biggest objection, is being able to afford to put 10% away. If that money come right off our pay cheques though I'm pretty sure most of us wouldn't even notice. I remember once when I receieved a fairly nice raise of 5% and I couldn't tell you how my spending changed at all. It doesn't take long for the money to be used up. The opposite is equally as true. If we took a 10% pay cut, most of use wouldn't even notice (except for the bad attitude at work).

This isn't in lieu of your retirement planning either. He's actually suggesting this on top of any retirement planning you have. Your retirement plan is to enable you to stop working, while the ten percent fund is to enable you to have more fun while not working. Trips you wouldn't otherwise take, a boat you wouldn't otherwise buy, etc.

Seeing as I don't like talking about things I'm not doing myself, you're probably wondering how its going for me. Well, truth be told, it's not. The problem with this concept is that Chilton doesn't tell you what to do when you're in debt other than to stop using credit cards. Obviously none of us want to be in debt (or stay there very long), so it's my goal to get out of debt as quickly as possible. So to do that I've been using the ten percent solution to pay off my debts. Once my wife starts working, the debt repayment should speed up nicely. The plan is to also start putting money away for retirement once again after she starts working.

Once the debt is paid off I can continue on with the payments to build wealth. I did run into a little snag with this plan though which I'll touch on more next post.

Anyone already doing this? Any success or failure stories? Do you think Chilton and I are crazy?

The Problem with Free

2010-04-08T09:00:00.000-07:00

In economics, I learned about a concept called the free-rider problem. If a good or service is free then people will take advantage of that good or service every chance they get. Nothing is really free, so I should clarify that to mean no additional cost. For example, how many of us eat way too much when we go to an all-you-can eat buffet. You're full before you're done your first plate, but you already have plans to go back for more.

Water in BC is another example. I know some other provinces charge for water usage, but I'm not sure which do and don't. So at first I was thinking this was a great benefit to living in BC. With the free-rider problem though, there is no incentive to reduce the water used. Someone has to pay for the filtering, storage, and delivery. That "someone" ends up being us all collectively through taxes. In a pay system I could actually take measures to reduce my usage as it's in my best interest. I don't care if my neighbor takes 2 hour showers or leaves the water running while he brushes his teeth, because I don't have to pay for it.

Another example that is hitting closer to home now, is health care. As my wife wraps up her schooling this month, it is becoming apparent that a shortage of nurses does not translate into a hiring of nurses. Part of the problem is that management in any government organization is better served by maxing out the departments budget rather than providing better service. The other part of the problem is that because we've paid for the service we're more than likely to use it. Increasing the strain on a health care system already under pressure while mismanagement of the limited funds makes the situation worse.

So I'm left asking if free is really in our best benefit. We've already seen the effects of a pay system in the US and it was also plagued by its own set of problems. However, at least there my wife would have no problem finding work.

Just something to mull over. I'm not offering any solutions, although I do have my opinions on how the system could be improved. I'm still positive that my wife will find work soon.

Has anyone else encountered problems from those so-called free services?

Update on Flooring

2010-04-05T09:00:00.000-07:00

Ever since we bought this place we wanted to replace the carpets. However, money has always been an issue. So although we're planning on a home renovation budget of 150 a month when my wife finishes school, we realized we would probably move before we got to enjoy the new flooring. I refuse to borrow any more money for consumption, but we received a nice tax return and decided to buy the flooring with it. It's probably more fiscally responsible to spend that money on paying down debt, but we decided that hating where you live to save money doesn't make sense.

Now or later, the money needed to be spent. I don't think we'd have any chance of selling our home like this. I didn't want to fix it up right as we're moving. I want to get a little joy out of the money spent too.

In my previous post about Plastic Debt Aaron suggested paying cash to receive a discount. I thought about it, but in this case opted not to. If I wasn't in debt, this definitely makes a lot of sense. However, in this case we already bargained a good price, put the tax return on the LOC, and get the 1% bonus dollars for my credit card. The interest saved on the LOC makes up for the savings any cash payment would have given me (I hope).

We discussed carpet, but I don't feel comfortable putting that down myself. Hiring a crew is not only expensive, but not realistic. We'd have to empty the rooms, but we're talking about doing our whole house. So we decided on laminate so I can do it at my leisure. I couldn't convince my wife to try carpet tile. Maybe next time.

I'll post pictures when it's done. I'm stressed with everything I need to do, but what's one more thing right?

Crazy investment, or a balncing act? What are your thoughts?

Save Money, Buy a Mac

2010-03-31T09:00:00.000-07:00

OK, that title is a little cheeky, so let me explain. While a little technical, hang with me and we'll get to the financial impact at the end.

I've heard from a lot of people that their machine has been slowing down. The first obvious reaction is to assume that it's because the computer has been getting on in age. In fact, most of you probably heard that computers need to be replaced every couple of years. This isn't necessarily true though. When people say computers are out-dated in 2 years it's because the technology has advanced so much and the new software is designed for the new system. However, if you're running the same software as always it doesn't need to run any faster than it did when you bought it. Like all machines though they do break down and parts need to be replaced. Sometimes those parts cost more than a new computer and that's when it's time to move on.

The problem with Microsoft Windows is the way files are written to disk and the way the internal database (registry) is written to. Over time the file system and the registry end up as messed up as a ball of yarn after my cat is through with it. The computer starts searching for the information it needs and becomes lost in the tangle causing all your slowness. Throw in some spy ware and a virus or two and the machine seems to grind to a halt.

So the financial impact? I needed a windows machine for school and I figured that meant spending a couple of grand that I didn't have. I'd already tried the typical tools that were suppose to speed it up my existing box, but to no avail. It took 10 minutes just to start up, so there was no way I was going to want that stress while in school. Finally figuring I had nothing to lose, I erased the hard drive and re-installed everything. It was like night and day. Still not the fastest machine in the world, but 100 times better than before the re-install. It was a pain to do, but it was worth it in the end.

Maybe Windows 7 has fixed these issues, but I doubt it. Even if they have,how much time and money do I need to invest in them before I just give up. Mac's don't have any of the above mentioned issues. The only issue they seem to have is not running certain software. The problem for me is that I still need Windows to run AccPac and QuickBooks, but hopefully that will change one day.

So before you buy another machine you don't need, why not try a re-install instead. When it does come time for a new machine, if you don't have any Windows specific apps like me, buy a Mac. It might seem more expensive, but factor in your time for maintenance, the time wasted waiting for a boot-up or an app to run, and the time waster removing viruses. Not to mention the nice Mac safety features like the magnetic power cord. This little feature would have saved me from needing to replace my laptop.

Any Windows lovers out there that care to disagree? Any apps you can't live without?

My Business Venture

2010-03-29T09:00:00.000-07:00

Whether you are an employee or if you're self-employed, your income is dependent upon the number of hours you work. Given there is a limited amount of hours in a day and even less that anyone is capable of working, there is an obvious limit to the amount of income you can earn. Some occupations pay more than others, but they are all have the same time limitations.

Investors and business owners aren't limited in the same way. An investor makes money based on the amount of money invested regardless of what he or she does with his or her time. A business owner makes money based on the work done by their employees. While it seems obvious now, this concept was brought to mind only after reading Rich Dad, Poor Dad by Robert Kiyosaki. Some of his ideas are sketchy, but I do owe my financial awakening to this book.

So when the opportunity to take over a painting business was presented, I decided to take it. I had no intention of leaving my current job, becoming a painter, or "toughing" it out. I knew it was going to be a lot of work, especially with keeping my existing job, but I knew I could do it. I wanted to bring a professionalism to the industry that I think it so desperately lacks. I created the plan, hired the worker, and worked hard at bringing in the customers.

I had assumed that by taking over an existing company I'd already have a customer base to draw from. One thing lead to another though and I was essentially creating the company by scratch. Although, more challenging, I wasn't deterred by this and I persisted. However, it wasn't long before my advertising budget was spent and the work wasn't coming. Probably not the best timing as the recession was basically just starting. Seeing as I wasn't doing the painting myself it was hard trying to keep my 1 painter around while I had zero prospects.

I'm sure I could have made a successful company given more time and money, I wasn't in a situation to give either. While I admire the entrepreneurs who stick with it, I wasn't able to make that same commitment. My family relies on the income that I bring in and I couldn't afford to keep going. I went into the business thinking of it as an investment and not as a replacement for my current job. I realized at that point though to make it successful would require me to tackle it full time. I went into it thinking it would work, or it wouldn't, but I wasn't going to get attached.

So, a year after I started it, I shut it down. It was very depressing for me to do so, but it was the best thing for my family. I'm sure I'll be a business owner again one day, but for now I'll concentrate on my schooling. Next time I'll be more prepared for a longer trip.

So what about your ventures? Any thoughts on mine?

Cheese Please!

2010-03-25T09:00:00.000-07:00

We've been thinking a lot about food lately as we try and get our food budget back under $300/month after we cut the eating out budget. So far we're at about $370, which isn't too bad, but it's not quite where we'd like it to be. Seeing as we cut the dining out budget from $300 down to $100 the extra $70 was kind of to be expected and is still a net improvement. Having said that, we're hopefully on track to getting that number much closer to $300 this month.

While we were shopping in the United States awhile back, we noticed the dramatic difference in the price of cheese. A $5 block of cheese here would fit nicely in the palm of your hand, while I could have used the block from the US as a dumbbell. So my wife asked me, why it was so darn expensive in Canada. OK, maybe she was just pondering the thought out loud, but I figured I'd look into it anyhow.

Turns out the main component of cheese is milk! Hard to believe I know. I knew this of course, but I was surprised by the amount of milk that is needed. Some estimates say 10 lbs of milk to make 1 lb of cheese. Wow! So, with milk being such a large component, it's easy to see why it's the cost of milk that forces the price of the cheese up.

So, why is the price of milk so high here in Canada? It's because of the Quotas in Canada. I remember my uncle talking about buying and selling quotas and it just made my head spin. If they produced too much milk, that was just too bad, you could only sell based on the quotas that you purchased. This system has been in place for over 30 years and is unlikely to go away anytime soon. As bad as the system is for the economy as a whole, the average dairy farmer has over $750,000 in milk quotas.

I found most of the information here if anyone is interested.

Not that I'm suggesting a trip to the US every time you need milk and cheese. I'm sure that would throw the gas bill out of whack. Although if you are there you may want to pick some up.

Hiring a Nanny

2010-03-22T09:27:00.000-07:00

One of my readers asked me last week to write about hiring a nanny. I thought it was an interesting topic considering I don't currently have any children. The reason I decided to write about it anyway, is that my wife and I had already been discussing the use of a nanny in our future when the children do come.

Before looking at the financial aspects of this, I realize this is also a very personal decision. Can you trust leaving your children with someone you don't know intimately? Will they raise your children as well as the parents can? The answer to that will vary based on your situation and beliefs and is entirely up to you to decide.

I personally believe after 8 years in school, my wife wouldn't be happy as a stay at home mom. If your not happy as a parent, you're not doing your children any favours. As much as we want to believe that staying home with this children is all bonding moments, in reality it's a lot of cleaning, cooking, and discipline. In some cases the stay at home mom is expected to make extra income, such as with a daycare. With a nanny both parents can come home to relax and spend time with the children. Those "first" moments can then be experienced together.

On the financial side it's important to measure the cost of hiring the nanny. It obviously doesn't make sense to go back to work if the income from that work doesn't provide enough to cover the child care costs. What I like about the nanny is that they generally cover the other services that the stay at home mom provides, like cleaning and cooking. Daycare might be a more affordable option, but then when you come home you still need to cook and clean which means you're giving up time for money. Time in this case that you're losing with your children.

Having two working parents obviously provides more income which can reduce the financial stress on the family too. If you've ever grown up in a home with financial struggles you'll understand the effect that that can have on the children too. This can also alleviate some life insurance costs. If one parent passes away the family is not devastated. Although insurance on the death of both parents needs to be considered.

Not everyone is going to respect your decision to hire a nanny. In fact when I mentioned it to other people there is often a long awkward pause. Living like everyone else though will just leave us in debt like everyone else. Remember, only you know what's best for you and your family, so don't let other people make that decision for you.

So what do you think? Is it worth the cost to you?

Valuing Work with No Pay

2010-03-16T09:00:00.000-07:00

I truly believe for a relationship to work, it has to be a true partnership. This is especially true when it comes to a couples finances. I've heard a few stay-at-home moms say that they didn't feel like they have any say over their finances because they don't bring home the money. What I think they are overlooking though is the value that they bring in to the home that isn't measured in financial terms.

There are only two ways to increase your disposable income. Either by generating more income or by reducing your expenses. Whether the couple has done so consciously or not, the stay-at-home parent has opted for the second choice. Although, I'm sure the decision is more often than not an emotional decision about personally raising your children. Some things you just can't put a price on.

The jobs that this stay-at-home parent is doing, could all be done if you paid the money to do so. You could hire a maid service, pay for day care, pay to have the groceries delivered, hire a cook, and so forth. I don't think most stay-at-home mothers or fathers consider it that way until they start to consider going back to work. Then you start comparing your potential income to these additional costs. You could then value the total of these services as the money made for doing all this yourself. It might help your self-esteem to see how much money you're saving the family each year.

This isn't limited to parents either. Any work that you do, that could be hired out, is "paid" for with your time in lieu of money. Mowing your lawn, painting your house, etc all require time that you could spend doing something else. When you elect to do these things, you've decided that your money saved is worth the time lost. I'm not saying that's wrong, only tht it's important to recognize the cost that is paid. Nothing in life is truly free.

Besides the benefits of respect that come from recognizing the roles that each person brings, it's also important to recognize the impact this can have on your future. Is it financially beneficial to return to work? Does it make sense to take on a second job? If I don't want to pay for these services, can I afford to give up the time required to do these myself? Instead of seeing it as being stuck and not being able to afford to work, I see it as making the decision that is the most beneficial to your family.

I realize that some things can't be measured so simply. Like the joy you get from spending time with the kids every day. Watching them take there first steps and so-forth. I even play poker with a guy who enjoys cutting his own lawn and wouldn't pay anyone else to do it for any price. These things are up to the individual and can't be measured. The important thing is to recognize your contribution and your partner's contribution to the family.

Do the math and see how much you're saving your family each year. If you're brave enough to share I'm sure people would enjoy reading it.

Good Debt

2010-03-15T09:00:00.000-07:00

In my daily blog reading I came across an interesting discussion on the government debt. There's only so much you can write in a comment, so I figured I'd blog about it myself.

Most personal finance bloggers will proclaim the benefits of being debt free, living below your means, and saving for various reasons. I agree with the sentiment, but I think we need to be careful that we don't over generalize the point here. For example, we save to meet goals, not because we like to stare at money. If you don't set your goals, saving money isn't bad, but it's not really serving its true purpose. Believe it or not, debt can serve a purpose too.

When I was reading in Economics about the government spending and government debt, I found what was not said much more interesting than what was said. There was no talk over whether debt was good or bad, or if the government would be better off in a surplus or not. Reading the textbook, I realized people would be better off running their own finances much more like the government. I know that's probably contrary to everything you've ever heard.

Debt has really developed a bad name over the years. I've had panic attacks in the past, worrying about how I was going to manage to pay my Visa bill or mortgage, so I understand why some people feel that way. Not only that, but while many of us received no real financial advice from our parents, I'm sure most of us heard again and again that debt was horrible. However, I believe this is an over-generalization. Debt can be horrible, but just because it can be, doesn't mean it always is. After all, I'm sure most of you heard the contradiction from your parents that the mortgage was a "necessary evil." I know I did.

The problem is that the word "debt" is being used too broadly. I would agree that consumer debt, which is a form of debt, IS a terrible idea. Consumer debt is debt used to fund the consumption of goods and services for personal or family use. This is what most of us are referring to when we say that all debt is bad. Examples: Any over due credit card balance, car loans, buy-now-pay later loans (appliances, flooring, etc), lines of credit for household items, etc.

On the flip side though, debt can also be a great tool to allow you to invest in opportunities you wouldn't be able to do by your own means. For example, educating yourself with student loans in order to provide your family with a greater income than you're currently receiving. Buying a real estate investment property that translates into higher cash flow. A working capital loan that allows you to start or grow your own business. Of course there are risks involved, but what in life doesn't have risks. There is no guarantee you'll have your job next month, or your so called safe investments will pay off either.

Governments work the same way. They borrow (or should) to expand our future income potential and to improve our economic state. Whereas consumption spending such as health care, schooling, etc. needs to come from our revenue sources. Borrowing for these items (as badly needed as they are) is just a bad idea. Funds for these items can only come by reducing our expenditure in these areas or moving funds from other areas of consumption. Just like we do with our own personal budgets.

Borrowing for the Olympics makes sense because it brings in more tax revenue, future tourism, and greater immigration. Borrowing to house the poor doesn't have that same return unless this leads to increased employment and lowered use of government services.

Have you been lumping all debt together? What are your thoughts on this "great evil"?

Money for Nothing

2010-03-11T09:00:00.000-08:00

First off I apologize for any spelling/grammar mistakes in this posting. I'm bleary eyed and exhausted after a very stressful day. I lost the GPS, was late for my exam because I had to search for the GPS, got lost because I suck at directions without it, didn't have time to cram, and struggled a bit with the exam. I think I did well, just not as well as I had hoped. My wife tells me to go to bed and no one will notice if I'm late with a posting, but I feel the need to stick to my goal of posting Monday and Thursday by 9am. I like to pretend it's important and something others look forward to reading. OK, enough of that...moving on...

I received a comment awhile ago asking about making money from blogging. I had requested another blogger to post a guest article about it, but either I gave him the wrong address, or he wasn't interested. So while my knowledge of this is limited to theory, here are my thoughts.

A great concept in making more money is the ability to make money for doing nothing (aka passive income). Getting paid for writing a blog you love to do is one example, but there are quite a few examples. Vending machines, selling used books, mystery shopping, rental properties, earning interest/dividends, etc. The problem I found with most of these ideas is that they either require a lot of money up front, or take a lot of work for a low return. I'd count blogging in the latter. If I didn't have the responsibilities that I do now, these probably would have been worth spending the time to grow. I'm hoping to encourage my children to explore many of these options.

I'm also very excited about the idea of investing in real estate and hope to be able to write about my many successes and failures in this area. First though, I need to pay down the debt and build up the capital before I can make these sources of income work for me. Once it starts though I think it will be like a snowball rolling down hill.

I think the best opportunity to make money for "no work" is to be a business owner. Not just working for yourself, but having others work for you. The idea is to become the least important person there so that you're still making money when you're not working. Obviously this takes time and a lot of effort, but the rewards would be quite high too. Whether you're self-employed or employed, your pay is limited to the number of hours you work. As a business owner, the business growth is potentially unlimited. You get paid more as the company does more work, not necessarily you yourself. This is something I've personally attempted so I'll share my experiences with you soon.

Anyone with any passive income success/failure stories? Tips? Love to hear them.

Personal CGA Update

2010-03-08T09:00:00.000-08:00

Last week I received an e-mail asking how my course was going, so I guess it's time for an update.

Well I'll start with a little background about the program and my courses. I received transfer credits from my diploma for four courses, making me a level 2 CGA student right out of the gate. The courses are all correspondence and I'm still working as a software developer, but hopefully not for too much longer. I download the course lectures and listen to them on my phone as I commute to and from work, which is a lot better than attending class. If I have any questions I can post them on the student newsgroup and either the course director or another student will come back with an answer. Overall it seems to be working out pretty well. I really like the fact the course materials are part of the course costs and a mailed directly to me after signing up.

They expect you to work while taking the program and in fact, one of the graduation requirements is 3 years of accounting experience with 2 of them being in higher positions. They recommend only taking one course at a time, and that is all I've been doing so far. It will take me about 4 years to complete this way, but given the 3 years experience necessary, I don't think this will be an issue.

My economics course I took apparently didn't count for some reason, so I ended up having to take it again. This was my first course and is what I'm just finishing up now. In the end I'm happy I didn't get credit, because I learned much more this time around and enjoyed it a lot more. My final for Economics is this Wednesday, so wish me luck.

I like that economics builds off some pretty basic concepts, like people having unlimited wants, but limited resources. Also, if you learned the concepts of supply and demand, you've basically mastered 90% of economics. I now have a better understanding of exchange rates, interest rates, economic profit and so forth. They even managed to change my mind about unions, but I'll just have to save that for another day. I was also glad to find out the majority of economists would agree with me about minimum wage.

I won't bore you with any more details. Now some last minute studying and then on to Intermediate Financial Accounting. Fun stuff!

Unexpected Money

2010-03-04T09:00:00.000-08:00

A couple of weeks ago, my wife received a letter that she was getting a student loan. Which surprised us as they kept turning her down for every other application that she made. More surprisingly yet, it was for the maximum amount allowed. We realize it's not free money, but it is the next best thing.

In my previous posting on budgeting, I mentioned the problems with paying off the credit card a month later. I really wanted to get the budgeting under control, but this aspect of it has made it more difficult. So we decided to use the loan to pay off January's debt, so that we can use our income from February for the February's expenses.

Maintaining the budget has become a lot simpler now. We're still struggling with a few budget items, but I hope to get that under control soon. After all, it's really a new skill to learn and you can't start off being great at it.

Unpaid Advertisement

2010-03-01T09:00:00.000-08:00

I recently read a blog posting from a blogger who was actually paid to write about a product. It's an aspect of making money at blogging that I hadn't really thought about. Turns out his readers didn't appreciate it very much though, which I thought was unfortunate. You can rest easy though that I have not received a penny for any of my posting including this one.

I've just received yet another advertisement for switching to the Shaw phone service. I was actually so disappointed with the pricing, that I called and complained verbally as well as sending an e-mail in to Shaw. Yes, it is amazing at what I can get worked up about.

If you get the phone as part of the package, they have a low introductory price of $14.95. That of course doesn't include voice mail or call display, which are two features I believe are vital. So after you add those on, you're looking at approximately $21. Keep in mind that's the promotional price and the real price will be higher in a year from now. While this may (or may not) be cheaper than Telus, you have to realize that it's an internet phone service which has one major drawback. If the power goes out, you don't have a working phone. I can (and do) live with that, but I just thought you should be aware of this.

The reason I find the offer so absurd, is that I already have a much better deal. I'm with Vonage and I'm paying $19.99+tax a month. That's not a promotional price (although they do offer 1 free month) and it includes dozens of features including call display and voice mail. It's not unlimited local calls, but long distance and local calls are treated exactly the same. It comes with 500 minutes and I only use about 250 per month. Best of all it only took me 15 minutes to set it up, including going to the store to buy the kit.

In all fairness, Shaw might be your best option if you don't already have a high-speed connection or you use a lot of local minutes. If you have an alarm system, you may want to look into a cellular service from the alarm company, or sticking with a Telus line. For anyone else looking to save a few bucks though, I'd definitely recommend Vonage. If you do sign up, feel free to tell them I sent you. I get a month free if you do.

Popping the Vancouver Real Estate Bubble

2010-02-25T09:00:00.002-08:00

After my last post, a friend of mine suggested that the housing market in Vancouver is about to burst. As much as I've been curious about the concept of over-inflated housing prices, I've avoided the subject because its been a great mystery to me. With my friend's comment though, I decided it was time to peer into the depths and contemplate the consequences.

The first thing I discovered was that bubbles are often discovered only after they pop. In other words, it's very hard to say with any certainty whether the market is currently in a bubble or not. I'm sure we all get the sense that housing prices in BC are incredibly high, but are they high due to natural supply and demand, or is it far more sinister? Some economists even argue that "bubbles" don't actually exist.

In order for there to be a bubble, people would have to be paying more for a home then they feel it is worth. I have to ask the question. Why would anyone do that?

I think the truth is that many of us have been told that renting is throwing your money away. We feel that we don't have any choice but to pay whatever price the housing market is asking. We also have a consumer driven mentality that pushes us to buy the biggest home we can get. Even if it's outside of our current means.

Vancouver is the most expensive city in the most expensive province in Canada to live in. Yet, most of us don't see moving as an option. We love it here and are willing to pay the price. Even if we grumble about it.

Speculating investors can force the prices up faster than we're doing on our own though. Hopefully the changes recently made by the government will slow this down and not crash the market. I'm not sure the exact percentage of speculators in the Vancouver market or the effect this will have.

Sure there will be corrections as the economy goes through its various ups and downs. Housing shortages and surpluses occur from time to time affecting the market pricing as well. In the end though, I think we're doing this to ourselves and don't really see this as a bubble. At least not one that will burst.

Living here is a choice. As long as we are willing to pay whatever it costs us to live here the prices will continue to rise. Only when we change our choices as a whole, will things change. I wouldn't hold my breath waiting for the world to change around us. If you're waiting for that crash to buy into the market, I predict you will be waiting a very long time.

Our best defence is to live within our means, pay off the mortgage quickly and move up slowly. If you're willing and able you could even move to a more affordable place to live.

If you're not in the market, you might want to wait for a market correction. Buy when everyone else is selling. However, I don't think even then housing here will be considered "affordable."

Changes to the Mortgage Rules

2010-02-22T09:00:00.001-08:00

Starting April 19th, borrowers will have to qualify for a five-year fixed-rate mortgage even if they opt to apply for a lower variable rate. You will also only be able to borrow up to 90% of the value of your home, instead of the previous 95%. Finally condominium investors will need 20% down to invest instead of the previous 5%.

So, how does this effect us? Well, hopefully it doesn't. Hopefully you've made the decision to live well within your means.

I think variable rate mortgages are a great thing. The reason I like them is because they're generally lower than the 5 year fixed rate, which means I have more money to put towards the principle. That's right I'm still paying the 5 year fixed rate or more when I don't have to. By buying a house I can afford and paying it off quickly I actually end up owning the larger house sooner. All this I discussed in Home Sweet Home.

As for borrowing 95% of your home, I don't really see that as a problem, as long as you're not digging a deeper hole. Debt doesn't have to be a bad word. It all depends on what the money is to be used for. Consumer debt on the other hand is a very bad word. I'll come back to this in a future post. Overall though 90% is not going to hurt us that much and protects the poor decision makers a little from themselves.

Finally, the only way you're making money investing in real estate with 5% down, is if your speculating and flipping. I'm not an investor yet myself, but common sense tells you this is just a bad idea. I saw the effects of this when the housing market crashed here last and people were left owning condos they couldn't afford. Too much risk for me!

I've been researching owning a rental property which I plan to do in the future. Even with 20% down the profit margin is very small. The real money is made only when the property sells and you have to be able to stick it out long term. With 5% down you're using your own money while you wait for prices to rise. If it doesn't happen for years to come, how long can you afford multiple mortgages?

Overall, I think these changes are for the best. They won't cause a major crash or restrict the market too much, which could be devastating to the economy right now. They still allow people to overspend, which while not very smart, is everyone's prerogative. They do prevent the majority of Canadians from going overboard though and seeing as these mortgages are backed by the government, it helps prevent the rest of us from being stuck with their bill.

So what are your thoughts? Is it enough? Should they have done more? Did they do too much?

Life Insurance

2010-02-18T09:00:00.000-08:00

Now here is a topic that most of us don't like to think about too often. This and estate planning often get ignored for as long as possible. However, if the unthinkable does happen, I don't think anyone of us wants to leave our loved ones hurting both emotionally and financially.

Like everything financial, you should try to keep emotion out of it as much as possible. Maybe even more so with Life Insurance and Estate Planning. I'm not saying that someone selling these services would tug at your heart string on purpose, but...

OK, so the question is how much do we need and what kind? Some people will tell you how much you need without knowing anything about you. Avoid these people. The truth is the amount of life insurance you need will vary depending on the situation you're in.

Life Insurance is an expense and not a lottery ticket. You should only buy what you need and no more. After all, the insurance companies aren't giving this money away!

People should buy life insurance so that when they die, their living estate combined with their insurance proceeds can allow for the proper winding down of their financial affairs and provide the desired standard of living for their dependents. -- The Wealthy Barber

If you are single and have no kids, chances are your living estate (what you own) is probably sufficient. If not, the insurance you're going to need is very minimal. If you're married with 4 dependent children and your wife is a stay at home mom, then your needs will probably be quite a bit higher. There are a lot of people in Canada that either have way too little or way too much life insurance.

Your living estate plus your insurance proceeds must provide for the following:

1. All debt must be paid off.
2. Enough capital must be available to cover future lump-sum obligations.
1. Funeral Expenses
2. College Expenses
3. Enough capital and other sources of income present to provide sufficient cash flow to support your dependents.
4. Inflation.

You should always insure the person or people on whom you or your family is dependent upon. For a single income family, this is the money earner. However, if the stay at home mother/father were to pass then a burden is left with the surviving parent for child care expenses. In this case the stay at home parent should still be insured enough to pay off the debt and to provide enough for child care until the children are old enough to take care of themselves.

If both parents are working and making good money, the insurance isn't really needed for the spouse. There is no financial devastation. If both parents were to die though the children would be left with nothing. So, in this case it makes sense to insure the parents and only pay out when both have passed.

When we think about this, we generally only talk about family members. If you are partners with someone in a business deal though, it may be important for you to consider insuring them as well. Too much to cover here, but just think about everyone who is dependent on you and everyone you are dependent on.

So based on the above, should you insure your children? I think the answer to that is no. Remember this is an expense that it used to insure that the dependents of the insured won't be financially devastated. While this would be very emotionally devastating, it won't be financially. Well no more than any other unexpected expense. You'll recover, but the reverse is not true if you were to die and leave them with nothing.

The only other argument for insuring children is that they may not be insurable later in life. However, only an infinitesimal number of people are turned down for life insurance when they first apply for it. In life you can't avoid all risks. There are alternatives for them if this happens to be the case as well. Personal savings, working spouse, etc.

There are basically two types of Life Insurance, Term and Whole Life. They are exactly what they sound like. One is for a certain term (number of years) and the other is for your whole life. Term is less expensive, but whole life offers an additional bonus in that it has a investment portion.

So, why would I recommend Term? Well for one, the investment or savings that whole life offers is just YOUR money. When you want to use it they offer to loan it to you and charge you interest. Interest on your own money?!? Second, the investment return for Life Insurance is typically not as good as you could get on your own. So if you buy term insurance, you can invest the money you're saving and use it later for free. Finally, eventually you're no longer going to need insurance. Your children will leave home, your debts will be paid off and your assets will more than cover any final expenses you have.

The Wealthy Barbers advice: Buy renewable and convertible non-participating term insurance. This gives you more flexibility than you'll probably need.

A mortgage life insurance is just a life insurance policy with a declining balance. It may be cheaper than a standard life insurance policy, but make sure you are comparing apples to apples.

Banks and auto loan companies will often want try to convince you to insure your debts as well. This may or may not be a good idea, depending on your situation. When your accounts are settled they will take your debts from any assets you have. If you don't have enough assets to cover your debts they won't be passed on to anyone unless they are co-signed. So the only debt you'd be leaving behind is your funeral costs. So if you don't have any assets or insurance to cover your accounts, why would you care if the loan is paid either?

Starving Yourself

2010-02-15T09:00:00.001-08:00

Have you ever starved yourself for any period of time? I'm not talking about a diet, although I'm sure some could qualify. I mean just ignoring those hunger pains and then when the food is put in front of you just want to gorge yourself.

Well lately I've been feeling the urge building in myself. Not with food but with finances. With my wife in school about to finish her second degree and me going to get my first, money has been tight. I've had a decent paying job thankfully, but with few student loans and a mortgage, it's been pretty tough.

The finish line is drawing near now though! She's done in May and will hopefully have a full-time job to go with it! So I can't help but think of what we'll be able to do with the extra cash. The list of wants has been growing the whole while she was in school and we now both feel the desire to gorge ourselves.

However, we all know that you're always left with a sick feeling in your stomach when you do eat too much too quickly and I don't think this would be any different. So, I figured I better start planning how to handle it.

I've already created a budget to account for most of the money. More towards our mortgage, retirement, and debt repayment. All those fun things. Don't worry it also includes a little more mad money, car savings, clothing budget, etc.

I do however think we need to celebrate! I plan to take my wife out for dinner somewhere nice to celebrate. I think we both deserve that. I also figure we could buy something we've wanted for awhile as a gift to ourselves. Not sure what that is yet... too many choices.

Once the new budget is in place and we feel the restrictions lifted a little, I think the feeling of starvation will fade away. We will eventually be able to achieve all the purchases we wanted, but it's just going to take some time to save up the money. That's still a nicer feeling that the bloated feeling of going deeper into debt.

Plastic Debt

2010-02-11T09:00:00.002-08:00

Like just about anything else, credit cards can become a problem if they are abused. And just like I would recommend avoiding alcohol or gambling if you have a problem controlling it, I'd recommend avoiding credit cards for the same reason. But, just like most other vices they aren't evil in and of themselves.

The Wealthy Barber suggests avoiding credit card use altogether. Which is probably the safer route to take for the general masses. If you aren't doing well at tracking how much you're spending then this might be the way to go. After all if you are spending cash you can watch your account balance to see how much money you have left at any given point.

I heard some great advice a few months ago. A credit card should be considered a method of payment and not a method of finance. So whether you pay by cash, debit card, or credit card you shouldn't spend more than you can afford to. If you do that than it really doesn't matter how you pay and it just becomes a method of payment.

I'll talk about borrowing money sometime in the future, but I think you already know that 19% is a bad deal. So if you do need to finance something, look elsewhere. Heck, I'll even give you a better rate than that. ;)

For any of this to work, you don't want to carry a balance on your credit card. So when the bill comes in pay it in full. Which should be no problem if you stick to the budget you created.

So if you can afford to pay cash, why would anyone use a credit card?

Well besides the convenience, and the ability to shop online, you can also earn rewards probably faster than any other rewards program. Everything from free gas to mortgage payments to trips around the world.

These rewards can add up quite quickly if you use your card a lot. In fact I put everything I can on to my card. I just recently switched over most of my bills to the credit card just to increase my points. If I get a student loan or a bursary, I still put the tuition on my Visa and then use the loan amount or bursary to pay the Visa. I'd throw my mortgage on there if they'd let me, but they don't seem to like that for some reason. ;)

I used to avoid annual fee cards like the plague too, but now I welcome them. I pay $20/year on my card which doubles the points I collect. For each $100 I spend I get $1 in bonus dollars. Without the $20 fee I'd have to spend twice as much for the same benefit. That extra $20 will get me about $250 in bonus dollars this year, so well worth it.

Now there are lots of bonus cards to chose from and I thought about writing a posting on that as well, but I have decided against it. I'm using the Desjardins Visa myself and I use the bonus dollars to go into an RRSP. It has a better return on the points for this than any of the others I looked at. I contemplated an Air Miles or Aeroplan Card, but I didn't like the restrictions (limited airlines, dates/times, etc). The flight cards might work out better money wise, but I'm happy with what I'm getting. I might change my mind in the future, but regardless my spending is working for me.

After all, it's free money for just spending what I normally would anyhow!

Lowering Our Propensity to Consume

2010-02-08T09:00:00.001-08:00

First off, I apologize for the title. Being a straightforward personal finance blog I shouldn't use the big economic terms. However, I have to admit that I just love saying propensity. Go ahead... try it... you'll like it!

"Propensity to Consume" is our natural inclination to spend. I figured at some point I'd steer the conversation towards ways that we can save a few dollars here and there. All personal finance blogs eventually do, so this is just the heads up.

The goal of any personal finance blog is to try and help others (and myself) become more financially educated. The ultimate purpose of that, is to of course become wealthier. If you weren't interested in that, there are better things to do with your time than read this. Like researching the next coolest gadget to buy.

I'm not referring to getting wealthier so that we can all roll around in money. Money is just a means to an end. Wealth gives us options and the freedom to follow our dreams. To not live in fear of losing your job, to stop working altogether one day if you so choose, or to travel the world if you so desire. Each person will have his or her own reasons for doing so of course and the list goes on and on.

There are only 2 ways to become wealthier. Either make more money or spend less. If you're always increasing your spending as your income increases though you never get further ahead. Also, for most of us making more money right now is not an option. I will of course discuss making more money from time to time, but I imagine the majority will be more about saving.

I didn't use to be frugal at all. This has actually just been a gradual change for me. I used to hate using coupons and shopping around for a better deal. In fact, frugal is sometimes seen as a negative trait (i.e. cheap). However, frugal just means to not be wasteful. Let's face it, we all have unlimited wants, but our income will always be limited. By carefully managing our funds we can ensure we are working towards our goals and not wasting our limited funds on items that don't truly make us happy.

In the book "The Millionaire Next Door," it describes a typical millionaire driving a used domestic vehicle, living in a rural area in a modest home, and still cutting out coupons. There is a good chance that the people you see driving the fancy cars and living in the expensive homes are living pay cheque to pay cheque and are constantly in fear of losing their jobs. These people probably have a great income, but their propensity to consume exceeds their income.

So, when I am bitten with the consumer bug, I ask myself if this purchase is worth delaying my goals for. Very rarely is the answer "yes."

The Olympics are Almost Here

2010-02-04T09:00:00.000-08:00

Like it or not, the Olympics are almost upon us. Roads are closing, buses are crowded, and the costs have escalated. So you have to wonder if it's all really worth it.

My wife asked me the other night whether I thought the Vancouver Olympics were going to make money or not. So I figured I'd be remiss to not write about it.

I guess the first part is determining how you actually calculate a profit or loss when you're looking at the Olympic games. I read an interesting article in this months CGA magazine that said things like the road improvements and increased security won't be included in the costs for the Olympic committee (VANOC). In other words, these costs are going to be coming from us, the tax payers.

The article also mentioned that costs have increased while sales were lower than expected due to the recession. However, it is yet to be seen if this will result in a loss or not. Even though there have been a lot of games recorded to have made a profit, there has been a lot surrounding these games that have made things more difficult for VANOC. My personal feeling is that the games will probably be around the break-even point. I guess we'll have to wait and see though.

I think more importantly, the benefits will go far beyond the actual events. Athletes, crews, officials, family members, and fans will all be crowding our streets. More people means increased revenues for surrounding businesses. For example, I talked to an employee at a local McDonald restaurant and she told me they already noticed a large increase in business and had to actually change some of their processes to account for it. Hopefully when people see how beautiful it is here tourism and immigration will increase bringing higher than expected future profits.

Also, while a lot of these projects were done specifically for the Olympics, they're not going anywhere after the Olympics is over. If planned well these new facilities will be able to bring in future profits. Plus we all get to enjoy the new roads to Whistler.

The timing for a lot of construction workers probably couldn't have been any better considering the slow down in the housing market and the recession. These projects all mean lower unemployment. This leads to less employment insurance payouts and more income tax revenue for the government. These workers then spend the money they earn which gets taxed and gives another business more money. In economic terms this is called an economic multiplier. Government spending increases income, which people spend, which increases income, etc, etc.

Of course the government will tax this increase in income, for both individuals and businesses. This of course brings in more revenue for the government and allows them to recoup the cost surrounding the games. Even the worst case predictions that I read expect this money to be recouped in no more than 10 years in tax revenue alone.

I know one complaint was that the money was not spent on the homeless or health care. While I think these are noble expenses I don't think these things would have paid for themselves like the Olympics will be able to. To me this is like saying paying down the mortgage is the most important expense. That doesn't mean you don't buy groceries or keep your eyes and ears open for investment opportunities.

So while this is going to be inconvenient for us for the next little while, I do think its going to be a good thing for this city, province and country. As always I'd love to hear your thoughts? Don't be shy!

Easier Said Than Done - Part II

2010-02-01T09:00:00.000-08:00

Continued from part 1...

So here's the budgeting experience so far:

I'm using Quicken to track all our expenses. It really helps to see trends and quickly check previous numbers. Turns out just entering in the purchases isn't enough though. So, I went in and updated the budget number so that I could more easily track how we're doing.

The first thing I noticed was that that I hadn't updated some of the expenses. It makes a big difference when my actual Life Insurance expense is twice the budgeted amount for example.

The second thing I noticed was that while we were mostly on budget for the budgeted items, we added some non-budgeted items. These weren't accounted for elsewhere, so we ended up overspending for the month. For example, we bought some movies earlier this month, but there is no budget for it. So if we stick to the budget for everything else, we're still left going over budget. Buying the movies is fine as long as we recognize that something else has got to give.

The third thing I realized was the importance of categorizing items properly. The two biggest examples of this were vacation spending and loans. When we went away for my wife's birthday, we bought alcohol and food for the trip. We also bought a few items that some friends had asked us to pick up. The problem was that these items were all categorized as food. You can just imagine what that did to our food budget. So to track these expenses more accurately, I actually created two new categories: Vacation:Food and Loans.

Lastly, I noticed that our small "savings accounts" weren't being tracked at all. Haircuts, car maintenance, eye glasses, etc. These are expenses that I've broken down into monthly payments, so I that I'm not hit with a huge bill when the time comes. This month was the time we buy the cat his 20lb bag of cat food for example. That kind of throws that budget out.

Once I get this under control, I should be able to find more money to throw at the debt. For example, I budget 250/month for gas. If I only spent 200 one month it's not likely I'll need 300 for the next month, so I can then throw this extra money towards the debt. Also, the next time the car maintenance comes around I'll actually have some money set aside for it.

So, I'm going to keep working at it and I'll let you know how it goes. Overall, I say I appreciate more now than ever the importance of watching your spending closely.

So how do you keep track of your finances? What's working what's not? Do you think it's worth the effort?

Easier Said Than Done Part I

2010-01-28T09:00:00.001-08:00

The reason I created a spending plan in the first place was so that I could pay my debts down faster and to not have to go into more debt in the future. Having the budget gave me that general framework, but it ended up being quite easy to just forget about the money at the end of the month. Then money like my poker savings just disappeared.

So now that I've said I want to budget my money, here comes the tough part. Actually doing it.

I don't currently have a lot of wiggle room in my budget. About the only number I can play with is the amount of debt repayment that I make. With both my wife and I in school (and some previous poor choices) we've managed to get a substantial debt built up. We're not really living outside our means now, but we have a pretty big hill to climb and I'd like to pay it off as quickly as possible.

My biggest motivation is to get out of the condo I'm in. Both to get away from my loud bass playing neighbors and so that we can start on a family.

So I started to tackle the job this week. I'm a pretty organized guy and pretty frugal so I have to confess I figured I'd jump on here and write about some minor tweaks I made and give some great advice about tracking these numbers. Unfortunately I have to admit, it's not quite as simple as I thought.

First off using a credit card complicates budgeting quite a bit. I can see why most financial books recommend avoiding them now. It's not just about carrying a balance. The concept of credit is buy now and pay later, so this months bill is for last months purchases. Mix in cash and it gets very confusing.

It probably wouldn't be so bad if I put the cash aside when I made the purchases to pay the bill next month. At this point though I'm essentially a month behind with not a lot of hope of catching up. In hindsight I shouldn't have let that happen, but let's move on...shall we.

I still won't say credit cards are bad, but they do make for some interesting budgeting issues. In fact, I wrote a posting on why I use my credit card for almost everything. I'll post it in the not too distant future.

At some point I'd like to catch up, so I'm not a month behind (tax return perhaps?). In the meantime, I tally up this months surpluses and deficits and use the difference to pay more (or less) on the line of credit in the following month.

My advice to anyone just starting out is to put money aside when you make those credit card purchases.

Part II next week...

Doing Magic with Numbers

2010-01-25T09:00:00.000-08:00

Time for a little magic!!

Last posting I talked about my poker strategy. I mentioned at the end of it that I had some problems tracking the funds. Here's the first part of the magic trick...the money disappeared.

That's when I noticed that there is a problem with my budgeting technique. I talked about the benefits of budgeting before, but I realize now that creating a budget is just the first step. It gave me a general idea of my limits and for the most part I kept within those constraints even though I wasn't checking the numbers regularly. And, if it wasn't for unexpected expenses it probably would work just fine.

When it comes time to pay the Visa and we need to decide how much to pay, the waters always seem to get a little muddy. We sort of just eyeball the balance in the chequing account and figure out how much we can comfortably afford to pay and still make the next mortgage payment.

To clarify, we don't leave a balance on the Visa ever. However, in this particular case we had some unexpected car expenses and some frivolous (but glorious) travel expenses that needed to be taken care of. So the question was how much to take from the chequing account and how much from the line of credit.

So using the eyeball method and seeing this inflated chequing account, we included my poker winnings in the amount to pay from chequing. Not intentionally of course, but I hadn't really been watching what was in there too closely. Well...there goes my poker plan...or so I thought.

Now here where the real magic begins. Ignoring my other expenses for the time being, let's look at just the car repairs and the poker savings. The poker winnings in this case were $200 and the car repairs were $3000.

Scenario 1:
I put my poker money into a savings account and draw the full $3000.00 from the line of credit.

The result: +$200.00 in savings -$3000.00 on the line of credit
Net result: -$2800.00

Scenario 2:
I use my poker money to pay down the visa and draw 2800 from the line of credit.

The result: $0.00 in savings -$2800.00 on the line of credit
Net result: -$2800.00

Prest-o change-o! The result is exactly the same. Actually I'm better off in scenario 2 because I save the interest on the $200 for as long as I don't pull it back out. And by changing my thinking the disappearing poker money comes right back into view. It's just a number in a column somewhere. Or, it would be if I had been tracking this better.

Keeping that in mind, I don't think it makes a lot of sense to have separate accounts for all these savings (i.e. poker, vacation, car, haircuts, etc). Especially when you have a large outstanding debt like I do. So instead of earning little to no interest I can put these things into the line of credit and save interest. This only works because I can pull the money back out again when I need it though. Putting these towards the mortgage for example would mean the savings would be lost.

The problem is only how to properly track these amounts. I'll discuss this more next post.

Poker Strategy

2010-01-21T09:04:00.000-08:00

I'll be the first to admit that poker probably isn't a good place to try to make money for most people. I gave it a shot but so have millions of others around the world. So, why would I be talking about poker in a personal financial blog??

I have two reasons. The first, is because I'm pretty happy with myself for the system that I came up with. The second is, it leads up to an interesting budgeting problem that I wanted to talk about. I thought about getting it all done in one posting, but then I thought "what's the hurry?".

Before you get all concerned about me here, poker isn't part of any long term financial plan of mine. It's just a hobby that I enjoy to do and I budget $60/month to play. So it's not like I can't pay the mortgage if I lose a lot in a month. For some people that could happen because they have an addiction. Clearly I'd advise them not to play.

I consider my poker money a sunk cost. That's a big economic word for money that can't be recovered once spent. So as I put the money on the poker table I count it gone. Any winnings then are free money. In the past that generally meant that I went out for lunch or bought a video game or something.

Probably not the most practical money management, but it's the way the human mind works. At least mine! It would certainly take at least some of the joy out of winning, if the money went towards groceries or Visa payments. We had those bills covered beforehand anyways. Otherwise the gambling would be irresponsible win or lose.

At the end of last year I won two fairly large tournaments. Large for me anyway. I spent the winnings from the first on a bunch of video games for my PS3. Then a month later I won another tournament. This time I wasn't sure what I wanted to do with it. So I hung onto it.

That's when I came up with the idea to save up my winnings. The winnings can then accumulate and I can draw them out to play more, play at a higher stakes, or better yet fly to Vegas! Wish I'd thought of this sooner.

One issue did come up through all of this though. How do you keep track of this money? Next posting I'll explain how I lost the winnings and then found them again through the magic of numbers.

Anyone else with a hobby that pays? What do you do with the money? How do you keep track of it?

Financing the New Car

2010-01-18T09:00:00.000-08:00

OK, Thursday I talked about buying a new car. Today let's discuss the financing options.

Option 1, is to lease the vehicle again. I'm sure there are valid reasons to do this and if you think you have one talk to an accountant. I think for the most part these benefits only apply to businesses and only certain ones at that. Even if you want a new vehicle every 2 years it's cheaper to buy the car and then resell it than it is to continue to pay the lease amount. It's certainly not worth it to me when I want to buy a used vehicle and drive it until the wheels fall off. A lot of companies are starting to drop this option as well anyhow.

The only reason I leased the first time was because I bought a car I couldn't afford. Mind you I think they were pushing the lease and compared a 2 year finance to a 4 year lease, but that's beside the point. I don't think it's smart to buy a car you can't afford any more than it is to buy a home you can't afford. So, for me this option is out.

Option 2, is to finance the vehicle. You could finance it through the bank or through the car financing company. One thing to take into consideration which I didn't the first time around, was any financing fees. The car dealers financing options are almost always going to look better than the banks. However, when we financed the dealer charged us a $500 fee. They wanted to charge us $1000 but I told them there was no way that was going to happen. Even with the higher interest at the bank it would have been cheaper to go with them it turns out.

An attractive offer from the dealerships is 0% financing. Again though, this might not mean what it sounds like. Read the fine print. 0% might exclude any offers you would have gotten if you paid cash. It also might have extra fees to finance, etc. Borrowing the money from the bank might allow more bargaining with the company for those cash incentives.

If you have enough room on a line of credit, you don't even need to go to the bank and ask for the loan. If I buy directly from a personal seller and not through a dealership, dealership financing won't be an option anyhow.

So, I'm going to be looking at some form of Option 2 because I don't have any other funds set aside. I'll use the line of credit if I can free up enough room, but otherwise it will be some sort of financing. However, there is a 3rd option that I plan to use on every vehicle from now on.

Option 3, is to pay cash from a good old fashion bank account. Sounds crazy I know, but let me explain before you give up.

Let's say I borrow the $12,600 from the bank to buy a 2yr old Ford Focus. Ignoring the $1000 push, pull or drag event. Assuming I finance that over 4 years at say 5%, the monthly payments are approximately $275/month. Here's the trick, once I'm done paying off the car, I continue to make the payments. Only this time to myself. Assuming the car lasts my projected 10 years, I then have $13,200 sitting in the bank for the new car.

The next car becomes even cheaper because I have longer to save for it. I could put $130/month aside and be able to pay cash for the next vehicle. You get a much better feeling of satisfaction when you pay for something with your own money. Not only that but earn interest on your money instead of paying interest on the money borrowed.

Now, if you're thinking you can't afford to put the money aside monthly, then how are you going to afford to make the higher monthly payments to finance it yourself? Somehow we always find a way. That's the same sort of mentality you have to bring to this to make it succeed.

Now that you're talking about a significant amount of savings, let's look at a way to make the money grow even faster. This results in lowering our monthly car payment even further.

For example, if you put $125/month aside into a saving account and want a new vehicle every 8 years. After 1 years of savings, you can buy a 7 year GIC. Then the following year you buy a 6 year GIC, etc. Earning much more interest than in a simple savings account. This technique is called laddering. I think the 5 year GIC might be a max, so you might need to buy a 5 year then a 2, but you get the idea.

Using INGs current GIC numbers, you end up with $12,846.59. More than you need with $5 less a month. Money you earned rather than gave to the finance company. If you compared 4 years on your own to 4 years with the finance company you save at least $25 a month. Not to mention the benefits that paying cash gives you.

The best part of all of this is that this technique applies to every big purchase, not just cars. Reversing the cycle of borrow, buy, repay can save you a lot of money in the long run! Not to mention the great feeling of not being indebted to anyone.

I'm going to use this technique on my vacations, flooring, and new electronics as well.

As always I'd love to hear your thoughts.

Thinking about a New Car

2010-01-14T09:09:00.000-08:00

I've been thinking about this for awhile and figured I'm running out of time to figure this out. Our Honda has had a good run and while technically running fine now, it's getting up there in age. Car years are like dog years right?

When I leased it originally, I wasn't all that financially savvy. So I didn't give it much thought. My wife wanted a Honda and I figured we'd get rid of our two old vehicles and buy brand spanking new. I figured it would pay for itself just by saving on all our repair costs. Well...I was wrong. Leasing was the only option for us (or so I thought) because of the high cost.

Almost 8 years later it is paid off and I'm thinking of doing it all over again. Only this time I wanted to give this some more thought before I make this big purchase.

OK, now for the details. I'm not married to any make or model although I was pretty happy overall with my Honda Civic. I don't want or need a luxury vehicle and in fact never plan to own one. Although, I wouldn't mind a few more features this time, like automatic windows, mp3 player, etc. My preference is for a new vehicle, but I'm not opposed to buying used.

Seeing as I'm not devoted to any brand like I know a lot of people are, I have to consider domestic vs import. Those terms are used lightly these days as the parts for either are made and put together around the world. I searched and searched for some good statistics, but all I've found are opinions. From what I've gathered the life span and repair bill are roughly the same no matter which option you choose. I'm talking about cars built in the last 10 years or so. Once the vehicle becomes too costly I plan to move on anyhow and a newer vehicle should have few problems regardless of the make and model.

Just like our retirement calculation we have to make some assumptions. I'm going to assume the average car has a lifespan of 300,000km or about 10 years. When I did some searching I found the average age of a vehicle in the US to be about 13 years old.

For my comparisons I chose Ford Focus for my domestic and Honda Civic for my import. "Why?" you ask. I just wanted to keep the comparison simple for now and the make/model doesn't matter too much. I gave them similar features that I consider musts like A/C, floor mats, power windows/locks and MP3 players. The actual vehicle I decide to purchase might be completely different, but it gives us a general idea about which option will win out. Although if import wins out, Honda is likely to be my next purchase.

If it sounds like I haven't made up my mind yet, it's because I haven't. You'll be reading the results as I figure them out.

So my next question is whether to by new or used and when to trade the vehicle in. This is where the import/domestic comes into play again. The domestics are obviously cheaper and will therefore come out ahead in most scenarios. However, if I plan to buy a new car every 2-5 years, having a vehicle with a higher resale value is important. If I plan to drive the car into the ground like I did this time, then the low depreciation of a Honda/Toyota is irrelevant.

One last thing about depreciation. I've often looked at a 1-2 year old Honda and wondered why anyone in there right mind would buy used over new, when the saving was so small. The mistake I was making was that I was looking at the list price. The real price is going to be quite a bit higher on a new vehicle once you factor in taxes, financing fees, rust protection, etc. These used vehicles have all that included.

So let's run some numbers and find out who wins...

	Ford Focus SE	Honda Civic SE
New	21,805	25,365
2 Years Old	12,560	18,511
5 Years Old	6,430	13,050

The 2 year old and 5 year prices were calculated using a depreciation calculator not actual prices. Although I did find the actual values to be pretty close to this.

I broke the costs out by the monthly amount in order to make the comparison. For example, a 5 year old ford every 5 years would cost $107.17 ($6430/5yrs/12months). The new Honda every 10 years would cost $211/month.

If you want a new vehicle every 2-5 years, the Honda wins out due to the lowered depreciation levels. In fact if it has to be a Honda you're better off buying a 2 year old vehicle and keeping it for 8 years than you are buying a 5 year old every 5 years. Odd I know! This phenomenon doesn't happen with Ford.

If you're looking for the best deal overall though, the 5 year old Ford wins out. So it's not that surprising then that the wealthiest people in the US generally buy used domestics. I learned that tidbit from The Millionaire Next Door (book review one day maybe?).

Preferences would obviously take a big role in this decision. For me personally I can't justify the extra cost of an extra $100 per month (plus the financing costs) to own a new imported vehicle. I have better uses for that money. However, I have decided that it is worth it to me to get the 2 year domestic over the 5 year old domestic. The cost difference is under $30 more a month, but it's worth the piece of mind to me.

I'll talk about how I plan to finance this next. This topic has already grown way to large.

So, what do you think? Is the extra $$$ worth new or import to you?

New Years Resolutions

2010-01-11T08:11:00.000-08:00

Happy New Year Everyone! I suppose this should have been last weeks topic, but I had to finish up that series first. :)

I'm not big on New Years Resolutions. What I mean by that is I don't like waiting until the new year to resolve to get something done. If I resolve to change my life in March I start in March, not January of the following year. If I fail in February, I don't say "oh well, there's always next year".

I do believe in resolutions though. I also believe in "clean slates". If I fall short of my goals, I dust myself off and start again. Depending on the goal, that might be the next day, week or month. For example, my weight loss goals this past year were weekly and when I gained or lost little in a week, I just started fresh the following week and carried on. It sure helps prevent getting down on yourself (or at least keeps the mourning shorter).

So, if I'm opposed to "New Years" resolutions, why am I doing one now you ask? Well, it's only because my latest resolution happened to fall in January. :)

Ever since I did my budget (years ago) I've been staring at the big eating out number. I keep feeling like there isn't enough money to go around and it's really the only number I can play with at the moment. It doesn't feel like we're eating out that much, but every month we seem to spend about $300 on dining out.

I know what some of you are thinking right now! Before you freak out on me for that number, make sure you know what your number is first. I was very surprised when I found out mine!

So we resolved to cut this eating out number down. It's already been tough and tempting to break this resolution. Especially when we're both tired after work/school or when I wake up late and don't want to pack a lunch. What keeps me going is knowing how much we can save by eating at home and what we can do with that money.

I also just don't make it an option. When I sleep in (which is always by the way) I just tell myself that buying lunch is not an option. After all if I'm behind by a few minutes I still need to brush my teeth, get dressed, etc. I'd never cut those things out when I sleep in, so I just make packing a lunch one of those things.

I suppose I could have also resolved to pack my lunches at night and go to bed earlier, but one man can only do so much! ;)

Another resolution that I made, is to eat less processed foods. Why? Because it's generally cheaper and better tasting to make the food "from scratch". Less chemicals in the body probably won't hurt either.

While convenient, the processed foods don't really save all that much time.I already make my own pancakes from scratch and have often mocked the use of instant mix. Being the hypocrite that I am though, I buy pre-made patties, microwavable lunches, etc. Honestly I don't think the increase in time will be that significant, while the health and financal benefits will be.

Anyhow, wish me luck. What do you think? What resolutions did you make?

Living Wage...More Like Living Nightmare

2010-01-06T19:02:00.000-08:00

Wow, my wife told me about this yesterday and I'm still fuming over it today. As part of her public nursing she had to sit in on a "lesson", "sermon", I'm not sure what to call it. She was afraid to speak up and I can't blame her. It would be like ending up in a gay bar and trying to spout off the sins of a homosexual relationship. Or on the flip side shouting the benefits of a homosexual relation in a strict southern baptist church. No matter how absurd the comments seem to you, you either look for an exit or bite you tongue and wait for the end to come.

So, what am I so upset about. Well the whole thing actually. The horrible treatment of the poor, including not taxing the rest of us enough to buy them a nice home and fancy clothes for one. Minimum wage being too low to live off of (which I had already planned to address in some future post anyhow). Along with a slew of other things that just get my blood boiling.

What really took the cake though is the Living Wage suggestion. If you don't know what it is, it's a minimum wage that is set based on the cost of rent. They've determined that rent should be affordable for everyone that is working 40 hours a week at no more than 30% of your total income. Unlike the minimum wage it doesn't require legislation to rise. So if the cost of rent goes up, so does your wage.

That equates to $16/hour in Vancouver!!

So why does this get me so upset? Well, it's because I picture some 12 year old kid working at McDonalds earning $16/hour, while a Software Developer that just spent 20,000 on an education is doing a co-op for $20.

I see the potential disaster for this being incredible! How much does a Big Mac cost when you have to pay your employees that much? How many people do you think a company can keep employed at that wage? Why would anyone go to post-secondary when you can get a job that pays that well out of high-school? Heck, why finish high-school?!?

What happens to the rest of the industry? Does a Doctor's wage sky-rocket the same amount as well? If so, they still have the same margin over the minimum wage person as they did before. Which means they buy more, which pushes prices higher until the minimum wage isn't enough again. "That will be 1 million dollars for that milk please sir." Crazy!!!

Finally this is just an escalating nightmare. With the increase in people able to afford rentals while the supply remains the same the rents are going to sky-rocket. Which of course increases the wage again. Can you say "spiral of death"?!?

Another problem that occurs with increased wages is that it becomes cheaper to replace the labour. Already we're seeing self-checkouts at grocery stores, but it wouldn't be that big of a stretch to see these at fast food places. Automated floor cleaners like the automated vacuums, etc, etc. Entrepreneurs are a resourceful bunch after all.

If labour isn't replaced, the other option to the business owner is to not hire full time employees. After all the living wage only applies if you work 40 hours a week. So more jobs end up going part time and people are then forced to work 2 part time jobs at $8/hour a piece. Not exactly the solution they were hoping for eh?

OK, so maybe a little dramatic. I realize that this would probably balance out in the long run. After all, I'd want to get in on these higher rent prices while I can. Builders will jump at the chance to build more apartments to rent out and investors will jump at the chance to supply them at that cost. Of course increased demand in real estate will force that market up too.

I'm all for helping someone get on their feet, but I don't see why we feel the need to help someone sit their fat ass on the couch. We're saying it's OK, not to push yourself, not to go to school. It's OK to piss your money away on drugs and alcohol. It's OK to make horrible decisions. Because no matter how little ambition you have you will be able to afford rent, be given clothing, and given a job that pay 3 times what it's worth.

Phew! Glad I got that off my chest. Now I probably made other people that are reading this feel like my wife did in that meeting. However, if you disagree I promise to be gentle. ;)

I was trying to keep the blog to once a week, but I have too much bottled up, so I'm going to up this to twice a week for now. Monday and Thursday I think.

Retirement Percentages

2010-01-04T00:47:00.000-08:00

OK, last post in this series...I think.

So what's the magic number. 40% of your last years income, 70%, 100%, or some other number? I don't think there is a magic number, but here are my thoughts anyhow.

The argument for 40% of your income is that you spend 30% on investing and 30% on your mortgage. So with 40% you cover all your expenses. But really, I could live with a lot less than that too. In fact, my salary is above average, so I could live on someone else's 40%. Or, if I become a CFO, I could make over 250,000 a year (hard to imagine, but I can dream). So 40% of that might be more than enough.

For me though, I don't want to settle with that minimum. After all, I don't have to go to school to be a junior accountant, but I am so that I can make more money. I'm not all about the money, but it only makes sense to me to get paid as much as I can doing what I love to do. I think it's just smart. So, if I'm not settling for a lower salary now, why would I want to settle for one later.

I plan to pay my home off well before I retire. When I do so, I'll then be able to spend at 70% of my income (using the same numbers previously discussed). I suppose I could save it all, or invest it all, but I'm looking forward to the increased standard of living. More vacation time at that point and I'd like to use it.

Assuming I put the last 30% towards retirement, it makes sense that financial planners tell you you need to make 70% of your last years income. After all, you've been living off of 40-70% most of your working life. You're retired so you no longer need to put money aside for it, so 70% make sense.

However, just like when I've paid off my home I don't want to save the rest I want to spend it. The same logic applies to my retirement. Once it's funded, why wouldn't I increase my spending to 100%?

OK, admittedly I don't need 100% or even 70%. But I don't need to earn 250,000 a year either. If I do earn that much though, I don't want to think of retirement as taking a pay cut. I want to look forward to it and look forward to spending the time and money with my wife as we do whatever we decide to do with our time. If we have any extra we can give it away. I plan to anyhow, but that's another topic.

I plan to enjoy life and my work as I work towards retirement as you never know what will happen in your life. At the same time I plan to enjoy my retirement for as long as possible.

Love to hear your thoughts and any numbers you think will work for you. If you haven't given retirement much thought I highly recommend it!

Planning My Retirement

2009-12-28T13:54:00.000-08:00

Too all my loyal reader, I'm sorry I missed last week. I was in Mexico and while planning to post, didn't quite find the time to pull myself away from the sunshine. Learned some interesting things there and I'll have to gather my thoughts before posting about it. In the meantime, let's carry on...

Seeing as I asked the question about what you plan to do in your retirement, I figure I should try and answer the question myself.

My answer has always been travel. Well it has, since I've been married anyhow, as my wife loves to travel. Have to admit, that it didn't take me long to get on board though! :)

But what does it mean exactly to travel in your retirement? How often will we travel and for how long will we be gone? Where do you go? I have to admit after about two weeks anywhere, I can't wait to get back home. We do live in the most beautiful place in the world after all! Also, my family and friends are here and if I can't take them with me, I'd at least want to run home to see them again.

I think the answer for me, is to go whenever and wherever I want. Probably every few months or so.

I also have plenty to do in between trips. Big assumption here, but I'm sure I'll have my hands full with children and grand children for one. When I'm not traveling or spending time with the family I'm sure you'll find me fishing a lake or more likely playing in a poker tournament somewhere.

On top of all that, I don't actually think I'll ever stop working entirely. I'm planning on having some businesses to over-see as well as a few rental/investment properties. I'm also thinking of working as a financial planner at this point for a few select customers. If they'll have me. ;)

I want to work without having to work. I want it to be my choice. So obviously to make that work I'll need to make sure my investments are capable of taking care of themselves while I'm out playing.

I'll eventually be talking about how I plan to get there, but I think it's helped me at least to get it written down. Let me know what you think.

One last thing....before anyone suggests golf, I'd rather get all my teeth extracted!

Retiring at 45?

2009-12-14T09:00:00.000-08:00

I've stumbled across a very interesting blog that I've been following. Tim has decided he's going to retire at 45. That really intrigued me and got me thinking about my retirement plans again.

At first the idea of retiring at 45 seemed just crazy to me. So I was intrigued and had to read on. I thought maybe he was just a little bit crazy and/or naive. I decided to read his blog starting from the beginning and I've only just now gotten to 2007, but already I can tell that Tim has given it some thought and has a viable plan.

The "conventional wisdom" or the notorious "they", recommend 70% of your last years income. The Wealthy Barber recommends 100% and I thought he had some good reasons for it. Tim figures all he needs is 40% and again he has some good reasons for it.

I was already planning on writing about retirement and advocating for the 100%. However, I was falling into that same old trap again. There are no magic numbers and no one should give you a number without knowing what it is you want and plan to accomplish. That number is going to vary for everyone based on the answers to a number of questions.

Why do you want to retire?
What does retirement mean to you?
What do you plan to do in your retirement?
When do you plan to retire?
How much money do I need realistically to make that happen?

I know its hard to plan for something so far in advance, but I also think it's necessary. Especially if you have high hopes for your retirement. The younger you are the more options you have. Compound interest is amazing and the younger you start investing the more impressive the results will be. However, deciding you want to retire at 55 when you're 53, might be a tad too late.

I have a hard time forcing myself to go in to work, so retiring at 45 does sound kind of appealing. Tim wants to write full-time and by having enough to pay his expenses through his retirement savings. Allowing him to focus on his writing career without worrying about having to make a living from doing so.

For me, that's the key issue. Why do you want to retire? If you're happy doing what you love to do, why would you want to stop? 45 is still 13 years away for me and I don't think I could handle the software industry for that much longer. Heck 6 more months, is feeling quite painful. That's why I'm studying to be a CGA and at least right now I can see myself working as an accountant that long past the age of 65. Doing what you love has to be the most important thing and I don't think you'd want to put that off any longer than you have to.

I'm not sure how the retiring at 45 plan would work here in the lower mainland though. Tim's home and mine have about the same value. However, he plans to retire in that home. I figure I have at least 2 upgrades to go before I'll have a home to retire in. He's in Saskatchewan by the way.

I think 70% is probably a safe number to throw out to the masses. Especially if you don't take time to determine what you want to do when you retire. I still recommend sitting down and figuring that out. Hmmmm... I suppose I should do that myself too. Maybe something else to blog about. :)

I'm still leaning towards supplying 100% for a few reasons, but I'll get to that on a future post. The point here is to think about what you want to do in your retirement and when you want it to start. Also, I really encourage you find your passion and find a way to make a living at it.

If you want to share your retirement plans, I'd love to hear them!

In Favour of the HST

2009-12-10T09:50:00.000-08:00

I was getting ready for work this morning and watched the news as I normally do. This morning I was watching the Restaurants take on the government as they try to get the HST removed from dining out. I'm actually all for their fight, but I thought some of the scare tactics they used to be little over the top.

I probably won't make any friends saying this, but I'm actually all for the HST in general. I'd like to see a fee more exceptions added like hair cuts and dining out, but on the whole I think it's a good idea.

Combining the GST and PST in it's own just makes sense from a collection and administration stand point. The less government workers we have to pay the better. My apologies to any government workers out there, but from a tax payer stand point it just makes sense.

Also, what most of us don't realize is that you're already paying the PST on a lot of items that are "exempt". If someone has to pay PST on a component somewhere along the line and they're not allowed to claim it back, it becomes part of their cost. They're not going to lose money so they increase the price. Not only that, if that product is bought by a manufacturer, they pay the PST on the component that already includes PST and because they can't claim it back they pass it on to you. So in some cases you're paying PST multiple times over.

Once these companies are able to claim the PST back they'll be able to exclude this from their prices. Now, every time I've said this people tell me that companies won't do this. Well, now that I'm knee-deep in my Economics class, I'm reminded of what these people are forgetting or are unaware of. The Laws of Supply and Demand.

All other things being equal, if the price of a product increases the demand will decrease. Pretty straightforward. People polled are already saying they expect to spend less once the HST is implemented. So, if this happens businesses will start to sell less. Given they have the ability now to lower their prices without an impact to their bottom line, which will in turn increase demand, they'd have to be stupid not to. All other things being equal, if the price drops the demand will increase.

In fact some products like computer hardware and lumber exports are already looking for every opportunity to get their prices lower. This gives them that opportunity and I don't think you'd have to wait that long to see these drops.

On the other hand, services like haircuts and restaurants don't have this cascading tax to draw from. So they're left having to lower prices without the savings, or live with a reduced demand. So I can understand them being concerned.

It's possible that the decrease in prices elsewhere will alleviate the strain people will feel in these areas and they won't decrease their demand. Although I don't really see I have an alternative to getting my hair cut other than doing it myself (like I said no alternative). As for food...

We're still going to have the PST portion exemptions on certain products, not completely finalized yet. Also, if you didn't pay GST on something before you're not going to pay the HST on it either. I'm not going to stop eating out because of an extra $2 on a $30 bill either. Eating out has always been much more expensive than the alternative of eating at home. But we do it when we're in a hurry, to celebrate, to see friends, etc. I don't see those things changing.

I'd still like to see the restaurant exception added, but I don't like the restaurants saying people will be let go, tips will go down, etc. Restaurants will close, carnage, end of the world in 2012!

Like everyone, I'd rather pay less taxes. However, as taxes go, this is probably the best one I've seen.

Love to hear your comments, although I do expect a little backlash. Assuming anyone is reading this ;)

Emergency Funds

2009-12-07T14:12:00.000-08:00

I was planning on posting about something entirely different today, but something came up that I thought I should write about today. I already had the other article written along with several others, but they can wait. Assuming anyone is reading this I don't want to overwhelm you by posting them all. :)

I took the car in for servicing today and I got the bad news that our transmission is shot. He seemed to expect me to just buy a new car. Having talked it over with my wife, we took the advice from the adage "the cheapest car to own is the one you have". I plan to talk about that one day and how we plan to buy a new car with cash up front. But, for now, I thought I'd look at how we're going to pay for these $1500 repairs.

So of course we had to draw from the 3 months of savings from our emergency fund right? I wish! Who has that kind of money sitting around anyhow? The truth is if, I did I'd have better uses for it anyhow. After all why would I want to earn 1% in a savings account when I'm paying over 5% on my mortgage and 3.25% on my line of credit.

Don't get me wrong, I think an emergency fund is a good idea. I just don't think 3-6 months salary is feasible or even smart. Once the other debt is taken care of think it makes sense to save enough for some unexpected repairs. The amount would depend on your comfort level, but I'm thinking a few thousand should suffice for my needs.

I wish I can say that's where I'm taking these funds from this time, but no such luck. I haven't built it up at all. What am I going to do now? What would I do if I needed more than I had, or was laid off for an extended period of time? My answer, is the Home Equity Line of Credit (HELOC).

If you think of it as an insurance plan it works a lot better than any others that I'm aware of. You don't have to pay a monthly premium until you actually borrow the money (also known as interest). The minimum is usually only the interest payment.

You will of course need to pay it off and you can't (and shouldn't) abuse it for non-emergency use. However, it can help you to get through a pinch. Like the one I'm experiencing today.

Just thought I'd share in case you were thinking that saving 3-6 months salary would be next to impossible too. This might be a better alternative.

Spending Plans

2009-12-03T09:00:00.000-08:00

If I titled this posting as Joys of Budgeting, I wonder how many people would have read on. Most people I've talked to, aren't big fans of budgeting. I think it's because most of us look at budgeting as restricting our spending. However, it's income that restricts our spending, not the budgets. At least we should be restricted by our income. Spending more than we make is a recipe for disaster.

A budget is just a tool to help us to ensure that our money goes where we want it to go. It doesn't mean the end of all fun shopping. You determine what you want to spend the money on. Whether it's movies, clothes, a new car, etc. It's a plan on how to spend the money the way you want and it's only as restrictive as you want it to be, or your income allows. That's why I used the term spending plan, as I think budgets make everyone immediately think of "tightening the belt".

In fact I personally find it quite freeing and not restrictive at all. When money is tight we have a tendency to avoid spending all together and when we do spend we feel guilty. At least I do! With a spending plan in place, I know what I have money set aside for. So if I have a video game budget of $50/month, I don't feel guilty about buying a $40 game with an otherwise tight budget. The savings and the debt repayment were already included when I added the video game budget.

Also, I think it helps to have a little bit of flexibility built into your plan. Wiggle Room, Fudge Factor, Mad Money, or whatever you want to call it. Just some unaccounted extra money, so that if you eat out a little more one month, or spend a little extra on clothes you don't feel guilty. If you start resenting the plan you're not going to want to use it.

Making your plan unrealistic or too restrictive is just going to make you hate it as well. Maybe you'd like to pay off your house in 10 years, but if that means no fun at all, it's not going to last. I've kept a very tight budget for several years while my wife was in school and we both started to go a little bonkers. It just can't last.

If you've tried budgeting before, you probably noticed that the money you planned to put into savings, after all your expenses, never seems to be there. You tell yourself it's just this month and next month will be different, but it never is. I think the reason this happens is because wants often become needs (or feel like needs) and when the money is there you spend it. Therefore, it's important that you pay yourself first.

This doesn't mean that you don't pay your bills, as I think your personal credit is your second most valuable asset beside financial knowledge. What it means is that you put some money aside for your savings automatically. Whether that is off of each pay cheque or at a certain date is up to you. The key is that money is moved so that you don't see it. Out of sight, out of mind. If you're building your RRSPs you're probably already doing this.

So after you pay yourself and you pay your bills, you're free to spend the rest of the money however you want. So if you end up not following the budget exactly, you're still OK. If you eat out more month you don't buy the video game that month for example. As long as you don't exceed your income you're fine.

If you find that your expenses are greater than your income, you are left with two options. You either need to make more money, or you need to reduce the expenses. Either way, the spending plan will be a useful tool in identifying these areas and allowing you to choose what is the most important to you.

If you don't already have a budget in place and you're not sure what things cost, just record your expenses for a month or two with no changes. You might be surprised at how much money is going to different things. Eating out always seems to catch people by surprise. Then decide if that's really the best way for you to spend your money. Keep in mind this is how YOU think you should spend your money, not how anyone else thinks you should. It's your choices and your money!

Home Sweet Home

2009-11-30T09:00:00.000-08:00

Last week I discussed home ownership vs renting. This week I wanted to take a look at owning a little bit more.

Someone once told me to buy the largest home you can afford. I didn't really discuss this with him at all, but it certainly was an appealing statement. After all, who doesn't want to own a large beautiful home. Since then though, I've heard some compelling reasons to do the opposite.

The argument is that if you can afford to make the higher payments for the larger home, you can afford to make additional payments to a smaller home. Most banks allow you to make both increased payments every month and a lump sum payment every year (usually on the anniversary). The amount of these prepayments vary from bank to bank, but they all go directly to the principal amount.

The other way to increase your payments on the home is to get a shorter amortization. Meaning you pay your home off in 15 or 20 years instead of the standard 25 years (or 35 for a lot of people in Vancouver).

By paying this less expensive home down faster, you pay less interest and more principal. You can then end up owning the home you originally wanted (or a better one) mortgage free faster.

Stealing some number from a seminar I just had with Doug Fordham, CA, here's an example. Although the number are a little low for the Vancouver area. For simplicity it ignores housing value increases.

If you have $20,000 down and can afford $1,500 per month you can either purchase a $250,000 home with a 25 year amortization or a $175,000 home with a 12 year amortization. If you choose the $175,000 home after 12 years you're mortgage free and can then sell the home and then buy the $250,000 home. It would then only take you 5 years to own the $250,000 home. 8 years sooner than buying it directly. You can then either move to a bigger home again or invest the difference. Either way, you are way ahead by not buying the largest home you can afford.

The other nice thing about buying a home that is more affordable, is that you don't have to panic when interest rates rise 1%. Which also means you can take advantage of choosing a variable rate interest rate. Or, if you're not comfortable with going variable at least you can choose a shorter term.

The Wealthy Barber Recommends a 5 year fixed rate and it is one of the only things I disagreed with in the book. According to Dr. Milevsky's Research Findings, choosing a variable rate mortgage would have saved consumers $20,000 in interest payments over 15 years (based on a $100,000 mortgage). It also states, consumers would have been better off borrowing at prime rate (variable) compared to a 5-year fixed rate 89% of the time.

With Variable your mortgage is generally lower than the fixed rate too. So if you pay the same as you would have with fixed you end up paying more of the principal down every month.

Couple other things to consider when you are purchasing a home. If you put less than 20% down you will have to get a high ratio mortgage, which means you have to pay for CMHC insurance. Also, you may want to look at the different mortgage options available. Right now I'm looking at the RBC Homeline plan. It's a mortgage with a line of credit (LOC). As you pay down the mortgage, the room on the LOC automatically increases. So you don't have to go beg for money at the bank when you need it later.

Something I seriously considered and ran the numbers on over and over again was moving. BC is the most expensive province to live in, in all of Canada. Over $200,000 more to live in Vancouver than Calgary or Toronto for example (the closest cities in pricing to us). BC in general is $100,000 more than any other province.

However, we decided we love BC too much to move. Living in BC is a choice though and we recognize that it has a cost. So while we could own a large single detached home 20 minutes out of Ottawa, we've decided we'd rather buy a town home and stay here in Surrey, BC. The cost for the two homes is about the same. Now that I recognize that as a choice though, I'm not resentful about owning a town home when I'd rather have a detached home. Like I said before, it's all about the choices we make.

Throwing Away Your Money

2009-11-23T13:33:00.000-08:00

I used to be quite convinced that renting was just throwing your money away. Over time though, I've learned that everything is not quite so black and white.

I like what was said about it in The Wealthy Barber. It states that shelter is a necessity and there are only two ways to get it. You either rent or you own. It's no more throwing away your money than buying groceries or clothes.

If you think of owning as an investment, like most investments, you need to be in it for the long term. Prices fluctuate, there are market corrections, and in the short term the value of your home could decrease. So one obvious time where renting makes the most sense is when you don't plan to live in an area for very long. Also, sometimes the area you want to live in might not be a great investment area. So you can't count on the home increasing with value or increasing with a decent return on investment.

So like everything else you need to evaluate whether renting makes sense for you and for your situation. Regardless of owning or renting, you don't want to spread yourself too thin. So, if you can't afford to own, Don't Do it!

Now that I've said that, given the right circumstances, I still see more benefits in owning over renting for most people in most normal circumstances.

The biggest argument I've ever heard for renting, is that you can invest the money you save by renting. That is assuming that renting is cheaper of course, which it probably will be if you put less than 20% down. To make a fair comparison of rent to mortgage you need to add the maintenance costs and/or strata fees to the mortgage. So if for example you save $100/month by renting you could then invest that difference.

While I think it's theoretically possible to make more money renting and investing the difference, I haven't seen it in practice. The problem with that theory is that you need to be able to make more money than the increase in the value of a home would have been.

The magic number everyone seems to like to use for housing price increases is a 6% per year increase on average. Of course the real number will vary drastically based on a number of factors including location. But, for arguments sake, let's assume that 6% is correct for you. It almost seems logical that if you could earn more than 6% on an investment (say 8%) you'd be better off renting. The problem is that this doesn't take into consideration the 6% is on the total property value not just your personal investment.

Let's say you put $7,250 down on a $145,000 condo. The following year the value goes up by 6%. That's 6% on $145,000, not $7,250. That's $8,700 which is more than 100% increase on your investment. Before you say I ignored the interest payments to the mortgage, I haven't really. Ignoring the equivalent in rent which you'd have to pay as your alternative, you paid $7,250 plus 100 more per month. Even then, you invested $8,450 for an increase of $8,700.

In my case I put nothing down and the value of my condo has increased by about 41% in 4 years. Now that's a higher than normal growth and it was luck and not skill on my part that I got in when I did. There is no investment I could have made that would have gotten me the same growth if I had invested it elsewhere. None that I know of anyhow!

Some other benefits I find to renting over owning:

As long as you don't experience sky rocketing interest rates, your payments will generally remain unchanged. Whereas rent will continue to increase and close that $100 gap. When you do sell, you also get some if the rent equivalent money back which would never happen with renting. Or if you stay put and don't move, eventually your mortgage is paid off, all you have left to pay is the maintenance fees and taxes. That certainly leaves you with more money to invest than the renter at that point.

Even without selling you build up equity in your home. Equity is the difference between what your house is worth and what you owe. So another advantage is that you can borrow against this money. Like anything this can get you into trouble too, so you need to be careful. Using this money allowed me to get out from a debt burden I couldn't have done without selling my place.

Another example of using the equity would be if you needed to make repairs in order to sell, but couldn't afford it until after it was sold. Also, at some point in the future I'd also like to purchase a second home for and investment and this is likely the best way for me to have the down payment.

So while rent is a valid option for providing shelter and might be the best option for some people, I still see more benefits to owning in the long term. Hopefully this helps someone. If not, I still enjoyed getting my thoughts written down somewhere. Feel free to correct me on anything you think I went astray on.

Financial Choices

2009-11-18T21:35:00.000-08:00

This may seem to be a strange way to start off a financial blog by talking about choices. Actually, it was the realization of the choices I have available to me that got me on the path to financial enlightenment. My wife and I were struggling with a very serious debt load and were wondering how we were going to be able to pay our bills for the month. It was then that I picked up the book Rich Dad, Poor Dad and started reading.

It opened my eyes to a whole new way of looking at my finances. I started to take serious looks at statements I had just taken for fact, like "your home is your greatest asset". I'll get into the specific things I re-evaluated and the conclusions that I came to in future articles. The point here is that I learned to do my homework, look around at my current situation and evaluate if I was making the right decisions or not.

Really finances are all about choices. Do I spend my $20 on a new Barenaked Ladies CD, go out for dinner, or buy the new Star Trek movie. Do I pay down my mortgage faster or contribute more to RRSPs. The choices are endless.

I think we all feel "trapped" at some point in our lives. Like the choices have been made for us and we're not happy with where we're at. I know it was that way for me at least.

I was at a point where I hated my job and my financial condition. Yet, I felt like I had no choices. Like I was trapped. I couldn't get another job because of previous choices I had made. I didn't have my degree. I didn't have experience with the main stream programming languages. I couldn't get a raise. The list goes on and on.

Then one day it just "clicked". I wasn't dead yet. Nothing was written in stone. So, if I wasn't happy with my choices, it was time to make new ones.

So, I decided I wanted to go back to school. I didn't really want to pursue programming anymore so I was looking for something more along my interests. I weighed all my options and decided to go for my CGA designation. I could do it part time so I didn't need to quit my job while my wife is finishing her nursing degree. Besides I hear they pay well when you're done ;)

Even though I still have a long way to go and I'm still working my crappy programming job, I have hope again. I'm making the choices for my future instead of letting them control me.

Then I noticed choices everywhere. Even the things I decided not to change are still my choices. After reading Rich Dad, Poor Dad, I scared my wife as I contemplated selling and chosing to rent. With the equity we had it would have been enough to take us straight out of debt. Instead we decided to use the equity to make our debt more managable while keeping our home.

I even contemplated the idea of moving to Ontario where the housing prices are MUCH more reasonable. While I still think that would give us a leg up financially, I can't tear myself away from this beautiful province I grew up in. But at least it gives me perspective when I think I can only afford this 2 bedroom condo. That's a choice in itself and no one is forcing me to live in this beautiful place.

The choices that everyone has are virtually endless. So it's always frustrating for me to hear someone say they have no choices and they're stuck. You won't always like the choices you have, but you'll always have choices.

Some choices are opposites and you have to choose the best one for you. For example, I want to be an accountant, but I don't want to go to school. So I had to decide which one was more important to me. Obviously I'm now enrolled. :)

Some choices just take time. Like I want a large detached home in the lower mainland of BC right now, but it's not going to happen over night. However, I am making decisions that will make that dream a possibility one day.

If you're not happy with your current choices, make new ones. You are the only one stopping yourself from being happy. Sometimes it's easier to just do nothing and blame circumstances or other people for your situation. Let me tell you what I realized though. It's not them it's you. Avoid the temptation to be lazy and let things happen. Evaluate your situation and if you aren't happy do something about it. Once you start to look you'll be overwhelmed with the choices you have available.

In future articles I'll talk more about the specific decisions. Like renting vs owning, which mutual funds to invest in, etc.