Category Archives: Finance

Buying a House

So, as you might know, we live in Canada in the Great White North.  That means purchasing a house is actually quite a reasonable and financially prudent option.  You see, the cost of renting here is very, very high – we are talking between $1,100 – $1,500 for a 1 to 3 bedroom suite (or duplex on the upper end).

On the other hand, houses are currently selling at between $200,000 (for a townhouse with 3 bedrooms and about 1,600 sq ft) to $400,000 for a 5 bedroom bungalow.

If you do the maths, a $350 – 400k house works out to be only $1,400 – $1,800 in mortgage payments. With property taxes and other insurance and other home-ownership costs, you are for the most part saving money when you do purchase a house.

Why? Well, the Bank of Canada’s extremely generous 2.95% or so Prime rate is the main cause of this.  It’s incredibly cheap to buy.

Of course, there are a few major dangers:

– Catching a falling knife

Housing prices dropped last year.  It dropped the year before too up here.  So there’s no reason why housing prices shouldn’t drop again this year, especially in light of the drop in the resource sector and gold prices.  Whatever you buy is likely to be cheaper to purchase in a year or two if you can wait that long (an equivalent place that is).

 

– Higher interest rates

The other major danger is that interest rates could rise, significantly.  The historic interest rate was significantly higher than what it was now.  Even if interest rates go up marginally, to say 5%, this could easily cause major problems in terms of the mortgage payment.

So why do we do it? Because for us, right now, it makes sense.

 

Canada Pension Plan – increasing contributions

Let’s talk about the Canada Pension Plan or the CPP.

What is it?

It’s a government backed retirement plan that provides funds after 65 (or 60 at a lower rate) if you have worked in Canada.  The amount you get is dependent on the amount you contributed through your lifetime, and is a 4.95% deduction off your paycheck along with an equal contribution by your employer.

What You Should Know

CPP maxes out at $1,038.33 currently (2014) and is indexed to the Consumer Price Index, so theoretically it will give you that amount (or it’s inflation adjusted equivalent) when you retire.

However, the CPP is not seperately financed.  All funds currently generated for the CPP goes into general financing for the government and is then used to pay out to current pension earners.  That is, the money you pay in now isn’t set aside for you specifically, it goes into a general pool.

In addition, the CPP is not fully funded though it supposedly is sufficiently funded till 2085.

How Much Do I Get?

25% of your average earnings.   Service Canada (who run the CPP) looks at your average earnings from 18 to 65, dropping out up to 7.5 years of your lowest earning years to calculate your CPP payout.

The maximum ‘allowable’ / calculated earnings was $51,100 in 2013 – if you earned more than that, it wasn’t counted towards the CPP (nor was funds taken for the CPP above that amount) but it did count towards the amount you’d get.

So, most people will definitely get significantly less than the maximum of $1,038.33.

Is Raising the CPP Good Then?

Depends on your point of view.  They’ll take more money from your paycheck now (raising it to 12% total or from 4.95% to 6% off your paycheck), in return for up to a 35% increase in the final payout.

Theoretically then, you could get more when you retire; but the question then is this retroactive? That is, do people who only paid in 9% through their life get 35% payouts? My guess is (and this is political); yes – so that Baby Boomers/etc who never saved get ‘saved’ by the government.  That I don’t agree with…

If not, maybe it’s good.  I still prefer to save money myself, but for a lot of people that might not be what they want.

Is It Going Away?

The important part to note is that while the CPP is theoretically funded sufficiently, there isn’t a separate pool where all CPP contributions are locked away.  It’s just a giant pool of cash which the government pulls from.  So, it’s possible if the government overspends that there just won’t be any money there when it’s needed.

Again, this is a possibility – not a certainty and really depends on numerous factors. However, it’s worth knowing and adding to your own considerations.

Emergency Funds

It’s strange, the question of an emergency fund rises up a lot.  If you don’t know what an Emergency Fund is, it’s a pool of cash you set aside for emergencies.  Most financial advisors recommend between $1,000 to $5,000.

The reasons for an emergency fund basically boil down to – don’t get into debt! Sometimes, expenses outside of your budget happen – a blown tire, an accident, sick days that aren’t compensated.

Having a fund that you can call on to help ease fluctuations in expenses and income keeps you from dipping into debt to cover it, removing you from the spiral of indebtness and poverty.  It’s also comforting to have some money around that you could just use…

Of course, there’s another train of thought that says – don’t bother with an emergency fund; especially when rates are so low.  You can get a much better return investing it and so long as you have a good credit rating and multiple forms of credit (Line-of-Credit or credit cards); you can use those as emergency funds.  With a LOC especially, you only pay for what you use and the rates are often very decent.

This way, the money you’ve invested will ‘work’ for you and you can dump it if and when an emergency happens.   It’s not necessarily a bad idea especially with the TFSA accounts these days.  The bad part of course is that you just don’t have that mental cushion anymore.

Myself, I lean towards the investing side – but I’m pretty comfortable and confident with investing.  For others, pure cash might be the better option.  It’s all about your risk tolerance…

 

Raise the Rates Idiocy

So, saw a post going around about raising the welfare rate in BC from $610.  What a lot of people don’t read and they don’t list in the petition is that they want to raise the rate from $610 to $1,300 (found on the website for the ‘Raise the Rates’ group.

Yup, that’s $1,300 a month.

Don’t get me wrong – I would sign that petition myself, there’s obviously an issue at $610.   Just a plain room in Greater Vancouver these days seem to range from about $425 – $550 (and more).  So, you definitely need to increase it for basic needs.

On the other hand $1,300 a month is ridiculous. That’s close to the $1804 (based on 22 working days and $10.25) a minimum wage worker makes working full time (40 hours a week) – their take home is $1703 after taxes which the welfare recipients don’t pay.

Of course, the fact is that the welfare number of $1,300 comes from the Market Basket Measure.  And what they don’t mention is that the Measure is calculated to give a basic living expense (everything included) for 2 adults with 2 children.

Yeah, so they want to give the family cost to 1 person. So a family of 2 adults then pulls in $2,600 a month or $31,200 a year without paying taxes.

That’ll do great things for the economy.  Of course, to pay for all this they also want to raise the taxes on those earning over $250,000 and cut the corporate tax cuts.  Oh, and raise minimum wage again to $12 an hour. I wonder if they actually ran any numbers to see if this would cover the costs (present market situation).  I’m guessing not but I haven’t either, so won’t point fingers.

I can say that if they started raising minimum wage rates again and our tax rates, it’s going to suck for the economy.  And the business.

God but I hate idiots.  I really, really do.  They ask for stupid, stupid things and make a reasonable suggestion (raise welfare rates) to something that even a moderate like me can’t get behind.

Oh, what I would raise it to? Probably around $900.  Not great, but you could live on that (barely). Which is kind of the point – you do well enough to survive and can then start working on making yourself employable.  You just aren’t comfortable.

10% Returns

10% sounds like a huge return.  It is.  In fact, it’s higher than most mutual funds will be able to provide, higher even than most hedge funds.  However, it is possible to do so, I have for nearly 8 years now.  Yes – even through the huge market crash in 2006 / 2007.

On that note, I’m just going to list some general thoughts for now.

The disclaimer: Not a financial planner or analyst, take what I say here with a grain of salt; don’t invest (not that I’m going into details anyway) on this information alone. Do Your Own Research.

First Things First

Generally, there’s no way to get to that level of return without taking a risk.

The more risk you take, the higher your general return.  It’s why you need to start investing young – you can take that risk when you are young – you have the time to make that money back.  Risking it all when you are 60 is a bad idea.

Also, you will almost never get that level of return from a mutual fund.  Especially once you take out their Management Expense Ratio (MER) – aka their cut.  In Canada, it’s generally 2-3% of the total fund.

Second Thing

You won’t get there without some research.  6 – 8% sure; not a problem – stick in an ETF that tracks the market, get a balanced couch potato portfolio and you’ll do pretty well most years.  It’s not great returns, but it’s a heck of a sight better than what you get in a GIC.

At 10% you need to be actively doing research, watching the general trends not only in the financial markets but the entire economy (global) so you have an idea of the way things are going to play out in broad strokes.

You also have to start looking at specific shares.  And yes, that means taking risks.

Third Thing

It’s not as risky as you think – you can still generate damn decent returns buying things like blue chips.  If you bought Telus shares in 2010 at $16.50, you’d have received dividends of $4.51 till today, received a 2:1 split and still have shares worth $34.64.  That’s more than 400% returns in 3 years, or approximately 133%.

I’ll talk about specific strategies, but there are ideas out there like Buying the Dogs of the DOW, Value Investing and Dividend Investing.  All of them have good points and can generate good returns, with an amount of manageable risk.

You just have to do the research (see point 2.)

Fourth Thing

Cut your losses early.  I have a hard time with this one still.  It’s important though.  If you go up by 10% and then down by 10% you are actually behind.  You have to reduce your downsides faster than your upsides.

Fifth Thing

Cash out.  Remember Telus? Well, make sure you cash some of that money out when you can.  Until you actually cash that money out, it’s all paper gains.

Sometimes you’ll want to reinvest that money.  Sometimes you’ll want it in bonds.  Whatever the case, cash out some of those gains – you might lose out on future gains, but you also miss any huge drops.

Sixth Thing

Diversify.  Don’t put all your eggs in one basket.  Own more than a few stocks, in more than a few sectors.

Caveat – if you have less than 5k to invest; you really should consider a mutual fund.  Yeah, I know – it’s still better than nothing and it’ll allow you to diversify automatically.

Seventh Thing

Never invest money you can’t afford to lose.  Really, that should be like point no.2 in anything I say.

Eighth Thing

Don’t play the market.  By that I mean don’t try to invest and ‘win’ each stock, you are much better off just doing a few transactions a year (in total!) than buying and selling each month.  Watch the market, but don’t play it unless you can make it your full-time job.

Ninth Thing

Practice, practice, practice! You don’t have money now? No problem – Google Finance allows you to create a ‘portfolio’ of stocks.  Start doing the research now, ‘buying’ stocks and funds and tracking your imaginary portfolio.  Watch how things change, and try to figure out why you are winning / losing.

You’ll learn a lot just by practising and doing your own research.

Tenth Thing

There’s no get rich quick scheme. I probably don’t need to say this – but people who try to sell you a get rick quick scheme are probably lying to you.  There’s no quick way to get rich investing; not without a huge amount of risk, a lot of luck and some great connections.

Lastly

Rather importantly, don’t discount luck in all this.   I’ve gotten lucky more than once; but you have to be willing to put yourself in play and in position to get lucky.

 

 

Retirement Savings & Compound Interest

So, I want to discuss something that is dear to me.  Compound interest and retiring.

Did you know that if you can get a 10% return on your investments, your initial investment will double every 7 years?

Or flip it around, if you get 7% interest; your money doubles every 10 years.

If you are 25 years old and saved $10,000 by that age, by 65 that initial savings at:

  • 7% interest rates = $160,000 (doubled 4 times)
  • 10% interest rates = $400,000+ (doubled over 5 times!)

Of course, few of us have $10,000 at 25.  So let’s say 35.  If you can get the above rates from 35 to 65; you’d have with that initial $10,000 investment:

  • 7% interest rate = $80,000
  • 10% interest rate = $160,000+

Note, I’m not discussing interest rates here and the numbers given are rough estimates.  They aren’t actuals at all; the actual compounded amounts are slightly smaller.

Still; not bad eh? But those are just numbers.  What would you need to live on? Well, assuming you could live on $28,000 a year including OAS & CPP; at 65 you would need about $128,000.

So, why aren’t you saving yet?