My interest in personal financials started in my mid-twenties when I realized that working for the Man for the rest of my life might be a bit too soul-sucking, and that I should have a plan to be financially independent as soon as possible so that I have as much time in my life to pursue my own projects and goals, no matter how daffy they may be, without worrying about money.
There is a lot in the above sentence, and a lot of assumptions. So you know, I’m a thirty-five year old software professional who lives in Toronto. I am married with no children. I rent an apartment, I do not own a car, I pay my credit card fully every month and our household has an above-average income. I consider myself good with my money: I generally don’t buy things I don’t need and for all my big purchases, I ask myself if it is worth the money, or if that same money would be better spent going toward my early retirement. Should I get that Xbox One, or retire a week or two ahead of schedule?
If you are like me, you probably have a lot of things on your mind and taking time to understand how to maximize your money is both confusing and really boring. I had trouble understanding a bunch of things:
- What is a mutual fund exactly?
- What is a hedge fund? I keep hearing about those…
- How do I decide what to invest my money in?
- What is an RRSP?
- What is a TFSA?
- Should I just buy a house?
- Can’t I get a financial adviser to properly manage my money?
I decided to start with the last question and talk to a financial adviser. I was impressed with the whole ordeal. For me, I had to go high up in a downtown office tower and sit down with a guy in a suit who had his own office with an amazing view; he looked really professional and confident. He worked for a large financial services company that had their own mutual funds. I didn’t really understand what the adviser was saying but I didn’t want to act as clueless as I felt. He proudly showed me some numbers that seemed impressive and soon had me convinced that I had to give him all my money so that I could start getting my money to work for me. I ended up investing in two mutual funds: a fund that put people’s money into the Canadian resource sector, because I thought that that would always be in demand, and an American mid-cap equity fund, because the adviser advised I do so.
When next tax season rolled around, I ended up owing the government more than $2000 in capital gains taxes. I didn’t even know what a capital gains tax was. I looked up the value of my two investments and saw that they barely budged. How was it that I invested in something that didn’t gain in value, and get slapped with this capital gains tax?
Needless to say, I was really upset and took all my money out of the financial institute that gave me such crappy advice and decided to investigate things myself. It occurred to me that I was a fool to think I would give all my life’s savings to some guy in a suit because he had a good presentation.
To be fair, the vast majority of financial advisers are much better than the one I got. In fact, my current financial advisor has a background as a tax accountant and has been instrumental in helping me pay the CRA as little as possible every April.
In a way I was glad this happened as it forced me to look into my own finances more and understand what was actually happening to my money. As it turned out, a mutual fund is really a bunch of guys in suits who decide to buy equities (shares of a company, stocks), and combine them into one fund. The fund’s value is totally dependent on what equities the fund managers decide to buy and sell, and how much of each equity they hold.
A capital gains tax turned out to be a tax people pay when they sell an investment (can be equities, government or corporate debt [aka bonds], or a house). So even though I didn’t sell anything, the fund managers were buying and selling specific fund equities on a daily basis to try to maximize the return of the fund.
And I discovered that because my fund wasn’t registered (I.e. protected from the tax man), I was taxed every time the fund managers sold equities and made a profit. Of course, those same fund managers sold some equities at a loss so that overall, their fund broke even. But because of the way the system works, I ended up paying taxes on their gains without the benefit of my investment value going up.
And so started my foray into the world of finance and understanding personal banking. It wasn’t long after this that I realized I knew nothing about money, that specifically I didn’t have a point of reference for anything. So when I saw gains of 8% I just assumed that was good without knowing why. When I was told to invest in mid-caps, I did without knowing what my other options were. I then realized that most financial advisers are really commission-based salesmen selling their company’s products. There is nothing wrong with that in general, except that when it comes to my money, I really want to know what my best options are, not what a given financial institution’s options are.
And there are a lot of options for saving your money. From high interest savings accounts, to various funds and stocks, to taxes, we will be looking at what really is happening with your money behind the scenes, what your best options are, and why.