Tag Archives: personal finance

Wills – Even Death Has a Fee

death-tax

I recently got a will. I went through a lawyer, and was quoted a notarized will for my wife and I at $400 each. With the lawyer, it was an intimidating experience at first, but I did some research on my own and found that you can get a will drafted for free, and notarized for as little as $15. Currently, I am in the process of trying to get a more competitive rate.

How did this all come about? I remember a few months ago seeing a story about a wealthy, well respected family being torn apart over an inheritance. Millions were collectively spent on lawyers. I don’t know how that mess turned out, but I’ve heard about crazy family members who launch lawsuits over an inheritance dispute. To add to the deep emotional damage such a conflict would inflict, the truth is that the only people guaranteed to benefit will be lawyers.

It seems that every family has crazy relatives, and it seems that if you have any considerable worth in your estate at all, you might want to spend the extra time and money to be clear on how you want your estate divided and passed on and stop any potential conflicts from ever happening.

What kind of things are part of your estate? The first thing to be factored is any debt you have, including credit cards, mortgages, and car loans. They are paid off before your estate and any estate beneficiaries. Once debts are settled, all your remaining assets with financial value, such as insurance policies, cash, TFSAs, homes, cars, appliances, and furnishings are added up and considered to be the value of your estate. If your spouse survives you, your estate is considered to be shared 50/50.

Once the value of your estate is ascertained, the provincial government will then proceed to tax it. As per the Ontario Ministry of Finance, the inheritance tax will be $3100 on an estate valued at $240,000.

Note that your RRSPs can be directly transferred to a family beneficiary with no tax penalty at all. You can setup an RRSP tax beneficiary at any time. If you don’t, your RRSP will be converted to cash and taxed as income in your final year and added to your estate to then be subjected to the inheritance tax.

If you don’t have a will, it will be up to the government to decide how to divide your estate. You should check how your province divides your estate as different provinces follow different guidelines. Often, your spouse and/or children will get everything. If you want to leave something for siblings, friends, charities, your community, university, or any other person or thing, you’ll want to put a will together. If you are looking for some ideas, you should search to see what unusual things people have left in their wills.

 

First Rule of Investing in Stock

first tip investing

If you had invested in Microsoft back in 1986, when they went public with their Initial Public Offering (IPO), you would have made 44,000% return on your investment (ROI). If you had invested $1000 in Microsoft then, it would be worth  $44 million today. This is why Bill Gates is still the richest man in the world, he owned the majority of Microsoft when it went public some 29 years ago.

Stories like this aren’t uncommon. Pretty much every publicly listed silicon valley company started off like Microsoft, and consequentially has amazingly wealthy founders. And thanks to stock markets, the ability to invest in other people’s good ideas and hard work is available to anyone.

There are many books, websites and careers based on investing in the stock market. So for this introductory post on the subject, I will simply say this: Invest in what you know.

To better illustrate this concept, consider this story that took place in the 1930’s. It was a party that a celebrated banker was throwing, he invited his business clients and colleagues. At the time, women weren’t involved in money matters much, especially the money matters of their extremely wealthy husbands. But the banker’s wife had inherited a small fortune from the death of a relative and wanted to grow the money herself.

She knew from listening to her husband and his friends talking about investing all the time that putting her money in the stock market was the best way to grow it. She saw one of her husband’s investment friends, Benjamin Graham, who at the time was a well respected investor (who later went on to define value investing, and teach other greats, like Warren Buffet).

The banker’s wife asked Benjamin, “What should I invest my money in?” to which Benjamin answered, “never invest your money into something you don’t understand. Invest your money in something you not only understand, but use every day.”

No one knew what the banker’s wife did with her money. Decades later, after her death, it was discovered that she had made a massive fortune, much more than her husband ever made, on the stock market. As it turned out, she followed Benjamin’s advice directly and invested in a revolutionary idea that she was uniquely positioned to appreciate, Tampax, the first makers of modern tampons.

If you don’t know what you’re investing in, you are literally relying on luck. It is possible that some solar panel company that just started up is going to go somewhere, but unless you know about solar technology, or how that industry works, all you can do is hope to get lucky, because you don’t understand what needs to happen for a company to be successful in the solar energy market.

I can’t tell you how much the concept of investing in what you know has changed my money outlook. I have invested in Google, and Visa because I use their products almost every day and I understand how their business models work. I love Netflix, and am very happy that I invested in them 5 years ago, before everyone had a subscription.*

In fact, all my dud investments (and there are a lot of them) have all been in companies I didn’t use or understand.

If you have some extra money you want to play with, and a couple good investment ideas that you personally use daily, then there is no shortage of companies for you to invest in. This means that if you love comic books and video games, invest in Disney (as they own Marvel now, and Star Wars, and have bankrolled all the big superhero movies in recent years). Like playing video games? Put your money where your mouth is, EA and Activision are on the Nasdaq, so is Sony and Xbox. Making lots of money with your home made goods business on Etsy or eBay? Maybe your unique experience makes investing in those companies a good idea to you.

A little more grown up than games and comics, and short of ideas? You should pay for an annual subscription to a publication that analyses individual companies for you. I have subscribed to the Motley Fool before, and indeed, that’s where I first read about investing in Netflix or Marvel. It is a great way to read about what other investors have to say about a lot of popular, and up and coming companies.

* As a full disclosure, I currently own shares in Disney, Google, Netflix and Visa. Though they have been a good investment for me over the years, they might treat you differently tomorrow.

Cars – The Prestige of Yesteryear

cars-waste-money

According to Statistics Canada, transportation costs consume 20.5% of the average Canadian’s household budget. In 2013, that amounted to $12,041 in transportation per year, of an average after-tax budget of $58,592. Only the cost of housing took up a larger portion.

According to the US Bureau of Labor Statistics, a 2009 study compared the household expenditures between the US, UK, Canada, and Japan and concluded that Canadians spent the largest portion of their income on transportation.

Transportation, however, includes cars, trucks, public transit, flying, and every other way to get around. Nevertheless, Canadians still spend an average 8.6%, or $5038, of their budgets on automobiles specifically each year, compared to the US, which spent the 2nd most at 6.1%. This includes buying/leasing a car, gas, maintenance, parking, insurance, etc. And though Canada has a higher tax on gas than the US, it is lower than what people in Japan or the UK pay.

After shelter, vehicles are likely to be the 2nd biggest expenditure in your life. At $5000 per year, over a period of 50 years, you’re looking at $250,000 for a lifetime of driving.

For a lot of Canadians, there simply is no option other than owning your own car or truck. Most smaller communities have very limited public transit options. Many jobs, schedules, and circumstantial realities make getting by without your own wheels impossible. And the harsh winter that we experience makes walking and cycling difficult (if not impossible) for half the year. Incidentally, our harsh winter also puts the percentage Canadians spend on clothing highest between Canada, UK, USA, and Japan.

There are many instances where cars in Canada are simply the only option for getting around. But, Canada is an urban country, more than 13 million of us live in its 5 biggest cities. Large Canadian cities usually have good alternative transportation options, including public transit and bike lanes.

Myself, I live in Toronto. I pay $140 per month for my public transit pass, and an average of $100 per month on Zipcar (which lets me rent a car by the hour). So $250 per month for 12 months equals $2500 I spent per year in ground transportation.

Compare that to the parking at the building I work at, which charges $16 for a full day of parking. $16 for 22 work days equals $352 per month only in parking.

parking

The biggest problem with cars is that they don’t appreciate in value, your typical car is always a horrible financial investment. Cars are famous for depreciating in value the second you roll them out of the dealership. If you drove your brand new car 1 km home and tried to sell it, you would not be able to sell it for the same price you just paid.

$250,000 per lifetime on a car is only the average. You really start to burn money when you pay for premium automobiles. This could be why driving a luxury car, like an Audi, Benz, or BMW, is such a status symbol. It tells the world that you have money to spend. Your average luxury car might cost 100% more than something more modest. But BMWs don’t have 100% better gas mileage, or last 100% longer, or go 100% faster. In fact, they don’t do anything 100% better than a typical car, so why spend the extra money?

This isn’t news. Perhaps it’s the crippling student debt and less job security that a lot of them face, but millennials are famously not interested in driving. In the US in 2010, only 60% of 18 year olds had a drivers license, compared to 80% in 1983. There seems to be a cultural shift away from driving happening. I haven’t even mentioned other negative effects of driving, such as pollution or spending hours a day commuting.

traffic

Combine changing attitudes towards automobiles with self-driving car technology and the emergence of the sharing economy and we are on the cusp of a revolution in transportation. If my hunch is right, getting around is going to get easier and less expensive.

Unavoidable Trifecta of Investment Costs (UTIC)

unavoidable-trifecta-investment-costs

There are costs that can be eliminated, like the constant buying of disposable razors, and costs that can merely be reduced. When it comes to investing your savings, there are 3 costs that are unavoidable: taxes, inflation, and fees.

These 3 costs are especially repugnant because they add up to a lot. Bill Gates, still one the worlds richest people, claimed in 2013 that he had paid over $6 billion in taxes. You lose about 2 cents for every dollar you have in a regular bank account every year to inflation. And fees are baked in to nearly every financial service you can think of.

Though you can never be free of any of these costs, you can certainly reduce how much you end up paying. You could get a financial adviser or an accountant. Indeed, legally avoiding taxes is a giant industry. But the more help you get, the more fees you incur. Generally, fees are lower than taxes, but not always.

If advisers and accountants aren’t for you, or if you at least want to better understand all this stuff, there is, of course, this blog 🙂

In a nut shell, to minimize tax payments, put your savings in a Tax Free Savings Account (TFSA), where it can grow tax free. If you’ve maximized your annual TFSA contribution, there’s always Registered Retirement Saving Plans (RRSP).

The best way to avoid fees is to learn about how your money works on your own. The more comfortable you are with saving and investing, the less need you will have for more expensive services, like advisers or accountants.

Unlike the other two prongs of this trifecta, inflation is truly unavoidable. The only thing you can do is make sure your money is growing faster than inflation, which isn’t always the case with high interest savings accounts.

 

Avoidable Costs – Disposable Razors

razors

I have mentioned the UTIC (Unavoidable Trifecta of Investment Costs) before. These are things that erode your savings, and the only thing you can do about it is make sure your savings grow at least as much as the unavoidable costs of taxes, fees and inflation.

But there is another way to increase your savings, that is to reduce your cost of living: the money you have to spend for living comfortably in Canada. This includes housing, clothing, food, cell phones, parking, transit, Netflix, etc. Some of these are unavoidable, everyone needs shelter, food, and clothing. But there are ways to reduce most costs, and today, I’m going to write about a personal favorite cost-saving decision: shaving with anything other than disposable razor cartridges.

There are definite environmental advantages to avoiding disposable razor cartridges, but this is a finance blog, so let’s look at the numbers. I’m certainly not the first blogger to look at the cost of shaving, sharpologist.com has a fun write-up about the costs of various shaving options.  According to sharpologist, straight-edge razors are the least expensive, by far.

I can vouch for that. I personally shave with a straight-edge. I spent $70 on the initial blade, $40 on a strop, $35 on a brush, and $50 on a sharpening stone. About $200. That was almost 10 years ago. That’s really all the money I’ve spent on shaving in the last 10 years, about $20 per year.

According to Gillette, I could get 5 weeks of shaving out one disposable razor cartridge. According to walmart.ca, 12 cartridges cost about $52. That means, I could get just over a year’s worth of shaving for about $50. Over 10 years, that works out to $500, $300 more than what I’ve actually spent. Consider the next 10 years, my real straight-edge cost remains at $200 while the cost of using Gillette’s disposable cartridges will rise to about $1000.

Over my lifetime, I can expect to save $2000-$2500 from using a straight-edge.

Given the more intimidating learning process, straight-edges are not for everyone. But that’s ok, there are still better options than disposable cartridges. Classic safety razors are also inexpensive, as are their replacement blades.

Bonds – Lending to the Man

bonds

I’ve been a big proponent of investing savings in the S&P 500. It offers great long-term returns, and is safe. But it’s not that safe.

The S&P 500 isn’t the safest investment because when you buy equity/shares in a publicly traded company, you are buying a slice of ownership. Your fortunes rise and fall with the fortunes of the company you partly own. And you can sell your shares the same way people sell barrels of oil or any other commodity, through a market.

But if the company you partially own goes bankrupt, chances are, you’ll end up with nothing. That’s because a long line of people and organizations that the bankrupt organization owes money to are first when it comes time to cash in on whatever is left of the company. This includes banks, employee wages and bond holders. Share holders are usually last to get any pay outs in the event of a bankruptcy, and usually get nothing.

Bonds are basically IOUs that a large government or company will issue. They are cheap loans that a government can make because all western governments are so large and have been around for hundreds of years, that they can guarantee your return.

A bond is a financial certificate, it means the bank owes you money. But it also means you have no say in any of the banks matters, unlike a share holder. So bonds are creditor stakes in a company, whereas share holders have equity stake in a company. When a company goes bankrupt, creditor stake holders will have priority over equity stake holders when it comes time to dividing the remains.

Western countries are basically impervious to bankruptcy for the foreseeable future. Even though headlines can be grim, and all governments take on more and more debt, there has also been an increase in Gross Domestic Product (GDP). If you totaled the value of every financial transaction in Canada, every exchange in goods or services for money, you would have the gross domestic product. In 2014, Canada’s GDP was $1.8 trillion USD.

Of that $1.8 trillion, the Canadian Federal Government took $276.3 billion in taxes and other revenue. With that kind of growing revenue, it is easy to be convinced that a large government can guarantee the bonds that it issues.

Bonds are usually sold at specific times, in Canada, Canadian Savings Bonds (CSBs) are sold every October and November. They have a 10 year maturity. That means that you get the money back on your bonds after 10 years. You get your interest payments once a year.

Bonds backed by most western governments are so safe, they are considered to be risk-free. As such, they offer a low interest rate of return tied to the interest rates set by the Bank Of Canada. The annual returns for the CSB can be found online here. As you can see from its previous returns, bonds don’t make you a lot of money. In 2014, Canadian Savings Bonds would yield only 1% per year, it would be easier to just get a high interest savings account in 2014.

Bonds are something that you can buy through various Exchange Traded Funds (ETFs), but you can also buy them yourself directly through the government every October. For more information on buying Canadian bonds directly, information can be found on their website.

Taxes – The Unavoidable Cost of Civilization

taxes

It is said that only 2 things are absolute in life: death and taxes. Taxes have been around for thousands of years. The purpose of taxes is to pay for the government, and various government expenditures, like police, fire, hospital, garbage collection, clean drinking water, education, food inspectors, military, and wars.

All these things cost money and various levels of government have been able to find ways to get more tax revenue every time someone discovers a new way to make money. Because taxes have been around for so long, everywhere, they are ingrained in the very fabric of society. You simply cannot avoid paying taxes in some way, which is why, along with inflation and fees, taxes are the 3rd and possibly most costly of the Unavoidable Trifecta of Investment Costs (UTIC)

Kinds of taxes include:

Consumer Taxes

In Canada, consumer taxes are:

  • Goods and Services Tax (GST), which is a federal tax (ie. national, run from Ottawa) and is spent across the country.
  • Provincial Sales Tax (PST), which is run at a provincial level, so the money is directly collected by Quebec City, Regina or Halifax and is not shared with other provinces. Only Alberta has no PST.
  • Or Harmonized Sales Tax (HST), which is a combination of PST and GST in one tax. Currently, only 5 provinces have HST instead of PST and GST:
    • Ontario
    • Nova Scotica
    • Prince Edward Island
    • Newfoundland
    • New Brunswick

As its name suggests, you will pay a lot more in consumer tax if you buy a lot of stuff, ie. consume.

Income Taxes

In Canada, both the federal government, ie. the Canada Revenue Agency (CRA), and provinces, eg. Fredericton, Regina will take a significant chunk of your paycheque before it even reaches you. Every year, you have until the end of April to complete your income tax return. Your income tax return is basically you telling the government how much money you made in a given year (including money from investments, foreign properties, and pretty much anything else you can make money on), and the government making sure you’ve paid your fair share of taxes on the income you claimed.

The CRA, ie. federal government, takes 15% of your income if you made less than $44,701, up to 29% on anything more than $138,586.

The provinces each take a different amount of your income. In Alberta, the provincial government in Edmonton simply takes 10% of your taxable income, no matter how much you made. In other provinces, your income tax will be determined by your income: the provincial government will take as little as 5% in BC and Ontario for low income earners, up to 21% in Nova Scotia for high income earners.

Property Taxes

Canadian cities and towns are all run by local governments and mayors, but the only taxes they are legally allowed to collect are property taxes. Because there are so many municipalities in Canada, there is a wide range of property taxes. Typically, your land will be assessed by the municipality you live in to determine the value of your property, taking into account renovations, the local housing market, amenities, proximity to good things like schools and transit. You will then pay an annual tax on the estimated value of your property that goes straight to city hall.

Capital Gains Taxes

This one is just for investors. If you make an investment, and sell it to collect a profit, you have to pay taxes on that. It doesn’t matter if it’s a house (as long as it’s not your only house) or stocks in your favorite company, the government wants you to give a share of the proceeds back to public coffers.

In Canada, you pay a capital gains tax on 50% of your investment profits. That means if you invest $10,000 in an unprotected fund (ie. outside of a TFSA or RRSP), and make a 40% profit, and then withdraw your $14,000, you would need to pay your current income tax rate on half your profit of $4000.

50% of $4000 (the income from your investment) is $2000. If your income tax rate is 37%, 37% of $2000 is $740 in capital gains taxes. The CRA has another example of calculating your capital gains here.

 

There are many other kinds of taxes and fees governments charge, like corporate taxes, inheritance taxes, carbon taxes, custom taxes, tariffs, etc. But there are also many kinds of tax deductions / breaks you can apply for to avoid paying a significant portion of your regular taxes.

It is controversial to say if tax payers get good value for the taxes they pay or not, but certainly, it is hard to argue that society would be better off without the kinds of services governments offer.

First Things First – Getting Burned At An Early Age

the liberating feeling of losing your shirt

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.