Tax Refunds: The Biggest Loser

   Every year, friends and family members compare the amount of money they get back from the government when filing their taxes. 

   While it’s treated as a badge of honour to get the biggest refund check, this screams about a fundamental misunderstanding of how taxes work.

   Why do you not want the biggest refund check?

   To answer that question, we need to look at what taxes are, and how they work.

What Are Taxes?

   A quick google search will turn up the following definition:

A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.

   Or more simply put, money that you pay to the government for the privilege to benefit from society.

   Most people fail to consider the second element when they discuss taxes. They get too hung up on the what aspect, or paying the government, and fail to consider the why element.

Why are Taxes Important? 

   Many of the experiences we have in our everyday lives are taken for granted. The roads that you drive on, the parks that you walk through. Schooling, healthcare, and much much more. All of these elements are paid for by the taxes that a government collects.

   If you enjoy the benefits of such services, it is your civic duty to pay for those through taxes. 

   And everyone benefits. For everything that’s occurred in your life, you need to give credit to the country that you are living in. Your country has provided the means to which you have accumulated all you have, in both possessions and experiences.

   This is an important distinction that is often missed. The more you have, the more you owe to the country that provided such opportunities. This is why it is often with misguided anguish that people rebel against the idea of the rich paying more taxes. The wealthier someone is, the more they have benefited from society, and thus the more they owe to that same society.

   I did not always live with such philosophies. Long before my journey with Business Minded started, I used to rage and rail at paying my taxes. Paying for roads I don’t drive? Healthcare I don’t use? Education that left me with only more questions? 

   In my self-absorbed way, I had forgotten about the friends and loved ones who also benefited from those same services. I had taken for granted the people whose lives had been saved by that healthcare system. I’d taken for granted the options at the supermarket, brought about by the infrastructure paid and paved by taxes. 

   And in my shortsightedness, I had overlooked the benefits that others enjoy. I had taken for granted the safety net held beneath me should I fall. I hadn’t considered what life would be like without those loved ones living healthy lives. Even if I wasn’t sick at that very moment, I owe it to my loved ones and to my future self to pay for the services that every day improve my life, and one day could even save my life.

How Do Taxes Work?

   Canada, US, UK, Australia, and many other developed nations use a marginal tax rate system. Essentially this means, the more you earn, the higher percentage in taxes you pay on every additional dollar earned. 

   If you earn $100,000 annually, you will pay the same amount in tax on the first $50,000 as someone who only makes $50,000 annually. For every dollar over $50,000, you will pay slightly more in taxes on those additional earnings.

   At no point does earning more money become a bad thing though. If you enter a new tax bracket on that last dollar earned, you only pay additional taxes on that dollar.

Why You Don’t Want a Big Refund Check

   If taxes are your contribution to society, and you only pay taxes on the dollars you actually earn, why don’t you want a big refund check? A big refund check at tax time means that you have paid more than you should have throughout the year. That isn’t a bonus to you, rather it means you gave away too much throughout the year.

   If you walk into a corner store to buy a candy bar that costs $2. The candy bar doesn’t change in value depending on how you pay. If you pay with a crisp $20 bill, your change will be $18. The change in this example is effectively your big tax refund. 

   Alternatively, you could have just paid with a toonie ($2), and not received any change. In either case, the candy bar is still the same, and still costs $2.

   The difference in this example is how much you paid in the first place. But unlike buying a candy bar, your tax refund takes a year to be returned to you. Instead, you would have paid the store owner $20 for a $2 candy bar, and come back a year later to receive your same $18 in change. You had, essentially, given the store owner an interest free loan for an entire year.

   Irrespective of how you pay, the benefit to you is the same. Whether you’re paying $20 for a $2 benefit, or $2 for a $2 benefit, at the end of the day what you’re left with doesn’t change.

   Getting a bigger refund is not the ideal situation. Next time someone brags that they have the biggest tax refund, that simply means they were the biggest loser during the year. They lost out on having that money for an entire year, and any associated freedoms and gains that money could have earned.

   This year, think not about how much you can get back, but rather think about how much you actually pay in taxes. There are a myriad of ways through which to reduce your tax liability in a beneficial way to you. Paying too much up front and asking for change back is not one of those ways!

Home Office Allowance for COVID

   2020 was an eventful year. Now that it’s over, and the dust is settling over a massively disrupted workforce, it’s time to look to the future.

   And part of that future in the very near term means filing our personal income taxes.

   When COVID kicked off, many people had questions over what this new “work from home” scenario meant for them. The method for claiming home office expenses was to have your employer fill out a T2200 form, which you could then use to claim tax deductions.

   But therein lies a very big issue. 

   Many employers simply refused to fill out these forms, effectively stranding their entire workforce with potentially eligible tax deductions that they weren’t able to claim.

   Fortunately, late 2020 the CRA recognized the enormous burden of filing out T2200 forms for an entire workforce, and has since offered a simplified approach - one that makes your life easier come tax-time.

Do You Qualify?

   The CRA has loosened the restrictions surrounding who qualifies for the home office deductions. Now, the bar to qualify simply states:

You worked from home more than 50% of the time for at least 4 consecutive weeks (one month).

What Can You Claim?

   In the simplified approach, the CRA has created 2 new forms, a simplified T2200, which goes under T2200s (form located here). This simplified form must still be completed by the employer, although the complexity of the form is greatly reduced.

   The T2200s form indicates whether you, as the employee, were required to work from home for part of your working year.  Filing a T2200, or T2200s, is required if you are planning on expensing specific items, such as office supplies or utilities. These specific expenses must be identifiable with receipts, and are claimed using option 2 of the new T777s form (located here).

   The other option for claiming the a tax deduction also avoids the use of the T2200s form, and doesn’t require input from your employer. Still using form T777s, you can elect option 1, whereby you are able to claim a flat rate of $2 / day, for every day worked from home during 2020. The maximum claim under this calculation is $400, or 200 working days.

   Note: this is still subject to qualifying for the deduction, meaning you worked from home for more than 50% of the time for 4 consecutive weeks.

Example:

   For illustrative purposes, assume the following is accurate: I worked from home on the kitchen counter for the entire month of May 2020 (4 weeks).

   The kitchen where I worked accounts for 100 sq ft of the 700 sq ft apartment. My share of the rent was $1,000 for the month, and internet was another $100/month. And, I worked 40 hours a week, out of a total of 168 hours (7 days * 24 hours each day).

   For the month of May, I would be eligible to claim:

(100 sq ft / 700 sq ft)*(40 hours / 168 hours) * $1,100 = $37.41 total deductions

   This manner of calculating involves some measurements of the space, as well as some reasonable assumptions. Living in a one bedroom apartment, the kitchen takes up over 50% of the total unit size. But, it’s not a reasonable assumption to include that entire area for my “home office” space.

   But that’s not the end of this story. 

   Upon asking, my employer refused to complete a T2200 form for me. As such, I instead must use the simplified method on T777s. This calculation allows me $2 / day, for every day in the same period. Those same 4 weeks have 20 working days. 

   Under the simplified method, my eligible tax deduction would be 20 days * $2 = $40 total deductions. Not only that, but I also don’t need to save receipts and employer signed forms to support a claim this way.

Additional Resources

   Not sure which type of forms to use? The CRA has a handy calculator here that will help you make that determination.

   Be sure to check out the forms and calculator early. If you need to have T2200 or T2200s forms completed by your employer, allowing yourself and your employer extra time to process is beneficial.

   Just to prove there’s a silver-lining in every challenge, the CRA has made it easier to qualify and claim tax credits for the 2020 calendar year. The right information, and some early planning might leave you just a little bit better off come tax time.

The Path to Success

   How will you achieve this year’s goals? How will you make this year your best year yet?

   Setting goals is a process of laying the plans that carry you outside of your comfort zone, to a new level for you. That’s the point of goals. To take you where you’ve never been before, to show you what you’ve never seen before, to make you better than you were before.

   But if you’ve never been there, how will you get there?

Follow A Path

   No matter what you desire in this world, someone has had it all before you. 

   Anakin had Obi Wan Kenobi. Luke had Yoda. Katniss had Haymitch.

   No matter where you are in your journey, there is always someone who has walked those roads first. With the abundance of information out there, it has never been easier to find those who have walked the roads ahead of you.

   How do you achieve something you haven’t had before? Find someone who has it. And learn from their ways.

   A quick search on the internet will reveal an enormous list of resources, some credible, most just noise. That quick search will have revealed a maze with countless starting points, just as many dead ends, but just as importantly, countless paths through to the other side as well.

   And that brings us to the second critical element to achieving more. Sticking with the path you choose.

But, Only One Path

   As you search for those who have walked the streets ahead of you, you’ll be confronted with many “guides” that can promise to take you to the promised land. All of these guides have a selfish interest in helping you succeed.

   Once you find a guide that resonates with you. One who’s path leads you to where you want to go. Stick with that guide. Through the trials by fire. The struggles, the heartaches, the close calls and near misses that meet you along the way. 

   It’s during those hard times that the sirens call from a new guru or guide becomes especially dangerous. The lure of an easier path is seductive, especially to one going through pain and suffering. Young Anakin left his path during one such challenging period. And the result of following too many different paths led him straight to the dark side.

   Once you have your path, stick with it. Through thick and thin. Lest you find yourself lost, following too many guides leading you in different directions. Wandering tired, alone, nowhere that you want to be.

The First Step

   Here is where reality sets in. 

   Obi Wan Kenobi isn’t flying to your doorstep to take you on a grand adventure. The Capitol isn’t summoning you to fight for honor and glory.

   Unlike the stories told around campfires, there is nobody about to drag you out of your comfort zone and towards the person you were born to be. 

   If you aspire to greatness. If you want more than you have. If you were born to be more than you are now, you must declare it. 

   Someone will reach the goals you set. Someone will become the person you aspire to be.

   Why not declare that someone should be you? Volunteer to pay the price of success. And with both feet, take the plunge into the world that awaits your greatness.

 

How To Apply This To Your Story

   Many people at the start of the year have improved fitness goals, so we’ll use that example. But, keep in mind, the steps can work for any goal you set.

   Find a gym, a coach, a routine that works for you. There isn’t a one-size fits all approach. For our example we’ll use a “train at home” style workout, P90X.

   Follow the P90X path. Sometimes it will burn. Sometimes you’ll want to quit. But stick with it. Don’t swap it out on week 2 for a different 5x7 app. Or a new gym membership. Once you find something that works, stay the course. 

   Getting mixed up in 4 different workout regimes, with the same number crash diets is a sure way to overwhelm yourself. And following multiple different paths to the same health goal will ultimately lead you stumbling into your future self 6 months from now in the exact same body you have now.

   Once you know the path that will work for you and your lifestyle, begin. Success starts with action. If you want to hit that health goal, start where you are, doing what you can, now. If you do that, and stay the course for at least the next 90 days, then I guarantee in 3 months you’ll look and feel like a whole new you. 

   It’s the path to success. Will you walk it?

A New Year’s KISS

   New Years Eve is almost upon us. While 2020 has been one for the record books, there’s something refreshing about a new year. 

   Put all of last year’s distractions and deviations aside, and lay out some fresh new plans for the next 365.

   A New Year’s Resolution - it’s almost mythic in it’s universal applicability. Yet while millions of people make bold proclamations, why does it then follow that a month later those plans and schemes sound more like pipe dreams?

   Why are resolutions so difficult? And how can you set resolutions that actually stick?

   The first reason so many resolutions fail by the end of the 3rd week, is the toughest hurdle to overcome. 

What do you want?

   Seriously, what do you want? Put aside the instagram / twitter / snapchat goals. The 15 milliseconds of fame that you’ll garner putting up pictures of your life’s highlight reel doesn’t show your true wants.

   Rather than taking an inventory of the instagram pictures you want to capture, take an inventory of the things that are important in your life. Focus on what you truly value. And then set a resolution, a goal, that helps that area of your life.

   For me, I give myself a few types of goals focused on these areas:

Career, Financial, Romance, Physical Health, Mental Health, and Relationships with Family & Friends.

   Each of these areas are important to my greater success. Shoring up and doing better on that scorecard will lead me to a more fulfilling life.

Kiss the scorecard.

   Once you know the areas of your life that you want to focus on improving, there’s only one thing left to do. 

KISS.

Keep It Simple, Stupid.

   Aside from chasing someone else’s dream, we so often go wrong making grandiose plans. Set a goal that’s realistic. A goal that you can clearly see the action plan to.

   If you can’t figure out how to get there by taking one action a day, your resolution is too complex to stick with.

   Resolutions aren’t an episode of intervention. You aren’t reinventing yourself in 60 minutes, less commercial breaks. Resolutions are identifying those one or two behaviours that you can do repeatedly. Day after day, week after week, month after month. Once you know what to do, the real battle begins. Tenacity and perseverance aren’t just buzz-words on a resume, they are the way. 

   If you want to be successful, no matter the resolution that you set, you need to follow through. Day after day, week after week, month after month. Grit. Stubborn determination. The secret of success.

   As you fire off the cork on the bubbly this New Years, remember your New Year’s KISS. Someone is going to start talking about their resolutions. No matter how cool someone else’s dreams sound, stick in your own lane. What is important to you? How can you improve those areas of your life?

   And keep it simple. No 14 step plans. Your resolution shouldn’t need a flow-chart. Just one step. And another. And then another. And a year from now, you’ll be raising a glass to your successes, and getting ready for another new year’s kiss.

Buying a Dream

   Would you buy something sight unseen?

   Anyone plugged into automotive news will have undoubtedly heard of some exciting new developments recently. A new Tesla truck, the Rivian vehicles, the return of the Ford Bronco.

   Each of these vehicles is quickly selling out, despite the buyers never having seen the end product.

   But what then is happening? Why are so many people spending their hard earned dollars on products that don't even exist yet?

   The answer of course isn’t some voodoo-like phenomenon. Nor is it as mythical as the law of attraction. 

   No, you can’t wish these things into existence. No Santa Claus, Tooth Fairy, or Easter Bunny will leave hidden gems under the tree/pillow.

   Instead, people are doing no less than setting a goal. A goal to own something in the future. Once the commitment is made, it is simply a matter answering the how question. 

   The difference between a dream and a goal, is the action plan to get there. No longer is it something you wish for when you close your eyes. That thing that you desire? It can be yours, with the right plan.

You can have more than you have now, because you can become more than you are now. - Jim Rohn

   Setting a goal, even one that stretches you beyond where you currently are, is a good way to motivate yourself to grow into the person you want to become.

How to Buy a Dream

Decide

   As with many things, making the first decision is easy. Decide what you want to have / who you want to become.

   Decide. And commit to that decision.

Plan, and Execute

   Like so many new car owners, that initial decision is easy. For a nominal deposit, that new vehicle is on the way.

   Next, is to determine what is necessary to keep that dream alive. 

   This planning is something we all do all the time. We decide what we need to have, and work out a way to get that. 

   Let’s say you put down your name for a new Tesla truck. For $800/month, you are a Tesla owner. For as long as you believe that’s who you are, you will find a way to get that $800/month. Maybe that’s a couple less nights out each month. Or picking up a side-gig. Or working for that promotion. 

   Whatever it takes - this is who you are, and you will find a way.

Execution

   Execution is where success is born. Taking action turns that dream into a goal, and that goal into reality.

   Committing to your initial decision means sacrifice. Continuous sacrifice, day after day, week after week, all in the pursuit of that initial ideal. It is this third step that separates the perpetual dreamers from those who will truly make it. Because dreaming is easy. Action is hard work.

   What dreams do you hold close?

   Don’t look for those shiny baubles ‘neath the tree this week. Or under the pillow. Or wrapped in a sugar-laden egg.

   Some dreams can only be bought. Paid for with cold hard cash, and the never-ceasing toils of one who believes in who they are becoming.

Raise The Roof On Your Economic Potential

   Are you being paid for the value you bring?

   Every year, companies evaluate their staff, and look at the pay scales that employees are graded on. Most jobs, and companies, will be paying based on a pay band. 

   These pay bands are reflective of the market rates for a certain set of results. 

   The more results that you can generate, the more value you have to the marketplace, and the more money you can demand. This principle helps govern your earnings, whether you’re looking for a cost of living raise, or something more substantial. 

How do Raises work?

   All corporations plan out their payroll costs in advance. While this helps the finance team prepare for the future, it also led to a side-effect that too many people have heard. 

   This side-effect can be explained simply as: “It’s not in the budget”. 

   How many times have you heard that in your own careers? Whether it’s a new project, or a raise, this line is used as an excuse, a justification, and an explanation all in one go.

   There’s only one problem with that sentence. It’s a lie.

   You see, all companies have the ability to deviate from the budget, especially for the right reasons. You could ask any company if they would be willing to spend one hundred thousand dollars to make a million dollars. The answer would be a resounding yes.

   Not once would someone say, “Hold on, let me check the budget.”

   It’s not a question about what the budget has in it, or what the pay band is. If the value is there, every company would be happy to pay for that value.

   The secret then is how do you increase your value? And how can you demonstrate that to the marketplace?

How Do You Increase Your Value?

   There are three key areas that help you increase your value. Each of these three areas will help you produce more value, and thus become more valuable to the marketplace.

Attitude

“Attitude is everything, so pick a good one.” ~ Wayne Dyer

   How you approach a situation, the attitude you adopt, will play an unprecedented role in generating results. A person with a positive attitude not only is more pleasant to work with, but that positivity will even help you overcome obstacles more easily. 

   The best part about attitude is that improving it is free, and instantaneous. 

   Take a look at your attitudes surrounding work, life, family, and money. Where can you turn your thoughts into something positive, and increase your successes?

Knowledge

   Knowledge is power. It’s also extremely valuable. There is a reason that doctors and lawyers get paid so much. It’s because the knowledge they hold is valuable.

   In every profession, learning how things work will make you more valuable. Whether that’s new systems, new processes, or new ideas. Learning about your field will help you command a higher price tag to the marketplace.

   Education is an on-going process. If you want to be more valuable, and thus paid more next year, you need to increase your knowledge this year. Every month, every week, every day, you need to strive to be better than you were yesterday. That is how you will continue to increase your value and raise your earning potential.

Skills

   While knowledge might be learnings, skills are a subset of practical wisdom that you can apply for better results. The primary skill that everyone should focus on is communication. The ability to communicate effectively is alone with the price of admission. 

   Developing skills like communication, time management, and prioritization will help you produce exponentially better results. Those results will in turn drive up your value to the marketplace.

How Do You  Demonstrate Increased Value?

   Becoming more valuable is only half the battle. You also need to be able to demonstrate that value to the marketplace. 

   Showcasing your skills, attitudes, and knowledge can be tough though. While some knowledge, like a law degree, can be verified from an academic institution, the vast majority of your education will come from other places.

   The books in your library. The seminars, conferences, and courses you’ve taken. The experiences you’ve had.

   Demonstrating a positive attitude is again something that is harder to show-off. For this one, you need only to approach life with a positive can-do attitude, and your reputation will take care of the rest. People are quick to vouch for someone brimming with that can-do-ness.

   But for your employer, most of the time those nuances are taken for granted. Demonstrating those qualities aren’t always enough. In those cases, you need to determine what value-add activities you perform, and showing how you produce a positive return for the company.

   Take a look at your work. Are you generating revenue for the company? If so, look at your billable utilization. The more hours you bill, the more money the company makes. If you can deliver more value, you can be billed out at a higher rate. As you grow in your career, how much more can you make for the company?

   Answering that question will help you tremendously in any compensation discussions, as you can show how your growth and development actually makes the company more money.

   If you’re in a non revenue generating role, look at the projects you are undertaking. What is the impact of your efforts? A project that reduces the costs for a company is just as valuable as generating revenue. Reducing expenses helps grow the bottom line.

   Learn what value you bring to the company. Understand how the work you do each day helps drive success for the company. Once you know this, you can shine a spotlight on the areas that you are valuable. 

   How do you raise the roof on your economic earning potential? 

   Become more valuable, whether it’s through a better attitude, additional knowledge, refined skills, or a combination of all three. And then learn how your efforts are creating value. Once you can explain that, you can command a higher economic premium for your efforts. 

   Success is a journey. One you don’t just go through, one you grow through.

Re-calibrating Your Autopilot Function

   Do you remember a time before this covid crisis hit us? Those hours spent commuting? How many of those drives /walks /train rides do you actually remember? And how many of those days were you simply moving through life on autopilot?

   This weekend, while out picking up some appliances for the house we’re renovating, I found myself hopping back on the highways after a long day of work. As my foot sank lower into the gas pedal, my mind slipped back to the seemingly endless lists of next-steps that we’re working through. And just like that, without even thinking, I was cruising back home. 

   Only I wasn’t heading home.

   My autopilot hadn’t re-calibrated to reflect my new postal code, and as a result I was speeding towards an unplanned destination.

   Fortunately, my life’s co-pilot had her eyes on the street signs as we roared on by at over one hundred kilometers an hour. She quickly interrupted the autopilot sequence, and brought us back on course.

What’s your destination?

   Where are you heading? Not just after a long day, but every day. What are your goals? What future do you want to live in?

   Set your destination. The things you want to do, the places you want to see. The person you want to become.

   Make sure you are calibrating your navigation system to guide you to the right destination.

Recalibrating Your Autopilot Function

   Once you know where you are going, it’s time to evaluate your systems.

   Conduct your pre-flight checklist.

   What are you doing automatically, every day? We all have routines. Routines that serve you, like brushing your teeth for good oral care. 

   But sometimes your routines aren’t helping you. Maybe it’s hitting snooze every morning. Or washing the week down with a crisp, cold, adult beverage. 

   Map out your routines, and project into the future. Where will you be in 5 years? 10 years? 20 years if you keep doing the same things you’re doing now?

   An almost imperceptible shift in direction could land you at your destination, or send you hurtling into the abyss.

   Just like an airline taking off in New York, heading for the sandy shores of San Diego. Half a degree off, to the north or south, will send that flight into the middle of nowhere, Mexico, or swimming with the fishes in the Pacific Ocean.

Calling On Your Co-Pilots

   Sometimes we can’t see that imperceptible change in direction. Sometimes we’re too close to the situation to realize that our routines are taking us to places we don’t want to go. Sometimes, you need a co-pilot to correct your course of action.

   Just as my co-pilot steered me back in the right direction, there will be times you need that nudge. 

   Who knows you best? Who can give you honest feedback about your routines? Those are your co-pilots. The friends, family, and loved ones who can steer you back on track.

   Much of your success depends on moving in the right direction, consistently, day after day, year after year. 

   Make sure your systems are calibrated correctly, so when you do flip on autopilot, you end up heading exactly where you want to go.

A Fresh Perspective

   How do you see the world right now?

   Fear about coronavirus? Concern over global warming? Angry about politics? Concerned about financial matters?

   Every situation, every trial and tribulation that we face in this world has the power to destroy you, or define you. How we view the world, the lens we apply, will largely shape the options we see and choices that we make.

   While there can be no mistaking that coronavirus has presented its own unique challenges and obstacles, how we react to this situation is entirely within our control. Despite what popular news media outlets propagate, coronavirus doesn’t spell the end for small business owners. 

   On Saturday November 28th, 2020, a couple friends of mine tied the knot. (Congrats!) And a wedding during a global health crisis poses its own unique challenges. But rather than let the complications paralyze them, the wonderful couple looked for opportunities to enjoy and share the day with their loved ones. Turning to technology, they were able to live-stream the event around the world, enabling loved ones on a different continent to share in the joyous occasion.

   Closer to home, my girlfriend looking for a unique gift turned to Etsy to find something perfect for this wedding. The result, a “coronavirus wedding” cookie.

   A talented local woman decided to turn her love of baking, and her new-found free time in quarantine life, into a side-hustle that capitalizes on an obstacle we all face.

   Here we have the same situation: coronavirus getting in the way of weddings. One couple doesn’t see this as a roadblock, but instead leverages technology to forge ahead with their love, while still bringing the experience to their loved ones.

   And a completely unrelated individual, seeing the massive disruption to weddings in 2020 as an opportunity to supplement and grow her income. All this, while thousands of others are cancelling weddings, and hundreds of thousands are filing new unemployment claims.

   The same situation, the same challenges, yielding vastly disparate results.

   Flipping the mindset which you approach any situation will open your eyes to new doors, new opportunities. These opportunities aren’t new, but they only reveal themselves when you change the way you view a problem.

   These examples are all around us. For decades, the mentality for gas-guzzling automobiles was to make more efficient engines. Europe is flooded with small-engine cars, all striving to hit emissions standards set by regulatory bodies. Sticking with the widely accepted way of thinking about the problem didn’t reveal a brand new solution - electric vehicles. Now one of the wealthiest people in the world, Elon Musk proved that thinking about the same problem in a different way is a viable way to succeed. No longer are we surprised to see a Tesla on the road next to us.

   What challenges are you facing right now? How can you think about those problems differently? Thinking about the same problem from a different angle will reveal to you different opportunities and options. 

   Who knows? Behind those newly revealed doors may lie the opportunity you’ve been waiting all your life for.

How to Combine Finances With Your Partner

   Who picks up the dinner check in your relationship?

   There are many different considerations when bringing each others’ finances into the relationship.

Step One: Know Thyself

   Who makes more income? Are the income streams steady? What are your spending habits? What are theirs?

   All these questions should be answered before you start merging accounts together. Your relationship with money will have a huge impact on the success of combining your finances. Understanding how you operate with money will help you avoid some of the more common relationship landmines that explode some couples’ futures. 

   And that’s no understatement. David Ramsey’s team turned up in studies that money issues are the second leading cause for divorce, only just barely beat out by infidelity.

   Assuming you’ve got a solid grasp on your own psychology of money, you can move to step 2.

Step Two: Communicate, And Trust

   After you know yourself; how you feel about money, how you envision this major step playing out, now it’s time to speak to your partner.

   The first of many such conversations.

   The key to most things in a successful relationship is communication. Finances are no different, and are perhaps even more important. Especially with the emotions often tied to the almighty dollar.

   Have regular, honest and open talks about money. How much do each of you have saved? What are your financial goals? What are your life goals, and how does money impact them?

   Getting on the same page will help you work through any difficult times that come up.

Step Three: Pick a Playbook

   Now that you’re on the same page, you need to decide together how the next chapters are going to play out. And to do that, we fall back to how we started.

Who picks up the dinner check?

   As there is no “one-size-fits-all” in relationships, there are a few commonly utilized “playbooks” for how couples approach this topic. 

Half-the-Pie

   One approach takes the view that both parties are equal. A joint account is established that each person contributes the same amount into. Any shared expenses are paid from by this account, meaning each person is contributing the same financial resources to the relationship.

Why does this Work? For couples who earn the same amount of money, this approach avoids any disputes about who is picking up the dinner check. Or the cable subscription. Or any one of the numerous other expenses incurred. Each person is paying 50/50 for their usage.

When might this fail: The flip-side, if couples aren’t on equal income levels. This approach can lead to one person contributing far more, as a percentage of their earnings, to the shared expenses. Ultimately, this means the lower income earner has less money for themselves, and resentment can start to form at lavish spending from their partner.

Equal Slices

   Similar to the “Half-the-Pie” approach, the equal slices approach involves setting up a joint account. But instead of each contributing the same dollar amount, each partner contributes the same percentage of their income.

Why does this Work? Especially useful when there is an income difference, this approach has each person contribute based on their earned income level. This is especially helpful in relationships where one person’s income is variable, either from work fluctuations, or as they start a new business/career. By splitting costs by the percentage, rather than raw dollars, one person isn’t unduly penalized for those income fluctuations.

When might this fail: While each partner is contributing the same percentage of earnings, that doesn’t always equal the same number of dollars. Any spending from the lower-earner can cause the high-income partner to question those expenses. The concern here is that someone is “free-loading”, again causing resentment.

Tit-for-Tat

   Often seen when a couple first starts dating, this approach alternates picking up the tab for things. Your partner pays one dinner bill, you pick up the next one. 

Why does this Work? Best used at the early-relationship phases, this approach doesn’t place too much weight on any one transaction.

When might this fail: This unstructured approach works well in the dating stage, but starts to fall apart when you start to intertwine your lives more completely. Some bills, like hydro, internet, rent, etc. aren’t well suited to a tit-for-tat style of treatment. On top of that, sometimes the bills aren’t seen as equivalent. A quick pizza order might not be seen as the same as that nice steakhouse meal last time. 

What’s Yours is Mine, Baby

   This approach joins everything. All accounts, all debts, everything.

Why does this Work? This approach takes the individual out of the equation. Everything becomes about the couple, and all incomes and expenses are shared.

When might this fail: The loss of some financial autonomy can be difficult. In this playbook everything is shared, meaning hobbies and individual purchases are made from a joint account. Her love for baking might not be on the same scale as his love for motorcycles. And no amount of brownies can bridge the gap between a bag of flour and 800 pounds of chrome and gasoline.

Scenario-Setting 

   This approach sets a scenario to live out before it becomes a reality. The most commonly seen scenario comes with the decision to raise children. Many times, this is a long-term reduction, and sometimes elimination of income from one partner. Learning to live on one income is a large adjustment for some people.

   Your scenario is yours to imagine, as you test out your ability to do it. Maybe it’s starting a business. Raising children. Retiring at 30. Or taking a year to travel the world. Testing your scenario first gives the confidence to pursue your dreams.

Why does this Work? Whatever your reasons, whether it’s parenthood, starting a business, or just the financial freedom, this exercise can show some incredible benefits. Living on one income, for example, can help jump start your financial foundations with extra investments and the development of a solid emergency fund.

When might this fail: This might fail if your lifestyle doesn’t adjust to allow for your scenario. Often we allow our lives to scale as our income grows, and living out any hypothetical scenario usually involves an income reduction, temporary or permanent. If your scenario is ambitious, it might take a few tries to get this right.

Step Four: Establish the Ground-Rules

   Once you’ve selected your playbook for combining your finances, it’s time to lay down some ground-rules. Here are a few important ones:

Maximum Dollar Spend / Personal Discretionary Funds

   No matter how you decide to combine and split your finances, each of you will inevitably want to make a purchase the other might not appreciate the same way. Having the autonomy to make those purchases without fear of judgement is important. For those purchases, you need an “allowance” over which you have free reign. 

   Want those new shoes? That’s what your allowance is there for. 

Guilt-free spending.

   Whatever the dollar value, each person needs to have a spend limit where they are authorized to buy without consulting the other. Over a certain dollar value though, either you need to save your allowance, or you need to consult your partner. The limits are yours to set.

Retirement Savings

   Saving for the future is important. There are tax advantages of having each partner possess a healthy retirement savings account, despite lifetime income limits.

   Setting these expectations in the ground-rules is important. How much risk to take in the investments? How much should be funded every year/month?

   Adequate preparation in this area will put you well ahead on the road of life. Have your partner keep you accountable.

Accepting Debt

   The final ground-rule to lay before combining finances with your partner is when and how to accept debt. Whether it’s a new credit card, or even student loans, these decisions have major implications on your financial health. 

   These decisions are too important to not be talked about.

   Combining finances with your partner is a big commitment, but one that affects all of us as we invite others into our life's journey. Knowing who you are is an essential first step, checking the ship for seaworthiness before inviting someone else aboard. 

   Communication and trust cannot be overstated, as any playbook falls apart without those two elements. 

   Combining finances with your partner doesn’t need to be complicated. The right ground-rules to keep you out of trouble, and you and your partner will be in a better place. 

   Stay together. Stay happy, stay healthy, stay wealthy.

Share the Load: 5 Risks of Co-Signing Loans

   Do you own your own home? Do you want to? Did you buy it with your partner?

   For the past few decades, the appreciation of real estate in several high-demand markets has significantly outpaced income growth in the same locations.

   If you want to live in Sydney, London, New York, Toronto, Vancouver, or Los Angeles, the prices of real estate have skyrocketed. As personal incomes fall further and further behind, the financial ability of tens of millions of millennials and Gen Y-er’s falls short of the bar. 

   If you want to “get into the market”, you might be forced to consider other alternatives. For the extremely fortunate, there are family members able to provide financial assistance to get over that down-payment hurdle. But the vast majority of people simply don’t have that luxury. 

   Another alternative that is more frequently coming up is having someone co-sign the loan.

   But co-signing a loan comes with its own risks, more heavily weighing on the co-signer.

Borrowing Against Your Future Options

   Debt is a financial tool, one that comes with its own rules. While any tool can be used to your advantage, you need to understand the rules before you play the game. The important element for a co-signer to understand is that the debt is effectively considered theirs. 

   If you co-sign a loan for someone else, that debt goes on your credit report. This extra use of credit could be a benefit, by diversifying your lists of financial instruments. But, that additional debt also increases your debt utilization. 

   Having too much debt can create difficulties in obtaining more. And when you’re a co-signer and not receiving a direct reward, losing those debt options can put you in a bad spot financially.

High Risk, Low Reward

   When you co-sign a loan, you are taking legal and financial responsibility for those debts. While it might feel good to help a family member or friend out, those financial obligations don’t provide a return outside of that good-will feeling.

   While generosity might be a key to finding lasting happiness, taking on too much risk for a low reward doesn’t balance the equation.

   Keep in mind, that you are needed to co-sign a loan because the other party isn’t financially established enough on their own. While that may be of no fault of their own, that doesn’t change the implications. The primary borrower is too risky to loan to without collateral. And you are becoming that collateral.

Additional Work for You

   Similar to the low-reward, co-signing a loan takes on an additional administrative burden. 

    While you might not ever need to pay any of the installments, you certainly need to know when and how much is being paid. Understanding the terms and obligations of the loan is essential, since the loan is effectively yours. 

   There is also the on-going burden of checking in, making sure those payments are being made on time, every time. This type of routine cadence puts an extra check-in in your calendar. Not to mention, you’ll need to become very comfortable talking about financial topics with the primary borrower.

The Downside of Your Legal and Financial Responsibility

   If all the rest sounds like work to you, you’re right. Co-signing isn’t a simple “good deed”. You are financially responsible.

   Ultimately that means if the debt isn’t being paid, you are on the hook. You could get sued over the loan, and you would have to pay the entire balance. 

   Often that legal measure falls on your lap as the co-signer first. The lender is looking at how best to recover their loan, and as we already mentioned, you as a co-signer are likely in the stronger financial position. For a lender, that simply means you are more likely to pay-up than the primary borrower who is defaulting.

The Hidden Cost of Settling

   Of course, not all co-signed loan cases end up being paid out in full. If it comes to that, often the lender will be willing to take a settlement. Those settlements could result in you paying only a fraction of what was originally borrowed.

   But a settlement isn’t as good news as it might sound at first.

   Under both US and Canadian tax laws, any amount less than the original principal that is settled on must be considered as income. Let’s say you owe $ 500,000 on a co-signed loan where the primary borrower has defaulted. The mortgage company might accept payment of $ 400,000 to discharge the loan. 

   That settlement results in a $ 500,000 (principal) less $ 400,000 (settlement), or $ 100,000 gain to income for the co-signer. This perceived gain (income) increases the income taxes that must be paid.

Important Note: If you are in this situation, go straight to a licensed tax accountant. The additional complexities require professional guidance to have the best tax results.

   Co-signing a loan, for whatever purpose, carries significant financial considerations. Whether you’re helping a family member break into the real-estate market. Or you’re simply consolidating financial resources with your significant other, knowing the implications of co-signing a loan is important.

   Debt is an important tool in your financial toolbox. Understanding how to use it, especially with and for others, can open doors that might otherwise be shut. But, don’t open those doors without knowing first what you’re letting loose.

Racing up The Ladder: Becoming More Valuable at Work

Ready to climb the corporate ladder?

   Are you worth your paycheck?

   Every person is paid for the economic value that they bring. While nothing is more visual than a salesperson earning commissions for bringing in a new deal, the same principle applies to every worker. That salesperson can’t close the deal without the right products and services on offer, the right tech setup to enable the deal, the right finances, the right team. 

   Everyone is part of a larger mechanism, one that thrives when everyone excels at their chosen specialty. 

   But how do you excel at what you do, and get paid for it?

Do More of What Matters

   Every day you do something valuable. But, you most likely also do some low-value activities too. Attending meetings that you shouldn’t be at. Answering unimportant emails. Taking long-winded phone calls.

   Those low-value activities detract from the value that you bring to the organization, and thus detract from your value to the organization.

   Do you want to be more valuable, to demonstrate that you are worth more than your current paycheck?

   The answer is simple - find the activities that are high-value, and do more of them. Increasing the amount of time spent on high-value activities will increase your value. 

What Activities Matter?

   The big question that comes up in my team when I recommend to focus on high-value activities is always; what activities are high-value?

   The answer is of course different for everyone. For a salesperson, high-value is spending time talking with prospects. While low-value is actually dialing the prospects. The difference? A thousand dead-end calls won’t stack up to one good conversation. 

   Or a consultant - delivering a proposal to a client is high-value. Recording time-sheets or answering emails, those are low-value activities. Too much time spent on those will erase the gains made by billable time on a project. 

   While every organization has a mission and vision, every department has KPI’s (Key Performance Indicators) that drive that goal. Understanding what your department's KPI’s are is essential to actually delivering that value. 

   Is your work directly related to a KPI for your department and/or company? If yes, it’s probably high-value and you should double down on that. If not, it is likely busy-work, and ultimately detracting from the value you could be bringing.

But, My Priorities Aren’t My Own

   The biggest hurdle that needs to be overcome, especially by those early in their careers is that they often don’t have a say in what they do. Those roles where you have to “put in the time”. 

   We all have bosses, and sometimes our bosses tell us to do things that aren’t driving value. Nobody is perfect, right?

   What should you do in those situations?

   Sometimes, you just need to suck it up and get it done. But do it quickly, so you can get back to the real value-add activities.

What Are You Worth?

   Decide what you want to be paid. Maybe it’s $100,000 / year. If that’s the case, you need to generate $50.00 per hour in value for the 2,000 standard working hours each year. 

   If you can do that, you’re already worth 6-figures!

   Now look at where you’re actually spending time. Did you go for an extended coffee break? Minus the cost of those minutes. Checked Facebook/Instagram? Give some of that 6-figure salary back. Attended a pointless meeting? Sign the check back to the company.

   And those tasks over which you have no control? They cost you as well. To make up for that, you need to have a few hours where your value is far greater than your desired rate.

   You are paid for the value that you bring to your company. Want to race up that ladder, and become more valuable at work? Spend more time on the most valuable activities, the ones that drive success for the business or department KPI’s.

   Just remember, for every minute that you spend not delivering the value you want to be paid for, you need to make up. Either in higher value activities, or by working more hours. And if you want a life outside of work, I’d focus on those higher value activities.

   If you want to be more successful in your career, make sure you spend the most time possible doing the things that prove you’re worth more. The more value you add, the higher rates you can charge. And that’s something you can take to the bank.

Voting for Better Returns?

   In case you missed it, one of the most powerful economic nations in the world is having an election. Stack that on top of an existing global health crisis, mounting racial tensions, environmental concerns, and you have a potent mix of fear and uncertainty.

   For our American friends, what does your vote mean for the long term future of the economy? And for those of us who aren’t casting a vote in the 2020 US Presidential election, what does the outcome mean?

   Certainly looking at the stock market the past week has shown one thing for certain: people don’t know what to expect. And that fear and uncertainty shows in stock prices spiking and plummeting all within the space of a few hours.

What Happens if the “Other Guy” Wins?

   No matter which political side you’re on, there is always “the other guy (or gal)”. And the blessing of democracy enables us to choose our leaders - which also means that the one you’ve pushed your chips in on might not always come out on top. 

   And when that happens, and the other guy wins, what happens then?

   The answer might not be that Hail Mary you were hoping for.

   The truth is, no matter who wins, the president of the United States, arguably one of the most powerful people in the world, has very little long-term influence on the stock market.

What CAN the President do?

   In times of crisis, the president exercises some very moderate influence in the form of economic relief packages. We saw this in 2008 with the big bank bailout. And we’re seeing the same thing now with COVID relief being dispensed to businesses and individuals alike. That extra cash is propping up the economy, but not in as substantial a way as many people would like to think.

   Outside of some short term relief, there really isn’t that much that the president can affect. Which means all the chest beating about how “great” someone is for the economy as a whole is just a marketing gimmick.

Who Does Control the Economy?

   If it isn’t the president, who is it that controls a nation’s economy?

   The short answer is nobody, and everybody.

   The economy is a complex system, made up of the economic productivity of all the parts. While some parts, like small businesses, may be suffering, other parts, like big tech, are thriving. One person in specific doesn’t actually exert that much influence, but rather the economy is the sum of the whole.

What Can You Do to Prosper Financially In These Times?

   Your vote doesn’t directly mean your finances will take care of themselves. That doesn’t mean your vote doesn’t matter - so for our American neighbors, go and vote. Your nation is more than just the stock market.

   But for everyone, don’t rely on the government, any government, for your financial well-being. Financial freedom is a worthy pursuit, but a journey where you are in the drivers’ seat.

   What to do, you ask?

   Keep sticking to your financial plan. Ignore the noise. For the long-range focused, invest in a diversified portfolio, and keep investing through all the ups and downs. The dollar cost averaging will take care of your returns, buying more when prices are down, and less when they are up. The diversified aspect takes care of your risk.

   For those with a more immediate investment focus? No fee savings accounts and government bonds. Those investments, while providing near 0% returns, are as safe as you can get.

   Do not try to gamble with who will win an election, and speculate about what that will mean for the economy and stock markets. That’s gambling, pure and simple.

   Success is yours, if you only make a well-thought out plan, and stick to it. Don’t get side-tracked by the clowns on the sidelines. This is your financial future, go after it with all the zeal that a commitment of that magnitude requires.

3 Steps to Recover from Identity Theft

   Identity theft is a growing concern, especially as we all expand our digital identities. 

   In light of cyber-security awareness month every October, it is important to know exactly what to do if you suspect you are a victim of identity theft. In the event of a compromised identity, there are three critical actions that you need to take.

   During 2019, I received a particularly disconcerting surprise. After an odd alert on my phone, I signed into my online banking. To my horror, my credit card bill was several thousand dollars higher than it should have been, all within the last 24 hours.

  1. Call Your Financial Institutions

   The first thing you need to do as soon as possible is to call your banks and credit card issuers, putting a stop payment on all your cards. 

   Most identity theft has one purpose, to steal your financial resources. By racking up bills and charges, you can quickly find yourself swimming in debt for purchases you never made.

   Fortunately, by reporting quickly, you can have those charges stopped, and even reversed so that you don’t owe anything.

   In 2019 after my credit card details were compromised, I immediately called Visa to explain those charges weren’t legitimate. Within 5 minutes, I had laid out that these charges were indeed not mine, and shouldn’t be charged to me.

   That simple phone call, made quickly, had all my cards locked, the charges reversed, and new cards reissued and in the mail.

   Of course, the most important things here are transparency, honesty, and speed.

   When I called Visa, they had actually already flagged those transactions on my account as suspicious. My honesty through the process meant that the whole situation was resolved quickly. But calling the bank isn’t always enough.

  1. Report the Fraudulent Activity 

   While a compromised card might not be full-fledged identity theft, if there are concerns that the fraud goes deeper, you need to report that theft to the authorities.

   Notifying the police is a good first step, especially if the identity theft includes the loss of personal identifying documents like your driver's license.

   The next group to identify are fraud protection agencies. In Canada, you should be contacting the Canadian Anti-Fraud Centre. In the US, you should be contacting the FTC. Each of these consumer protection groups provides additional resources to you, the victim, and also take steps to protect others from similar incidents.

  1. Update All Passwords and Accounts

   We’ve all experienced the frustration of our employer’s IT department forcing a password change every 90 days. You can’t reuse old passwords, they can’t be too easy to guess, and you’ve still got to change them every 90 days? 

   But if your identity does get compromised, the third item on your action list should be to update all your passwords immediately. A password generator like lastpass can help generate strong passwords. 

   Identity theft is a serious problem, and getting more and more prevalent in our society. While changing your passwords frequently and protecting your personal identifying information are both important, we can’t always protect ourselves from the unseen. 

   If someone does get a hold of your personal or financial details, it is important to act quickly and decisively. Set aside panic and hold off on your anger. Following these three steps will help you protect your resources, and recover from identity theft quickly.

5 Types of Insurance You Need

   Insurance can provide a life-line in a dire situation, but only if you have the right coverage. With so many options for insurance, what types of insurance do you need to keep your family protected?

   The 5 types of insurance here are all ones that you should definitely consider for your insurance portfolio.

Life Insurance

   Everybody dies at some point. And even death isn’t cheap. The costs associated with a funeral can add up quickly, and leave your loved ones holding a hefty bill. One way to protect your loved ones from the high costs of dying is through life insurance.

   Life Insurance pays out your policy in the event of your death. This can help cover funeral costs, and provide a financial safety net to help your loved ones weather a difficult storm. These policies can be broken into Whole Life Insurance, and Term Life Insurance. The type of policy that is best for almost everybody is Term Life Insurance.

   Life insurance isn’t required for everybody all the time, but in certain life situations that insurance is the smartest choice you can make. If you have significant financial obligations, whether that’s from buying property, owning pets, or raising children, life insurance is essential. The same goes for the primary bread-winner in a family. Life insurance protects your loved ones if you aren’t around to support them anymore.

   It is often recommended that your Term Life Insurance policy is 10 times your annual salary. That provides enough of a financial safety net to help your loved ones carry on this wonderful, albeit sometimes difficult, journey without you.

Medical Insurance

   Medical insurance is a must-have for everyone. A single medical issue has the power to bankrupt even the wealthiest among us. Because the costs or medical care are so high, you need to have health insurance.

   Fortunately for the Canadian readers out there, that health insurance is paid for by the government. But if you aren’t so fortunate to have government help with those medical bills, you need to buy your own health insurance.

Home or Renters Insurance

   Ask anyone who has just moved about how much stuff they have. As they unpack boxes upon boxes of things they’ve collected, the value of all those accumulated possessions adds up.

   One thing you can be sure of, it’s that life throws curve balls every once in a while. And some of those curve balls show up in the form of theft, floods, fires, earthquakes, and more. 

   To protect your assets, you should have homeowners or renters insurance. These insurance policies protect your home and everything that’s in it. And that can mean a lot of things. 

   If something were to happen and you lose your worldly possessions, home/renters insurance will even pick up the tab to help you settle somewhere else. Whether that’s paying your rent somewhere else, or setting you up in a hotel. Tragedies don’t have to wipe you out financially, as long as you have the right homeowner or renters insurance. 

Auto Insurance

   Automotive insurance is another must-have if you own a vehicle. Thousands of pounds of steel hurtling down a roadway might be a convenient way to move around this big ol’ world. But, it’s also a good way to really cause some damage. 

   Having auto insurance helps cover you from both the property damage that arises from a car accident, but more importantly, that insurance covers any necessary medical costs. Those costs can quickly lead to financial ruin for an individual. 

   Not only is auto insurance a good idea, it’s legally required before operating a motor vehicle. Don’t gamble with your financial life. Make sure you’re covered by auto insurance before you drive.  

Long-Term Disability Insurance

   Have you ever considered not being able to work? Most people don’t give that any thought. But as you are the source of your future wealth creation, you need to protect yourself and your ability to create that wealth. 

   Disability insurance provides income replacement in the event that you are no longer able to work. While other insurance can help with things like medical bills, other costs don’t simply go-away because you can’t work. For those costs, having a guaranteed income replacement is essential.

   When shopping for disability insurance, the best rates are often through your employer. In fact, many employers provide this insurance as a mandatory benefit. But, not everyone has an employer. For those readers who work for themselves, having a disability insurance policy is essential. This will provide the financial safety net you need in case you are unable to work for an extended period of time.

   Life insurance, health insurance, homeowner / renters insurance, automotive insurance, and disability insurance. These policies should make up the majority of your insurance portfolio. Each policy is designed to protect you and your loved ones from an otherwise devastating situation.

   The right insurance ensures that you are taken care of, no matter what life throws at you.

How Does Insurance Work?

   Insurance offers you the ability to protect against the downside risk of many things in life (even death itself). But, is insurance really worth it?

   Of course, the answer is, as always: it depends.

   But before we can understand when insurance is a good idea, and when it’s best to say no, we need to look at what insurance is.

What is Insurance? And how does it work?

   Insurance is a promise to pay you if a certain event takes place. 

   The event in many insurance policies is the replacement of a product in case it breaks (device insurance). But it could be covering damages caused, for instance, by a driving incident (car insurance). Or even paying your estate funds in the event of your death (life insurance).

   Selling these “guarantees” is a business. A very lucrative business.

   And the skyrocketing corporate profits means one thing: you, the consumer, loses out far more often than you win.

   Most of the time that’s a good thing. It’s far better to pay for life insurance and not die. Or car insurance and not crash. But, with insurance offered on a wide range of products that we use in our daily life, buying too much insurance can be a poor financial decision. Spending money on things you don’t need is a poor purchase, no matter how you look at it.

When Should You Buy Insurance?

   Insurance is often made more complicated than it needs to be. Deciding when to buy, and when to pass on insurance, needs to follow a simple formula.

“What you are insuring needs to be of sufficient value to put you in a bad financial position without the insurance.”

   What this means is, if what you are insuring would be difficult to replace with your current financial resources, the insurance is probably a good idea. Or put even more simply:

Emergency fund < Value of Item = Buy Insurance

   If your emergency fund is sufficient to cover the loss, you shouldn’t buy the insurance. Instead, keep increasing your emergency fund as well as your other investments.

   If on the other hand the value of what you are buying is more than your emergency fund, then insurance is a good idea.

   Insurance is often offered on a variety of purchases. I’ve had offers for insurance from anything as small as a video game, to cell phones, all the way up to my automobile and home.

   Most recently, when shopping for new appliances, I faced the sales pressure from the appliance salesperson. I was being regaled with tales of broken appliances that weren’t covered by warranty, and frightened by the estimated cost of repair visits. But quickly looking at the numbers, I could tell I wasn’t going to come out a winner. Insurance on the kitchen appliances was coming out to more than 10% of the total cost of all the appliances. Do I buy? Do I pick and choose? If so, which appliance is most likely to break?

   Ultimately, I fell back on the formula: my emergency fund could cover the replacement cost of any single appliance. And the likelihood of all appliances breaking at the same time must be extremely rare. Rather than buy the insurance, I’ll be better off passing on the insurance, and setting a little extra away into my emergency fund.

Further Use of the Insurance Formula

   Of course, sometimes insurance is more than a simple yes/no question. In the case of home and auto insurance especially, there are different policies. One of the key factors in determining the cost of the policy is the deductible, or the amount you need to pay first before insurance pays out. As you can imagine, the higher the deductible (the more you need to pay first), the lower the insurance rates.

   The formula we looked at above can be modified slightly. 

Emergency fund > Difference in Deductible = Buy High Deductible Insurance

   In this case, if you can cover the difference in deductible without jeopardizing your financial position, you should buy the higher deductible insurance. This will mean you pay more in the event of a claim, but if you don’t need to make a claim, your insurance rates are lower.

   Common auto insurance deductibles are $0, $500, and $1,000. If you can cover the $1,000 deductible, the difference in insurance rates from a $0-deductible insurance policy could be thousands of dollars over the course of your life.

   Never fall prey to sleazy sales tactics again, you have the numbers to support you in making the right choices. That simple formula telling you what you can afford in an emergency, and what you should seek external protection on, will help cut a lot of confusion out of the insurance question.

   Making sure you are adequately covered is a function of what financial risk you can comfortably absorb personally. When you can look out for your own financial interests, you need to rely less on insurance to cover the difference. And spending less on unnecessary insurance helps you get even further ahead. 

   The freedom to pick and choose what is right for you without worrying about repercussions is liberating. That is one piece of financial freedom.

What is the best Life Insurance?

what is the best life insurance

   Is your family protected in the event of a tragedy?

   While nobody can truly be ready for disaster to strike, there are some things that you can do to ensure your family is looked after in the event of a tragic death. Life insurance is one area where you can take steps to protect yourself and your loved ones.

   But with so many insurance types and policy options, which one is right for you?

What is Life Insurance?

   Life Insurance, simply put, is an arrangement with a company that, in the event of your death, your family will be paid out a specified sum of money.

   In general, those policies are broken down into two distinct classifications; Whole Life Insurance (WLI) and Term Life Insurance (TLI).

Why Would You Use Life Insurance?

   Generally, people use life insurance to ease the financial burden of their passing. Looking out for their loved ones from beyond the grave, so to speak. 

   But, while there are some excellent reasons to buy life insurance, those reasons change throughout your journey through life.

   For example, a fresh University graduate with little to no responsibility might not even need a policy. There are no dependents who rely on the new-grad. 

   Fast forward a few years, and that new-grad is ready to start a family. Again, with two incomes, a rented apartment, and no kids, insurance might not be necessary. But as life progresses, the new couple buys their first home. Suddenly, an expensive mortgage might be a very good reason to look into life insurance.

   Over the years, kids come, and continue to grow. Insurance helps give the family peace of mind. But as the years tick on by as they are wont to do, the house gets paid off, and the kids move out and start lives of their own. Retirement savings are churning out their own returns, enough to live on comfortably for the rest of your days. Is insurance still necessary? The financial risks of an early death have all but passed.

   Throughout this fictitious life journey, there have been several points where insurance is a good idea: new home, new family, etc. But as the family life changes, so do the needs for insurance.

   And those evolving needs bring the focus back to Whole Life Insurance (WLI) and Term Life Insurance (TLI).

What is the Difference Between WLI and TLI?

   Whole Life Insurance is a guarantee to pay a specified sum of money on your death. These policies last with you your entire life, which is why they are specified as “Whole Life” policies. Simply put, you pay into a fund, and when you die, your family is paid out a predetermined amount of money.

   Term Life Insurance on the other hand, is insurance for a specified term. Usually in 5 year increments, up to 30 years (policies differ greatly, check out each policy thoroughly before purchasing. These policies cover you in the event of your death during the term. At the end of the term, the policy expires, and you are no-longer covered unless you buy a new plan.

What are the Benefits and Drawbacks of Whole Life Insurance?

   Whole Life Insurance is designed as a fund you contribute towards over a set period of time, ranging from 5 to more than 20 years. You pay into this fund on a regular basis, and they guarantee a certain dollar amount to be paid out on your death.

   The main benefit of this style of policy is that you have a guaranteed amount coming to your family and loved ones when you die. 

   Also, since this is an investment fund where you are allocating some money, you might even be able to take some of your contributed dollars out as a loan.

   But, all that glitters isn’t gold.

   Whole Life Insurance policies are expensive. I mean seriously expensive. 

   WLI policies will cost you thousands of dollars a year while you are funding the account. And, these are investment accounts. As we’ve looked at for our other investment accounts, the companies running them charge exorbitant fees. Furthermore, you cannot get out. There is no money-back option - once you’ve bought, you’re locked in for life.

What are the Benefits and Drawbacks of Term Life Insurance?

   Term Life Insurance is also exactly what the name implies. Insurance for a specified term. 

   Since there is no guaranteed payout, in fact you should hope your family never collects on those policies (to collect means you die), the insurance premiums are reduced. While WLI may cost thousands a year, TLI is only hundreds (if that). The payouts offered are usually much higher as well. 

   Another benefit is that TLI policies are simple to understand. You pay $X a month/year, for Y years, and if you die before Y years is up, your beneficiaries get $Z.

   Again, this type of policy has its own drawbacks too. As TLI policies expire at the end of the term, if you still decide that insurance is right for your family situation, your premiums will likely be higher when you sign for a new policy. The higher premiums are a result of your increased age when buying the policy, as in general, the cost of a TLI insurance policy increases as you age.

Which Life Insurance Policy is Best?

   While there can certainly be a case made for different policies, for the vast majority of people Term Life Insurance (TLI) is best. To understand the reasoning, we need to revisit why you would want life insurance in the first place.

   People get life insurance to protect their families from the unexpected, especially when the financial burdens of the family would be hard to handle as just one person. But as you age, your financial needs change. The payout of a Whole Life Insurance policy likely isn’t sufficient to help your spouse keep the house and raise the kids when you’re just starting out. In that case, the higher payouts from TLI are more valuable. 

   And as you advance in your life and financial journey, the payout from WLI shouldn’t be the “make or break” point in your financial position. Death is a fairly permanent next step, so to need to take that step to unlock additional monies is an extreme measure.

   Term Life Insurance, with its lower premiums and higher payouts is optimal for almost everyone. And the savings (the difference between a WLI policy and a TLI policy) should be put into an investment portfolio. This invested money will grow over time, and you won’t need to die to access the additional funds. 

   If you select a balanced, low cost fund, you’ll avoid those high fees and might even come out ahead! Insured when you need it, with a financial safety net built to catch your family if they ever need it.

   Life Insurance provides financial peace of mind, knowing that your family will be cared for in the event of your untimely death. Term Life Insurance is the cheaper option, and in the vast majority of cases will be the better option. With the cost differences invested in your own investment accounts, the additional investments and growth will bring you out ahead of a comparable WLI policy.

   Financial freedom includes peace of mind. Life insurance can deliver just that, for a nominal cost, at just the right time.

   To end this article in the most relevant salutation, I shall borrow the immortal words of Spoc: 

“Live long, and prosper.”

What is a Spousal RRSP?

   Are you and your partner taking advantage of the right tax breaks?

   One powerful investing option available to couples is the Spousal RRSP. 

What is a Spousal RRSP?

   A spousal RRSP is an investment account that you can open and fund on behalf of your partner. The money that you invest for your partner becomes a tax credit for you, helping you reduce taxes in the current tax year. 

   The reason to take advantage of the Spousal RRSP program is to even out your retirement assets between the two accounts. This is especially prevalent when one partner earns significantly more than the other.

   To see this in action, consider the following couple, Jane and John. Jane made $120,000 last year, while her partner John is a stay at home father. John’s income from his part time work was only $40,000.

   The RRSP contribution limits are calculated as a percentage of your earnings, up to a yearly maximum. For the current year, Jane’s RRSP contribution limit would be $ 120,000 * 18% = $21,600.

   John on the other hand has an annual RRSP contribution limit of $ 40,000 * 18% = $7,200.

   If they were to both max-out their RRSP contributions, Jane would have a significantly larger nest egg come retirement time. John and Jane would need to withdraw that money during retirement, and Jane would end up paying a much higher tax rate.

Retirement Tax Time

   In the above example so far, Jane would have a much larger retirement account balance for retirement. This means that she would be withdrawing more from her accounts than John.

   Let’s say they needed $100,000 each year for their retirement lifestyle. Jane, with the larger account, would withdraw $80,000, while John would withdraw $20,000. That means Jane pays income tax on that $ 80,000, which John pays income tax on the $20,000.

The Spousal RRSP Option

   Alternatively, Jane and John could take advantage of the Spousal RRSP. Jane’s limit would still be $ 21,600 for tax deduction purposes, but Jane could invest some of that money into a Spousal RRSP for John. 

   To ensure that both Jane and John had similar investment accounts, Jane could contribute $ 14,400 to her own RRSP, and the remaining $7,200 to John’s RRSP through the Spousal RRSP program. John could contribute his own $7,200 for the year as well. At the end of the year, both Jane and John will have $14,400 in their RRSP’s. 

   Jane will have realized $ 14,400 in tax savings from her own RRSP, plus another $ 7,200 from her Spousal RRSP contributions, for a total of $ 21,600. John will have realized his full $ 7,200 in tax savings for the year as well.

   This would give them comparable sized retirement accounts, and allow them to each withdraw a lower amount annually in retirement. 

   Instead of Jane withdrawing $ 80,000 and John withdrawing $ 20,000, they both could withdraw $ 50,000 to reach the same combined annual income in retirement. The difference here is that Jane pays a lower marginal tax rate, ultimately saving money on taxes. And less taxes paid as a couple means more of their hard earned dollars can be spent on the retirement lifestyle they want!

How Do I Open a Spousal RRSP?

   Anywhere that you can open an RRSP, you will also be able to open a Spousal RRSP. This allows you to contribute some of your RRSP allowable contributions to your spouse / partner, giving you the tax deduction and your partner the tax-deferred investment growth.

What About the Fine Print?

   As with all investment accounts, there are terms and conditions applied. For a Spousal RRSP that means a restriction upon when the Spouse can withdraw the money. Funds must sit in the investment account for at least 3 years before withdrawals are made. Making a withdrawal sooner triggers a tax liability, where tax must be paid on the contributions.

   The other caveat is this: that money is your partners. While you can contribute any amount you want, within your personal RRSP contribution limits, you cannot access or change the investments.

Is a Spouse RRSP right for you?

   If there is a large income discrepancy, caused by a stay-at-home parent, or even just different professions, the answer is most likely yes. 

   Splitting your retirement savings between both members will help balance the withdrawals. This will reduce the marginal tax rate paid on those retirement funds withdrawn.

   Spousal RRSP’s are a powerful financial tool available to couples, helping balance out retirement savings to reduce taxes in retirement. If you think this tool is right for you, perhaps it is time for an open and honest talk about the families finances. You’re in this journey together. Not all trials will be simple, so you might as well take the easy road when it’s available!

How To Start Investing (Canadian Edition)

   Are you ready to start investing? 

   The simple fact is this: you need to invest if you want to achieve financial freedom. The number of people who have made, and kept, their wealth without investing rounds down to 0%. And for the vast majority of us, we will never have the type of paychecks that could deliver financial freedom without investments.

   Like it or not, you need to invest. Your future depends on it.

   One of the primary ways for an individual to invest is to enter the world of financial instruments, in particular stocks.

Why the Stock Market?

   The stock market is simply a collection of companies. They sell ownership “shares”, that entitle the shareholder to a piece of the profits. That piece of profits, now and into the future, has a value. The market price of that value is the share price.

   It is important to look at the basics when starting to invest. Wall Street has a bad rap, much of it earned by a few bad apples that spoil the basket. But, irrespective of the story you spout about Wall Street, investing is a necessity for your financial future. And investing in stocks is one of the easiest ways to begin investing.

How to Access the Stock Market?

   Before you can invest, you need to know how to get access to those marketplaces.

   Traditionally, this was done by your financial advisor. An individual, sometimes representing your best interests, would help you place your hard earned cash into a series of investments. 

   Today, access to financial markets has never been easier. There are online brokerages, robo-advisors, and financial advisors. Each avenue offers their own advantages and disadvantages.

Online Investment Brokerages

   Investing online is an easy way for any DIY-er to get started. These online platforms and apps allow you to buy and sell financial instruments - often for a fee.

   The real advantage to these platforms is the ability to invest in whatever you want.

   Looking to buy and sell individual stocks? Can’t get enough of the weekly highs and crashes of Tesla? Maybe an online investment brokerage is for you. 

   Online brokerages allow you to choose your own investing style, and you have complete control over your successes and failures.

   The disadvantage is exactly that freedom. Your failures are yours to own. 

Robo-Advisors

   Robo-advisors also were born from the internet. The ease of accessing investment markets for anyone with an internet connection helped fuel the need for a simple, effective way of investing.

   The main benefit of robo-advisors is the low cost access. These providers give you a few choices that suit your risk profile, and increasingly, your social conscience. These choices are designed to hit a specific goal, and really provide an excellent way to get into investing.

   The trade-off of course is the loss of options. In a robo-advisors guided portfolio, you can’t pick and choose what stocks you invest in. 

Financial Advisors

   Finally, financial advisors are still around. And still valuable, for the right people. 

   A financial advisor will help you navigate some of the intricacies of investing, including multiple asset classes. The benefits of advice from a good financial advisor, with a fiduciary responsibility, cannot be understated. 

   But, that advice comes with a price. Financial Advisors are comparatively expensive to the other options.

   Of course, with more options to choose from, how do you know you’re making the right choice?

How Should You Start Investing?

   Stocks are an easy way to get started with investing. But which route is right for you?

   To help you make that decision, ask yourself a few questions:

Have you invested before?

   If no, skip right over an online brokerage. Get your feet wet with an advisor, either robo or in-person. Investing isn’t a game of chance. Learn to walk before you try to run. 

   If you have experience investing, this is an option you might consider.

How much time do you have to devote to investing?

   Self-managed investing at an online brokerage requires a lot of financial research to see the best results. And that research takes time. Lots of time. If you like reading earnings reports and company profiles, self-managed investing might be for you. You should also be re-balancing your portfolio at least once a year, and likely once a quarter. 

   Finding yourself with less time on your hands? Other options might suit you better.

Do you have a complex financial situation?

   The more complex your financial situation, the more likely you would benefit from a financial advisor reviewing your accounts. While robo-advisors are often quite good at the majority of financial situations, sometimes you just can’t beat the comfort of a human touch.

Are you just starting out?

   Financial Advisors can offer tremendous advice. But, if you’re just starting out (and reading “How to start investing” articles), you probably aren’t in a position to benefit from that advice. 

   Online Brokerages on the other hand are relatively cheap and easy to access, but provide enough options to easily make mistakes and lose your shirt.

   Robo-advisors hit that sweet spot in the middle. Enough choice to make you feel like you are controlling your financial destiny, but enough financial theory to help avoid some easy-to-make mistakes.

   The best part is, this is your financial journey. You are in control, and can pick and choose as is right for you. Personally, I enjoy a mix of robo-advisors, with some self-managed investing at an online brokerage for some additional customization. 

   Keep in mind, your future depends on you taking action. Whichever route you decide, whether it’s an Online Brokerage, a Robo-Advisor, or a Financial Advisor, regularly investing money is essential.

   Anyone can achieve financial freedom. You just need the right investments to help you along your journey.

Oh, The Places You’ll Go

Which road are you taking to success?

   Where does success come from?

   Were some people simply born with more talent? Or, is success learned?

   To answer that question in true Canadian fashion, let's look at hockey. 

   In his book Outliers, author Malcolm Gladwell examines the quintessential Canadian pastime, including looking into the storied histories of the world’s top players. 

   Statistically, the best in the world are born in the early parts of the year, January to March. But there’s more to this anomaly than meets the eye.

   As Gladwell goes to show, being born in the early part of the year makes you the oldest on the rink. Since elite players are selected and groomed from a young age, being older gives you significant coordination and size advantages over the younger people you are matched up with. This invariably ends up with coaches and parents touting their child’s sporting prowess, and enrolling them in more practice time.

   The increased number of hours devoted to an area of interest unfailingly develops skills at a faster rate. And those kids that were “naturals” at hockey? Well, increased ice time makes them better players.

   In other words, we create our own self-fulfilling prophecies. We believe we are good at something, in this case hockey, so we spend more time practicing. More time practicing in turn yields better results.

   But what about those late-year children? Are they any worse at hockey? Or are there undiscovered phenoms, the proverbial diamond in the ruff?

   The unfortunate reality for many is, we’ll never know. They will simply never get their shot at success on the ice rink.

   All because of a story they were told as a child.

   “You aren’t as good at hockey.” “Math just isn’t for you.” “You aren’t good at <fill in the blank>.”

   Certainly some things we aren’t good at. Fact: Nobody is great at everything.

   But are you selling yourself short because of a story that you’ve held onto for years without properly testing?

   Examine your life. Where do you say, “Oh, I could never do that! I’m just not a …” 

   And put those statements to the test. Don’t think you can write? Try writing. Sales? Try selling an idea to a friend or colleague. Talk to strangers? Try starting a conversation. 

   It’s time to unshackle yourself from those long-held and never tested narratives. Your success belongs to you. Not to some false negatives installed on your mind when you were a child.

   This is your story. Write it for yourself.

   Oh, the places you’ll go. In the timeless words of Dr. Seuss “You can steer yourself any direction you choose…. And will you succeed? Yes, you will indeed. 98 and ¾ percent guaranteed.”

Financial Freedom: A Diet That Works

What's in your financial diet? Do you have too much unhealthy misinformation on your plate?

   How many different diets can you name? 

   Keto, vegetarian, pescatarian, Atkins, vegan, DASH, Weight Watchers… and that’s just scratching the surface of a nearly endless list.

   Hundreds of options, but for one goal: healthy living. 

   How can countless options exist, many in direct conflict with other diets, all promoting the same goal?

   Anyone who desired to live a healthy lifestyle will get lost, bogged down in the mountains of “facts” and counter-facts that each diet proclaims. And at the end of it all? They’d be even more lost than when they started their journey.

   That very same story plays out across our lives, and no more so than in the quest for financial freedom.

   I write often about the strategies for financial freedom, and each holds its own merits, depending on where you are in your journey. But for those of you just starting out, you don’t need strategies on top of plans. You need the first step. 

   The rest of the staircase will come. But only one step at a time.

Financial Dieting: The First Step

   Go on a diet. A financial diet. Cut out almost all financial information out of your life. How is APPL trading today? Who cares. What about TSLA? Irrelevant.

   There are countless broadcasters and bloggers who pander to the masses with a new story about what to buy or sell today. These “gurus” are in the entertainment business. 

   And your financial freedom? It’s not a laughing matter.

   It’s time to go cold-turkey on those entertainers. 

Low-Cost Index Funds / ETFs: The Next Step

   Once you have cut out the distractions, find a low cost index fund provider. Personally, I like WealthSimple, but there are many to choose from. Questtrade has a low cost platform, and some major banks offer low cost Index funds too.

   The key here is simple: keep management fees low. Under 1% is a requirement, and the lower they are, the better off you’ll be. 

   Index funds and Index ETF’s track the performance of a wide range of stocks, like the S&P500 or the TSX composite. Essentially, you are buying a small piece of everything. As those companies grow, so does your wealth.

Automate: The Most Important Step

   Finally, the next step that you can take is to automate. Setup your account to automatically fund every week/month, and let it take care of itself.

   And that’s it. No more stock reports. No more sensationalist stock-market entertainment shows. Just sit back, relax, and let your money grow. 

   Check back on your accounts every once in a while - I certainly check on my investments once a month. But the daily swings that are so widely covered in the media? I don’t suffer the same ups and downs. My emotions aren’t toyed with on a daily basis, and that is liberating. Just one step closer to freedom.

   Financial freedom is about more than having the money to do what you please. It’s about being free from the emotions tied to money. And in three simple steps, you can take a little piece of that freedom now.

  1. Go on a financial information diet.
  2. Find a low-cost index fund / index ETF.
  3. Invest, automatically.

   You’re on the road to financial freedom - breathe easy.

How valuable is your degree?

college degree

It’s a question asked by every person seeking higher education. Is my degree worth it?

It’s a very serious question. The financial implications alone could change your entire life’s trajectory, for the better, or for the worse.

Doors could open to immense riches. Or, you could end up drowning in student debt, qualified for little more than to pour coffee at Starbucks.

At the root of the question lies a startling and frightening truth. For the vast majority of us, our education is worthless.

The knowledge we learn, if we retain any of it at all, is available for free and accessible within the top 10 google search results.

Of course, there are some professions that require formal education. I certainly wouldn’t want just anyone patching me up on the operating table. Or setting financial policies for the entire nation.

But for most of us, what we learn in school isn’t about the knowledge we walk away with. That knowledge is free.

So why is schooling so important in today’s society?

To answer that, we need to go back in time a few decades. Back to a time when there existed a knowledge gap.

The Knowledge Gap

It used to be up until fairly recently, that schooling was the way to improve your family's economic future. Knowledge was a commodity, and having gathered that knowledge through some form of higher education was a valuable asset to have.

The more you knew, the more value you could bring, and the more you were worth to an organization. More schooling was directly correlated to increased earning potential.

But recently, that “knowledge” imparted by the great educational institutions has become so commonplace that it’s considered a prerequisite to even get a seat at the table. Everyone has the “knowledge” associated with a bachelor’s diploma or degree, so there is no longer that gap to fill. No gap, means no economic advantage for acquiring the knowledge.

While one may argue that getting a degree is necessary to even be considered for a seat at the table, the value of that degree has diminished greatly.

The Information Era

Compounding the issue is the availability of answers to just about any question or problem that you face. For the cost of a reliable internet connection, all the worlds’ knowledge is available 3 clicks away.

In the information era, specialized knowledge is available for such a cheap fee, that there is virtually no economic value to acquiring it.

But don’t despair yet. While the knowledge you might seek has little economic value, there are still some merits to growth and development.

The Skills Gap

For centuries, the gap was knowledge. The information age has eliminated that gap, and levelled the playing field. Never before has the opportunity for success been granted to so many people.

Today, anyone, from any background, has the opportunity to succeed.

You just need to recognize that in the changing world landscape, the gap has changed. This means that you need to look at something other than information to increase your economic value.

And that new gap is the skills gap.

Knowledge is no longer the solution, but the ability to apply that knowledge. The skills to take the information, and make something valuable out of it.

What are the most valuable skills?

While there are many areas that you can focus on developing to increase your economic value, there are a few common areas that are virtually guaranteed to improve your results.

Setting and achieving Goals is one of the best skills that you can master. The ability to determine what is an important direction, and then setting up the systems and routines to get you there will serve you no matter your vocation. Building upon that skill set are the skills of prioritization. Understanding where to focus in today’s world of constant distraction will further compound your ability to deliver valuable results.

The next universal skill set that is sure to deliver economic value, is the ability to communicate clearly. Communication is one of the most highly rewarded skills. That skill goes beyond language, and spills into crafting your message, compiling compelling stories, and creating real change.

Where can you go to improve your skill sets?

If skills are becoming more valuable than knowledge, knowing where to go to develop those skills is essential. Luckily, higher education institutions are on that list.

Colleges and Universities are a great place to stimulate the development of skills. From setting goals, to prioritizing under a dynamic workload, schooling institutions help develop the skills that add value in today’s market.

But there are other options too. Online learning platforms have seen massive jumps in both quality and popularity. The focused learning curriculum of these courses allow you to tailor your growth specific to your journey.

The important note here is this: it matters far less what knowledge you are learning, and far more what skills you are acquiring.

Understanding the different styles of Picasso and Van Gogh has limited value, but having the skills to clearly communicate the benefits of a new strategy or product will greatly increase your value to the marketplace.

When advertising your resume or academic background, be sure to highlight the skills you have developed. Those skills are the answer to what will bring you fame and fortune.

To answer the question; how valuable is your degree? Ask yourself not about what information you now possess, but instead what skills you have and can use to increase your value.

Target Date Funds – Set it and forget it?

Chances are, if you have looked into retirement savings at all, you’ve seen Target Date Funds (TDF) advertised. But what are these funds? And, more importantly, will they actually help you retire on time?

What is a Target Date Fund (TDF)?

Simply put, a target date fund is an actively managed mutual fund. The funds are managed in a way to re-balance, and ultimately move into more conservative investments as the target date gets closer.

The premise is to handle the asset allocation for you, so that you don’t have to worry about complicated investment decisions. You simply pick the year you want to retire, typically in 5 year increments, and the fund handles the rest.

Marketing efforts by major investment industry players, especially over the past 15 years have really paid off. These funds are so popular, that employer sponsored RRSP’s and retirement accounts are almost entirely comprised of these types of funds.

Does the Target Date Fund live up to the hype?

Yes.

And no.

There are several pro’s and con’s to Target Date Funds. Let’s look at each, starting with the criticisms.

What are the issues with Target Date Funds?

While each investment broker will offer a different sales pitch, the criticisms can be broadly broken into three categories.

A One-Size-Fits-All Approach

When you’re simply estimating the date you want to retire, the fund doesn’t take into consideration any of the other factors of your financial health. The most important on this one is your risk profile. While a longer time horizon means you should be prepared to take on additional risk at the onset to reap the return of compounded growth. However, if you are planning to use those funds for another, shorter-term option, like home-buying or education, all of a sudden your risk profile dramatically changes.

Your financial future is as unique as you are. And a target date fund simply doesn’t have the customization to accurately capture your unique needs and desires.

It’s a Competitive Game

Another criticism is that Target Date Funds are not all the same. Even if you picked the same time horizon, let’s say TDF 2035 (15 years from now). Different funds, run by different managers, will carry a slightly different selection of investments inside. This difference in investment options, and the varying mix of debt to equity investments means that each fund performs differently.

In the competitive market of mutual funds, this can lead to poor decisions, and poor returns. This is witnessed as the number of investors who can consistently beat the general market on a somewhat reliable basis is numbered to only a handful of investing professionals. While we’d all like to think the mutual fund manager is Warren Buffet or Ray Dalio, that just isn’t the case.

TDFs: Pay-to-Play

Another criticism of target date funds is that they are a pay-to-play game. Essentially, the offerings you receive are only a small subsection of the entire market. For example, your bank will only offer you fund options that are managed by a related institution.

Many years ago, before I became immersed in the world of personal development, I held a fund with my bank. Looking deeper into the details behind my target date fund, I was not at all surprised to find that the investments held in the TDF were all smaller subsections of other funds sold by my bank. That meant my RBC fund had varying percentages in RBC Emerging Markets, RBC Utilities Funds, RBC US Funds, etc.

What that really means, is that the funds that you see are often covering the ever compounding fees from other mutual funds. And as we’ve previously discovered, even a small change in fees can have a dramatic effect on your total lifetime returns.

On top of that, the selection of funds will be further reduced by the institution that you are working with. This is why many employer sponsored plans aren’t the same across different companies. The offerings aren’t selected for what is best for you, the individual, but based on the rates and admin charges that the company pays to participate.

Knowing this, the question still remains, “It can’t be all bad news, what is the up side?”

The Key Benefit of Target Date Funds

Investing can be complicated.

Actual returns are impossible to predict. And the choices! There are more options in front of you than if you walked down the cereal aisle at the grocery store.

With all those options, in the face of uncertain results, target date funds had the perfect marketing advantage: they were simple to understand.

Someone, presumably an investment professional, will automatically re-balance and reinvest your portfolio with the goal of reaching a retirement date with an appropriate investment mix.

What consumers were really hearing was: Invest here, and you can retire on 20XX date.

The allure of that simplicity, and some misconceptions surrounding how excellent TDF’s are, has helped these style of funds explode into the investing scene in the past decade. Odds are, that if you have investments through an employer sponsored retirement plan, or even if your individual plan was advised by your banker, that you hold a TDF. With the majority of people invested in these style of funds, what do you need to know?

Key Take-Aways: Target Date Funds

TDF’s are convenient, and easy to understand. Investing in them could be exposing you to crippling investment fees. But, the only thing more costly than those crippling fees? Not playing the game in the first place.

Knowing that, it is more important to pick a fund based on the level of fees than the “predicted returns”. Vanguard typically has low-fee options that would serve your needs well.

Target Date Funds are one of the easiest ways to dip your toes into the realm of investing for your retirement. By lowering that initial hurdle, TDFs make it easy to get started on your journey to financial independence. But, because they are a one-size-fits-all approach to investing, you should also supplement your TDF investments with your own investments. This will allow you to play with the lever of asset allocation, and your risk profile, based on the goals that you have. Those individual investments are the bells and whistles on your new car. Same base, but you can customize it to fit your lifestyle.

A low fee TDF, paired with some independent investments, put you squarely in the driver’s seat. It’s your road to financial independence, so the driver’s seat is exactly where you need to be.

Your Finances Are What You Tolerate

Are you settling?

The biggest cost that anyone ever pays financially comes from settling. Learning to tolerate small things will ultimately rob you of great returns throughout your life.

While the areas in which we often find ourselves tolerating less than ideal circumstances are numerous, there are a few that stand out as clear robbery of your financial health.

Bank Fees

Big Banks have long held the top spot for where we are told to store our money. Unfortunately for us consumers, those marketing messages aren’t cheap. And, neither are sports arenas.

To pay for all the extras that big banks are involved in, a common strategy is to leverage account fees on just about every product sold.

While the fees themselves seem small, there are two things to consider.

Just like the recipe for success is the right small things, stacked over time. The recipe for disaster is the opposite. The wrong things (even small in size), stacked over time will lead to financial ruin.

The second consideration is the precedent set when accepting a small fee because it’s “not that much”. That is only the first step, and the question then becomes where to draw the line?

It is far better to not take that first step, and avoid bank fees altogether. There are a few ways to do this, all of which I have done myself.

Open an Account with a Credit Union

Credit Unions operate much the same as banks, largely the same offerings, but without the overhead. While this means you won’t see your favorite sports team being sponsored by a credit union, you also won’t encounter the account fees needed to pay for such extravagance.

Open an E-Account

Another option is to look at e-banking options. These institutions have surged into popularity due to their low-cost offerings. That includes no pesky account fees.

Ask for the Fees to be Removed

Another option, and one especially important for those who won’t take on the hassle of changing financial institutions is simply to ask for the fees to be removed. I currently have accounts with a couple of the big banks, for various financial reasons. At both those banks, I simply asked for my fees to be waived, and they were! Now it’s your turn - take a look at your bank. Are you paying fees? Try asking for those fees to be waived. If not, maybe it is time to look at other alternatives.

Investment Fees

While bank fees cost you a few thousand dollars, they lie at the top of a slippery slope. The next area where many people simply tolerate what is offered lies in investment fees. The difference between low fees and standard fees might not sound like much.
After-all, the difference between 0.5% and 2% is a paltry 1.5%.

But that 1.5% makes all the difference in the world.

Take a $50,000 investment in the general market, returning 7% annually, for 30 years. After those 30 years, the account charging 0.5% in fees has: $330,700.

But what about the account with 2% fees?

That account only has $216,100.

That paltry 1.5% difference in fees just cost over 100 thousand dollars. And that’s simply considering the sum of $50,000. If you consider this impact on your life’s retirement savings, that number could be many times multiplied.

How much are you paying in investment fees? Are you tolerating the levels of fees that will result in financial hardship later in life?

Lowered Earnings

The third, and most costly area that we end up tolerating our lot in life lies in our careers. Far too many people don’t take the time to consider what economic value they are bringing to the world.

Failing to understand the valuable contributions that you make will ultimately lead you to undervalue your work. This is perhaps the most prevalent example of “settling”, as people tolerate the job they have without asking the hard questions.

In a 2018 Gallup survey on worker engagement, the all-time high record was set. 34% of American workers are engaged at work.

That means 66% of workers are not fully engaged. For that majority, the question, “are you paid what you’re worth?” is even more important. If engagement isn’t there, people aren’t working to fulfill an inner drive. For those 66% of people, it is more important than ever to understand their economic value.

To understand what it is that you do to create economic value, you need to think about the value-add tasks of your role. How much revenue does that bring in? Or how many costs are you saving?

As an employee, some of the earnings or savings are a direct result of your actions. That should give you an indication of whether you are paid enough. Other considerations are; how much would it cost to replace you?

Being paid for what your worth could mean the difference of hundreds of thousands, or even millions of dollars over your career. In the pursuit of financial freedom, every choice, good or bad, plays a role.

In all areas of our lives, we are asked to tolerate situations because “that’s the way things are done.” That could mean accepting fees that aren’t justified, or even accepting pay that’s too low. The decision to settle in any of these situations is costly though. From thousands to hundreds of thousands, the cost of tolerance is a high price to pay.

Where are you going to say, “enough!”? What areas of your life have you merely tolerated for too long? It is time to take a stand, your future just might depend on it.

How can you be better at your job?

   This week, several members on my team approached me with the question, “How can I be better at my job?”

   It’s an important question. One we all have asked at one point in our lives. And the answer is one that can have a profound impact on your entire life.

   The answer, perhaps overly simple,  has only 3 parts.

The To-Do List

   Opening up the notebooks of my team members, the first thing that practically fell out was a seemingly endless list of “To-Do’s”. Each of them, independently, had written down all the balls they were juggling right now. 

   And there were a LOT of items on those lists. No doubt, you can relate. How many things are on your lists? 

   How many times have you thought, “There simply isn’t enough time in the day to get all this done?”

   Trying to help take inventory of what their tasks were, we started putting those To-Do’s into buckets. Grouping tasks by the nature of the work gives a better understanding of what my team was spending their time on.

   Ultimately, we were able to separate these task lists into a few separate groupings, or buckets.

   Batching tasks helps give some clarity over where you are actually spending your time. Take out your to-do list, and group those tasks into buckets of similar items.

Make it Rain

   Putting those To-Do list buckets to the side for a moment, we then looked at what jobs they were each trying to do. Boiling down the job into the most basic metric: what makes it rain?

   Think about your work. What is it that you do in your work that makes it rain? What work do you do that makes money? 

   If you are a software developer, it’s producing working software. If you’re an artist, it’s making and selling art. If you are an event planner, it’s running smooth events.

   In every role, there are a handful of actions that really make it rain. Understanding what those few critical levers are will help you become more valuable. 

   Now think back to that endless list of To-Do’s that you have. Which of the buckets are the same on both lists? The To-Do list tasks that fall into one of your make it rain bucket, those are your money-makers. Do more of those, and do them well, and you’ll become way more valuable.

What The F*?

Focus. 

What the focus.

   Asked separately, both Bill Gates and Warren Buffet gave the same answer. The keys to success lie in your ability to focus on the important things.

   As my team members looked into their To-Do list, they were really revealing their focus. Anything on that endless list was something that was weighing on their mind, and sapping their time and energy.

   By putting more focus on the activities in the make it rain buckets, my team members will ultimately be more valuable to the company. Put another way, by focusing on the real value-add activities, my team members will be better at their jobs.

   You want to be better. Better in your career. Better financially. Better in all aspects of your life. I know you do, because that’s why you show up here each week.

   Understanding what it is that you do to make it rain, and then allocating more of your time to focus on those key activities makes you better. And that difference in performance between you and everyone else? That will, in time, be rewarded.

   Think about these elements this week: What can only you do to make it rain? Are you spending enough time on those activities? Can you increase your focus, time and energy on those money-makers to become even more valuable?

3 TFSA Mistakes That Could Cost You Big Time

   Are you making one of the three most common TFSA mistakes?

   For Canadians, the TFSA is one of the best investment style accounts you can hold. But that only applies when you follow some rules. Breaking any one of these rules, and you could be in for a nasty surprise come tax time!

   The Tax Free Savings Account (TFSA) is actually a style of account that allows tax free investment growth. Tax savings? Check. But, there is a specified limit of lifetime contributions that increases every year. The only way to increase the amount of funds covered tax free in this tax advantaged investment account is to let the markets work their magic over time.

   Of course, in times of great opportunity, sometimes impatience starts to rear its head, and people start looking for ways to get ahead of the game. Unfortunately, those activities could actually hurt you more than you’re expecting.

Trading too Often (Day Trading)

   With the increased market volatility during 2020, especially the crash in March, investing into the stock market can produce some wild swings in valuation. For those more involved in short-term trading (defined: gambling), there has presented the opportunity to score some quick returns. Investing for the short term steps a little too close to the vast grey-area that the Canada Revenue Agency refers to as, “investing for business activities”. 

   “Business Activities” as it applies to your TFSA means that you have found yourself in a grey-area of TFSA tax law. Somewhere in that grey area surrounds the frequency of buying and selling transactions. If the CRA determines that the buying and selling of investments is too frequent, those transactions may be disqualified, and therefore not tax-advantaged. You would then be required to pay taxes on those investments.

A note on frequency of trading: 

   Any long term buy and hold strategy will be fine, even if you have weekly or monthly contributions made automatically. This is where the grey-area begins. 

   For example: I might have weekly contributions to my TFSA - resulting in 52 purchase transactions a year. On the other hand, someone else might have bought and sold only a half dozen times throughout the year, playing on the market swings of particularly volatile stocks. While my 52 transactions would be fine, the person with only those half-dozen transactions might still be classified as “business activities”. 

   We saw this a couple of years ago during the weed-stock bubble. Playing the volatility in those stocks resulted in some people walking away with huge gains in their TFSA, ultimately increasing their tax-advantaged investment limits. But, the tax-man always takes his cut. And many people who had tried to “beat” the CRA were ultimately re-assessed and forced to pay tax and penalties, as well as losing that contribution room in their TFSA for the year. 

   As a general rule of thumb; if you think you’re out-smarting the tax office, watch out. They will find a way to get you.  

Buying Certain Foreign Investments

   Another mistake many people make is in which investments they buy for their TFSA. While the list is fairly straight-forward, there are a few areas that still trip people up.

What can you invest in?

  • Cash
  • GIC’s (Guaranteed Investment Certificates)
  • Bonds
  • Mutual Funds
  • Securities listed on a designated stock exchange

   In general, if the investment is traded on a major market like the TSX, NASDAQ, or S&P, your investment qualifies in your TFSA. But, that isn’t the end of the story.

   With the diversity of investments available, you can invest in virtually anything under the sun. There are a few types of investments that don’t qualify for the same levels of tax protection as say your RRSP. The most notable of these investments comes in the form of a REIT. 

   REITs, or Real Estate Investment Trusts, often pay their shareholders an above average dividend yield, which makes them extremely popular. With the international nature of many of these big REITs, the currency of distribution can trip some people up. Some REITs pay their dividend distributions in USD. While that alone is not a problem in a TFSA, the US tax office steps in to ensure they get their piece of the action too. Unfortunately, a TFSA does not provide the same protection from US Withholding taxes as an RRSP would.

   Be sure to know what investments you are holding in your TFSA. If the investment is in a foreign country, the same withholding tax protections might not be available compared to holding those investments in a RRSP.

Over-Contributing to Your TFSA

   The final mistake is far easier to identify and fix. Contributing too much into your TFSA will result in penalties, including additional taxes and charges for each day the TFSA sits in an over-contributed state. 

   Each resident has a contribution limit that increases each year they reside in Canada full-time (more than 183 days/year), and are over the age of 18. The confusion arises when moving money into and out of your TFSA. Withdrawals from your TFSA suffer a timing delay before they can be re-contributed. 

   For example: Assume you have fully maxed out your prior years contributions. Then, in August 2020 you remove $30,000 from your TFSA. Even if by October you have that $30,000 to re-invest, your contribution room doesn’t reset until January 1, 2021. That means, if you put the money back into your TFSA in October, you would be in a state of over-contribution until January 1, 2021. That period from October to January would result in penalties and additional taxes, despite your lifetime contribution limit not changing.

   To see what your contribution limit is for any given year, sign into your myCRA account.

   Remember, your contribution limit for the year is total contributions, and doesn’t add-back in any withdrawals until the following year.

   By adopting a long term buy and hold strategy, and only buying qualifying investments, you will be well positioned to avoid the costly TFSA mistakes mentioned here. Financial freedom is only a few right moves away - avoid these mistakes and you will be well on your way.