What is a Dividend?

   When you buy a company's shares, what are you investing in?

   When you invest, you are becoming part owner of that company. Which means you’re buying the rights to their current assets, and the revenues they generate in the future. The earnings that the company will make in the future has a value, which is what drives the share price.

   But the reason for you to invest isn’t so that your company makes money. It’s so that you make money.

   There are two ways that can happen, share price appreciation (growth), and dividends.

What is a Dividend?

   A dividend conveniently derives its name from the mathematical equation, a number divided by another number. In this case, the numbers are the total amount of a company's income to be shared with the owners.

   As a shareholder, you are entitled to the declared amount for each share you own. The company then pays you, the owner, that amount of money on a set date.

Why are Dividends important?

   As an investor, you want to grow your investments. Dividends is one way that can happen, as a company pays out some of its growth to you. Some companies pay out dividends so reliably, that people build their investment portfolios around them. Those companies, like Coca-Cola, have been paying a regular dividend each quarter for many many years, which can provide some comfort to investors. Those investors actually plan for that dividend to be paid as part of their financial plan.

DRIP, drip, drip

   Building dividends into your financial plan will eventually lead you to talk of DRIP strategies. DRIP, or Dividend Reinvestment Plans, take the dividends that would have been paid out, and purchase more shares with those earnings. In this way, your investment can keep growing as you buy more and more shares with the earnings that you make. This is especially important for a few reasons.

   Firstly, DRIP plans can avoid the additional transaction costs of purchasing more shares. Most consumer trading platforms charge a fee per transaction as trading commission. When using DRIP, those investments are made by the managing company, and not you. That means you can avoid those trading commissions, and keep more of your money working for you.

   The second benefit is equally as important as cutting the fees. This is time in the market. DRIP plans take your “cash” earned from the dividends, and invest it immediately back into that stock. While the convenience shouldn’t be overlooked, the biggest benefit is that you don’t need to think about the investment. Taking the choice out of the equation helps you reinvest those monies faster, which cuts the incalculable cost of inaction..

DIY DRIP

   Unfortunately, some DRIP plans are administered by third parties that have terrible fee structures. Coca-Cola is one such company. The administrators of that plan charge fees for each reinvestment, often in excess of what a private investor could achieve with their own trading platform. In those instances, it would be more advantageous to take the cash when the dividend it paid, and immediately reinvest back into those stocks. While more labor intensive, this DIY approach can cut down on the total fees paid. 

   The DIY plan also doesn’t carry the second benefit. You need to make that conscious choice to reinvest, which opens you up to all sorts of biases. 

   If a DIY DRIP plan is your investment strategy, you need to set clear operating principles of when to use those proceeds to buy additional shares. It’s far too easy to succumb to the mentality that “the price will be lower tomorrow”. Those market timing games are addictive, and almost never pay out in your favor.

   Dividends can provide an exciting and different investment strategy. Whether you’re a DIYer or sign up for a commercial DRIP plan, dividends provide an excellent avenue to grow your investments, or simply provide cash flow for you to enjoy.

 

Important Reminder:

Dividends are a privilege, not a right. A company can decide to stop paying dividends at any time. If you’re looking into a DRIP investment strategy, you should be focusing on companies with a long (10+ years) history of paying dividends. Those companies are less likely to cancel their dividends, due to shareholder (owner) expectations.

How Do You Use Your Resources?

   Are you putting your money to work for you? How do those choices impact the rest of your life? And what about the other resources that you have?

   These questions are important to answer to achieve the best results in your life. Too often we start with the first question without thinking about our own unique life situations. To help you align your actions with your life goals, you should be thinking about your future first.

   Looking at asset allocation and financial products too early in this process can lead you terribly astray. So before you open up your investing app and start scrolling through stock tickers, pull up a seat and a piece of paper. It’s time to turn on the most powerful computer you own.

Find Your Goal Posts

   Before you can lay any plans, financial or otherwise, you need to set your goal posts. These goal posts will help you dial in your aim on what is truly important to you, and provide a measurable indicator of how you’re doing. 

   What are your goals? Travel the world? A cottage on the lake? A new electric vehicle? Early retirement?

   These are your goals. Jot them down. Set those goal posts.

   Once you think you’ve got your sights set, think about why those goal posts are there. Is this something you truly want? Too often we find ourselves playing the most unrewarding game of following the follower. When we play that game, the goals that find their way to the top of our lists aren’t really our goals at all. Instead, they are the goals of our family, our friends, our children. Society's “goals”, not yours.

   Be honest with yourself here. Are those goal posts really yours?

Measure Your Progress

   Once you know what your goals are, you need to analytically scrutinize what is actually required to reach them. How much does your dream life actually cost?

   Have you ever guessed how many jellybeans are in a jar? Or how many ping pong balls fit inside an empty 747? Humans are usually pretty poor at estimating how much is required when the amounts get large. Without using some tools of analysis, we usually guess at numbers that are either way too high, or way too low. That’s why we’ve looked at different tools like the 4% Rule, to help narrow down the answer to the question, how much do your goals cost?

   Using tools like the 4% Rule will help you understand how far away those goal posts really are. Irrespective of whether those posts are 100 steps away or 100,000, knowing the distance will let you know how far you’ve come and how far is left to go.

Allocating Your Assets

   Once you’ve examined your life, and where you are heading, you need to look at how to get there. To do that, we examine how you assign your assets.

   Traditionally, people assume that asset allocation boils down to how much you put in different investment categories. Real Estate, Fixed Income, Stocks, Crypto, Foreign Currency, etc. Those financial products are important, but often leave off Human Capital. Your skills, your time, your energy. 

   How you invest your resources, particularly time and energy, has a huge impact on your financial future. Investing more in your skills and well-being will increase your value as an economic contributor. As you become better at your job, you increase your ability to earn.

   After you’ve invested in yourself, you need to look at how to put your money to work. While low cost ETF’s serve as the backbone for financial advice that I deliver, that isn’t the only lever you have to play with. Some people need to be changing how much is invested in each area.

   For example, picture Fred as having a stable job as a teacher. His earnings are relatively flat year over year, and he has a high level of job security. Depending on Fred‘s goals, he might want to look to be more heavily invested in stocks (low cost ETF), willing to take on the additional investment risk given his relatively low-risk career.

   Suzie on the flip side, is a commission-only sales rep. With variable income, she might want to look into higher weightings in fixed income investments, to help smooth her earnings out throughout the slower periods.

   How you allocate your resources is incredibly important. But it’s also a very personal decision, heavily influenced in where you are, and where you’re going. 

   What are your goal posts? Are you moving in the right direction? Does how you invest your time, energy, and money all align with the direction you chose? Invest wisely, and there’s no limit to how great your life can be.

What Happens If My ETF Closes?

   Do you own ETFs?

   It’s no secret to any of my readers that I am a strong advocate of ETFs. I would argue that an ETF has a place in everyone’s investments, based on the benefits that it provides. But, with many more index funds than stocks, it is inevitable that some of those funds will fail. What happens to you if that happens?

Index funds can close?

   Yes. Index funds can close, and in fact do close down far more frequently than you’d imagine.

   While there are many reasons that an ETF might be shut down, it usually boils down to profitability. 

   A quick recap of ETFs: an ETF is simply a group of investments placed into a basket and sold together as a package. The administration is done by the fund provider, for a fee which is built into the returns that you’ll see.

   If an ETF (or mutual fund) can’t operate profitably, the fund is shut down. What that means, is if the administration costs to monitor and trade in the selected basket becomes too costly, and the demand isn’t there to pay for those higher costs through management fees, the fund is shut down. 

Example: An Oil-Centric ETF

   To illustrate, picture an ETF that tracks the major oil companies. Owning that ETF gives you an exposure to all the oil and gas companies, without being too heavily leveraged in one specific company. In this way, when another oil disaster like the BP oil spill harms the stock price of one company, you aren’t as dramatically affected compared to someone who invested the same amount in BP shares directly.

   But, times change, and so do consumer preferences. Investors could start leaving the oil and gas investments in favour of greener pastures. Literally. As investors become more environmentally conscious, the demand for our hypothetical Oil-Centric ETF could diminish. In that case, while oil and gas still exist, fewer and fewer dollars are invested in our ETF. As those investors withdraw their investments, the administration costs don’t change. 

   People are still needed to track the index, and manipulate holdings whether there are 10 investors or 10,000. Those costs when borne by the 10,000 might be manageable. But the management fees derived from just 10 investors won’t be sufficient to make money on the operation of the ETF. In this case, the ETF would simply be terminated.

What If You Still Have Money In The ETF?

   What if in the above example you were one of the 10 investors who still owned the ETF when the managing company decided to shut it down?

   Closing down an ETF is not like a stock going bankrupt. The ETF is just a collection of investments. While the fund might no longer be traded, the underlying investments still have value. As a result, when the ETF declares that it will be shut down, you won’t lose all of your invested monies.

Shutting Down an ETF

   Given the huge number of ETFs available at any given time, closing down and starting a new ETF happens extremely frequently. Perhaps by necessity, or simply just through practice, the process is relatively simple.

   A few weeks before the ETF has it’s “stop date”, an announcement is made to all current ETF owners, outlining the intention to close the ETF down. This notice period provides ample time to sell your stake, if desired. But, the notice period is long enough that you don’t need to panic sell. While there might be some price adjustment, it shouldn’t be major. Remember, that the ETF derives its value exclusively from the underlying shares. While the ETF might be disappearing, those shares are still being actively traded.

   If you haven’t sold by the stop date, the ETF begins liquidating it’s holdings in the underlying stocks. At that point in time, you won’t be able to buy or sell anymore. After the ETF holdings are liquidated, your proceeds will be funded back to your investment account.

   Ultimately, your monies are returned to you for you to continue investing in those greener pastures.

Some Closing Remarks

   While closing down an ETF sounds extremely simple (it really is simple), there are still a few things to note. If you do elect to hold until the stop date, the managing company may charge a “dissolution” fee when they return your investment dollars to you. Also, since selling the whole ETF position is more complex than your normal trading, those funds might be tied up for 6-10 business days. The temporary loss of access to those funds is an important factor to consider when deciding whether to sell or not.

   One final element of note is that the underlying assets of that ETF are actively traded stocks. This plays several roles when evaluating the decision of if/when to sell. If the ETF is trading lower than the market value of the underlying shares, it might be wiser to hold until the fund is dissolved. But, those underlying shares are actively traded. Any gains and/or losses that the fund incurs during the wrap up proceedings are yours to keep, no matter which way the scorecard shows.

ETFs Still Have a Place

   If after reading this you’re suddenly having doubts about ETFs altogether, let me allay your fears. The types of funds I typically recommend, such as the S&P 500 index funds (SPY, VOO, etc.) are all extremely popular. They aren’t going anywhere. If you invest in a reputable broker's (Vanguard, Fidelity, BlackRock, etc.) main market funds, you won’t ever have to deal with the closing of an ETF.

   As you begin to get more niche with your investing preferences, you might start to encounter such scenarios. Being vegan might be an acceptable dietary choice, but when it comes to investing, a healthy dose of everything won’t lead you astray.

What are Index Funds

   Index funds and mutual funds have surged in popularity over the past decade, and for good reason. These types of investments can provide many benefits for investors. 

   One of the most important benefits, and the reason why I recommend these types of funds, is their simplicity. Simple to use, and simple to understand.

   Of course, when it comes to personal finance, the entire finance industry is built on taking something simple, and twisting it into something impossible to understand.

   The same treatment has been performed on our beloved ETF’s and mutual funds, all wrapped up beneath the mathematical concept of indexing.

What is an Index?

   In its simplest form, an index is a way to measure something.

   It’s actually a concept we’re all very familiar with.

   The average test score from your class in a certain subject is an index. The win % of your favorite team is an index. The gas mileage (mpg) on your car is an index.

   You are measuring something, taking a list of data, and using a mathematical formula to draw inferences from that data. How well you performed compared to class average, for example. But, you could look at a different index, and come up with a different result. How you compared to the class median, for example. Comparing your scores to the mean versus the median, may give you a very different outcome.

   And that’s just cutting the surface of indexes. A different index could look at test scores by birth month, weighting heavier those born in the summer months, and lighter those born in the spring.

   This of course, is just scratching the surface, because we’re still only looking at our class test scores. The machinations of finance can take those scores and chart them against neighboring schools, states and even nations.

Indexes in Finance

   As a way to measure something, that definition is incredibly vague. That leads to all sorts of different numbers, able to be used in different ways. 

   Take the S&P 500 for example. This index of 500 of the largest publicly traded companies looks at an average based on market capitalization. It’s actually fairly logical, that a company like Apple or Amazon, with enormous market capitalization (Share Price times Shares Outstanding) should be more heavily reflected than a much smaller company like Molson Coors.

   Compare this to another well known index, the Dow Jones Industrial Average (DJIA). DJIA is indexed based on a modified market price weighting. This places the weighting based on share price, and not on market capitalization as we saw with the S&P 500. 

   For example, picture Company A with a market cap of $100,000, made up of 10 shares worth $10,000 each. Compare that to Company B with a market cap of $1,000,000, or 10 times the size. But Company B has a share price of $5,000, and 200 shares outstanding. Using a price weighted index would more heavily weight the much smaller Company A, based solely on its exclusive and very expensive share price.

An Index for Everyone

   The increasing popularity of index funds for retail investors has led to an equal surge in institutions creating these funds. Just like a walk down the cereal aisle, you’ll find a fund for anything. 

   Regular flavors aren’t enough? Try frosted flakes. Or fruity puffs. Or chocolate crunch. Or anything in between.

   There are index funds for the environmentalists. For manufacturing, farming, heck, even vegan ETFs can be bought. Whatever flavour you’re looking for, you’ll be sure to find it. And if not? Someone will make it for you, for a price.

   With under 4,000 publicly traded companies in the US (3,671 in 2020), there are almost 8,000 mutual funds that package and split those stocks in every imaginable combination. 

   If that sounds like a lot of funds, you’re right! Now imagine the cost of maintaining so many complex, confusing indexes (groupings of stocks). The added complexity is staggering, and the costs are ultimately borne by you, the buyer. 

Which one(s) to Buy?

   I cannot tell you which fund will outperform the market this year. Nobody knows that. And anyone who claims they do, is trying to pull a fast one on you. But, there are a few criteria that you should follow when buying your investments.

Know the assets - if you can’t tell what the calculation is, and understand what you’re holding, you probably shouldn’t be investing in that fund. As with most things, investing is simple. It’s not easy, but it’s simple. 

Ignore past performance - this might sound counter-intuitive, afterall, you want to back the winning horse. But there’s a very good reason every marketing pamphlet carries the same disclaimer, “Past performance doesn’t guarantee future results.” That line is completely true. What was best last year isn’t guaranteed to be best again.

Control your costs - if you take only one thing away, it’s this: minimize your expense ratio. Expense ratio refers to the costs charged to create and maintain the fund. The more complex the fund (or the greedier the fund manager), the higher the expenses. Those expenses mean you not only need to pick a winner, you need to beat the average by whatever rates they charge. Consistently picking the fastest horse is almost impossible. Picking the horse, who then starts half lap behind the competition is insanity. Don’t stack the deck against yourself.

   Index funds, when done right, can pave the path to financial freedom for you. But there will always be those trying to take advantage of such opportunities. 

   If you want to find investing success, stay vigilant. Don’t put your money into something you don’t understand. And avoid handicapping yourself as much as possible. Investing doesn’t need to be complicated. Buy into a cheap fund, with good total market coverage, that you understand. And keep buying, month after month, no matter what the price is doing. Do this, and one day you’ll wake up rich.

Frames of Reference

   Have you ever seen a herd of gazelle running? (Thanks BBC's Blue Planet)

   All it takes is one gazelle to start galloping, and the rest immediately join in. This of course helps keep the gazelle safe. If one sees a lion waiting to pounce, not every gazelle needs to see the lion, they simply trust that there is danger, and that running is the safest course of action.

   Humans aren’t a whole lot different. 

   Our expectations about life are often framed by those surrounding us. The cars that our friends drive, the houses they live in, the lifestyle they lead.

   Sure, we all know that we shouldn’t compare our lot to the neighbours. But we’re only human, and we do compare.

   As we see repeatedly the types of life and lifestyle that others showcase, we quite naturally start to think of those lifestyle attributes more positively. A new car, a bigger house, a faster boat, shinier phone. These types of desires are so prevalent that we even have term coined for it, Keeping up with the Joneses.

   With the ever expanding reach of social media though, our neighbours aren’t just the house across the street. People are inundating themselves with the highlights of everyone, from Hollywood elite to instagram influencers to that gal from highschool. With those expanding social influences, people are more and more trying to live outside their means, all for the almighty ‘gram.

   This lifestyle inflation has disastrous consequences, as Canadians and Americans are borrowing more now than ever before. The average Canadian now has over $20,000 in debt excluding their mortgage.

Expanding Your Frames of Reference

   Alright, borrowing excessively is bad. Especially when it puts a strain on your financial system. But what can you do about it?

   Going cold turkey on social media is pretty unlikely. And since we’re already on the IG, it’s always a good social talking point to check out Hollywood’s who’s who.

   But rather than focusing only on the highlight reels of the rich and famous, maybe it’s time to expand your frame of reference. With billions of people living in impoverished nations, perhaps it's time for a heavy dose of reality. 

   Millions of people don’t have access to reliable electricity, are you sure you need an even bigger TV on the wall? Millions more still don’t have access to clean drinking water. Is it really an inconvenience that your fridge only makes wedge shaped ice?

   Before making that next impulse purchase to show off in your own 3-second highlight reel, take a moment to consider what you have in your very rich life. A little gratitude goes a long way. That genuine appreciation might not be captured in 140 characters or less, but it will certainly make you a whole lot richer.

Love or Hate? Dollar Cost Averaging

Expecting your year end bonus soon? Do you invest it all at once? Or try to capture the benefits of dollar cost averaging?

What is Dollar Cost Averaging?

Dollar cost averaging (DCA) refers to buying a piece of the investment consistently, over time. In this way, the same investment dollars, say $100 / month, will buy you the investment at the average price of that investment. When the price is higher, your $100 doesn’t buy as much, whereas when the price is lower, your $100 buys more. This averages the cost of ownership out, and mitigates the chances of you buying at the market peak.

This sounds good in theory, and I must admit, I am a big advocate of this idea. 

 

If you buy into the idea that dollar cost averaging works, then you will consistently buy into the market without worrying about what the price is at that current moment. That’s because, in the long run, you’ll average your cost of ownership out.

 

I recommend automating your investments, so that on a preset schedule, those investments are purchased into your portfolio. This automation removes your emotions from the equation, and eliminates the gambling aspect of investing where you try to time the market. You no longer need to concern yourself with whether tomorrow's prices will be higher or lower than today's.

 

If this philosophy works so well, why then would I argue against Dollar Cost Averaging when you come into a large windfall, like a bonus, commission cheque, or inheritance?

“Stonks always go up.” - /r/WSB Reddit User

A phrase coined by the popular investing subreddit sums up precisely why Dollar Cost Averaging doesn’t work in the long run. Stocks always go up.

 

This of course is not true in the short term. But the objective of long-term investing isn’t to gamble on the short term outcomes, but to make a sure bet on the progressive growth of companies over the long term. 

 

We’ve seen the truth in this statement time and time again. At the time of writing in February 2021, the NYSE and Nasdaq are sitting at all time highs. Not even 12 months after the coronavirus plunge on March 23rd, 2020. Those highs seen today are far above the 2008 highs just before the market-altering financial crisis and subsequent stock market crash.

Is today the day before the next crash?

Depending on which television station or professional economist you tune into, you’ll hear all sorts of claims. Tomorrow could be the end of the world, or it could be the day that financial markets soar ever higher. The truth is, nobody knows. Anyone who says they do know is simply making a prediction, a guess no different than who will win the next sporting event or reality tv show. The bolder the prediction? The higher the TV ratings. Those so-called experts are just clamoring for attention over all the other noise in our lives.

 

Listening to any of these programs is sure to play on your emotions. What if they know something I don’t? They are the experts afterall. Am I being played for a sucker? Why does the other expert say something different? Who is right? Can I still win this game?

 

The cost of these emotions is all too often inaction.

 

That is why, when you come into a large extra payment, it’s best to jump in with both feet. You can’t predict the future in the short term any better than these television “experts”. And you know, in the long run, stocks always go up.

 

Let’s look at this in a real example. Assume in 2008 you came into $10,000 to invest. Also assume you’re the unluckiest person around with investing. In 2008, the S&P 500 hit it’s high for the year in August, hovering around $ 1,300. The following 6 months saw a progressive decline all the way to $676 in March 2009. 

 

If you had invested all $ 10,000 in the markets in during the August 2008 highs, and left those investments alone throughout the following market meltdown and subsequent revival, today you would have tripled your investment, owning $ 30,267.92 (calculated at market close, Feb 12th, 2021). That’s a 300% return in 12 years! Not too shabby for the unluckiest investor alive.

 

To make that grow even further, you could have averaged down through dollar cost averaging throughout the following 6+ months of market decline and market recovery. Turning that 300% ROI into something even higher.

 

If on the other hand you had tried to time the market, when would you have invested those dollars? March 9th, 2009? Unlikely. That’s the absolute bottom, and investors had just had their confidence shaken. 40% losses in 6 months, a staggering number. What about the end of April 2009? Well by that time the market had already recovered 29.13%. Waiting any longer than that and your returns were even less.

 

You see, there’s no better time to invest for the long term than today. We don’t know what tomorrow will bring, and barring a world-ending event, it’s quite possible that today’s prices are the lowest we’ll ever see again.

 

Stonks always go up.

The Market Vs Stocks

One caveat is that we are looking at the market performance. Taking a gamble on any one company is exactly that, a gamble. The market, on the other hand, is a collection of all companies. Sure, some companies fail. But those companies that fail are replaced by other companies. Some do exceptionally well. Some don’t. 

 

The fact is, the best players in this game are constantly changing. 

 

General Motors dominated the market for years, before needing a government bail out. Meanwhile Tesla came in out of nowhere and captured large swaths of the market.

 

But one thing is for sure. This game will always be played.

When you come into extra money, make the guaranteed bet, that the market will continue to increase in value. With this knowledge, you will be sure to buy at today’s prices. 3 to 5 years from now, you’ll only wish you could get those investments at the prices you did just a few short years ago.

 

If those same investments ever do go on sale in the future, load up on some more. This will average down your cost of ownership, and make your returns just that much higher.

The GameStop (GME) Game

   What in the world is going on with GameStop (GME) stock prices this week? Meteoric stock price appreciation, amidst a brewing war between retail investors and billion dollar hedge funds.

   This situation has the potential to change Wall Street permanently. But that begs the question, what exactly is going on?

Investing, The Traditional Approach

   One primary way that we reach financial freedom is through investing. Putting your money to work, so that you don’t have to.

   To do this, you find someone who needs your money, loan it to them, and they pay you back over time. This could be buying real estate you plan to rent out, where someone needs your money to own the property, and they pay you for that privilege through rent. Alternatively, you could find a company, give them your money in return for an ownership stake, and you are entitled to a piece of the profits of that company. That is, in its simplest form, what investing in the stock market is.

   Over time, people have found more creative ways to make money though. Some people decide to take a different approach. Instead of investing in future profits from a company, they decide that a company is less profitable than other people think. These people sell the current interest in that company, with the plans to buy back those shares when the company under-performs.

Short Selling, The Long and Short of It

   Making a bet against a company is more like gambling than investing. But, it can be very lucrative, if your bet pays off. 

   Short selling is essentially making this bet, except with other peoples’ money. Instead of owning what they sell, they borrow the shares from someone who does own them, and sells those shares to the open market. The promise here is to buy back the shares that were sold, and return them to the original lender.

Introducing GameStop (GME) To The Game

   One such occurrence happened recently with GameStop. A large institutional investor, Melvin Capital, made an aggressively large bet against a company called GameStop (ticker code GME). They did this by short selling, or selling shares of GME that they didn’t own, with the promise to buy those shares back at a later date.

   Getting word of such a large bet against GameStop, some regular folks (retail investors) decided they’d take up Melvin Capital in the wager. Traditional investing logic was thrown out the window, as retail investors looked at the game from an economic standpoint. No longer was purchasing GME stock about price-earnings ratios. The value of the company's shares has become completely disconnected from its earnings multiple.

   Knowing that Melvin Capital needs to buy those shares back, because those shares that Melvin Capital originally sold were borrowed, retail investors correctly understood that the game was now about Supply and Demand. It doesn’t matter how well GameStop does (or doesn’t) do. There is a guaranteed demand, so the only thing left to do was to constrain the supply. With limited supply, and high demand, the sellers pushed the price equilibrium (in this case the share price) much higher.

   Changing the rules of investing, particularly on this GME stock, led to a rapid appreciation in share price. Meaning that while Melvin Capital sold shares at prices in the low teens, they now had to buy those same shares back at prices in the hundreds. Essentially, Melvin Capital stood to lose billions.

Changing The Rules of The Game

   With billions of dollars at stake, some people will do just about anything to not lose. Those people are willing to lie, cheat, and steal.

   And that’s exactly what they did.

   By Wednesday, January 27th, 2021, this GME situation was out of hand. The share price was rising exponentially, and millions were getting involved. Robinhood, a trading app, was the most downloaded app in the app store, as both news and social media stirred up a feeding frenzy. A whale (Melvin Capital) was dying, and everyone wanted their pound of flesh.

   Shortly after market open on Thursday, January 28th, 2021, there was a violent change to the game. The institutional investors flexed their muscles, and many brokerages including Robinhood and Interactive Brokers, placed buying restrictions on retail investors. These actions prevented normal people like you and I from participating in the investment markets. 

   That single act, of greed and desperation, threatens to disrupt the entire financial system as we know it.

What’s Next?

   You may be wondering, “I don’t own GME, so why would this be important to me?”

   By assaulting the retails investors ability to openly and fairly trade in specific investments, both moral and legal codes were violated. The class action lawsuits already opened against such trading platforms, coupled with SEC investigations, and the millions of eyeballs trained on this developing situation could certainly impact how brokers and institutional funds operate.

   For anyone who has investments, whether it is just your retirement accounts, or you actively trade, legal changes in the securities industry look to be just on the horizon. Being aware, and staying in the know, will help you set yourself up for success as the world continues to change and evolve.

How to Reduce Your Taxes

   You want to pay less taxes.

   While taxes might be your contribution towards the society you live in, everyone wants to pay less than they do. Fortunately, there are some excellent ways that you can legally reduce the amount of taxes that you owe.

Save for Retirement

   Whatever your country's retirement savings plans are called; RRSP (Canada), 401K (USA & Japan), Superannuation (Australia), etc. There are some serious tax breaks for contributing to your retirement.

   For Canadians, contributing to your RRSP accounts grants you a tax credit, effectively lowering your taxable income for the year. While your income is lower for tax purposes, you also have the advantage of increased investments to your name. The growth on those investments is only taxed when you withdraw the money, usually on retirement which could be many years from now. This tax-deferral is beneficial to you now, and can be important for tax planning later in life.

   The reason that saving for retirement comes with tax advantages stems from the purpose of taxes: to pay for the society that you benefit from. 

   As you increase your own financial resources, especially in funds such as the RRSP or 401K, you are reducing your reliance on government systems designed to protect you when you retire. A lower reliance on those systems means you bring about a lower societal burden, and your share of contributions can be decreased.

Claim Business Expenses

   If you are making money on a side hustle, you may be able to claim some tax credits based on your expenses. 

   While your side-gig means you earn more, and therefore pay more taxes thanks to the marginal tax rate system, there are some benefits for deducting expenses that you incur. These could include expensing part of your home if you are dedicating a certain area to these side-gig activities. 

   For example, someone making money on the side selling hand-sewn clothes and other products. They would be able to expense materials and sewing equipment, the sewing room in your home, and other costs incurred from those business activities. It’s very important if considering these types of deductions that you’ve kept the receipts and proof of expenses.

Deduct Capital Losses

   Maybe you’re more the investor type, and you make additional money in the investment markets. As with all forms of investing, there is always risk, and sometimes you end up losing some money. Those losses are also eligible to reduce your taxes.

   For the more sophisticated investors, this type of deduction is an important consideration. Sometimes it’s better to incur a loss on one investment, and use that to offset a gain somewhere else. This type of tax planning is best performed by experienced investors, or under the guidance of a certified tax or financial planner.

Claim Education Expenses

   Another way that we grow our incomes is by growing ourselves. While the tax code is behind the times in terms of what qualifies, if you are receiving education from an accredited institution your tuition costs might qualify for tax credits.

   Mostly these accredited institutions are universities and colleges delivering professional, post secondary education.

   If you are continuing your training and development by taking courses at this level, those tuition costs should be considered when preparing your taxes. 

Deduct Charitable Contributions

   One final way to reduce your taxes is to contribute to a charitable organization. If taxes are your contribution to society as a whole, charities give you the freedom to put your dollars to work on a cause that is important to you. 

   Those charitable contributions that you make help society improve, and better take care of various people and/or ideas. That has a tangible, meaningful value, and you are rewarded with tax credits for doing so.

   For example, if you contribute to the Heart and Stroke Foundation, you are promoting research and development into cardiovascular issues and remedies. The more discoveries that the foundation makes, the healthier the population can become. As people become healthier, there is less drain on the healthcare system due to cardiovascular ailments, and society as a whole experiences a lower financial burden.

   In that way, your donations not only help a cause that you believe in, but also benefits society through their advances.

   If you want to pay less taxes, look for ways to improve both yourself and the society you live in. Whether it’s a stronger financial foundation, or adding value through business and education, your growth journey benefits more than just you. And to reward you for your efforts, there are numerous tax advantages that you can reap along the road. The only question left is; how do you plan to grow?

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.

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.

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.

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.

A Guide to Purchasing Brand Names

   When should you spend top dollar to buy brand name goods?

   Personal finance writers everywhere espouse a frugality mindset, often supporting the notion that brand names are a waste of money when you can buy similar No Name goods for a fraction of the cost. And the examples used so often leave little doubt. 

   Who needs a $4,000 purse, when a $80 purse is just as functional? Or a $10,000 watch when a $40 Timex does the same thing?

   While the argument in favor of the cheaper option is compelling, there is far more at work than the simple dollars and cents.

When should you buy Brand Name?

   Buying quality goods isn’t just a luxury, there are some very good reasons why someone would choose to spend the extra money.

The Product is Part of Your Identity

   How much is your identity worth?

   The answer to that is there is no price you wouldn’t pay. It is simply who you are.

   We can see examples of this every day, just by taking a look in your front pocket. Do you have an iPhone? Do you know someone who does?

   From a technology standpoint, iPhone’s are an inferior product. Hands down, different android phones perform better than the iPhone across any single metric. Battery life, camera quality, durability, ease of use. An android phone is certainly superior in whichever criteria you choose.

   Why then do so many people have an iPhone? Because it says something about who they are. Their identity is synonymous with the ideals and values that the product embodies. People love their iPhone’s because it is a reflection of who they are, and the phone is simply a tangible way of showing that identity to the world.

   The same case can be made by Harley Davidson Motorcycles. People will pay a premium for a Harley because they feel that the product symbolizes their own values of freedom and independence.

   When the product is a way of showing the world who you are, the question becomes more than simply what the price tag is for a set of features.

Higher Quality is Valuable

   Another reason to buy a premium product is the long term cost of ownership. 

   During a camping trip this summer, some friends made the comment that the coolers we used are quite expensive. Anyone familiar with Yeti products would agree. The coolers that we have for camping and outdoor adventures weren’t cheap. 

   But, as a testament to the quality of the cooler, we haven’t yet had food spoil because it wasn’t kept cool enough. For our outdoor adventures, having a product that works well isn’t just a nice to have, it’s essential.

   But aside from peace of mind, the difference in quality can actually lower the long-term cost of ownership. A quality product can be with you for years, even decades after a cheaper alternative has needed to be replaced.

   One such example is in footwear. A good pair of leather boots, properly maintained, can last a decade or more. With semi-regular treatment of the leather, and the occasional re-sole, those favourite pair of boots will outlast a dozen pairs of the cheaper options. Ultimately, due to the longer lifespan of a quality product, the total cost of ownership is less.

When to Buy Brand Name - A Practical Approach

   Thinking about higher quality, or even the personal identity makes the decision to buy top of the line goods easier. But it is too easy to fall into the mindset that you should always buy top quality. Sometimes the no name option is the better choice than another Gucci wallet.

   In true Business Minded fashion, as we strive to unlock the secrets of success, we needed a more formulaic way of making these choices. These decisions can’t simply be at the whim of “Does it match my identity today?” or, “Do I need top quality?” 

   The solution to this problem of No Name vs Brand Name comes from a piece of wisdom I heard a few years ago. 

When you are buying anything for the first time, buy the cheapest product you can. If that product wears out or breaks while you’re using it, replace it with the best quality option that you can reasonably afford.

Why this works?

   This guide to purchasing helps take the guesswork out of the game. When you’re buying a product for the first time, you don’t know what to look for, or even if you’re going to continue using the products.

   When I first moved into our condo with my girlfriend, I bought a mixed pack of 32 cooking utensils. By no means were these top quality, but I had enough different tools to cook with. In short order, one of the spatulas that I used every morning broke. By this point, I knew exactly what I liked about the spatula, and what was valuable to me. Now, when I went to make the replacement purchase, I knew exactly what to look for, and am overjoyed with our high-quality replacement.

   What about the rest of that mixed pack of cooking utensils? Well some of them I use regularly, and know what to look for if they ever need to be replaced. And the rest? I haven’t ever picked them up. Buying top quality from Day 1 would have been a complete waste on those items that have never seen the kitchen lights.

   Deciding what to buy shouldn’t feel like a chore. This simple formula of buying cheap, and replacing with quality ensures that you only spend your hard earned dollars on things that you’re actually going to use.

How To Choose The Right Credit Card For You

   Credit cards offer a variety of benefits, but with so many choices out there, how do you know if your card is the right one?

   While many of us have at least one credit card, these have really stuck out as the way of the future recently. Reeling from the coronavirus, the payment processing industry has fully embraced credit cards, with many stores simply refusing to accept cash or other contact-laden payment options. With increased usage of credit cards, it is more important now than ever to ensure that you have the right card for you.

Why Credit Cards?

   Credit cards offer the convenience and flexibility of payment virtually anywhere. Newer cards also have a “tap” function that allows you to pay under a certain amount without using the keypad. That technological capability made credit cards a clear winner as fear of germs and viruses escalated.

Factors to Consider When Choosing A Credit Card

   Credit cards come with a whole list of different costs and benefits, which can make the choice unnecessarily complicated. Three of the elements found on all cards are:

Interest Rate

   The interest rate is displayed as the annual percentage rate (APR). This is the interest that you will be responsible for if the credit card is not fully paid on time. That interest rates can fluctuate quite significantly, reaching 20% or more! While this is an important number to know, if you use your credit cards responsibly and pay them off in full every month, you won’t incur any of those high interest charges.

   Consider your own financial habits. Do you pay off your statement in full every month? If so, the APR isn’t really influential in your purchasing decision. If, on the other hand, you sometimes miss a payment, or only pay the minimum balance, the APR interest rate can have significant financial implications.

Fees

   The list of fees associated with each credit card can be both extensive and confusing. Some of the more common fees that you should be aware of are listed here:

The annual fee. Some cards come with an annual fee, often designed to give you access to more or better perks. While this sounds good on the surface, in reality many of those cards the additional perks don’t warrant the additional fees.

Cash advance fees. Cash advance fees are paid if you need to withdraw cash from your credit card account. While most companies don’t accept cash right now during Covid-19, there are always a few exceptions. In those rare situations, it’s always good to know what the fees are. These are either a flat amount, or a percentage.

Foreign currency charges. Credit cards often have a modifier on foreign exchange rates. For example, one of my credit cards charges me 2.5% more than the current market rate on all non-Canadian dollar transactions. If you do a moderate to significant amount of shopping in another currency, it might be worthwhile getting a credit card in that currency to minimize those extra fees. 

Statement fees. Statement fees have certainly become more frequent over the past few years. These fees are levied on print or re-print of account statements, as a type of environmental fee to encourage people to go paperless. These types of fees also can encompass transaction investigation fees, when you ask your credit card company to investigate suspicious or unknown transactions on your account.

Insurance premiums. This final type of fee is for balance insurance. These fees are especially prevalent on cards issued to individuals with no or low credit scores.

Perks

   The main reason credit cards are preferred by consumers over cash or debit transactions is the ability to earn different types of perks. 

   The size of the benefit is often contingent upon at least one of two factors. Your salary, or the annual fee. Bluntly put, the more money you earn, the better the rewards you’re entitled to. There are three types of perks that are typically offered.

Reward Points 

   Reward points are as varied as the companies offering the credit card. This is probably the biggest deciding factor between credit cards that you’re interested in. Do you like to travel? A card that rewards with airline tickets or Air Miles would fit your lifestyle. Like free groceries? That’s a different card. What about a shopping aficionado? There are likely reward points for your favorite boutique as well.

   Matching your reward points with your interests and values is the best way to get the most out of your credit card. For example, I have two different cards, one that rewards groceries and gasoline purchases. The other card has a more general reward point system, with rewards used for travel booking. Both of these cards work well for me, rewarding me where I spend my money, with rewards that I value because they fit my lifestyle. 

Cash Back 

   Cash Back rewards cards are another extremely popular option. Instead of receiving reward points, these cards return a certain percent of your purchases. Effectively, these cards give you a small discount on all qualifying purchases. 

   If these cards are of interest to you, be sure you do a quick calculation to see your required monthly spending to either qualify or break-even on those annual fees. 

Insurance, Hotel Upgrades, and/or Car Rental Upgrades 

   Another perk that is often offered is various kinds of insurance. For example, both my credit cards offer different types of insurance. One gives me trip cancellation insurance for any travel booked on that card, while the other insures rental vehicles. These are often the less-advertised perks of the cards, but are actually extremely valuable if used effectively.

How to Choose the Right Credit Card for You?

   Knowing what the interest rates are, the fees, and the rewards will help you shape your decision. To help you make that decision, think about the following questions:

Do you always pay your credit cards on time?

   If not, start doing so now. As you build up that financial discipline, you should get a card with the lowest interest rate possible. No amount of rewards will make up for extra interest charges.

Do the rewards from your necessary spending justify the fees?

   You shouldn’t feel pressured to spend simply to make the card worth it. If you have the right card, the purchases you’re already making should bring you out ahead after considering the fees associated with the card.

Are the rewards aligned with your lifestyle?

   Being rewarded is nice. But this is your decision, so make sure that the reward points won’t just sit around like that giftcard to the store you’ll never go to. The perks should mesh well with your lifestyle, so that you use them, and actually see the benefits. 

The Bottom Line

   Credit cards have a place in everyone’s financial fortress. Used effectively, the rewards and benefits can help you immensely. But, that comes at a cost. Financial discipline is necessary to avoid insanely high interest charges. Paying 20% APR interest even once hurts, and makes it that much harder to stay on top of your finances. 

   If you have the discipline to know your budget, and stick with it, credit cards will reward you handsomely.

Lending Money To Family and Friends

   Over the course of several long, hard summers working construction, I had painstakingly built up a prized collection of professional tools. Those tools, and the skills that I developed through those countless hours in the scorching sun made me the go-to guy for fixing small problems at my friends houses. For the price of a hot meal and a cold can, there was little that I couldn’t fix. 

   Then one day, a good friend of mine came and asked to borrow some of those tools. My skills weren’t needed, the job wasn’t that big, but he needed the tools that I had.

“No problem.” I said, “Just pick them up on Friday and drop them off at the beginning of next week.”

   Friday rolled around and I handed over a few of those recently cleaned and organized toolboxes. I wanted to help, and I wasn’t using those tools right now anyways. Better a friend gets some value out of what would otherwise be collecting dust on my shelf.

   But then Monday morning rolled around, and instead of a knock at the door bringing those tools back, I received a phone call, “Hey Brian, any chance I could keep these for a few more days? Something came up and I still need those tools a little longer.”

“Of course. How about you drop them off next weekend?”

“Sounds good, appreciate it buddy.”

   Next weekend came and went. Then the weekend after that. Finally, a few weeks later my friend showed up with my toolboxes. He sheepishly grinned as he returned them, with a chuckle and a bit of an apology. Other than a little impatience on my part, no big deal right?

   A little while later, when I finally went to use one of the sets that I had loaned out, and a long list of small things were either damaged or outright missing. To say I was furious was an understatement, especially since the one thing I actually needed? Of course that size wrench was one of the missing items.

Money is a tool.

   I recently recounted this story, when asked about lending some money to a family member. The friend who came asking for advice was slightly perplexed, “What does this have to do with my situation? My brother isn’t asking for a wrench, he needs some cash to get him through his current situation.”

   That’s when I needed to explain. Money is a tool. Nothing more, nothing less. Just as you would use a hammer to build or destroy, money does the same. It has the power to create, or take away. To build comfort, or remove discomfort. And while I may appreciate my tools, I certainly don’t want more wrenches for the sake of having more wrenches. 

   The philosophy you have about money will play an enormous role in how lending money to family and friends impacts you, and your relationships. 

Things to Consider When Lending to Family and Friends

Don’t Lend What You Aren’t Prepared to Lose

   Just as I learned from lending my tools, sometimes what returns isn’t in the same condition as what was lent out.

   There are stories abound of family or friends never fully repaying the loan (or never repaying any of the loan). This ultimately damages the relationships that you have. While borrowing from the bank may have a higher interest rate, what is the cost of your relationship with that other person? 

   Bringing a wallet into a relationship often has a nasty habit of increasing the friction between the two parties.

   While the advice can never be as cut and dry as, never loan to family or friends, a good general guideline is to never lend more than you’re prepared to lose. That way, if the worst comes to pass, you aren’t left in a tough situation yourself. This might even give the relationship a better chance of staying intact.

Count on Life Interrupting the Payment Plan

   As the weekend stretched into weeks on end, my patience was fraying. Where were my tools? We had an agreement!

   That irritation at the constantly changing terms of our arrangement certainly tested my patience, a test which, when trapped in my own mind, I certainly failed.

   Lending money to loved ones is no different. While the bank might shrug and say tough luck, it's a whole lot harder to do that when you care about the person. And while at first it seems like you’re just being generous, if you’re anything like me, that nagging voice of doubt will eventually start muttering. And those quiet whispers aren’t pleasant.

   Whenever possible, don’t send over money “just to cover this week”, because that one week could very well stretch into one month. If you have a need for yourself in the foreseeable future, it might be best to hold off getting financially involved. 

Ask Questions

   There are times when you might want to help out with a monetary loan. In those instances, you should try to get as informed as possible first. Ask questions, so you can set your own expectations, and to understand the needs. It’s never easy to ask for help, especially the way North American culture has conditioned us to provide for ourselves and our own. If a friend or family member is asking for help, it can be a sign of deep respect, and quite likely will help you feel good about helping out.

   Setting your expectations right from the outset will help you control some of those nagging thoughts that pick away at the strands of your relationships. Ask the borrower questions like:

Why do you need the money?

Who else is lending you money?

How do you plan on repaying me?

When do you plan on repaying?

   These questions will help you understand both the need, and also the plan in place to resolve the debt. And the plan to repay helps the borrower too. Good intentions only go so far, and beyond that, you need a rock-solid plan.

A Gift to You (of sorts)

   While this advice on lending money to family and friends may save many relationships over time, there is another solution. Don’t lend at all. Instead, can you make a gift of the money (some, or all of the requested amount). The gift towards a worthy cause for a loved one will help strengthen your relationship, and avoid the potentially high cost of borrowing in the future. And that high cost of borrowing isn’t interest or fees. It’s friendship. 

   When lending money to friends and family, your philosophy will play a large role in how that sits with you. But even if you aren’t unduly attached to the all-mighty dollar, it is always wise to have a few rules of thumb. 

Don’t lend what you aren’t prepared to lose. And most definitely count on life interrupting the best laid plans.

If you are dead-set on giving your loved ones some assistance, other than loaning money there is always another option through gifting.