Investing in Stock Markets: 101

   The stock market is one of the most common areas to invest in. But what exactly is the stock market?

What is the Stock Market?

   The stock market refers to all markets and exchanges where you can buy and sell shares in public companies. In aggregate, the stock market refers to all publicly traded companies in the world. Ownership of these companies is represented by shares of ownership, or shares. Most countries have their own exchanges, though with the global nature of business, consumers can buy and sell shares across exchanges around the world.

What is a Stock Exchange?

   A stock exchange is a collection of companies deemed to be traded on that exchange. For example, the New York Stock Exchange (NYSE) and/or the NASDAQ is where many of America’s public companies can be bought and sold. Toronto has their own Exchange, through the TSX (Toronto Stock Exchange), and London has their own Exchange (LSE). Basically, a stock exchange is just a large store where you can buy and sell a variety of financial instruments, from shares to bonds, and even options. The shares on offer at each “store” may be different. For example, Enbridge is a Canadian energy company, and can only be bought or sold on the TSX.

The Stock Market and Stock Exchanges are Different. Why is that important?

   The stock market refers to the all-encompassing marketplace for buying and selling financial instruments, including shares. Each exchange operates on their own currency, for example the TSX buys and sells in Canadian dollars, the NYSE and NASDAQ operate in USD, and the London Stock Exchange operates in the British Pound. This means that buying and selling across international exchanges opens you up to foreign currency fluctuations. Also, since the exchanges are based in a specific country, that country's tax laws will also impact your investments.

Investing in Exchanges: ETFs and Index Funds

   As an extremely popular method of investing, Index funds seek to track the overall performance of stocks fitting a certain set of criteria. Some of the most popular indexes that are reported on are the S&P 500, or the 500 largest companies traded in the USA. Another index is the Dow Jones Industrial Average (DJIA), which is comprised of 30 of the largest companies in the US. By investing in ETFs, investors are able to diversify within an exchange at a relatively low cost of ownership. Rather than purchasing one share of each company in the market, an ETF allows you to purchase the general movement of the exchange as a whole.

Market Fluctuations in Today’s Economic Climate

   Understanding the difference between stock exchanges and the stock market in general is even more important during these difficult times in 2020. As the coronavirus is a global event, every country is impacted. But the impacts are not felt equally across the entire world. This means that the business disruption will be more severe in some countries than in others. As a share is simply a purchase of ownership in a company, certain companies and exchanges will be affected more severely than others.

   To illustrate this, we can look at the returns for the TSX Composite Index and the S&P 500 for the week of March 23 to March 27, 2020.

Opening and Closing Level of the TSX and S&P 500 for the week of 3/23/2020.

   In that time, the TSX saw an increase in value by 7.5%, while the S&P 500 grew 10.93%. How each government responds to the health crisis will influence how exchanges perform in the overall market. To diversify your investments, it is wise to consider investing beyond your local exchange. But, the calculations aren’t always as straight forward, depending on the accounts you are using, tax laws can impact your returns quite substantially, especially when foreign markets come into play.

US Withholding Taxes on Stocks (For Canadians)

   At the risk of diving too deep into the rabbit hole, it is worth a quick look at US withholding taxes. The two largest stock exchanges in the world (based on market cap) are located in the US, the NYSE and NASDAQ. Given the size of these exchanges, it is extremely likely that you will invest some of your financial resources on these exchanges. Canada and the US have tax treaties which allow for preferential treatment, but most investment proceeds in the form of dividends and interest are subject to withholding taxes. These additional taxes can be avoided however, if you are making these investments in a qualified account.

   The accounts that qualify for this favourable tax treatment are in general your retirement accounts, such as an RRSP. This is an important distinction to make, because the TFSA, which is another popular Canadian tax advantaged account does not receive the same special treatment for US holdings.

   If you are using an account that isn’t your RRSP to invest in the US, you will need to file a tax form with the Internal Revenue Service (IRS) to take advantage of the Canada-US tax treaties that reduces (but not eliminates) foreign withholding tax. This form is the W-8BEN.

Summary

   Investing is an important element in everyone’s financial plan. The stock market is one place where many of us will invest some of our money. Even in the stock market, there are different subsets, groups of companies in different regions, traded on different exchanges. These exchanges operate as stores, selling slightly different merchandise. Some of these stores will do better than others, as global events impact different regions at a different scale.

   Aside from investing in companies around the world, the savvy investor also needs to know how currency fluctuations and tax laws will impact their returns. With the right mix of investment accounts, you can capitalize on the benefits of diversifying into different exchanges. RRSPs receive preferential tax treatment in the form of eliminating withholding taxes on interest and dividends from US sources. When considering investing in the US, it is more beneficial from a withholding tax standpoint to use the RRSP over the TFSA, as long as your objectives for both accounts are the same, investing for retirement. For all other investments on US stock exchanges, it is important that you file a W-8BEN to take advantage of the existing tax treaties between Canada and the US. This will ensure you aren’t leaving money on the table. After all, less taxes paid means higher returns for you!

   Knowing how to use the tools available to you will help you build the right financial plan for you. Financial freedom isn’t a lofty ideal, with the right knowledge it is a realizable goal.

How to Invest during Market Volatility

Wall St Sign
Credit: Adobe Spark
Wall St Sign Credit: Adobe Spark

   Are you able to see good deals on stocks and ETFs in today’s markets? If you had asked yourself this question a month ago, likely you would have been able to provide a number where you would absolutely love to buy at. 

   Take VGRO for example. The Vanguard Growth ETF portfolio is one of the most popular ETFs to hold. It is a balanced fund, representing all sectors across major North American stock markets. 

Note: The following example is for illustrative purposes only. I am not affiliated with the Vanguard ETF’s, nor should this constitute an investment recommendation. As always, investment decisions should be made based on professional advice and proper due-diligence. 

   On February 15th, 2020, VGRO was trading for $ 27.71 CAD. Without a doubt, most investors interested in this fund would have loved to get their hands on a share for $25.00 CAD.

   Fast forward to March 13th, 2020. VGRO closed the markets at $ 23.29 CAD. Is VGRO a good buy at this price?

   If you had done the research and determined that $ 25.00 CAD was a good price based on the underlying assets, making the purchase decision at $ 23.29 CAD should be a no-brainer.

   Assuming that is the case, why are people so fearful of buying into the market during current volatility?

   The answer lies in how close people are to the decision. While $ 25.00 might be an excellent price to buy VGRO at, the concerns about where the current bear market will bottom out at has people who were rational for years now acting irrationally. The cure for this is in placing Limit Orders. 

   A limit order allows investors to set a price that they are willing to buy or sell at. In the above example, if buying VGRO was a good deal at $ 25.00, a limit could be set to make that purchase once the price reached the $25.00 mark. In a long-term buy and hold strategy, this allows the investor to make smart, forward thinking investment decisions regardless of market conditions. 

   In this way, making the choice to pay $25.00 is actually easier than the decision to pay $23.29 right now. By eliminating the short-term emotions, investors can make sound investments at good prices.

   The other benefit of this type of strategy is to reverse the emotions that you feel. Rather than being fearful as the markets are dropping, you get excited that you are closer to the bargain prices that you identified. This means you aren’t waiting and anticipating the bottom of the market, which is good because timing the market is impossible. Instead, you are doing your research ahead of time, and waiting for your chosen investments to go on sale.

   Of course, the best way to invest for almost everyone is to skip all of this. Automating your investments will let you invest on autopilot, capturing any discounts currently found in the market. But if you are looking to invest a little more play money to take advantage of deep discounts currently available, try looking into limit orders. This will help you make rational, informed investment decisions without succumbing to the emotional roller coaster of the daily market swings.

The 80% Rule to Retire

   How much income do you need each year to retire comfortably?

   We’ve looked at different ways of figuring out your retirement nest egg size, like the 4% Rule. But even that assumption is predicated on another assumption, that you know how much you need each year. Do you know the answer to that question for you? 

How much income do you need each year to retire?

   Estimating how much you will need each year is hard. The amount of money each person needs will relate directly to their unique situation, further complicated by their own list of goals and aspirations. Will you own or rent your living arrangements? Do you have dependents to support? Are family members helping support you? What about your lifestyle, what do you want to do? Do you want to travel? Where do you want to travel to? These are but a few questions that each person needs to answer for themselves, as the answers will greatly impact your financial plans in the future.

   Another issue with retirement planning is the time the question becomes important. Deciding and planning for your eventual retirement should start in your early 20’s, when you first start earning money for yourself. At this stage, it is easy to look at your current lifestyle and think, “I can live off KD and ramen noodles. After-all, I’ve been doing it all through college and I turned out fine.

   Unfortunately, that is certainly not the case when you are older. As you grow and develop throughout your career, your lifestyle creeps upwards too. Suddenly ramen noodles and beer aren’t the only things in your diet. And you certainly wouldn’t want to go back to living like you did in your college days, cheap food and cheap student housing included.

   If your current living arrangements aren’t how you will live when you retire, and you aren’t sure where life will take you as the decades roll by, what can you do now to prepare as best you can?

Career Planning: Income for Retirement

   While we may not have answers to the difficult questions posed earlier, many of us can look ahead in our careers. We are able to see where our careers are taking us, and plan for the roles that make up the general direction we’re facing. Whether that is a paralegal with visions of becoming a partner, or an apprentice electrician looking to become a grand master in her craft. These future roles we are aiming at, and may one-day hold ourselves have an abundance of information about them. This information includes the expected average annual salary. For bench-marking how much you will need in retirement, financial planners will often estimate 80% of your income at your highest earning level. 

   Planning for income during retirement at 80% of your peak earning potential will allow for lifestyle creep as you become more successful. If you plan on making $ 80,000 / year at your career peak, you should expect to need 80,000 * 80% = $ 64,000 each year during retirement.

   This 80% of peak earning potential estimate will help you set a target for your retirement nest-egg to work towards. As with all things of importance, your odds of success greatly increase if you have a clear target and a plan to get there. Think about your career, where you’ll be, and how much that means you should plan for in your retirement. With the right plan, financial freedom is available to everyone.

Estimated annual retirement income needed

Investing Strategies for the Coronavirus

February 23rd, 2020 - the stock markets around the world started slipping amid fears of the coronavirus (COVID-19).

   This week has been one to separate the successful investors from the unsuccessful. But the question is, amid all the panic and markets crashing, how do you become one of the successful?

   Turning on any TV channel, or scrolling through any number of online forums devoted to finance will tell you which stocks to buy, which to sell. There are countless predictions of where the “bottom” is, each saying a different thing. With all this noise, who is winning?

   To answer that question, we need to look at investor discipline.

   What was your investing strategy before the noise of the news started preaching panic? Have you changed your investing strategies as a result of the information screamed at you?

   Many of you have been reading long enough to know, the best investing strategy is to make regular contributions. This will result in the dollar-cost average of your portfolio being lowered during market downturns like this week has been. When the market recovers, you will be further ahead because you have been purchasing investments as they have been decreasing in value.

   Unfortunately, it is too easy to be caught in the sway of news media, and start abandoning your proven investment strategy by trying to time the bottom of the market. People caught in the latest Wall Street hysteria hold back regular investment contributions, thinking that they alone can perfectly predict the bottom of the market. This type of wishful dreaming gets in the way of the investing truths that we all know. None of us are smart enough to perfectly time the market.

   Your best bet? To continue investing as you always have, on whatever regular schedule you use. For me, that is the start and the middle of the month, aligned with my pay cycles. Since the crash happened after my mid-month contributions, I effectively paid full price for my investments at that time. My next regular investment (made probably around the time you are reading this), based on my own schedule will therefore be a purchase of ETF’s, stocks, and bonds that are “on sale”. This purchase of “on sale” investments will lower the average cost I have paid for all market investments in my portfolio.

The key take-away here:

Keep investing per your schedule. Don’t get caught up in the hype and try to time the market, or you might just miss out on a day of rapid recovery and all those associated gains.

   Of course, for those looking for a little extra credit, or for those who simply love a good bargain. The stock market investments are on clearance right now. Perhaps it’s worth a little extra belt-tightening over the next few weeks or months, and throwing a little extra in with your regular contributions. The extra purchases made when stocks are “on sale” will only serve to increase your financial wealth as the global economy steadies out over the coming months.

   If you can keep your calm during panic, and recognize a good financial opportunity when it presents itself, you’ll be well on your way to financial freedom! Happy, healthy, and prosperous investing to you!

How much do you need to retire?

   How much do you need to retire? This question has caused countless sleepless nights for all ages. With studies released every year all yielding the same alarming result, the vast majority of people are ill-prepared for retirement. Studies by any number of financial institutions, finance blogs, or news media agencies, conducted independently yet all displaying the same results. People are unprepared. What these studies don’t usually dive into, is the question; how much do you need?

How much do you need to retire?

The 4% Rule

   First created by William Bengen, the 4% Rule tells you how much you can safely withdraw from your retirement accounts to ensure you don’t run out of money. Used by many financial planners as a rule of thumb, you can also benefit from this calculation. 

The 4% Rule Example

   Meet Sally. Sally is 65 right now, and looking forward to three decades of retirement, living to the age of 95. 

   Sally has determined, based on her lifestyle and spending goals (travel and entertainment), that she needs $ 60,000 per year to retire comfortably. Based on the 4% rule, Sally would need a retirement nest egg of $ 1,500,000 to achieve her retirement goals.

   While that number alone provides some insights, there are some key assumptions driving the 4% rule.

Assumptions of the 4% Rule:

The 4% Rule makes a few critical assumptions:

  • Retirement will only last 30 years
  • Asset Allocation is between 50/50 and 75/25 stock to bond mix
  • Withdrawals are consistent, and comprised of interest, dividends, and capital gains

   What this means is that, if you plan to retire early, or have a long life-expectancy, 4% might be too aggressive to fund your lengthened retirement. Also, a 50/50 to 75/25 asset allocation mix might be riskier than you would like. Taking on too much risk could, in negative economic times, result in your portfolio depleting too much to be able to recover in the allotted time frame. And the final key assumption made is that the withdrawals are first funded by interest and dividends, and only small amounts of your portfolio are sold to cover the difference.

   This final assumption has caused some companies like Morningstar to discount the 4% rule as “too simple”. Their assertion is that the historical data that the 4% rule was created on doesn’t take into consideration the lower bond yields. By reducing the income from interest, a retiree would need a more aggressive portfolio to make up for the weak bond yields. Put simply, 4% is too much to withdraw. As a result, other numbers have been used as a benchmark, ranging from 3% to 3.5%.

   In Sally’s example, she might need a nest egg of $ 2,000,000 to safely retire at a 3% withdrawal rate. Or alternatively, she would need to learn to get by on only $ 45,000 / year.

How much do you need to retire?

   As you can see, there is no consensus on the amount. Lifestyle choices, alternative income sources such as pensions and old age security, and even life expectancy can greatly alter the calculations on a case by case basis. 

   Considering all these aspects, you still need a financial goal to aim for. For your planning purposes, I would suggest using a middle-of-the-road benchmark. If Sally could rewind until she was 30 again, her goal would be to save $1,750,000 before retirement. This allows her a 3.5% withdrawal rate, taking $ 60,000 per year.

   As you get closer to retirement, you will have a much larger investment portfolio than you do now. At that time, more options will be available to you, and a visit to a financial planner would be advisable.

Action Items
  1. Consider what you plan to do in your retirement.
  2. How much does that lifestyle cost each year?
    • Consider: Do you own your own home? Do you rent? Are you receiving Old Age Security or Pension benefits?
  3. Take your estimated annual spend and divide by 3.5%. 

 

Your answer has given you a financial goal to aim for. Don’t be discouraged by where you stand in relation to your goal, take pride in knowing you have a clear direction.

How to Plan for the End

In this world nothing can be said to be certain, except death and taxes.” - Benjamin Franklin

   While not particularly motivating, Benjamin Franklin is indeed correct. And to that end, we should be prepared for that unavoidable permanence. But how?

How do you plan for the end of life?

  • A Will
  • A list of bank accounts, URLs, usernames, passwords.
  • Instructions for financial management of accounts

A Will

   A will is a legal document outlining what you want to happen with your estate upon your passing. Your will is used to outline your wishes, and leave assets to various individuals and groups (think spouse and children, and charities). Why you need a Will now further outlines the importance, and gives you steps to take to produce a will. 

  • Take action today: protect your family from estate taxes, and do your part to make a difficult time easier for your loved ones.

Accounts, Subscriptions, and Services

   Subscriptions are everywhere in today’s society. As we become further plugged in, and even reliant on technology, these subscriptions provide access to a wide range of services. Even services that once thrived on paper correspondence, like banks and government tax agencies, are creating online profiles and portals to conduct business. With all these online accounts in our name, navigating the list of services we’re using can become quite a chore. Indeed, I have spreadsheets with 30+ different accounts for business and personal use. With such a complex ecosystem of electronic connections, providing our loved ones a list of all accounts and login details is important.

   Providing a single, unified list of all accounts and details will help you stay organized, and make things much easier in the event that control needs to be passed on to a loved one. To help manage this, there are a few options.

   Spreadsheets are a convenient way to store account details. For my work-related logins, I store all my details on a single, password-protected file. This allows others with the password to access the files, and obtain access through my usernames and passwords to any service that I use for work. Certainly the ability to easily share the spreadsheet, especially if using a cloud based service like Google Docs, provides a measure of convenience that is hard to duplicate. One disadvantage is, while easy to use, spreadsheets do not provide high-level cyber security, and may not be best for storing sensitive information.

   On the other end of the spectrum for cyber security are password management services. Companies such as LastPass or BitWarden (I have no affiliation with either company) provide secure logins to store all passwords. These services also help you create and store high-strength passwords, to greatly reduce the chances of your accounts being compromised. Both these solutions offer both paid and free services for individuals, and provide high-strength, convenient password and account management services.

   No matter the route you take to organize your account logins, having a way to pass on the detailed list of login URL’s and account details will make life much easier for your loved ones.

Instructions for Financial Management 

   Another area of concern, especially among couples, is how to manage finances. While I would advocate that in matters of money, both parties share the knowledge and decisions, I understand that in some relationships this simply isn’t the case. If you are the one who primarily handles financial aspects, you need a way to pass on that knowledge and a “what to do next” plan to your partner and/or children. This is information that goes beyond simply what assets and liabilities exist, as those are covered in your will. Instructions for financial management should explain, at least at a high level, your investing strategies and asset allocation. Also included should be a short list of trusted financial advisers, or knowledgeable friends that would be willing to help understand the finances.

What to include:
  • Where investment accounts are held
  • Basic investing strategy, and financial goals
  • Trusted financial adviser / friends
  • List of resources to help educate your remaining loved ones
    • Books, Blogs, Courses, etc.

   Death is simply a part of life. Accepting this fact might not make the loss of a loved one, or your own mortality easier to bear, but it will certainly help you plan for the inevitable. Those plans should include a will, to outline your wishes for the distribution of your estate. This step will help you minimize estate taxes, and dispel potential conflicts between remaining family and loved ones. 

   Another helpful step is to compile a list of accounts for services that you use. Included in this list should be: service, company, a login URL (if applicable) account numbers, user names, and passwords. This will help keep things organized, and prevent service disruptions that further increase the difficulty of an already trying time. Finally, providing financial management best practices and strategies, along with education resources and trusted advisers will help ease the burden of financial management from your surviving loved ones. 

   The right plans implemented early will let you and your family / loved ones sleep peacefully at night, knowing that you have done all you can to set them up for success.

What Is An RRSP?

   Registered Retirement Savings Plan (RRSP) accounts were designed to provide an incentive for individuals to set aside money for retirement. These accounts provide a central foundation for long-term saving goals. 

What is an RRSP?

   A Registered Retirement Savings Plan (RRSP) is a tax-deferred account. This works by deferring taxes until the money is withdrawn in the future. The purpose is to incentivize people to save for their retirement, which the government does by simply saying, save now, and don’t pay taxes on that money until you need it. 

   The way this tax-deferral works is by reducing your taxable income for the year by the amount of your contributions. For example, if you make $80,000 per year and you invest $10,000 into your RRSP, the government will only take tax as if you earned 80,000 - 10,000 = $70,000. You are therefore receiving $10,000 tax-deferred. That $10,000 will be taxed in the future when you withdraw your money.

   Your RRSP may be opened at any time, although some institutions will require you to be the age of majority. Any RRSP account that you own must be withdrawn or converted into an RRIF or annuity when you turn 71.

   RRSP’s are offered by a wide range of financial institutions, from banks to credit unions, mutual fund and investment companies, and even life insurance companies. Through these institutions, you may open an RRSP investment account. Once you have an account, you then have further options of where to invest. The below is a list of eligible investments in an RRSP.

Eligible investments for RRSP
  • Cash
  • GIC’s
  • Savings Bonds
  • Treasury Bills
  • Bonds
  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Equities
  • Mortgage-backed Securities
  • Income Trusts
  • Gold & Silver Bars

What are the Benefits of an RRSP?

   The obvious answer here is that your contributions to an RRSP are tax-deferred, meaning you save money on taxes now, with the promise to pay that tax in the future. This works by allowing you to contribute more money to an investment account. For example, assuming your combined tax rate is 30%, and you plan on investing $10,000 pre-tax this year. If you were to invest after-tax, that $10,000 * (1-30%) = $7,000. Instead, by investing in your RRSP, the taxes are paid in the future. This means that you can invest the full $10,000 now, an extra investment of $10,000 - 7,000 = $3,000. That is $3,000 more invested now that can grow over time. 

   Using the tax-deferral of an RRSP account is especially important when you use your RRSP as an essential part of your financial strategy, allowing you to save taxes overall. For a more in depth look at how you can use different investment options to save taxes, check out our comparison between RRSP vs TFSA.

How Much Can You Contribute to Your RRSP?

   Unlike the fixed amount you can contribute to your TFSA annually, the RRSP has an individual contribution limit set as a factor of your income, up to an annual maximum. Your RRSP contribution limit is set by the lower of 18% of your annual income, or an annual maximum set by the government. In 2020, the annual maximum is $27,230.

   Any unused lifetime contribution room is carried forward each year. To see how much you can contribute, check out your account with the CRA. Most individuals who have filed in the past couple years will have been prompted to create an online account already, and since you’re reading this online, you probably are tech-savvy enough to have an online account

   Alternatively, your lifetime contribution limit will have been mailed to you (if you still have mailing selected as an option), and you can find this on your RRSP Deduction Limit Statement.

What If You Over-contribute To Your RRSP?

   There is a $2,000 safety buffer, allowing you to over-contribute by $2,000 before you will be required to start paying tax. The tax levied on excess contributions is 1% of the excess balance per month.

What if you need to Withdraw?

   Contrary to popular belief, there are no explicit penalties to withdrawing from your RRSP. If you withdraw from your RRSP, that money is taxed as income in the year that you withdraw. However, unlike the TFSA, when you withdraw from your RRSP, that contribution room is lost forever. For example, if your lifetime contribution room was $100,000 and you withdrew $15,000 for your wedding. You will pay tax on that $15,000 in the year you withdraw, plus, your lifetime contribution room will drop to 100,000 - 15,000 = $85,000. This lifetime contribution room is lost forever.

   There are 2 special cases where that is not the case, the First-time Home Buyers Plan, and Continuing Education. In those special cases, any withdrawals you make must be repaid over a set term. Essentially, you are borrowing from yourself. In these cases, the contribution room is not lost, but future contributions will be applied to the loan and hence not tax-deductible.

Advanced: Deferring Your Tax-Deferral

   You don’t need to claim your tax credit in the year that you make a contribution. In this case, you will essentially be putting after-tax dollars into your RRSP, similar to how you would a TFSA. Those “Unused RRSP Contributions previously reported and available to deduct” will show up on your RRSP Deduction Limit Statement.

   You may choose to do this if you expect to be in a higher income bracket in the future. This will mean you can still invest in your RRSP accounts now, and take advantage of investment growth, while saving the tax break for when you are earning more in a higher tax bracket.

What this all means for you

   The RRSP is an essential investment account for every Canadian. The tax-deferral properties give this type of account a big leg-up over traditional investment accounts. By saving on taxes now, you are able to contribute more, and let those investments grow over time. The taxes are then paid when you start withdrawing money. 

   If financial freedom is in your life’s plans (it should be), the RRSP is an essential tool to help you on your journey.

What is a Good Credit Score?

   Credit scores are extremely important in your financial life. Understanding what they are, and how they are calculated is important. But even then, what qualifies for a good credit score? And what about the other end of the spectrum, what is a bad credit score?

The FICO 8 as a Credit Score Benchmark

   While there are a few different credit scoring formulas, one of the most common is the FICO 8 score. Your FICO 8 score will provide a very close estimate to where you stand among all credit scoring methods. This is important to note, since when you retrieve your credit score from one of the different credit reporting companies, the number they provide should be close, but will not be exactly the same. This is partly because they are likely using a slightly different formula than the FICO 8. For that reason, using the FICO 8 as a benchmark will provide a very close approximation of your credit worthiness.

What is a Good Credit Score?

   The FICO 8 score, and all credit scores, are broken roughly into the following bands: Poor, Fair, Good, Very Good, and Excellent. A good FICO 8 score is in the 670 - 739 range. Individuals with scores in this area are generally not turned down for loans, and shouldn’t experience too many financial roadblocks. Unfortunately, the reverse is true. Individuals scoring below 670 may experience difficulty finding a credit card, and will pay higher interest rates on their loans. This is in addition to the other non-financial aspects, such as experiencing more barriers to job markets. The chart below shows the ranges of the FICO 8 score.

Chart showing credit score ratings

Better than Good

   A Very Good and Excellent credit score is even better than good (obviously). Individuals who achieve this range of credit score generally receive more favourable interest rates on loans, and have greater access to debt. Entering this level, over 740, will result in better financial options, and hence make your journey to financial freedom even easier. If you have an interest in achieving financial freedom in your life, there’s a good tangible target to shoot for: a credit score over 800.

What is a Credit Score?

   Credit scores can make our lives easier, or vastly more complicated, depending on our rating. But what are these credit scores? How are they calculated? How are they used? And, where can you see yours? 

What is a Credit Score?

   Credit scores are a measure of your financial trustworthiness. Based on a sliding scale between 300 and 900, the higher your credit score number, the better. Put simply, a high credit score indicates to lenders that you are less-risky, and that you have a good track record of paying your debts. Different reporting agencies have different calculations, and even different scoring ranges, but in general a high score at one agency will match a similar score from another agency. As a result, finding your credit score from a single agency will give you a good indication as to where you stand.

How are Credit Scores calculated?

   Different agencies calculate credit scores differently, and even the calculations are proprietary and not known for certain. That said, the most common scoring calculation used is the FICO score. In general the FICO score can be broken down into 5 core areas, generally weighted as follows.

  • 35% Payment History
  • 30% Amount of Debt
  • 15% Length of Credit History
  • 10% New Credit
  • 10% Credit Mix

   While this isn’t an exact formula, it’s a good estimate as to the most important criteria. Each category influences your credit score. Let’s look at how it all stacks together.

Payment History

   How well you have paid your bills in the past is the biggest influence on your credit score. Are you paying everything on time, every month? By routinely making your payments for all your bills, you indicate to lenders that you are reliable, which drives your credit score higher.

Amount of Debt

   The amount of debt you have, and the amount you use also plays a role. In general, you want to be below 20% of your total allowable consumer debt. For consumer debt, credit card limits and lines of credit are the most important types. It is important to make the distinction between types of debt here, since mortgages and auto loans can be rather large, you won’t be adversely penalized for using them, despite throwing off your total debt usage ratio.

Length of Credit History

   How long you have had an established credit history impacts your credit score. The longer you have had credit available to you, the better your score will be. This of course impacts young people and immigrants the most, as they haven’t had the time to establish their credit history yet. 

   Another consideration in this area comes with cancelling sources of credit. For example, it might be beneficial to hold onto your oldest credit card or line of credit even if you don’t use it anymore because it proves you have a longer credit history.

New Credit

   Applying for new credit can drive your credit score down. This is seen as risky behavior, as you obtain new sources of credit in a short period of time. As you prove that you can manage the level of credit that you are eligible for, your credit score improves. Again, this doesn’t mean that you shouldn’t find new sources of credit, indeed there are good reasons to change credit cards, etc. But, making a lot of changes at once might make you appear more of a credit risk, and your credit score will adjust to reflect that.

Credit Mix

   The final element is credit mix, or the types of credit available to you. Having a diverse array of credit options improves your score. This can be a combination of auto loans, credit cards, lines of credit, mortgage, etc. Being able to effectively manage multiple sources of credit indicates to lenders that you are financially responsible, and your score is higher as a result.

How are Credit Scores used?

   Arguably credit scores are the most important number in your financial life. They impact everything from housing rent and job applications, to the interest rates you pay on loans. Your credit score can even impact your relationships, with studies showing that your credit score can even impact your dating. 

   Credit scores are used as a measure of your financial risk. A lower number indicates that you are more risky, and therefore lenders demand a higher interest rate to account for the increased risk. This means that being financially responsible isn’t just good practice, it’s also saves you money! The difference of a fraction of a percent on large items like auto loans or mortgages can mean thousands, or tens of thousands of dollars in savings over your life.

Where do you find your Credit Score?

   You are entitled to a free copy of your credit report each year from each of the credit scoring bureaus. For our US readers, you may request your credit report here:

https://www.annualcreditreport.com/index.action

For my fellow Canadians, you may request your credit report from Borrowell here:

https://borrowell.com/

   Knowing how credit scores are calculated, what your score is, and how to find it is important. This three-digit number can have quite an impact on your financial future. As with any scoreboard, why not try and set the highest score you can? Your whole financial life will be better for it!

2020 TFSA Update

   For Canadians, the Tax Free Savings Account is an incredibly valuable investment tool. As the allowable contribution room that increases each year, anyone using this investment tool needs to be aware of the latest contribution limits. 

For 2020, the annual contribution increased by $ 6,000.00.

   If you have been over the age of 18 since the year 2009, your total lifetime contribution limit is $ 69,500. The chart below shows the annual contribution limits, and a cumulative total. To find your lifetime contribution limit if you were younger than 18 in 2009 (born after 1991), simply add the annual limits of all subsequent years after the calendar year you turned 18.

2020 TFSA

Contributions vs. Account Balance

   There has been some confusion about allowable contributions, especially when investments have grown. Contributions are considered independently of the account balance. This is especially important after the economic boom over the past decade. If you had investments that performed well over the past few years, it is quite possible that your account value has grown to beyond $ 69,500 already. This does NOT mean that you can’t contribute this year. As long as the amount you have contributed, your invested principal, does not exceed your lifetime contribution limit.

Example: TFSA Lifetime Contribution

   To highlight this, let’s look at Dominic’s situation. Dominic is a 30 year old Canadian resident, living in Canada on a continuous basis. Born in 1990, Dominic was 19 when the TFSA was introduced, and therefore has the entire lifetime contribution limit allowed.

   In 2019, Dominic received an inheritance, and invested all of his allowed amount into his TFSA, the full $63,500. His investments were predominantly stocks, and he saw significant gains over the year. On January 1, 2020, the balance in Dominic’s TFSA account was $ 73,000 - a gain of $9,500 over the year! Dominic hasn’t withdrawn any funds, but is concerned that his account balance is over the $ 69,500 lifetime contribution limit. Fortunately, as a BusinessMinded.ca reader, he knows where to go for information before making any rash decisions.

   Looking at Dominic’s situation, we see the following:

Lifetime Contributions: $ 63,500

Investment Growth: 9,500  

   Understanding that investment growth has no impact on lifetime contributions, Dominic can still contribute $ 6,000 in 2020. This will bring his used lifetime contribution up to the 69,500 limit, while increasing his account balance to 79,000 ($ 69,500 contributions + $ 9,500 investment growth).

TFSA: A Powerful Tool

   Understanding how a TFSA works is important for achieving financial freedom. Armed with the right knowledge, a TFSA will play an important part in your financial future. With $ 69,500 in cumulative lifetime contribution room in 2020, there are plenty of ways this powerful tool can be used to drive your personal financial success.

Where can I find more information about TFSA’s?

Read What is a Tax Free Savings Account?

How does this compare to an RRSP?

Read Which is better? RRSP vs TFSA.

How much will achieving your goals cost?

How much will achieving your goals cost?

   Knowing how to avoid the common pitfalls of achieving goals increases your chance of success. But there is one other often overlooked cost of achievement, and that is the financial cost of progress. For all of our goals or resolutions, there will be an impact on our bank account. Recognizing these costs will help you build them into your financial plans, and clear one last hurdle to your achievement.

What type of costs will you see?

   For my fitness goals, the gym membership will cost several hundred for the year. And while I have some gear already, continued use will ensure that needs to be replaced. By the end of the year, I expect to have spent $ 2,500 on gym memberships, workout clothing, running shoes, equipment maintenance, etc.

   As I progress my career goals, I will need to have the wardrobe for the positions I plan to be in. For new suits and dress clothing, $ 2,000. The courses and professional development that will get me to my career goals? Another $ 8,000.

   By now this is starting to sound like a MasterCard commercial, and that’s only considering the costs for two of my pillars. Once we add in social outings, date nights, romantic get-aways, journals, guided meditation apps, etc. The financial cost of all that I plan on achieving climbs even higher.

   Of course, achieving what I have set my sights on this year? Making this year my best year ever? That, is priceless

How much will achieving your goals cost?

   Setting the right goals will put you on the path to living your best year ever. But an important part of achieving your goals is to understand the costs associated with each of those goals. Here’s how you can be better prepared:

  • Pull out your list of goals
  • Under each goal, list what you’ll need to get there
    • A coach? Courses and seminars? A weekly entertainment fund? New gear / clothing?
  • How much do each of these prerequisites cost?
  • How much more do you need to set aside now, and ongoing, to ensure you can achieve your goals without undermining your financial foundations?

   Understanding the costs of achievement helps you plan accordingly. No matter the numbers you come up with, it is essential that you create the plan, and keep your eyes fixed firmly on the achievement of your goals. Because the cost is nothing compared to the value you’ll experience when you make this year your best ever. The value of that? Priceless.

How to use your Emergency Fund: Best Practices

   An emergency fund can save our hides in an unexpected event. That safety cushion can be used in an emergency, or as an opportunity fund. But using the fund is only part of the equation. We also need to replenish it, or risk going into the future financially exposed.

When is it okay to use your emergency fund?

   Sometimes unforeseen events happen that put a strain on our finances. For these situations, we can dip into our emergency savings to prevent us from having to borrow money from other sources, like bank loans and credit cards. Our savings are designed to protect against the struggles of life, designed to make our financial position stronger and safer.

   In general, your emergency fund is there to help with the one-time expenses that creep up on you. A car accident not covered by insurance, a medical emergency, or unexpected travel. Anything sudden that causes you to deviate from your current financial plan can be covered by your emergency fund. But be careful that the expenses that come up are really one-time items, and that you aren’t dipping into your emergency fund for everyday purchases. If that’s the case, your expenses are creeping too high and you’re in danger of living beyond your means. And that is a very dangerous road to travel. 

   You also could dip into your emergency savings for once-in-a-lifetime investment opportunities, after appropriate due-diligence of course. You don’t want to chase too good to be true promises with your financial safety net.

What do you do after you’ve used your Emergency fund?

   What’s next after you use your emergency fund? Whether it is to cover financial shortfalls from a real emergency, or simply taking advantage of an exceptional opportunity, that money has come from a loan. You have loaned yourself funding to cover an extraordinary item, but make no mistake, you are still in debt. The only difference is that instead of borrowing from a bank or other source, you have borrowed from your future. 

   If you do use your emergency fund, you need to treat it as you would any other debt, pay down aggressively until you are debt-free, or in this case, until your emergency fund has been restored.

   In the few times I have needed to resort to using my emergency fund, I treat that loan as equivalent to one my bank would offer me. That means that I charge myself interest on the loan I made to myself. As I pay down that loan, I also pay “interest” into my emergency fund, meaning my fund is larger than it started, and I have an even larger safety net to cover future financial shortfalls. 

   Using your emergency fund is okay, especially in emergency situations. That is afterall why we put those extra dollars aside. But when we do use our emergency fund, we need to remember that we are loaning that money to ourselves. When we consider the use of our emergency fund as going into debt, we think twice about using the money. If our cause is truly just, and we need to use our safety net, thinking about it as a loan also ensures that we pay it back quickly. That way we return to a state of equilibrium, where we protect our financial stability from the unexpected future.

Your Opportunity Fund

How much do you have set aside for emergencies?

   Common financial advice says you should be holding at least 3-6 months worth of living expenses in cash, just in case an emergency comes up. This should be a target of everyone’s financial plan, to save 3-6 months worth of necessary expenses, and have those funds stored in cash, readily available if you need them.

   Accepting that target savings amount can be hard, made harder still during periods such as the last decade. That seems like an awful lot of cash to be stored, especially when the markets are performing well. After all, isn’t it better to be invested in the market in the long term? Doesn’t that mean holding a large cash position is actually losing the opportunity for greater returns?

   The answer to these questions is yes, and maybe.

Let’s look into that further.

   Over the long term, every investment market has increased. That doesn’t mean that they increase every day, every month, or every year. But over the long term, they have gone up. Unfortunately, emergencies by their nature cannot be predicted. But neither can opportunities.

   And therein lies the beauty of your emergency fund. It is liquid cash, available for use at a moment's notice. If a once-in-a-lifetime investment opportunity arises, you have funds already available that allow you to capitalize.

   It has been said that fortune favours the bold. But courage alone is worthless without the resources and ability to act. It is time to reconsider how you think about your emergency fund.

   Think of your cash reserves as both preparedness for emergencies and for opportunities. This ensures you are not just ready for the worst case, but also that you are actively scanning for opportunities. 

What kind of opportunities exist?

   Just this month, a former colleague of mine was offered an opportunity to join a startup company. This opportunity brought tremendous upside to his career, but also introduced an increased level of risk. As part owner, some months he may even have to forego his paycheck to allow the company to chase bigger and more lucrative deals. Having a fund that allows him to take advantage of the opportunity without putting his financial position at risk is the purpose of his opportunity fund.

   Other opportunities exist all around us, if only we’re looking. A real estate investment opportunity to purchase into rental properties as part of an investment group. A company that the market over-reacts to bad news and their stock is temporarily under-valued. An opportunity to buy a rare and valuable art collection from an estate auction.

   These opportunities exist all around us, but not every day. When they do arise though, temporarily re-purposing your emergency fund and using it as an opportunity fund is a viable option.

   Keep saving, putting money into both investments and bolstering your cash reserves. And keep a weather eye on opportunities, because it isn’t about what could have been, but what could be. This is your future, and capitalizing on opportunities is a perfect way to make that future brighter.

Where should you invest your money?

We’ve all heard advice from friends and co-workers, “You need to be in the market.” More often than not, they are referring to the real estate market, with their never-researched philosophy that real estate is the best investment.

Unfortunately, this “be in the market” advice is rather misleading, as there are a wide number of investment markets you can participate in. Furthermore, the actual annual returns from various markets often switches each year. Putting this together, it simply means that there is no one “right way” to invest your money to guarantee top returns.

Here are 5 of the common markets you can be in:

Equities

Referring to stocks, the equities markets are the most common investment. An equity, or a share, refers to an ownership interest in a publicly traded company. As a shareholder, you are entitled to a portion of the company's growth and earnings. As a company does well, you can experience investment returns through dividends, earnings being paid to shareholders, or through stock appreciation, the company becoming more valuable which makes the price of the share(s) you own increase.

As a subset of this market, there are various funds and Exchange Traded Funds (ETFs) that hold a collection of shares from different companies. You can buy into these ETFs, and thus own a collection of different companies. This way of investing is extremely popular these days, as it allows you to own a diversified stock portfolio as a low cost of entry.

Fixed Income

Fixed Income investments are debt loans you make to others, usually in the form of Bonds. Most commonly these borrowers are governments and large corporations, who are reasonably certain to pay you back the loan. The structure of these investments is that you provide up-front capital, and the borrower pays you back interest over time, and your principal is returned to you at the expiration of the loan.

When considering loaning money, or buying bonds, you want to be compensated for the risk. This is often seen when purchasing a government bond, as most governments in the developed world are stable. Knowing that the US or Canadian government will still be around in 100 years, you can be fairly sure that your money will be returned to you. With this lack of risk, the amount of interest is fairly low.

With the advent of the internet, there are also peer-to-peer lending sites popping up. These sites allow you to loan money to other consumers. Since these debtors (people borrowing money) are an unproven entity, the interest rates are higher to compensate you for the risk that some of these debtors won’t ever pay back the money you loaned.

Commodities

Another common investment is in commodities, which we hear about in the financial segments on the evening news. While there are many commodities, most commonly we hear about the price of oil and gold. Since these are used in production, you can invest, or buy rights to, a certain amount of these materials. The objective is of course to buy when there is excess supply, and sell when the demand is high.

Given the cost and scale of purchasing aluminum or copper, cattle, oil, etc these markets aren’t quite as accessible to the general consumer. For many of us, to invest in the commodities markets we would need to use a financial instrument called a derivative. These complex financial instruments are best left for another time.

Foreign Currency

Another form of investment is in foreign currency. With the global nature of trade, the cost of currencies fluctuates as goods and services are performed internationally. This causes currencies to be worth more, or less, relative to each other. These fluctuations provide an opportunity to buy and sell currencies to make a profit.

Most currencies are pegged to the US Dollar, and these fluctuations are directly impacted by economic performance compared to the US. Trade between countries has a very strong impact, which means that the number and level of tariffs can dramatically impact the fluctuations of currency. For example, government policy replacing NAFTA with USMCA will impact trade in North America, and that will cause currency fluctuations.

Physical Assets

Physical assets provide another option for investing. This is where you buy an asset that will make you money. This includes real estate as an investment, where you will buy property and rent out its use to generate income. Over time, the asset may become more valuable, which will allow you to sell at a profit.

While real estate is by far the most common example of a physical asset, there are also specialty markets for a wide variety of assets. It could be as simple as buying and renting out a camera lens to make money. Or a sports cards / stamp collections. Or exotic cars. Or artwork.

The purpose of investing in a physical asset is that it allows you to generate income through rental, or investment returns through increases in value. The key distinction between investing in an asset and simply buying stuff (being a consumer), is that the asset is expected to go up in value or provide a financial return while you own it.

Where should you invest your money?

There is a long list of ways you can invest your money, with these 5 being some of the most common. Equities means buying ownership in a company, fixed income is loaning money to generate interest income. Commodities and foreign currency trade on supply and demand, impacted by global trade and government policies. And physical assets provide an extremely wide range of options to invest money in valuable items, such as real estate and artwork.

With numerous markets, and a wide variety of options, you can truly create your own financial adventure. BUT, the most important aspect of investing still remains the same;

You need to be investing now for your future. 

Where you invest is up to you. But don’t be scared by the doomsday sellers promising you that if you aren’t in their chosen market that you will lose out. 

There are a lot of investment options out there, make sure you are participating in some of the different markets on a regular basis. With regular, disciplined investing, no matter the market, financial freedom can be yours.

‘Tis the Season of Giving

   The holidays are upon us, and with it comes the inevitable bombard of requests from various charities. There is not enough money to donate to everyone, so how do you decide who makes the cut, and who doesn’t?

   The motivational Jim Rohn, an iconic figure for personal finance advice, said to allocate 10% of our incomes to help those less fortunate. Charity is a way of giving back to the world and society that shaped us, and allowed for our success. While 10% is not a requirement nor a maximum limit, we all are constrained by how much we are able to give.

   While it can be hard to say no to people in need, it is important to stick to our financial plan, even when it comes to charity. With hundreds of worthy causes, we need to identify the ones that speak to us directly.

Who makes the cut?

   This is a very personal question, which you must answer for yourself. Often the causes we support are ones we hold near and dear to our hearts; a loved one is sick with a rare disease, or we have a soft spot for furry four legged creatures. Whatever the cause, staying true to who you plan to help will enable you to give more generously to those causes that speak to you.

Avoid the Guilt trip

   We’ve all been there, walking into the grocery store, and someone approaches you. They spill out a long sad story of a family in need this holiday season. But you can be the hero, you can help them with just a few dollars!

   It’s a very sad fact that others in our society are struggling to get by on a daily basis. But you can’t save them all, and sooner or later you are going to have to say no, not today. The charity fundraisers will do all they can to make you feel guilty for “turning your back” on others. This is why you need to know what charities you support, which ones are going to receive your donations. Knowing that you are helping a worthy cause helps prevent those feelings of guilt that you have as you walk away from yet another outstretched hand. 

   The important thing is that you know who you want to support, which causes are just, what aid you can provide. There are many others just like you, each who have their own causes. While you may be trying to save the whales, let someone else save the children, and another save the trees. We can’t change the world alone, which is okay, because we aren’t alone. There are millions of other people out there doing their part to make the world a brighter place. And knowing that, you shouldn’t feel guilty, instead you should feel proud of the ray of light and hope that you can cast on your worthy causes. 

   Give generously to the causes you support this season of giving, and feel proud in the knowledge that you are doing your part to make the future just that little bit brighter.

How much are you spending this Holiday season?

   With Black Friday kicking off the holiday buying season, how much do we actually plan on spending?

   Recent reports by PWC, CPA Canada, and the Retail Council of Canada (as reported by CTV news) indicate that we are in for an expensive month. Canadians are planning to spend $ 650.00 on gifts alone this season, with travel and entertainment adding an extra expense for many Canadians. This all adds up to an estimated spend of over $ 1,500.

   While the numbers alone aren’t cause for concern, the surveys also report a few other more alarming statistics. 46% of Canadians won’t be planning out their spending over the holiday season, and in a Manulife report mentioned by CTV news, 60 percent of consumers are willing to go into debt over the holidays.

What does this mean?

   The old adage “Failing to plan is planning to fail,” might be applicable here. Without a general sense of how much you are planning to spend, it is hard to save for the holidays ahead of time. This leads to loading up the credit cards, and paying far more than you planned once those interest bills start coming in.  

   Putting a plan in place, and sticking to it, can avoid some of the nasty surprises that January usually brings. Since Christmas comes fairly reliably every year on December 25th, it would make sense to allocate some dollars to the gift fund throughout the year. Automatically contributing each month to a small gift fund will help ensure that you always have the resources to show your love and appreciation to those you care about.

But it’s too late for me now!

   Let’s say you don’t have a gifting fund already set up, and the holiday season is upon us already. What can you do? 

   There is still time to put a budget in place! Speak with those loved ones that you plan on exchanging gifts with, and work out a reasonable budget. This helps you both out, by taking the guess-work out of how much should you spend, and lets you focus on what you want to give. 

   And if you do need to take on debt this holiday season, make sure you pay off your credit cards in full each month. This will ensure that your high interest debt doesn’t end up costing you far more than you planned to spend on the gifts. 

   The holiday season is supposed to be full of love and joy, don’t lose sight of that amidst financial concerns. The right plan can help you get through this season with a full cup of holiday cheer!

Where are you spending your money?

   Do you think you could save some more money now for a brighter future?

   Many of us look at our current circumstances and believe that we’re stretched thin as it is. The moderate savings we make each month, that’s all we can afford. When we’re asked to find a little bit extra, our initial reaction is, I can’t do that.

   How well do you know your spending habits? Do you know where you are spending your money now? We often have a general sense, but when we get into specific details of where each dollar goes, the results are often eye-opening.

Get to know your spending habits.

   Becoming aware of your spending habits is quite easy these days, with the majority of our transactions occurring through credit cards and electronic payment methods. It is a simple, and not overly time consuming process to look at last months statements and learn where you are spending your money. 

   That knowledge alone can help you make better financial decisions in the future, and may even uncover some areas for additional savings.

   But you can take that process one step further, by becoming proactive versus reactive to your spending. 

Becoming Proactive in your Spending

   To become proactive, you need to be putting thought into your purchase decision, and what that means, before you actually swipe your credit card. One highly effective strategy to do this is to carry around a small notebook, and before every purchase write down what you are spending on, and the amount. This notebook will put a small interruption between the usual tap-and-go buying that you are habitually used to. That brief pause gives you time to reflect, do you really want or need that candy bar or bottle of pop?

   Our financial goals are usually not derailed my large decisions, rather they suffer death by a thousand cuts. It’s the small, habitual purchases that we make that robs us of the extra few dollars each week to contribute towards our financial goals. By tracking, especially proactively by using a notebook, you take back some control over your wallet. That small, powerful step puts you back in charge of your financial destiny. Financial freedom is yours for the taking, if only you get out of your own way.

Why You Need a Will Now

Is your family protected in the case of your death?

   You work hard to take care of your friends and family, that’s why you have taken an interest in achieving more. But what if the worst happens, and you aren’t around to support your family and community further? This is where a will becomes essential, to ensure what you worked hard for in life goes to where you want it to after your passing.

What is a Will?

   A will is a legal document that tells the courts what you want to happen to your property, and the care of any children still considered minorities, in the event of your death. 

Why are Wills important?

   Without a will, your property and any young children will be assigned to the courts to deal with. This creates a lengthy, time consuming, and often expensive process. Furthermore, disagreements over your property causes more stress on loved ones, and can result in fractured relationships as well as your property being distributed in a way you wouldn’t want.

   A will helps alleviate these issues, by telling the courts exactly what you want to have happen with your property. Through this document, you can allocate bank balances, property ownership, and distribution of family heirlooms to different people. You are also able to donate to charities or institutions. By creating a will, you are also able to create tax savings through gifting allowances, etc. This ensures more of the assets you gathered through your efforts are given to the right people, and less is lost in estate taxes to the government.

   Perhaps the most important aspect for parents of young children though, is the ability to direct who will be caring for your children in your absence.

And if I don’t have a will?

   If you don’t have a will, a probate court will assign an administrator to consolidate the value of the estate, and disburse the property and assets based on court decisions. This almost always splits the estate among the surviving spouse and children, if applicable. If neither of these options is available, the government takes ownership of the estate.

   Aside from stressing the relationships of surviving loved ones, a court appointed administrator must follow certain formulas and rules for distributing the assets of the estate. This could result in the family home being given to someone you wouldn’t have intended, or even forcing the sale of assets to divide the proceeds among the beneficiaries. When this happens, the tax laws come into play, and you can lose a substantial amount of value of your estate in taxes, leaving far less to your beneficiaries than you would like.

How do you prepare a will?

   There are a variety of ways to prepare a will, including some very low cost solutions. At the expensive end, you can hire a lawyer to assist in the preparation. They will help you compile a list of all your assets and debts (liabilities). From there, you can indicate who should receive what asset, or part of an asset. That same process is followed by the cheaper options, websites or even DIY kits that you can find on Amazon!

   Once prepared, the will should be witnessed by 2 adults who aren’t included as beneficiaries. The final element of creating a will is to name an executor, someone who will work under court supervision to ensure that your will is followed. Other than being an adult, there are few restrictions on naming an executor, and you can easily name a spouse or child to deal with this. The executor’s role is important in ensuring the smooth settlement of your estate, including discharging any remaining debts you have, and informing government and financial institutions. 

   Now that you have a will, store it in a safe place! A home safe is usually best for this.

   You work hard for your success. Make sure that those efforts aren’t wasted for your loved ones, family, friends, and community that you leave behind. Taking the time to create a will is an important step in ensuring that your assets are distributed fairly, without losing excessive amounts to taxes. And if you have young children, this step is even more important as it will ensure they are cared for by the people you nominate.

   A will is an important element of your financial plans, that will ensure your achievements keep paying off to your loved ones long after you’ve moved onto your afterlife adventures.

How to Finance your Goals

   There are a tonne of things you’d like to do, right? Go on vacation, upgrade your vehicle, go to that fancy hotel restaurant, learn something new, etc. Our bucket lists are long, and they should be! There is so much in this world to experience, and it would be a shame to not do all we want to. But most of your goals come at a price. 

How do you finance your goals?

   For many people, they would like to do a great deal of things. They talk all about those plans, without actually putting together an action plan to follow through. Often this ends up with most of that vacation, or the new TV purchase, or any other item on the bucket list, being charged to a credit card.

   Financing anything through a credit card is a risky proposition, and while credit cards have definite advantages, they shouldn’t be used in lieu of a plan. Instead, they should be a key part of your plans.

   We all know for big ticket items, like a house or wedding, that we must save for quite a while before we are able to purchase them. But are we regularly setting aside money for the rest of the things in our lives? With consumer debt on the rise, and an estimated $ 500 Billion of non-mortgage related debt held by Canadians (as of September 2019), many people are financing their lives through borrowed money. Delinquency rates, or people not paying their debts on time, is also on the rise. Too much lifestyle funding without a plan is getting people into trouble!

   Many Business Minded readers are in a better than average financial positions, and are certainly more likely to be paying off their credit cards every month. But that doesn’t mean having a structured plan isn’t valuable! 

   As with most aspects of your financial lives, you probably don’t want to spend much time thinking about budgets for your goals. So to make sure you stay on track, without spending much time or energy, we need to turn to automation to help us out. For the major events and purchases that we’d like to experience in our lives, we need to automatically allocate a small amount of funds to separate accounts. Over time, these accounts will grow, and when it comes time to take that vacation, or buy the new phone or computer, we have the funds ready to spend. 

   I try to take at least one vacation every year. To ensure I am able to do that, I allocate a small amount of funding each month to a separate high-interest e-savings account. Over the year, those funds build up until I take my planned vacation. And the process repeats itself from there. Automatically save, achieve my goal, rinse and repeat. 

   Having systems that look out for us protects us from ourselves. Knowing that my money is already spent on a vacation that will occur in 8 months helps curb my impulse purchases today. And when it comes time to take my vacation, I am not left stressing about where all that money will come from. 

Financing through a Simple System

   Automate your goals. This system seems simple, yet for the vast majority of us, it is a system we never put the time in to implement. So today, take 15 minutes and create your simple system.

1)   Decide which goals you are pursuing, and when. How much will those items cost? Divide the cost by the time until you need to pay, and you have your amount to save each period.

2)   Open a separate account to hold the monies. This shouldn’t take you more than 5 minutes through online banking. 

3)   Set up automatic contributions to your new account, contributing the amount you calculated in step 1 each period, automatically.

4)   Enjoy life!

   The systems you put in place to control your impulses and make sure you live life to the fullest are dull. Systems don’t inspire anyone. But spending 15 minutes today can provide you the resources you need, when you need them. Achieving your goals doesn’t need to be any more intimidating than it already is. Make sure you have the financial systems in place to help reach your goals. 

   This system will help you avoid the pitfalls of consumer debt, and prevent you from needing to borrow from your future to pay for your today.

Will your retirement savings be enough?

Will your retirement savings be enough?

   This question is enough to cause concern among many people. How much do you need to retire? With news media throwing around words like economic recession, these concerns also bring another element to consider, sequence risk.

   Sequence risk is the danger posed by an economic downturn on an investment portfolio in the short term. While a recession provides an excellent opportunity to build wealth for a younger person, that same recession could greatly impact retirement accounts for those already in retirement or close to it. Simply put, sequence risk is the threat of withdrawing money in a downturn.

   Despite an economic downturn, you still require money to live. Because of this, when your portfolio loses value, you need to withdraw more of it as a % of total to end up with the same benefits. Burning through your retirement portfolio too quickly can lead to more life at the end of your money, not a comfortable place to be in.

   To illustrate, we’ll look at a retirement portfolio of $ 1 million, invested in stocks. (We’ll pretend like you didn’t read the asset allocation articles and didn’t realize that 100% invested in stocks is risky!) If you retired in 2008, your $ 1 million portfolio would have been hit with a loss of approximately 38%. That takes your portfolio down to $ 620,000, and you’ll still need to withdraw to pay for retirement! Those withdrawals are $ 50,000 in the first year of retirement, which is 8.06% of the portfolio!

   If you had retired in 2011 instead, where the stock market virtually didn’t grow, with an average growth of approximately -0.00 %. A withdrawal of 50,000 from your $ 1 million nest egg would only be a withdrawal of 5%.

   That is the impact of sequence risk, that you may be withdrawing more as a total % of your portfolio in a market downturn. Spending through your retirement savings too fast, even when the dollar amount doesn’t change, is something that is almost impossible to recover from.

How can you mitigate sequence risk?

   Understanding what sequence risk is, and how it can impact your retirement savings allows you to create a financial strategy to mitigate the risk. There are many options available here, and anyone close to retirement would be wise to consider them.

   More heavily weighting your portfolio into fixed income, or bonds provides relative safety from stock market fluctuations, and can provide cash flow in the form of interest. While this will help deal with threats posed by sequence risk, bonds also have a much lower rate of return. 

   Also on a similar line as fixed income, you can also hold cash reserves, which again is a safe asset allocation approach, albeit with an even lower risk and returns. Ensuring you don’t have to liquidate your more volatile investments, like stocks, during an economic downturn will help you weather the storm. Historically in the longer term, stocks have always increased in value. As a result, if you don’t need to sell during market low points, you can ride out the financial storms.

   There are other options that provide some protection against sequence risk. Owning rental real estate properties can help generate extra cash flows. This again is a more diverse investment portfolio, and that diversification provides options.

   But what if you are close to retirement, and don’t already have the appropriate asset allocation or real estate? The good news is, it’s not too late to start making your portfolio more conservative, or look at alternate investment options. Another key consideration is phasing into retirement more slowly. This could involve working part time, scaling back hours while still generating some income, which lowers the amount you need to withdraw from your retirement accounts in the short term.

   Sequence risk can throw a wrench in our best laid investment plans. And with concerns over an impending recession, it’s never a better time to explore your options in case the global economy does slow down. There are many options that you can look into; from changing asset allocation to more conservative (less volatile) investments, to exploring real estate investment properties, or even working longer to weather an economic storm. Tough times will pass, and with the right tools at your disposal, those tough times don’t need to derail your financial future.

What is a Target Date Fund?

   Asset allocation is an extremely important lever controlling your investment risk and returns. Knowing how much risk you should have at each stage in your life will help you invest effectively, without chancing losing it all. To assist with this asset allocation, a type of fund called “Target Date Fund” were created.

What is a target date fund?

   Target date funds are portfolios of investments that are managed on the basis of risk. The idea behind these funds is that you select a date in the future, usually when you plan on retiring. The fund will then handle the asset allocation for you, gradually shifting from a stock-heavy weighting at the onset to a more balanced or fixed income heavy weighting at your target date. 

   Alright, target date funds do the asset allocation part of investing for me. Surely it’s not that simple?

What other factors impact target date funds?

   Not all funds are created equal. While the premise is the same, some target date funds will target different areas of stocks. For example, one fund may invest more heavily in natural resource companies stocks, while yet another fund focuses more on financial companies stocks. Each fund is trying to out-do other funds, while maintaining the asset allocation risk levels based on your target date. 

   Even the risk level can vary by a few percentage points across different funds. For example, several funds with a target date of 2045 may have different levels of stocks. Some funds might have only 85% stocks in the portfolio, and yet others may go as high as 92% of stocks. This could have significant impacts on both the risk and return of the fund.

   When investing in target date funds, research is required to make sure that you are investing in a fund that aligns with both your social and financial goals.

What happens when the Target Date is reached?

   Target date funds are usually used for long term investing. The target date is not the end of the fund, but rather the end of when you are expected to be contributing to the fund. After that date, it is expected that you will be withdrawing from the fund, as in the case of retirement. This means that the monies in the fund will be more heavily weighted in fixed income and cash, providing you marginal returns while reducing risk.

   Once again, this is a general case. Some funds do actually force a “liquidation” of sorts, and convert your target date fund into a different, more conservative portfolio. When picking a target date fund, this is an important question to ask; “What happens on the target date?”

   Target Date Funds provide a relatively straight-forward way to invest in a diversified portfolio, while also ensuring an appropriate asset allocation strategy is being followed. The fund will reduce risk as you approach the target date, ensuring that your long term investments will be better protected against market fluctuations when you expect to draw on those investments.

   As with all investment decisions, research and counsel from a financial planner is advised. But the most important element is that you take action and invest now, as soon as possible.

   Financial freedom is a goal of all of us, and target date funds provide an easy way to step into the world of investing with a reasonably good strategy right out of the pamphlet. Investing in your future is the only way to ensure that future meets your dreams. While the world of investing sometimes seems complicated, target date funds might just be the answer you were looking for!

What is Asset Allocation?

   There are three fundamental principles to successful investing: asset allocation, market timing, and time in the market. To achieve optimal financial returns, while balancing an appropriate level of risk, we look at asset allocation.

What is Asset Allocation?

   Asset Allocation is an investment strategy that involves investing part of your portfolio in different investment classes; stocks, fixed income, and cash. These assets, or investments, make up a portion of each balanced portfolio. The amount of risk associated with the portfolio is determined by how much of each asset class is held. For example, a 100% stock portfolio is much more risky than a 50% stock, 50% fixed income portfolio.

   Okay, so Asset Allocation simply refers to how much of my investment portfolio is made up of stocks, bonds (fixed income), and cash. I’m with you so far, but why are you telling me this?

Why is Asset Allocation important?

   As one of the three levers that controls investing, Asset Allocation is the most easily adjusted. While we cannot invest earlier, and correctly timing the market is a statistical impossibility, asset allocation is our best bet to invest effectively.

   Asset allocation is widely considered the most important investment decision, with far greater impact than the specific stocks in your portfolio. The asset mix, between stocks, bonds, and cash determines the risk / return rating of each portfolio.

   In general, stocks are the riskiest, yet offer the highest returns. Fixed income is safer, but the returns are lower than stocks. And cash, or Certificate of Deposits (CDs), are the safest of all investments, yet yield the lowest returns. Asset allocation is important to understand, as it governs risk and expected returns. 

   Alright, Asset allocation is important. How do we use it best?

How to use Asset Allocation?

   Financial advisers will often recommend asset allocation based on your age, as a general approach to determine how much risk you are open to. The traditional formula is 100 minus Age = asset allocation weighting. For example, let’s say you are 30 years old. 100 - 30 = 70. This means that 70% of your portfolio should be invested in stocks, while fixed income (bonds) and cash make up the remaining 30%. 

   The traditional formula doesn’t take into consideration the increasing life expectancy, and I would advocate that for our younger readers, the asset allocation benchmark formula should be 115. For our 30 year old reader, that would look like 115 - 30 = 85. Therefore, 85% of a 30-year old's investment portfolio should be in stocks, with the remaining 15% invested in fixed income and cash. 

   This benchmark system makes a very important assumption, that the investments are made with a long-term focus. This long-term focus looks towards retirement, not shorter term financial goals like home-buying or weddings. If the monies will be needed within the next 5 years, a far more conservative asset allocation is recommended.

Key Learning Notes:

   Asset allocation is the single most important lever to control your financial investments. The term refers to how much you invest in a single area, between stocks, fixed income (bonds), and cash. The more heavily weighted in stocks, the riskier the portfolio, and the higher expected returns. As a general rule, a good benchmark for asset allocation can be established by using 115 (or 100) minus Age = allocation for stocks. This benchmark is effective if using a long term focus, for example saving for retirement.

Action Item: 

Perform the asset allocation benchmark calculation for your long term investment accounts. What is your benchmark score?

Now look at your investments. How much, as a percentage, do you have invested in stocks? Fixed income? Cash?

Is there any re-balancing required? Ideally, this exercise is conducted once or twice a year.

What’s something you wish you knew in your 20s?

   I was reading the forums this week, when this question popped up. Sure there are some generic answers: “you’re young, enjoy life”, “don’t worry so much”, etc. But there was a couple of answers that hit right at the heart of what we talk about at Business Minded.

“Spend less time worrying about investing small sums of money and focus on growing my career. Must have spent 100’s of hours reading forums, reading books, local real estate listings and figuring out which ETF was perfect for my small amount of savings.”

   This lady, or gentleman, is not your typical internet forum troll. The lesson that they are trying to impart here is both essential and ageless. No matter how old we are, if you are working in a career, you can increase your earning potential. We can increase what we are worth, by being able to bring more value to our customers, whether those customers are inside a company or external clients. By increasing our value, we are rewarded far in excess of the rate of return on the stock market.

   The earlier we begin to invest in ourselves, the more we will be able to earn in our lifetime. And that can have a dramatic effect over the course of several years. 

   There is no better example of this than a situation I advised one friend on. Andy (not his real name) found himself in a particularly wonderful situation early in his career. He had two opportunities on the table, his current job (Job A) at $ 70,000 annually, or an offer on the table (Job B) for more responsibility and a $ 85,000 annual salary. Seems like a no brainer right? But as always, there’s a complicating factor. Job A was offering an investment opportunity for equity in the company. The expected return was 400% after 5 years. With an astronomical return like that, the decision just became a lot more complicated. 

   From a numbers standpoint, the opportunities would be equal if Andy made 15,000 * 5 years = $ 75,000 on the investment deal. At a 400% return, that means an initial investment of $ 18,750. Andy has on hand approximately $ 30,000 to invest in Job A’s equity, which would result in $ 120,000. With a 5 year lens, which for many of us is beyond where we can reliably predict, Job A is far superior, to the tune of $ 45,000.

But what happens after 5 years? How far does that $ 45,000 advantage go?

   The skills we develop pay off now, but they keep paying us dividends into the future. A higher earning potential leads to our ability to generate substantial resources over the course of our careers. The job experience alone from an earned promotion can raise our financial outlook to untold heights, as we grow and increase our value. 

   Back to Andy, assuming his earning potential increases at the same rate for the rest of his career, 20 years from now with $ 15,000 extra per year leads to a gain of $ 300,000. That far in away exceeds the return of the $ 45,000 investment from Job A. When faced with the numbers, the decision became clear, Job B was the better route.

   How much time do we spend worrying about our investments right now? How valuable could we become if we spent that time learning, growing, increasing our earning potential?

   Investing in ourselves has the highest return on investment out of any investment we could possibly make. And the right time to invest is now. Invest in yourself. You can increase your value, and improve your future for the rest of your life.

Unsure of what the best way to increase your value is? The Career Growth coaching platform is designed to help you take control over your professional growth. Check it out here, or send me an email directly to brian.marchant@businessminded.ca to discuss if our program is the next step to take you to greater professional heights.

3 Questions to Align Your Goals

Are your goals really going to take you to the good life?

We all have goals in some capacity, focused on each of the areas of our life. Maybe that’s more money, a healthier lifestyle, more close friendships, or more impact in our careers. Many of these goals were set either some time ago, and we’re working towards them. Or they came about through social pressures; I should be healthier, I should chase more career success, I should save more money. Both these reasons for setting goals are valid and effective, but only when they are aligned with your values and your vision for your life.

And it is this alignment that we need to ensure exists.

But how do we know if our goals are aligned?

We can do this by looking at three different questions. These questions have been cultivated by some of the iconic thought leaders and speakers of our time, Jim Rohn, Zig Ziglar, Brian Tracy, and others. By spending time reflecting on the answers, we can determine if our current goals are in alignment with our life plan. Let’s look at the questions, and how they help us find that alignment.

What would you set as a goal for yourself if you won 5 million dollars? What would you do differently?

This two part question eliminates some of the constraints that we often consider when setting goals. Often times our goals, and the action plan associated with them, are influenced by our limited resources. Of the three limiting resources, this question reduces the impact of the financial side.

Take a look at your list of goals that you have today. If money wasn’t an issue, what would you change about that list? How would your goals be different? What would that do to your action plan, how you spend your time and energy each day?

What would you do if you only had 6-months to live?

A real eye-opener, which unfortunately some people actually do hear. Many of our goals are set with a long time horizon in mind. Saving for retirement 30 years from now, living a healthy life so we can experience those years with energy and vitality. Or climbing the corporate ladders to reach our highest levels of impact 10 or more years from now. But what if that time wasn’t there?

How differently would you act? How would your priorities change? This question helps clarify what is truly important in our lives, so that we can include more of that in today’s plans. If your answer involves adventure, what adventures can you take now? If your answer includes family and friends, are you spending enough time with them now? Are you showing them how much they mean to you?

What one great thing would you dare to dream if you KNEW you could not fail?

This final question asks about our current goals. Are they big enough?

Again, our current goals are often constrained by certain elements; our time, our energy, and our money. But there’s one other constraint we often don’t consider, but one that shapes our entire existence. The thought that maybe we might not succeed. This fear stops us from attempting those grand schemes and desires that would really make our lives great.

If you didn’t have that fear, what would you dare to dream?

Finding alignment between our goals and how we plan for life to turn out can be hard. By asking ourselves the right questions, we are able to find clarity over what is truly important. Knowing what we find essential to our lives helps us build more of that into our goals and vision for the future. Answer those questions, identify what is important to you. And most importantly, dare to dream that it is possible. You can have that life you dream of.

Action Item:

Break out a sheet of paper or a new word document. Answer the 3 questions:

  1. What would you set as a goal for yourself if you won a million dollars? What would you do differently?
  2. What would you do if you only had 6-months to live?
  3. What one great thing would you dare to dream if you KNEW you could not fail?

Now reflect on the answers, are your goals leading you to the life you desire? And one last challenge; I dare you to dream of what is possible for you in your life.

5 Benefits of Credit Unions

   As we grow in our ability to bring value to the marketplace, we earn more money. Knowing what our options are to handle that money is therefore an essential starting place. While we all know about the big banks, there is an alternative to be found in Credit Unions.

What is a Credit Union?

   A credit union is a member owned financial institution, that operates similar to a bank. Historically credit unions have restricted membership on the basis of company worked for, geographical location, or any other criteria. In recent years however, membership requirements have been loosened, which provides many of us an alternative to the banks. In terms of product types offered, credit unions and banks are generally the same. There is one major distinction between banks and credit unions. Credit unions are not-for-profit entities. This leads to a myriad of benefits to using a credit union.

1. Lower Account Fees

   Banks are for-profit companies, and as such they levy fees for the services they provide, in an effort to increase shareholder returns. Credit unions, on the other hand are not-for-profit, so the fees (if any at all) are lower. Without the need to drive shareholder returns, credit unions are only trying to cover operating expenses. This allows credit unions to charge significantly lower fees for services.

2. Lower Interest Rates on Debt

   Similar to the above, without the drive for consistently increasing shareholder returns, credit unions are able to offer slightly lower fees on borrowings. A December 2018 report released by the American National Credit Union Association (NCUA) shows that credit union loans charged lower interest rates for a variety of products, including home equity loans, car loans, and shorter term mortgages. These lower interest rates could save you thousands of dollars, depending on your borrowing requirements.

3. Higher Interest Rates on Investments

   While saving money on interest is good, on the flip side, credit unions also can offer higher interest rates for deposits. On the same report by the NCUA, certificate of deposits paid out higher interest rates for any time duration. This means that your extra cash can be put to work, making you more money.

4. Better Customer Service

   Since credit unions are member owned, customer service is generally better than big banks. Members are able to vote on initiatives at the credit union, which leads to a bigger focus on customer service. Contrast this to a bank, which focuses on profits and often leads to cost cutting, especially in the area of customer service. If there’s one thing we can agree on, its when there’s an issue with your money, sitting on hold to reach an unresponsive call-center is not the ideal situation.

5. Expansive ATM Network

   Credit unions typically have fewer brick-and-mortar locations, and even those are centered in a specific geographical area. To deal with this level of access, many credit unions enter into ATM agreements, allowing surcharge free access to an expansive ATM network. These agreements often result in thousands, or tens of thousands of no-fee ATMs spread across North America.

   We work hard to earn our money, which means handling it well is important. Credit unions are becoming increasingly more accessible, and provide an alternative to traditional banking options. From higher interest rates on investments, to lower account fees or interest rates on borrowings, credit unions offer some distinct advantages for our financial well-being. Couple those financial advantages with excellent customer service and extensive ATM access, and credit unions might just make your financial life a little easier.