How Does Insurance Work?

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

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

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

What is Insurance? And how does it work?

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

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

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

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

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

When Should You Buy Insurance?

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

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

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

Emergency fund < Value of Item = Buy Insurance

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

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

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

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

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

Further Use of the Insurance Formula

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

   The formula we looked at above can be modified slightly. 

Emergency fund > Difference in Deductible = Buy High Deductible Insurance

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

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

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

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

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

What is the best Life Insurance?

what is the best life insurance

   Is your family protected in the event of a tragedy?

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

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

What is Life Insurance?

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

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

Why Would You Use Life Insurance?

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

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

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

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

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

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

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

What is the Difference Between WLI and TLI?

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

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

What are the Benefits and Drawbacks of Whole Life Insurance?

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

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

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

   But, all that glitters isn’t gold.

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

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

What are the Benefits and Drawbacks of Term Life Insurance?

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

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

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

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

Which Life Insurance Policy is Best?

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

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

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

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

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

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

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

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

“Live long, and prosper.”

What is a Spousal RRSP?

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

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

What is a Spousal RRSP?

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

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

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

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

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

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

Retirement Tax Time

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

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

The Spousal RRSP Option

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

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

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

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

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

How Do I Open a Spousal RRSP?

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

What About the Fine Print?

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

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

Is a Spouse RRSP right for you?

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

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

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

How To Start Investing (Canadian Edition)

   Are you ready to start investing? 

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

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

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

Why the Stock Market?

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

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

How to Access the Stock Market?

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

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

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

Online Investment Brokerages

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

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

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

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

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

Robo-Advisors

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

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

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

Financial Advisors

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

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

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

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

How Should You Start Investing?

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

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

Have you invested before?

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

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

How much time do you have to devote to investing?

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

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

Do you have a complex financial situation?

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

Are you just starting out?

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

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

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

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

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

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

Financial Freedom: A Diet That Works

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

   How many different diets can you name? 

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

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

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

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

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

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

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

Financial Dieting: The First Step

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

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

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

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

Low-Cost Index Funds / ETFs: The Next Step

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

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

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

Automate: The Most Important Step

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

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

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

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

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

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

How valuable is your degree?

college degree

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

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

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

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

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

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

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

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

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

The Knowledge Gap

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

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

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

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

The Information Era

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

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

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

The Skills Gap

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

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

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

And that new gap is the skills gap.

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

What are the most valuable skills?

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

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

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

Where can you go to improve your skill sets?

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

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

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

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

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

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

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

Target Date Funds – Set it and forget it?

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

What is a Target Date Fund (TDF)?

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

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

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

Does the Target Date Fund live up to the hype?

Yes.

And no.

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

What are the issues with Target Date Funds?

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

A One-Size-Fits-All Approach

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

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

It’s a Competitive Game

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

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

TDFs: Pay-to-Play

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

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

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

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

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

The Key Benefit of Target Date Funds

Investing can be complicated.

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

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

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

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

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

Key Take-Aways: Target Date Funds

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

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

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

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

Your Finances Are What You Tolerate

Are you settling?

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

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

Bank Fees

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

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

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

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

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

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

Open an Account with a Credit Union

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

Open an E-Account

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

Ask for the Fees to be Removed

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

Investment Fees

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

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

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

But what about the account with 2% fees?

That account only has $216,100.

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

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

Lowered Earnings

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

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

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

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

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

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

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

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

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

How can you be better at your job?

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

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

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

The To-Do List

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

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

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

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

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

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

Make it Rain

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

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

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

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

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

What The F*?

Focus. 

What the focus.

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

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

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

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

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

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

3 TFSA Mistakes That Could Cost You Big Time

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

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

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

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

Trading too Often (Day Trading)

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

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

A note on frequency of trading: 

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

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

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

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

Buying Certain Foreign Investments

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

What can you invest in?

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

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

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

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

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

Over-Contributing to Your TFSA

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

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

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

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

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

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

A Guide to Purchasing Brand Names

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

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

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

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

When should you buy Brand Name?

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

The Product is Part of Your Identity

   How much is your identity worth?

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

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

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

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

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

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

Higher Quality is Valuable

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

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

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

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

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

When to Buy Brand Name - A Practical Approach

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

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

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

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

Why this works?

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

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

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

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

How To Choose The Right Credit Card For You

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

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

Why Credit Cards?

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

Factors to Consider When Choosing A Credit Card

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

Interest Rate

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

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

Fees

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

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

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

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

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

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

Perks

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

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

Reward Points 

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

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

Cash Back 

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

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

Insurance, Hotel Upgrades, and/or Car Rental Upgrades 

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

How to Choose the Right Credit Card for You?

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

Do you always pay your credit cards on time?

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

Do the rewards from your necessary spending justify the fees?

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

Are the rewards aligned with your lifestyle?

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

The Bottom Line

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

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

Lending Money To Family and Friends

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

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

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

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

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

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

“Sounds good, appreciate it buddy.”

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

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

Money is a tool.

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

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

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

Things to Consider When Lending to Family and Friends

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

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

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

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

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

Count on Life Interrupting the Payment Plan

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

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

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

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

Ask Questions

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

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

Why do you need the money?

Who else is lending you money?

How do you plan on repaying me?

When do you plan on repaying?

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

A Gift to You (of sorts)

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

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

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

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

Best High Interest Savings Accounts

   What is the best high interest savings account in Canada right now?

   This question is important for determining the right accounts for your personal financial systems. Understanding the best place to store different buckets of money is essential for optimizing your financial systems. Savings accounts often rank close to the top when people consider their own financial needs. There are even a dedicated number of people who will switch banks multiple times a year, all looking for the best savings account.

   Unfortunately, this often misses the mark. While having a good savings account is preferable, the benefits are often too small to be really noticeable, in the grand scheme of life.

   With that, let us look into why your savings account is important, but also why this is a decision that should be classified more in the  “set it and forget it” category.

Why is your savings account important?

   Your savings account is perhaps the very foundation of your financial fortress, and the starting point for future financial endeavors. Your emergency fund, the first real “investment” that you should be making, should be stored in cash. This safety net will see you through the ups and downs of life. With any luck, your emergency fund will sit there untouched for long periods of time. As a result, having that cash stored in a safe, accessible place is ideal. 

   Recall that your emergency fund should be stocked with 3-6 months of living expenses, and even upward to 12 months of living expenses. This is a sizable amount of cash, and to make the most of it, should be stored in a high-interest e-savings account. This will reduce the impact of inflation on that emergency fund, if only by a small margin.

   Since these cash savings are stored in a cash savings account, it makes sense to secure the best high-interest account that you can.

Why your savings account choice shouldn’t change often.

   Too many people focus solely on the interest rate provided by their savings account, even going as far as to switch banks to get the latest and greatest promotional offers and rates. While this may net you an extra half percent or so on your cash savings, the actual dollar value simply isn’t worth your time to swap banks.

   Let’s assume you have an emergency fund of $ 30,000. You receive $ 300 per year in interest per percent of interest paid by your bank. Differences between top high-interest accounts, and the general high-interest offerings are probably less than 1-2% annually. What that means, is that the interest difference between various high-interest accounts is $ 600 or less, on a 30,000 dollar balance. Given the number of hours it takes to change banks, the hassle is often not worth it. These changes only make the illusion of progress towards your financial goals, when in reality your time is better spent elsewhere, such as improving your vital career skills, or refining your goals. 

A better approach to savings accounts.

   Rather than chasing the highest interest rates on savings deposits, it is far better to examine all the offerings at your chosen institution. This includes account fees, accessibility of your money, any extra service charges (like EFT fees), as well as investment options. Simplifying the services you use will save you both money on fees, and more importantly, save your time.

What High-Interest Savings Accounts are “best”?

   Ensure you are taking into consideration all your financial needs and goals, and then pick the account that fits right with your plans. To help you get started, here are some of the available high interest accounts from some of the more popular financial institutions. Remember, these savings accounts are an essential piece, but still only one piece, of your financial puzzle. (Note: I am not affiliated with any of the institutions mentioned below.)

Financial Service Provider Account Requirements Interest Rates (Annual)
RBC No account minimum 0.5% (after promotional period ends)
CIBC No account minimum 0.2% (after promotional period ends)
TD Canada Trust $ 5,000.00 0.05%
Scotiabank No account minimum 0.15% - 1.35%, depending on length of time without withdrawing any money
BMO No account minimum, $200 contributions monthly to unlock the best interest rates 0.05% - 0.7%. Comes with 0.65% interest rate boost if minimums are met.
Tangerine No account minimum 0.25% (after promotional period ends)
Wealthsimple No account minimum 0.9%
EQ Bank No account minimum 2.00%
Alterna Bank No account minimum 1.9%

   Each of these accounts offers their own respective benefits and draw-backs. Remember, when making the decision about where to store your emergency fund, it is best to consider your other financial needs. 

   For example, I use other RBC and Wealthsimple products, such as investment accounts and credit cards. Keeping my savings accounts at these two institutions makes the most sense for me, providing visibility and access, despite not carrying the highest interest rates on the list.

   Making the right choices starts with selecting the right accounts. Eliminating  fees, and maximizing interest, in that order. Fees will shrink your financial resources far faster than interest can replace. Once that crucial first step is taken, sit back, relax, and move onto more important (and profitable) areas of your life, both financial and elsewhere. 

   The right knowledge, paired with decisive action will lead you to the financial success you strive for.

 

Interest rates and account details available as of June 1st, 2020.

Working from Home? Getting Your Taxes Right

   There is no doubt that COVID-19 has changed the way many of us operate in the world. While social distancing measures are slowly being lifted across the world, there is no doubt that the way of life for many of us will never quite return to pre-pandemic levels. 

   Already there have been several large businesses who have made the decision to have employees work remotely on a permanent basis. Even the company that I work with has started the process of terminating office leases for several of our divisions, transitioning to a full-time remote environment to save on office costs. These moves will likely impact you, or someone you know, pushing people to create home office environments to accommodate these changes. What would a push towards WFH (work from home) actually mean for you?

Tax Implications of WFH

   In Canada there are federal tax implications for home work spaces, allowing you to deduct home office expenses from your income. This helps you reduce the income taxes that you pay, which ultimately leaves more money for other areas of your life. To qualify, one of two conditions must be met: 

  1. The space must be where you work more than 50% of the time.
  2. The space is used only for the purpose of generating your employment income.

   What these conditions mean is that you either; work from more than 2.5 days a week, or that you have a dedicated home office. This is an important distinction, because as the past few months has shown us, we might work from home a substantial amount of the time, while not having a home office set up.

   This certainly applies in my case, where my living accommodations aren’t large enough to provide room for a separate office space. All space in my condo is for both living and working. Therefore, I would not qualify by having a space reserved solely for generating employment income.

You have a “Work-space in the Home”, now what?

   Even if you do work from home more than 50% of the time, or have a home office. If you are an employee, there are a few other criteria for claiming work expenses. As explained in the bulletin for the Income Tax Act IT352R2, employees must be required by contract to provide the office space. Also, expenses incurred cannot be reimbursed by the employer. 

   What this means is, in general, if you have a desk provided to you by your employer, you likely do not qualify. Likewise, if your expenses are reimbursed, you cannot also claim this as a tax deduction (sorry, your employer has already claimed those expenses).

   As employers make the switch to different office space arrangements though, those lines become more blurred. Some offices offer “hotelling” of their desks, meaning the employer isn’t providing you your own work space. In increasingly grey areas caused by these working arrangements, it is best to have your employment contract stipulate that you are expected to maintain your own work-space at home.

   Along with the employment contract, your employer will also have to fill out Form T2200 that confirms the requirement of a home work-space, as well as how much of your expenses are reimbursed.

What expenses can be claimed?

   We often think of the more obvious expenses, like printer paper or cell phones, but there are quite a number of “overhead” expenses that can also qualify. These expenses are based on a reasonable cost allocation. For example, if your home is 1,000 sq ft and your home office is 200 sq ft, you would be able to claim 200/1,000 = 20% of certain expenses. Some eligible overhead expenses are:

  • Hydro (Electricity)
  • Internet and Phones
  • Maintenance fees
  • Rent
  • Property taxes
  • Homeowner’s Insurance

   Making the best financial decisions means being informed. As the way we work transforms to fit our “new normal”, this extends to how our work-from-home spaces can be used to reduce your taxes. Knowing where to look to find savings on taxes is just one way you’ll be positioned to thrive in the year ahead.

It’s an Emergency: Spending your Savings

   The numbers are out, and they aren’t good. April unemployment numbers were released by Stats Canada this week. 

Some of the key points mentioned:

  • Unemployment rose to 13%, a number that doesn’t fully include recent job losses. Taking into consideration other elements, like self-employed persons who worked 0 hours, that number climbs higher than 17%.
  • “21.1% of Canadians lived in a household reporting difficulty meeting immediate financial obligations.”

   While these numbers don’t paint a rosy picture, the question becomes: 

What can you do to prepare yourself during the COVID pandemic?

   The answer to that question falls into two categories; those who aren’t seriously affected (yet), and those who are.

   If you haven’t been dramatically adversely affected, your focus should be on strengthening your financial fortress, and exploring ways to increase your value. Check out the 5 Steps to Recession Proof Your Life.

   If on the other hand the COVID situation has hit you hard, the questions you face are far more concerning. While the focus is still on cash, growing your reserves might not be an option. At this stage, you need to be eliminating debts and freeing up cash flow (i.e. cutting the cord on some of those subscriptions). Then it’s time to look at where to draw money from.

I’ve lost my job. What do I do now?

   With unemployment numbers jumping to unprecedented highs, and far more rapidly than ever before, this financial downturn has struck hard and fast. Next steps for you should involve reversing your “good times” financial allocation.

It’s an Emergency. Use your Emergency Fund

   If you have been following the financial advice of Business Minded, or any personal finance professional, you likely have some funds tucked away in an emergency fund. Now is the exact time that you’ve been waiting for. Start drawing down on your emergency savings to pay your bills.

   These days come rolling in full of uncertainty, will you go back to work next week? Next month? Many people are seeing their situations as a temporary inconvenience, and this is leading to some risky financial behavior. Expecting to return to work, and therefore floating your expenses on credit cards or other forms of borrowings is exceptionally risky, and likely to place you in a worse financial position.

   While it may be hard to see that wonderful looking emergency fund start to deflate, it is far better than skating on thin ice that comes with borrowed monies.

   Once the emergency fund is used up, you should then start looking at liquidating your investments, starting with non-tax leveraged accounts. By the time you get to this stage, you should be seeking out professional guidance, as your unique situation needs to be more closely evaluated. 

   As the economic environment worsens, it’s time to use your emergency fund for what it was designed for, emergencies. Drawing down on those hard-earned savings will help you weather this economic storm, and allow you to come out on the other side with your financial fortress intact.

Investing Advice from The Berkshire Hathaway 2020 Annual Meeting

   This past week saw the release of Berkshire Hathaway’s 2020 annual meeting. Along with the financial results of the company famously headed by Warren Buffett and Charlie Munger came some commentary from the widely recognized Warren Buffett.

   While the annual meeting was over 5 hours, there were a few snippets that come as timely words of wisdom from one of the world’s wealthiest people. 

Never bet against America.

   Throughout the years, America has proved its resiliency and ability to overcome tough times. This commentary can be more broadly applied with the simple yet powerful statement, bet on humanity.

   While we might be currently facing one of the most challenging periods of our lives, one thing is true. We will survive. 

   While I would caution the mentality of investing as any form of gambling, there is one hand that I would undoubtedly go all-in on. That hand is that we will not just go through this, we will grow through it. We will become better, faster, stronger from the challenges that we as a species are facing right now.

Buy America, And Forget About It.

   As with the first piece of sage advice, Buffett also makes some commentary on the ability of the average investor. Most people are better off taking that bet on human progress and investing in a total market ETF. 

   When saying this, Buffett recognizes that some people like him have careers in investing, and as such devote an above average level of time and attention into investing. These dedicated investors are the ones making individual stock picks based on years of research and experience. For most of us who are not combing through annual reports on a daily basis, taking a broad stance is better suited to our needs and our experience levels. 

   These total market ETFs allow us to place a bet that some of the best companies will survive and thrive. And that bet on human progress hasn’t been wrong, in the long run, ever.

   What can one of the world’s most successful investors teach us? Bet on humanity. Together we will not just survive, but we will thrive.

5 Steps to Recession-Proof Your Life

   Recessions are a normal part of the ebbs and flows of life. With that truth, recessions present their own challenges and opportunities. If you have a recession-proof plan, you could be well positioned for the next recession, whenever that finally comes. The economic slow down spurred on by the COVID-19 pandemic could very well trigger a recession event later in 2020. With that possibility looming on the horizon, it is not too late to build your recession-proof plan.

   There are 5 areas that need to be in any recession-proof plan, primarily dealing with cash. It’s been said that cash is king, and that is especially true during a recession. With employment markets and financial markets depressed, as is usually the case during a recession, having cash available provides a protective barrier around your life.

Emergency Fund

   Much of that cash should be held in an Emergency Fund. You have no doubt heard the advice before, 3-6 months of living expenses saved in cash. This will provide a barrier in case of the unexpected, like a job loss that sometimes comes with the shrinkage of the economy. If you don’t have that money saved in cash, make that a priority. This barrier provides you some protection, and gives you more time to make tough decisions, if needed. 

   Even if you have an emergency fund, now is a good time to increase that further. Three to six months of living expenses might be recommended, but extra cash never hurt anyone during a recession. While I have my own Emergency Fund, I am continuing to grow it each month. This will keep me safe in the event that my paycheck stops coming. If I follow the rest of my Recession-Proof Life plan, that extra cash cushion would be great to reinvest in the financial markets as the economy starts to recover. 

   Where should you store that cash? While interest rates have been slashed repeatedly in the past few weeks, a high interest e-savings account is still your best bet. In North America you can still find accounts at close to 1%, which while not much, is better than the 0% many large bank chequing accounts are offering.

Reduce Debts

   Cash is king, and debt is an obligation to pay some of that cash to someone. To protect your cash while you build an emergency fund, you also need to reduce any debts that you have. This means paying down all your consumer debt, starting with the highest interest rate loans first, usually credit cards. With investment returns being unpredictable at the best of times, and even more so now, taking that guaranteed win of savings on interest is important. 

   Once you are clear of any high interest debt, focus on paying down some of the other loans that you have. These might be your Student Loans or Personal Line of Credit. While there are different methods suggested for getting out of debt, in an effort to save you cash, I am only suggesting the financially most beneficial method. Paying off the highest interest rate debt first.

Trim the Fat - Reduce Unnecessary Expenditures

   Over time we sign up for a variety of services. When we’re looking at preserving our cash, it might be time to evaluate the value of these services. Depending on the severity of your situation, you might want to completely cancel these subscriptions, or it might be worth a call to discuss lowering your rates. Many companies would rather retain you as a customer than lose you completely, and often this preference makes them more open to negotiating your rates with you.

   Take a careful look at where you spend your money. Subscriptions are an easy area that savings can be found, but we often pick up other financial habits during times of prosperity. These habits aren’t always healthy. Evaluate where you are spending your money, and make changes if necessary. 

Diversify Your Income Streams

   Recession-proofing your life also means you need to look at where your money is coming from. For many of us, our salary is the primary source of income. But that doesn’t mean that it needs to be our only source of income. There are plenty of ways to generate income outside of your 9-5 hours, and now is an excellent time to explore those opportunities. The side-hustle has received a substantial amount of attention over the years, and for good reason. Finding something that you enjoy, that you can earn money doing, if only part time? To many of us, that extra freedom of getting paid for a passion project is exhilarating. And, with the internet, getting started couldn’t be easier. 

   Of course, the side-hustle route isn’t for everyone. Maybe you would rather go all-in on your career, reaching up the rungs of that corporate ladder. You can also take control over your income, by diversifying your investments into something that pays dividends / interest on a regular basis. This way you can bring in a little more positive cash flow each month. While those investments might not replace your full time income, every little bit helps, especially when recession-proofing your life.

Grow Your Skills

   One final way to recession-proof your life is to remember your professional development. What skills do you need to develop to help take you to the next level of your career?

   Recessions are usually accompanied by a rise in unemployment, and current events in 2020 are no different. With a reduction in the Canadian labor force of over 1 million people in March 2020, jobs are becoming even more competitive. That prompts the question, how do you stand out among hundreds of candidates? The answer: by becoming more valuable. And that answer doesn’t just apply to those who are out of work. By continually developing your skills and increasing your economic value, you will stand out among your peers, and be more likely to retain your job in the event of layoffs. 

   Education has become more accessible than ever with online learning, and with world-wide social distancing measures in place, many people are finding they have more time on their hands. Directing that time at developing or enhancing your skill sets will ensure that you are ready for whatever the future holds.

   Recession-Proofing your life starts with the right plans. What are your plans to manage your finances? By building an emergency fund, you are able to withstand any financial storm. This is aided by paying off debts, and cutting back on unnecessary spending. Once you’ve taken care of the cash outflow, you should look at the sources of that cash. How can you diversify so that you have income coming from multiple streams? The final element of your recession-proof plan is in making you more valuable. What are you doing to develop your skills?

   Recessions are a normal part of life, having the right recession-proof plan will make sure you are positioned not just to survive, but to thrive.

Be Realistic With Your Risk Tolerance

How is your stomach for risk tolerance?

   At the time of this writing, the S&P 500 has a -22.97% return YTD in 2020. As we look at investing from an analytical standpoint, it is reasonable to assume this is just another market crash. Similar to the dot-com crash of early 2000’s, the mortgage backed lending financial crisis in 2008, and a collection of other dramatic financial events in the history of the stock market. In the long run, it is reasonable to predict that human progress will continue to drive long-term financial success in the markets. 

   But, that doesn’t mean that the financial events caused by the coronavirus should be ignored. The recent stock market decline has provided an excellent barometer for your risk tolerance.

What is Risk Tolerance?

   Risk tolerance is simply your ability to withstand fluctuations in the markets, which does mean the occasional loss.

   The more risk tolerance you have, the less concerned you are with short term fluctuations. The converse is also true, the less risk tolerant you are, meaning you are risk averse, the less you are willing to lose money even in the short term.

Why is this important?

   Depending on where you are in your investment life cycle, you may want to adjust your risk tolerance. For example, if you are young and just getting started investing, you likely will be more willing to take losses for the chance at higher gains. Young people typically don’t have as much to lose, and have time on their side to weather out any financial storms.

   As you get older, and that nest egg grows in size, many people become less risk tolerant. This is especially true when you are getting closer to the age of retirement, when large swings in the stock market can drastically impact your financial fortress, when you need that money most. For more information on the impact of stock returns on your retirement, check out our article on sequence risk.

Why is this important now?

   For the past decade, the stock market has been on one of the longest upward runs in history. This likely influenced people’s self-evaluation of their risk tolerance. Seeing gains day after day for 10 years increased the FOMO (fear of missing out) of those prosperous times. It is quite easy to say you are “open” to the normal fluctuations when all you see is those double digit returns in the black. 

   The early part of 2020 has been a reality check for many people. Those negative returns have opened people’s eyes to the realities of investing in the short term; sometimes you win, sometimes you lose. If you have found yourself losing sleep over the losses incurred over the first quarter of 2020, perhaps your risk tolerance was set too high. 

   This is something you need to evaluate for yourself, taking into consideration your unique situation. Are these recent losses impacting your ability to enjoy life? Are they causing an undue amount of stress? Or perhaps you were right in your assessment of your risk tolerance, and you aren’t fazed. Maybe you even recognize the tremendous opportunities that lie in the crashing markets.

What to do if you’ve misjudged your Risk Tolerance?

   Irrespective of the investing choices you may have made in the past, it is important that level heads prevail. If you think you were previously too risky, do not sell at a loss if you have any other options available. While nobody can tell how long the markets will be depressed, or even how low they will go, one thing is certain. We will survive. And, just as importantly, we will thrive again. What you can do going forward is change the asset mix that you invest in on a regular basis. By making an adjustment on your future contributions, you will over time change the asset allocation mix of your overall portfolio. This way you can learn from recent events, and avoid locking in any temporary losses.

   Investing provides a way to make your money work for you. But it isn’t a guarantee that you will always like the outcome, especially in the short term. Understanding your risk tolerance will help you invest wisely, and sleep better at night.

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.