Apple time

Today is the day a lot of people have been waiting for. In a few hours, Apple shall (hopefully) unveil the latest version of the iPad. Every Apple product launch is awaited with bated breath. There are tons of rumours and leaks leading up to the launch. Its like an industry in itself - the rumour machine.

Anyways, this blog is not about the device itself. What I am going to talk about is the product and the cost. The iPad has thus far been priced from $499 ($519 here in Canada). And a ton of people have bought it. For themselves. For their kids. And in some cases even for their significant others.

And this has kind of surprised me. Even if you go for the cheapest iPad, after taxes and basic accessories, it sets you back by at least $600. And then you go ahead and spend more on apps. In my opinion, that's a good chunk of money. Especially for a device that very few people really need.

The iPad is the perfect example of a want. There is very little that you can do on the iPad that you couldn't already do with other devices that you already have (i.e. the laptop or desktop, your smart phone, your DVD player, your game console etc). Yes it does makes stuff more convenient but we don't actually need it.

And then in exactly one year a newer version is released and we want the latest one all over again. Of course Apple products tend to hold their value fairly well in the resale market. iPad 2s were apparently fetching around $375 as of a few days back. So you could sell the one you have for that amount and go ahead and get the latest and greatest.

Cost of ownership - ~ $225 / year

Of course this is for the base level WiFi model. If you splurged for the 3G model you have a data plan to pay for as well so the cost for the year would go up accordingly.

Is $225 a big amount to spend each year? Maybe. Maybe not. 

I have not yet succumbed to the calling. I would sure love to have one. But my frugal brain holds me back. Will it continue to win? I don't know. 

Have you already bought the iPad? Are you planning on buying one? or more? Is it an upgrade? What are you doing with the older one? Please do tell.

Tax Time

I'll call this the Tax special. Canadians (and others as well) are well into Tax season - everyone's favourite time of the year :) Some things to think of at this time ...

1. File early: I don't believe that I am unique in delaying filing my taxes simply because I am too lazy to get around to it. Canada Revenue Agency (CRA) is normally pretty good at grabbing your taxes through the year. So most of us file to get some back in the form of Tax refunds. And so if you are due to get a refund, better today than tomorrow. So get on it.

2. Slips and receipts: Make sure you have all your tax slips and receipts. Sometimes we change jobs a few times during the year or move accounts or actually move ourselves. Keep track of who owes you a T4 or T5 or RSP or Charitable Donation or other receipts. Businesses have until the end of Feb to mail out the slips. So if you have not received them by now, feel free to get in touch with them and find out what's happening. Worst case, call CRA and they will help you get your T4s.

3. Deductions: The Tax system offers a bunch of deductions ... even for us lowly employed folk. Make sure you use all of them that apply. Some common ones include RRSP, Child Care, Children's Fitness Tax Credits, Public Transit Credits, Medical Expenses, Relocation (if moving to be at least 40 kms closer to your job or school), Tuition credits (for students), Property Tax or Rent credits etc.

4. Save copies: Make sure you save yourself a copy of everything that you send to CRA. With online filing, a lot of us never send anything. But we also tend to get rid of stuff as soon as the refund cheque comes in. CRA send the refund cheques automatically assuming that your filing was accurate. They tend to take their time to decide if they need to look at your return closely and have upto 6 years (or is it 5) to request additional information or receipts. I normally advise people to keep their copy of the return and documents for upto 7 years. The analytical ones amongst us might want to store stuff even longer if they want to track their income patterns / tax payments etc. It can be fun :)

5. Carry forward amounts: Don't forget about your carry forward amounts. Tuition credits, unclaimed RRSP contributions, Capital losses, charitable donations etc can be carried forward. Make sure you do not forget about them.

Random tips:

• If you donate money to charitable organisations (and you should) remember that the first $200 each year only offer you a 15% deduction. Donations beyond the $200 mark offer you a much larger deduction. So if you only donate around $200 each year, it is a good idea to hang on to your receipts and claim them once every 5 years (you can carry forward your donations for 5 years). That way you get the maximum bang (tax-wise) for your charitable donations.

• All the govt support programs (child tax benefit, OAS, Disability, GIS, HST credits etc) are linked to your tax returns. What does that mean? It means that if you do not file, you won't get your benefits. So even if you have minuscule income, make sure you file your return.

• If possible get the highest income earner in your family to claim the deductions. This will get you the biggest refund for those deductions since the deductions are always at the marginal tax rate. Pension splitting lets you get the same for seniors. A number of credits can be transferred amongst family members. One example is the Tuition credit. Students get a credit based on the tuition fees paid. They can carry forward this credit themselves to future years when they start having income. Or they can transfer it to their parents. If you are studying to be a Doctor or in an MBA program or something similar which will allow you to land into a high paying job as soon as you graduate, it may make sense to keep your credits for yourself. If however your parents have income that is significantly higher than what you will have (which is true in most cases), let them take the deduction for a bigger refund.

• CRA doesn't complain too much if you are due a refund and you do not file your return. However if you owe, you absolutely must file by the April 30 deadline. Failure to file may result in penalties in addition to interest charges on the amounts owing. If you do not have the funds to send in a cheque along with your return, it is still a good idea to file your return. Call CRA and let them know of your situation. As long as you have filed your return, there won't be a penalty. And they may even be willing to waive the interest payments if you ask nicely.

• Made an honest mistake in your taxes and realized it after you filed - file a T1 Adjustment. Need to come clean on income you had that you didn't report - use the Voluntary Disclosure process to kill those tax audit nightmares. However this won't work if CRA has already started investigating you. So the sooner the better.

• Can't understand taxes and can't afford to pay someone to do them for you? If you are truly low income and have a simple tax situation (i.e. no business / investment income etc) you can avail yourself of the services of the volunteer tax preparers as part of the Community Volunteer Income Tax Program (CVITP

Any more you can think of? Please feel free to add in the comments.

Facebook

I don't think there is a single person that isn't aware of the upcoming Facebook IPO. After endless speculation Facebook filed papers this week to go public. And with the filing, we now have endless articles, opinions, reports related with Facebook (as if we didn't have all of that before!).

Here is what I have learned ...
- Facebook plans to raise about $5 billion.
- The IPO should value the company at between $75 and $100 billion.
- There are going to be tons of actual billionaires and very many multi-millionaires.
- Heck even the artist who drew the murals on the walls of Facebook's offices could have his stock turn out to be worth about $200 million.

Is Facebook a good thing to invest in? Should you try to get in on the IPO? Should you try to buy the stock on Day 1? or Day 2? ever? never?

Here is what I think...
1. Facebook as a business is likely in pretty good shape. About 800 million active users is a lot. And most of these users have a lot invested in it ... friends, photos etc. So it is highly unlikely that there will be a mass exodus any time soon. It makes a good amount of money from Advertising. And with all the data available on the various users, it is an advertiser's paradise. It is already making a lot of money. That's a good thing and a lot of IPOs can't say that about themselves.

2. Social networks aren't going away. And you can only use a network that others are also using. You may love Google+ for example but if all your friends are over at Facebook, you aren't going to make the switch on your own. So its base of users isn't likely to disappear any time soon.

3. While the Facebook IPO will make a lot of people very wealthy, I am not sure that can be said about the investors coming in at this stage. Most companies IPO way before they are at the very top. If Facebook goes public at a $100 billion valuation, how much room does it have to grow? It would grow 4 times and immediately be in the Apple and Exxon leagues as the world's most valuable companies. Can Facebook be the most valuable company in the world?

I personally feel that Facebook has held off its IPO for far too long. That has resulted in the existing share holders benefiting the most from its growth. But as a result, that leaves very little further potential growth to be enjoyed by the average retail investor.

Does this make it a bad investment? Probably not. If Facebook has it in itself to rival Apple, you could invest $10000 and see it turn into $40000. Is that good enough for the average investor? Is that good enough for you?

Fantastic Mortgage rates

If you are in the market for a new home. Or if you have a mortgage with a remaining amortisation that is 5 years or more, you should be super happy this week.

Last week Bank of Montreal announced that they had lowered their 5 year rate to 2.99%. That is really incredible considering that a lot of people don't have variable rates as low as that.

And now ING Direct is offering a 10 year mortgage at 3.99%. Wow!

We have no idea where mortgage and interest rates will be over that long a term. So to be able to lock in your mortgage for a 10 year period at that low rate is just too good a deal.

I remember with envy that in the early 2000s I started off my mortgage at a 5 year rate north of 7%.

The case for not investing in your own company

For a lot of people out there, being invested in the company they work for comes naturally. It is after all a known quantity. Of all the investments out there, the one you can know the most about is the place you work. You know whether things are on the right track, if the products or services being offered are selling, if the company is looking to grow, what the morale is like etc. Additionally, a lot of organisations will offer employee stock options so that is one way you find yourself wandering into the "self-invested" realm. As an added perk, your organisation might offer employee stock purchase plans where you have the opportunity to buy stock in the company at anywhere from 5 to 15% off market value. It is like getting a free and guaranteed 15% return. And then of course we have the corporate pension / retirement plans where a good chunk of the funds are invested in the company itself. Is this a good thing?

I say not. And I have just one main reason ... Diversification

1. Talk to any financial adviser and the need to diversify ones investments is front and centre. This really takes a back seat when investing in the company we work for. We are already heavily dependent on the success of the company thanks to our pay-check. If your company does poorly, the risk of losing your job or worse the company itself disappearing heavily impacts your net worth because the prime source of your investing dollars is now gone. Add to that the risk that your already invested $$ could also be going down in flames. That is not a pretty scenario. Ask all those Enron and Nortel employees.

One does not have a choice with respect to stock options so there is no escaping them. Once they vest, I would simply cash them out (even if the company is doing great) and take the money elsewhere.

Same goes for the stock purchase plan. Take the shares at 15% off market price and sell them as soon as you can and pocket your 15% growth. The program forces you to save which is always a good benefit and gives you a 15% return ... can hardly complain about that.

For the retirement plans, if you have the option, try investing in balanced funds. Nothing worse than seeing your job gone and your company disappear and then checking your retirement account to see that its balance has dwindled as well because most of the money was invested in the company itself.

Of course there are always going to be cases where people come out millionaires because they stayed up to their eye-balls in the company they worked for. But for every such person there are tons others that lost everything. The idea is to reduce risk. And with risk reduction comes some level of reward reduction as well. So you won't become a multi-millionaire this way but if your company flames out and disappears, you won't find yourself on the street as well.

Waste or Economy helper

I read a news item today that informs us about Elin Nordegren (Tiger Woods' ex-wife) tearing down a $12 million home she bought only last year and re-building. As someone who's never known $12 million and quite likely never will, I was certainly "impressed" by the story. After all, I don't think she and I have a lot in common. I have trouble throwing out a $12 shirt I bought on sale that has served me well for 5 years but still shows no signs of wear - why discard perfectly good clothing??

What was more interesting though was reading the comments. I only scanned the first page of comments and practically every single one of them complained about the excessive spending and wasteful nature and what $12 million would do for so many people who could better use that money. It was typical Occupy-rant with us versus the 1% mentality. But are those people really right?? I don't think so and here is why...

In my opinion, every one of us 99%ers should applaud her decision to tear down the $12 million home. It is the perfect example of wealth re-distribution from the rich to the ... well ... less rich. The money she spent buying the home and whatever she spends on tearing it down and rebuilding and decorating will go where? To real-estate agents, lawyers, construction workers, dump truck operators, electricians, plumbers, landscapers, architects, builders, carpenters, cleaners, interior designers, chandelier manufacturers etc etc. These people in turn will spend that money at local restaurants, coffee shops, toy stores, car dealerships, spas, electronics stores, cinemas etc.

In short she is quite probably single-handedly kick-starting the local economy. If she hadn't decided to renovate / rebuild, all that money would stay in her bank account. This way it gets spread out among the people. Why would anyone have a problem with this, I fail to understand.

Ideally, we should encourage every single wealthy person to take similar actions that appear vain and ridiculous at the outset but if you scratch just a wee bit deeper, they are actually exactly what we need.
I'm sure I am not the only one that sees it this way.

Air Miles is changing

Do you collect Air Miles?

If so, you may want to pay attention.

Air Miles is one of the more popular "points" / "rewards" programs here in Canada. You shop at participating retailers and show your card and earn points. Collect enough Air Miles and you can get yourself all kinds of rewards (and yes flights are amongst the rewards offered).

So Air Miles is changing. So far the Air Miles you had collected never expired. Well that's going away. Effective Dec 31st 2011, Air Miles have a 5 year life span. You use them or lose them. In addition Air Miles is introducing something called Air Miles Cash where you can automatically convert your Air Miles to "Cash" and redeem the Air Miles Cash at any participating retailer for stuff you like to buy ... just like having a Debit card.

But of course not all is as simple as it seems. The rate of exchange between $$ and Air Miles Cash is not the same as the "value" available if you redeem for rewards (called "Dream Rewards" from now on) - 95 Air Miles = $10 Air Miles Cash. And you need to pre-select whether you wish to divert your points to "Cash". Its not clear to me if you get to re-classify those points to Dream Air Miles.

If you do nothing, everything continues as usual and you continue to collect Air Miles in your "Dream Rewards" account. Just make sure you use them within 5 years of earning them.

For more details check out the Air Miles website. 

Do you like this change?

New Year

A very Happy New Year to everyone.

So what does one need to do once the new year's eve alcohol and festivities wear down? From a financial perspective, there are a few things you should look at right away ...

1. TFSA: If you have a Tax Free Savings Account, a whole new $5000 in contribution room becomes available as of January 1st. So if you have to dough ... make sure you put the money in the account and let it grow ... tax-free as soon as possible. Even if you do not have money saved up, you can start smaller regular contributions from your paychecks. Pay the TFSA before anything else and you won't miss the money. :)

2. RRSP: Hopefully you have already made your RRSP contributions for the 2011 tax year. If not, the countdown to the deadline starts now. Make sure you do that before Feb 29th to get you tax savings in time for your 2011 return. You could be even more proactive and start contributions for the 2012 Tax year. Of course this means that you need to guess a bit on your RRSP contribution room for the year. But if your income has stayed much the same or grown in the past year, your RRSP room should be at least what it was for 2011. Its never a bad idea to start something safe now and then when you get your Notice Of Assessment, you can always top it up.

3. Mortgage lump sum prepayment: If you have a Mortgage and plan to make a lump sum payment to the mortgage without penalty, Jan 1st gives you a fresh opportunity to do that. Most lenders allow annual lump sum prepayments with no penalty. If you have funds lying around, doing nothing, get them working for you by saving you mortgage interest.

4. Credit card debt: Before you do any of the above, make sure you pay off your credit card debt that you may have accumulated thanks to Christmas and Boxing day shopping. The 19 or 29% interest you pay on your balances will be far greater than any benefit gained from any of the above.

In addition to the above, the new year is a great time to reassess your financial situation, review your plans, and course correct if needed.

Have a Happy New Year!!!

Mortgage Basics

When I first found myself looking for a mortgage, I was a bit confused by all the terms and procedures. I've tried to compile all that I could think of in this post.

Mortgage: This one is simple. It is essentially a loan that a lender gives you that allows you to buy the home. This of course only applies if you are like most of us and do not have all the funds to purchase your desired home outright in cash.

Mortgage rate: The lender will only front you the money for your home if there is something in it for them. So they charge you interest on the amount you borrow from them. The mortgage rate is the rate of interest per annum that you will have to pay for the borrowed funds.

Fixed rate: Most people go with a Fixed rate mortgage. This is the agreed upon rate of interest to be charged on the borrowed funds. This fixed rate does not change over the term of the mortgage. So your interest costs are predictable and the same can be said about your payments.

Variable rate: Variable rate mortgages have an interest rate that can change over the term of the mortgage. Mostly a variable rate will be lower than a fixed rate but that is not always true. A lot of people avoid variable rates because of the uncertainty. Currently interest rates are at historical lows and hence variable rate are low as well. But if the economy improved dramatically say in the next year and rates went up, your mortgage rate would also go up if you went with a Variable rate mortgage.

Open or Closed Mortgage: A open mortgage is one that allows you to pay off the balance of the borrowed funds at any time with no penalties. This provides flexibility in case you need to sell or move to a different lender. A closed mortgage assumes that you will stay with the current mortgage till the end of the term. If you try to leave before hand there will be some "early termination" penalties which typically tend to be around 3 months interest (but could be different). In my experience closed mortgages offer better rates than open and most people tend to opt for those.

Term: The Term of the mortgage is simply the duration of the contract with the lender. It should not be confused with Amortization which refers to the total time you expect to take to pay off the entire loan. The Term comes in various flavours - anywhere from 1 year to 10 year (some can be even longer) but the 3 and 5 year terms tend to be the most popular. At the end of the term, if there is still an outstanding balance on your loan / mortgage, you are free to pay it off without penalties or renew with the lender under new terms or move to a different lender.

Amortization: This is the total anticipated period of time that you expect to take to pay off the mortgage. In most cases it defaults to 25 years. And most people leave it at that. However it does impact your required payments - the longer your Amortization period, the lower your required payments.

Down-payment: The amount of saved funds you must bring to the table for the purchase of your home. Typically 5% is the minimum with some jurisdictions allowing 0% down mortgages as well. With lower down-payments you must also pay mortgage insurance (since the risk of you not being able to pay your mortgage is higher as you have not demonstrated sufficient savings ability) which normally applies if your down-payment is less than 25 20% of the cost of the home.

Appraisal: The lender at times will require that your home be appraised since they do not want to loan you more money than the house is worth. If you want to pay more than what the place is worth you have to do that with your own funds.

Pre-payment clauses: Most lenders will allow you some flexibility in making more payments than are required, thus allowing you to pay off your mortgage faster without penalties. Some will allow you to increase your regular payments by a certain percentage while others will allow you to make lump sum payments that do not exceed a certain percentage of the original mortgage amount in any given calendar year.

Payment schedules: Basic mortgage payment schedules require payments once a month. If you get paid twice a month you can split that monthly payment into 2 and pay it each time you get paid. Most lenders offer "accelerated" bi-weekly or weekly payments. For accelerated bi-weekly payments you are basically paying half the required monthly amount every 2 weeks. However since there are 52 weeks in a year, you are making 26 bi-weekly payments each year and thus making 2 extra payments (essentially 13 months worth of payments in 12 months). This only works if your budget allows it but it does allow you to pay off your mortgage a bit faster.

I can't think of anything else at the moment but if I am missing anything, please ask in the comments and I shall add it here.

Costco

I intentionally did not qualify the headline. This post is not just about whether I like Costco or hate it.

I have been a Costco member for a number of years now. My initial impressions were ...
1. Costco stuff is expensive
2. Their membership policy is stupid
3. I hate their receipt-checking at the exit
4. I hate buying in bulk
5. They have yummm soft serve ice cream

Over the years, most of these initial impressions have held.
1. Costco stuff is expensive: I do not mean that you pay for the same thing more at Costco than at other stores. What I mean is that because they only carry select brands and select models of products of those select brands, you end up paying more for the item. For example, at my local Costco, they have a Black and Decker Toaster Over for just under $70. When I wanted to buy a Toaster Oven, I could find ones in other stores for as low as $20 (on sale) . Granted that the ones at other stores aren't as big (capacity) or have as many features as the one at Costco but for someone who will mostly just use it to toast a couple of slices of bread, that $20 unit will be more than adequate. If you're looking for the cheapest product in the market, Costco is not the place for you. If on the other hand, you're looking for more value for your money ... that's a different story.

2. Their membership policy is stupid: I know from reading news items about Costco's financial results that most of their profits come from the membership fees. But I strongly believe that they would sell more merchandise and make more money if they did away with the fees. Or at the very least, let everyone visit the store so that they can at least observe the deals that the store is offering compared to other stores. I hate this Direct Buy-ish mentality.

3. I hate their receipt-checking at the exit: One of my greatest pet-peeves at Costco is the person (or persons) standing at the exit using their marker on your receipt. They add zero value to anyone. The format of the store does not allow you to walk out without having made your way through the cash. So it is highly unlikely that someone can steal anything from the store. And more importantly the person tagging your receipt is not in a position to do anything but do just that ... tag your receipt. Most people walk out with their carts loaded like the store won't open tomorrow. So even if the receipt checker wanted to be diligent and check every item in your cart, they couldn't. I would much rather have those people at the cash so that the lineups don't get too long.

4. I hate buying in bulk: Some items aren't too bad in terms of the size that one must buy. But others can last years. I moved last year and made the mistake of buying their packing tape ... it came in a pack of 8 ... i still have 6 1/2 left. Same goes for soap, dental floss, pens etc. I shall never buy buns or baguettes because they normally have a best before date of the next day and there's no way I wanna eat all that bread in such a short time.

5. They have yummm soft serve ice cream: At $2.09 (after taxes) that's a nice treat.

Over the years I have also figured out what works best for me in terms of saving (and spending) money at Costco.

1. Buy on sale: Most items periodically go on sale at Costco. And they aren't always listed on the coupons that are handed out at the door. When buying at those sale prices, you will rarely find better deals elsewhere. So stock up on things like Craisins, paper towels, bathroom tissue, diapers, wipes, furnace filters, batteries, Brita filters, salsa, cereal, juices, Gatorade etc.

2. Walk the isles: As I mentioned above, a lot of items that are on sale are not mentioned in the coupon handouts. So if you know that you're going to need batteries soon, its worthwhile to walk through that isle even if you only came to pick up milk.

3. Don't be shy about returns: I hate returning items and therefore I used to weigh my purchase carefully before actually buying the item. This does not work well at Costco since what you see in the store today, may not be there tomorrow. And as Costco staff have repeatedly suggested to me ... if you see something that interests you, pick it up. You can always return it if you change your mind. So that is exactly what I do now. With their liberal return policy, I can easily return the item at a later date. If the price drops (as it often does) you can always get cash back or return and repurchase the item if you haven't used it yet.

4. Check the silent markdowns: On clothing items specifically, when they have only a limited amount of stock remaining or only limited sizes, the price gets marked down without any indication that it is on sale. So you can find clothing that would normally be priced at $29.97 is now available for $7. I have a pair of Dockers shorts, Tommy Hilfiger dress pants, fleece pull over, shoes etc that all cost me less than $10 each. The least I paid was probably $3.97 for a nice sweater.

5. Gifts: When looking for presents for kids or house warming events, Costco is often a good place to shop. Most toy (sets) offer good value at decent prices. The only disadvantage is that there is no concept of gift receipts. I wish they had a way to fix that.

6. Get the risk free Executive membership: Their Executive membership is a no-brainer. Instead of the $55 regular membership you pay $100 but that extra $45 is risk free. If over the course if the year you do not make enough purchases to get it back through the 2% cash back rebate, just walk over to the returns / membership counter and they will refund you the difference.

7. Pharmacy: I like the Costco Pharmacy simply because it has the lowest dispensing fees I have seen. Shoppers Drug Mart and the kind charge close to $10 or more for that same service. At Costco it is in the $3 range. This saves everyone money because drug plan expenses are rising every year. Plus they take about 20 mins to do the prescription and that's about the time I need to make my walk through the store.

8. Enjoy the samples: I try to sample as much stuff as I can. But I will rarely buy the item then and there. When they offer the samples, the items are at regular prices. If you like it, wait a couple of weeks and it will go on sale ... unless of course you need it right away.

That said, I would love it if they changed their policies a bit ... especially get rid of the fees and the receipt-checker.

Do you have any special tips to share?

Should parents open their financial books for their children?

Money is a touchy subject in itself. To that pot you add the family dynamic and you have yourself one spicy drama. A lot of families don't really talk about money. Whether they have a little or a lot. And we always wonder what the best strategy is.

Kids often want to know everything - finances included. They want to know how much you make, how much you have and I guess how much they will have when you pass on. But should parents share all this information?

When kids are young and dependent on their parents, I don't think they need to know any more than is necessary. I think it is important to share with your kids if you have little or no money. That way you can temper their expectations. And more importantly teach them the value of every dollar. They can appreciate that while the parents may be able to provide the basics, there isn't much around to throw away. And this is a valuable lesson.

If you are the stereotypically middle-class parent, making enough to meet the basic needs of your family with some left over for the future, perhaps all the kids need to know is that you have a comfortable financial situation but not enough to blow it on regular ski vacations and spa retreats etc.

What if you have done well and are perhaps in the high income low spending category with a decent net worth and no financial troubles to speak of? Perhaps you are saving well for retirement and at the same time have your home paid off (or are close) and are also saving for your kids' education. How do you teach fiscal responsibility to your kids? Even in this situation, I would simply indicate to the kids that there is enough for needs but not necessarily for all kinds of wants.

If you see all the scenarios above, it is clear that I tend to be in the "its better to under-represent your financial situation to the kids" camp. And of course this is coloured from my personal experiences and situations as I grew up. But the reasoning is simple ...

You want your kids to value money. You want them to think before they spend. You also want them to not spend what they don't have. As kids, they do not have a lifetime perspective. Talking about retirement savings and saving for emergencies is pointless because those are alien concepts for a teenager.

You sort of want them to be careful with money while still being there for them if the situation demands it. For example, just because my child has $500 saved from gifts or baby sitting or lawn mowing cash, its not necessarily the best idea to blow it all on an iPad when there are better uses for that money. On the other hand, if its time to go to University and it would be beneficial in the long term for them to go to a pricier place or take a more expensive / longer program, you don't want to force them to take the local admission or a shorter course simply to save money.

So there is a delicate balance there. I would not want to underplay my situation so much that they stop considering options just because of the money. But at the same time I don't want them to assume that I have the Rockefeller fortune behind me and that they should go and lead the most expensive life.

Food becoming expensive

The Globe and Mail confirms today what we all know already. Food prices are rising and will continue to do so.

Of course when it rains ... it pours. So when the economy is not so good, and unemployment is high and wages are stagnant, of course the cost of living has to increase. It only makes sense.

So what are your options when it comes to your money. How do you lessen the blow? Get smarter. And by that I don't mean that everyone should line up for a brain transplant. I mean, get smarter about what you buy and how you buy and how you spend. Here are a few things you could do...

1. Watch the flyers - Stores continue to offer "deals" on certain items week after week. Make use of those offers. Buy extra butter when its on sale for $2.99 a pound so that you can avoid having to buy it when its back to regular prices at $4.99 a pound.

2. Do not waste what you buy - Very often when we visit the grocery stores we'll pick up 3 or 4 kinds of veggies or fruit because it caught our eye. Of course there is only so much we can eat. And with produce, it does tend to go bad a lot quicker than say butter (kept in the fridge of course). So only buy stuff that you need and will be able to consume before it goes bad. That apple or those bananas or that cauliflower that went bad because you never had a chance to eat, is money down the drain. And it costs you over and over again ... you paid for it in the store. Maybe you cooked it and then it went bad so you paid to cook it and to store it and then you also pay the city to haul it away and dispose of it either in the land-fill or their composting facility.

3. Buy in-season food items - if you like to buy strawberries in January, they're obviously not going to be as fresh or from a local farm because there's snow all around you. So you will likely have to pay $3.99 for a pound instead of the summer time when stores practically want to give it away. By trying to buy seasonal produce, you not only save money but also allow yourself to experience some much needed variety in your meals.

4. Try to mix and match stuff - If potatoes are 'cheap' (relatively) this week, try to add them to other items and prepare a different wholesome meal. Maybe you've only had broccoli steamed or raw on it own. Try throwing it into a pot with some potatoes and some zucchini perhaps and get a new dish that you may enjoy. Combining items like this lowers the average cost of your meal.

If you can think of other tips, please add to the list ...

Why is employing legal tax avoidance strategies a bad thing?

There is a tax code that all Canadians have agreed to (through their elected representatives who have voted on the various provisions and passed it into law come budget time). The Canada Revenue Agency enforces this tax code by making sure that everyone pays their fair share. But what is this "fair share". In my opinion, a "fair share" is what you must pay as per the tax code. You might think that I am just repeating myself. But there is a subtle difference.

Consider this scenario of 2 identical families with 2 adults and 2 children (say 5 and 9 years old). Both families have a single income and for the sake of simplicity let us assume that they both have employment income as their sole source of income. Both are neighbours living in the same kind of home as well so everything is identical between them. Again to keep things simple, neither has any RRSP deductions or any deductions for that matter except what I list below.

Family 1: 
Annual Income : $40,000
Charitable Donation deduction: $0
NET income after taxes, CPP & EI deductions: $35,073
Average tax rate: 12.32%
Net disposable income after accounting for Charitable Donation: $35,073

Family 2:
Annual Income : $61,600
Charitable Donation deduction: $21,600
NET income after taxes, CPP & EI deductions: $57,995
Average tax rate: 5.85%
Net disposable income after accounting for Charitable Donation: $36,395

As you can see above, Family 1 with a pre-tax income of $40,000 pays 12.32% of their income in taxes and takes home $35,073.

Family 2 on the other hand, in trying to be identical to Family 1, donates every dollar of their income that is in excess of their neighbour's income to charity. Their effective tax rate is 5.85% and after accounting for their charitable donation and taxes, they take home $36,395.

Most people will simply look at the tax rate and the pre-tax annual income and scream bloody murder.

How is it fair that a family making 50% more income pays taxes at a rate that is half that of the lower income family? And to add insult to injury, they end up with more money at the end of the year.

This is where all the "Occupy" folks are dead wrong. Family 2 is simply taking advantage of the tax code and coming out ahead. It is difficult to find fault with Family 2 in this example because they are giving away so much money to charity. So even the people who would normally have an issue with this case will likely hold back. But Family 2 could have very easily used other deductions to achieve similar results ex RRSPs, Dividend Investments, Capital gains, Public transit credits, Children's Activity credits, Medical expenses credits, tuition credits etc.

And I do not see anything wrong with that. They are simply paying their fair share of taxes and using the existing tax code to do what works best for them. If their effective tax rate turns out to be lower than their neighbours, its not their fault.

Millionaires and Billionaires like Warren Buffet likely use all these strategies and more to end up with an effective tax rate that is lower than what their chauffeur or secretary has.

So why do we frown on folks that follow the letter of the law and come out ahead?

Tax Rates

Here's an interesting article in the Globe and Mail talking about the why it is important to do a bit more thinking before making changes to laws and tax codes. The discussion stems from a proposal to hike the rates at which capital gains are taxes.

Here is the article.

A lot of people tend to take a simplistic view of things and tend to make snap judgements about whether something is a good idea or not. This if often coloured by their own situations, experiences, biases and political and financial affiliations. Something we all need to learn to do is to step back and take a "bigger picture" view of the situation.

Are Budgets really sexy?

A whole host of people out there swear by Budgets. According to them, if you don't budget you cannot be financially successful. You cannot ever be in the black.

I would beg to differ. I don't mean to say that Budgeting is worthless. But I don't thing they are super essential. Here's why...

What does a budget really do for you? For one it tells you exactly how much to spend on what and when. They sort of force you to live within relatively rigid lanes. But life is anything but rigid. No 2 days are the same. So how can one expect to spend a preset amount on the same things month after month?

On the other hand, budgets don't really help you control your spending. That's the job of your will power. All budgets do is give you a guide on what your spending should be. What actually happens is that for most people, month after month, the lines get blurred, and we have trouble drawing in the lines so to speak. And there are always the surprises, the oh-I've-been-waiting-for-this-sale-forever-so-I-have-to-buy-this-now situations.

Perhaps there's a better idea. Keep an eye on your spending. And as long as you're under the ceiling, you're good. This will allow you the freedom to do what you want while still keeping your bank account in the black.

My parents never kept a budget as far as I know. And I grew up in a typical lower-to-mid-middle class family. So we never really had a lot of money to go around. So we were always careful about spending. But I don't remember any budgets. And I guess that habit has continued in me. I have never kept a budget. I do keep track of what I spend on what. But its always after the fact. I do keep a general idea of where I hope to land on the monthly expenses. And I have been this way all the time ... even when I didn't have much in the bank account.

Thankfully things have turned out OK and I have never had to go into debt (well except for the mortgage). So I guess the question is ... am I right? Are budgets really overrated?

Mortgage "good habits"

When we are buying a home, emotions are high. We're excited, already planning the colours of the walls and who gets what room. Its natural that smart financial habits take a back seat.

Here are some of my "good habits" that I hope others can relate to or perhaps learn from.

1. Don't buy the home you can afford but rather the home that you need. - For most people, the first step in the home buying process is a visit to the bank to figure out what they can afford. While its a good to know what you are allowed to spend, isn't it a better idea to first find out what is it that you need?

The first step has to be to assess your needs - the size of your family, plans for expanding the family in the next 3-5 years, do you need a bungalow because of mobility issues, location i.e. proximity to work, transit, schools, shopping etc, lifestyle etc. If you're a couple with no kids (and no plans to have any or they've already left home), you can likely do with a 2 bedroom place. If you've got a baby (or two) on the way, you need to plan ahead accordingly. If you always take public transit, there's no point looking for a home with a 2-car garage. If you have a very outdoorsy lifestyle and all you want from the home is a place to sleep, you likely don't care if there's a basement or a man-cave.

Once you have figured out what you need, the next step would be to figure out what the market is asking for your needs. Never overlook or outright ignore certain areas or kinds of homes, unless there is a valid reason to do so. Hear-say, perceptions are all useful tools but we're talking about big money here so you owe it to yourself to check out all the options.

Now that you know what you need and what it will cost, in most cases you should know whether you can afford it or not. The visit to the bank should simply be to confirm your calculations and to actually get something on a piece of paper that others will want before letting you have their home. Of course the banks will give you way more money than what you need. Resist the temptation to convince yourself to buy more house than you need. Its not like the bank is offering you free money. You still have to pay it back and more importantly you still have to pay all the interest on that extra money. And that extra money will be the last to be paid off and hence will cost you in interest till the very end.

2. Shop around for the best mortgage.
Most people do this already. But they tend to focus on the just the rate. When I am shopping for a mortgage, I am looking at a few other things as well. Here are all the balls that are in play in my calculations ...
- TOTAL interest cost over the life of the mortgage. Based on my financial situation, I prefer to guesstimate how long it would take me to pay off the entire mortgage. I prepare 2 tables - minimum required payments only & aggressive but feasible pay down. That instantly shows me how much I can save in total interest costs over the life of the mortgage and provides good incentive to follow the aggressive scenario. Always keep your eyes on the Total interest cost ... that's the ball you want to watch ... in fact add it to the purchase cost of your home because this is the true cost of your home.
- Pre-payment options. Most banks / lenders will allow you to increase your regular payments up to a certain percentage and / or allow you to make lump sum payments which go directly against principal reduction. All this with no penalties. Some banks will give you either or. Others will give you both but vary in the percentages. Check out the different options.
- Incentives. Are there upgrade dollars in play if you go with a certain lender? Is someone offering cash back? Is someone offering lower interest rates for the first year? In my experience, in most cases, these are simple gimmicks. In rare cases going one way or the other can be beneficial. Maybe if you take the mortgage from a certain bank, they waive various kinds of fees on other accounts you have with them. This could amount to hundreds of dollars per year and could be a definite plus.

3. Budget for closing costs.
Again most people do but some are very surprised. Avoid putting everything you have into your down payment. Once it goes to the bank, its gone and if you need it 2 days after closing, you aren't going to get it. Well not for cheap anyway. I like to keep a good chunk handy and once I have paid off all the closing costs, if I still have money left over, I use the lender's lump sum payment privileges. That way it only costs me a few dollars in interest over the month or 2 that I held on to the cash but it gives me a lot of flexibility and peace of mind.

4. Avoid unnecessary upgrades.
Very few people actually follow this. Its human nature to want what you don't have. But the smart buyer has his eyes on the bottom line. Every single dollar that you add to your purchase price, will get paid off last. As a result, you will be paying full interest on it for the life of the mortgage. So that $5k granite counter top that you sign off for instead of the standard laminate one is going to cost you over $6K in additional interest (at 5% over 25 years). So you're paying over $11K for that granite counter top. Why not get some use out of the standards that you are paying for anyway and replace them when needed. It'll cost you less.

5. Pay off that mortgage as aggressively as you can.
There is nothing sweeter than owning your home free and clear. And think of all the available cash flow you will have when you no longer have to pay the mortgage. Its like you just won the lottery or got a huge raise.

I'll deal with some more specific tricks in a separate post since this is long enough already. But hopefully this is useful itself.

The flawed system

Over the last couple of days, there has been increasing noise about the household debt levels. Apparently, Canadian household debt levels are at the same levels seen in the US just prior to the 2008 recession. Everyone is saying that we need to reduce debt. The Finance Minister, the Bank of Canada Governor, the C.D. Howe Institute ... the list goes on.

So why is it then that we have such liberal credit policies in place?

The interest rates are at amazingly low levels which in turn means that mortgage rates are low as well.

Banks will lend you all kinds of money ... and you don't even need to ask. You sir, are pre-approved for $$$ in Line of Credit, in addition to all the $$$ we are giving you to buy your next house.

Credit card companies are literally tripping over each other trying to get people to sign up for credit cards. And as soon you get one, you're bombarded with an endless supply of "cheques" so that you can max out that credit limit. Its ok if you can't pay off that money coz that only means that the companies will collect some hard-earned interest at 20%.

You can't go to any store today and expect to complete your purchase without being offered their store credit card. "Oh you already have a credit card?? Well ours is nicer. We give you extra $$ in bonus cash. Plus ours is made from the best plastic ever. Its so nice that you won't even know its there ... till the bill shows up."

Looking to buy a used beater car? "Why not go for this brand-new top-of-the-line luxury model that warms and caresses your butt as you juggle your coffee and cigarette and "handsfree" cell phone and eye-liner (wait! that's a separate rant:)). Can't afford it, well we've got just the deal for you. Since you can't afford the car, we'll give you money and the car."

And then the customer is to blame. If the "system" thinks that credit is too "free" ... well "unfree" it. About a decade ago, one needed atleast 5% down to buy a home and the longest amortization available was 25 years. I was shocked when I found out that you could now get one for 0 down and have amortization periods as high as 35 years. A lot of people don't have careers that long. How can anyone in their right mind expect them to pay off their mortgage?

I know there are a lot of people who will hate me for this. But this is what my common sense tells me ...

1. If you cannot show any discipline and save a measly 5 percent of the purchase price of the home you want to buy, you should not be allowed to buy a home.
- Yes some will argue that if they can pay their rent consistently, they'll be able to make their mortgage payments. While that is valid, its not fair to compare rental payments to mortgage payments. Add property taxes, condo fees, snow removal contract fees, hydro, gas and water bills, higher property insurance and a few others that I may be missing. Most people do not factor these costs when deciding between renting and buying. The 5% down is kind of a good faith payment, that shows that you are capable of some sort of savings. Even if you have a big enough income ... if you spend it all, becoming a home owner isn't going to help the situation.

2. If you do not expect to pay off the home in 25 years, you should not buy the home.
- 25 years is a long long time. At a 5% interest rate, on a $200K mortgage, if you just keep making the minimum required payments and the interest remains the same for the full 25 years, you will have paid almost $150K in interest on top of your mortgage amount. This will look even worse when you consider higher interest rates and higher amortization periods. Any appreciation in property will quite likely be wiped out by the interest costs. And then there is inflation and the other costs I mentioned above and very quickly its clear that you are not really ahead relative to if you were renting. Most people overlook the interest costs. And ofcourse the Banks don't want to talk about it ... its what they're after. If you start worrying about interest ... they wont get anything.

3. For 2nd and 3rd and 4th and subsequent properties, the down payment requirements need to be much higher ... perhaps even as high as 50%.
- These "investment" properties tend to mess with the real estate market a lot in my opinion. And if the market drops ... these are the first ones that get off loaded. A family that lives in the home that they own is less likely to walk away from it if its value drops. On the other hand, an investor will see it simply from a profit / loss perspective and would much rather "cut his losses". By making the down payment requirements higher for investment properties, the risk is shared a bit more evenly between the bank and the investor. It will allow fewer speculators in the market and thus perhaps avoid bubbles.

Will the "system" wake up and do the right thing? Time will tell ...

Can you live on $50K a year?

I was reading and article on MSNBC today talking about the fact that $50,000 is the median income in the US.

It got me thinking about whether $50K a year is sufficient income to life comfortably. I actually went back and checked my expenses this past year so see where I landed.

I also did a quick check using the tax calculator on TaxTips.ca to see what the take home income would be with a gross income of $50K. Here is what I found.

- With a single earner, 4 member family (couple + 2 kids), a $50K income would translate to a net, after-tax income of just over $40K.

- $40K net income translates to about $3300 per month.

- This should allow the family to lead a comfortable middle class lifestyle without giving considerations for RRSP, RESP, TFSA etc. Depending on the family's priorities, they may actually be able to invest in the plans to some extent.

So in my opinion $50K should be sufficient for a family.

And in case you are wondering, I did come in under the $40K threshold as well - not counting the RRSP, RESP, TFSA etc. But if $40K was all I had to work with, I am sure that I would have managed my expenses better (maybe there would not have been the 2 vacations or the 2 cars etc)

What about you? Is a $50K income sufficient for you?

Temptations all around

For someone trying to watch their spending, Christmas time is the worst time of the year. There are sales all around. All those pretty looking flyers with things that you would love to have. The temptation is just too much. So how does one survive this glut of temptation?

A few simple rules ...

1. Decide before hand how much you can afford to spend all season. And then ... most importantly ... stick to that budget. No matter what.

2. Identify the items you need. Maybe these are things for your loved ones. Or maybe they are for yourself. Either way, make a list of the things you need. And stick to needs.

3. Once you have your list identified, you need to figure out how much you will pay for each item. The total for all the items has to be within your budget identified in #1 above.

4. Now watch out for sales. If the items on your list go below you "expected" price, grab them. Most stores will price-match through till Christmas day in case the price drops further. So its a no-risk buy.

5. If the items are for yourself, consider waiting for Boxing day (and week).

6. Finally if you end up with some left-over dough after all items on your list have been accounted for ... Hold on to the rest. Its tempting to spend it all since you have been good all season. But a penny saved is 2 earned. Hang on to it for a rainy day.

Credit Cards are evil right?

The simple answer is NO!

Its not the cards that are evil. What's evil is Credit Card DEBT.

Most financial advisers and articles will tell you that if you are trying to live a financially clean life, you have to start using cash and do away with credit cards. That is true for people that are addicted to using cards to run up debt and spend beyond their means.

However for everyone else who can exercise a bit of self control or who already pays off their credit cards bills in full every month, Credit cards are quite useful.

Here is what I like about Credit Cards...

- They are so bloody convenient. I do not need to worry about carrying change. I do not need to worry if I have enough cash in my wallet if I see a great deal when I am out shopping. I do not need to worry about how to figure out how much I spend each month. Use a single card and other than stuff that you cannot use your card for ... everything is listed on you credit card statement.

- They save you money. A lot of cards offer you all kinds of perks. Rent a car and you can skip the Collision Damage Waiver fee. Buy your flight tickets on the card and you get free Travel Accident Insurance or in some cases even Free Trip cancellation / interruption insurance. Buy something on the right kind of card and you get up to an extra year of Warranty on the items. Some cards will also offer you a Loss or Damage insurance on your purchases. Others will give you Price Protection. All kinds of ways to save you money.

- They let you get something for nothing. All the cards that offer some kind of rewards allow you to get that reward (free travel, cash back, hotel stays etc) simply for buying the stuff that you would have bought anyway.

- They are safer than cash. If your cash gets stolen, you are out of luck. That money is gone and there is no getting it back. Lose your card instead and as long as you report it to the issuer in time, you lose nothing.

The key to using Credit cards is to ALWAYS ALWAYS pay off your monthly balance in full. No Exceptions. Another key is to ensure that it is a no-fee card or if there is a fee, that the reward you get is greater in value than the fee. And you should never chase after a reward by increasing your spending. The card only works if you use it to spend on stuff that you would have bought anyway. Not stuff that you are buying so that you can get a reward.

Also, always know what your balance is on the card at any given point of time. Don't wait to see your statement to figure out how much you spent last month. It'll be too late.

Be smart with your card and you will rarely trip up. Enjoy the benefits and let the companies pay for it :)