All posts by Financial Independence Hub

Cash Alternatives: Bond ETFs and other Vehicles

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By Alizay Fatema, CFA 

(Sponsor Content)

Central banks across the globe are likely to continue with their attempts to tame inflation by hiking interest rates, crushing the hope that markets will return to normality any time soon.

With the unemployment rate at a historically low level, inflation remains a top concern for the Bank of Canada (BoC) and the Federal Reserve (Fed), who are also dealing with looming risk of a recession and uncertainty regarding the impacts of the recent bank turbulence. The BoC and the Fed appear to be ahead of global peers in their attempt to slowdown inflation – raising the question around whether we have seen the peak in rates in North America.

The rapid tightening cycles by policy makers are reinforcing the appeal of owning high-
quality ultra-short bond, and money market ETFs. A series of recent rate hikes by the Bank of Canada and the Federal Reserve gave a boost to yields for these products, making the saying “cash is king” true to a certain extent, as investors who are worried about higher inflation and slowing growth prefer investing in these cash alternatives to ride out the market volatility. In today’s market, you can earn an attractive yield while taking less risk – earning while you wait for volatility to subside.

Yield curve[1], are we in love with the shape of you?

Normally, the yield curve is upward sloping, meaning longer-term bonds yield more than shorter-term bonds as investors often demand higher yields for locking their money up for a longer period. However, at present, the shape of the yield curve is inverted, which means shorter-term securities are yielding more than longer-term ones. This inversion is largely owing to the Central Bank’s quest to reduce inflation by hiking the interest rates.

Due to historically low interest rates in the last few years, investors were compelled to take more duration[2] risk by adding exposure to longer-term bonds and higher credit risk[3] by investing in lower credit quality segments such as high-yield or emerging markets bonds. However, due to the current yield curve inversion, the tables have turned now, offering a unique opportunity for fixed-income investors looking to earn higher yields.

Source: Bloomberg USYC3M10 Index (Sell 3 Month US T-bill & Buy 10 Year US Bond Yield Spread) Sep 1992 to April 2023

Why stash cash in money market & ultra-short-term bond ETFs?

The front-end of the yield curve (0-1yr) offers an attractive asymmetry and opportunity to capture yield between 4-5% + with limited duration and credit risk. This allows investors to earn the highest yields we’ve seen in more than a decade on fixed income and build a more stable high-quality fixed-income portfolio by adding exposure to ultra-short investment grade bonds and money market securities. Based on the current interest-rate volatility, hugging the front-end of the curve seems a more prudent and consistent way to preserve capital in a fixed-income allocation. BMO ETFs offers solutions such as BMO Money Market Fund ETF Series (ZMMK), BMO Ultra Short-Term Bond ETF (ZST) and BMO Ultra Short-Term US Bond ETF (ZUS), which are a great way to get exposure to the front end of the curve.

These money market & ultra short-term bond ETFs invest in high credit-quality instruments that provide a great degree of safety and capital preservation. Firstly, by investing in securities that mature in less than one year, the duration risk is minimal, which results in lower interest rate sensitivity in your portfolio. Secondly, these ETFs offer high liquidity[4] due to the nature of their underlying securities, which means they can be bought and sold easily with minimal market impact. Continue Reading…

New tax-free Questrade FHSA helps Canadians save, invest & realize their dream of homeownership

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Image courtesy Questrade/iStock

By Rob Shields, Questrade 

Special to Financial Independence Hub

On April 1, 2023, Questrade became the first in Canada to offer the new First Home Savings Account (FHSA). For us, this was a major accomplishment in our continued mission to help Canadians on their journey to financial independence. Our goal has always been to challenge the status quo, transforming financial, investing and mortgage services for the good of Canadians. Knowing the Government of Canada was introducing the new FHSA on April 1, the team at Questrade began planning months ago. Our goal was to offer Canadians this account on day one, so they can start saving, investing and growing their money for their first home. Mission accomplished.

Save for a home faster

Saving for a home is a big challenge for many Canadians. With housing prices as they are — especially in major cities — maximizing your down payment is critical. By opening an FHSA account at Questrade, Canadians can invest up to $8,000 annually, deduct their investment contributions from their taxable income and give it the opportunity to grow in the market. They can contribute up to $40,000 in this account, with no limits to how much it can grow, making it a powerful savings tool. Ultimately, they can withdraw it tax-free to use it for a home purchase: with no requirement to repay. The only requirements to open an FHSA are: being a verified resident of Canada, being at least 18 years of age, and being a first-time home buyer.

Imagine a scenario where you open an FHSA account with a goal to buy a house in 10 years. If you maximize your annual contribution limit of $8,000 per year for the first 5 years, you’ll reach the lifetime contribution limit of $40,000 in 5 years. If you invest your account with a Questwealth Aggressive Growth Portfolio, which had an average return of 7.18% per year, your account could grow to $69,993 after 10 years*. That’s $69,993 you can withdraw tax-free to put towards your home, with $29,993 coming just from investment gains. Continue Reading…

3 things that make me want to pull my hair out

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Pexels: Mikhail Nilov

By Bob Lai, Tawcan

Special to Financial Independence Hub

I have been writing on this blog for almost nine years. Over that time, I have learned and gained a lot of personal finance and investing-related knowledge. Whenever I gain new knowledge, I try to share it on this blog with the hope that readers can gain the same understanding as well.

As much as I love sharing new knowledge with other people, there seem to be some deep-rooted misunderstandings, myths, or misconceptions on certain topics. I really don’t understand why some people have these misconceptions and I will try my best to debunk some of the common misconceptions I have encountered, just so I don’t have to keep ripping my hair out.

#1 Don’t want a raise to avoid the next tax bracket

Our tax system is extremely complicated, so I understand there are some misunderstandings here and there. The biggest misunderstanding is that all your income is taxed at your tax marginal rate.

Due to this misunderstanding, people often make such statements like…

“I don’t want a raise just to get taxed more.”

“I am not working overtime to get bumped to the next bracket and lose my income to taxes.”

And so on…

But that’s a very very wrong understanding. Your income is taxed on a tiered bracket system. Below are the 2022 federal tax brackets.

Taxable Income – 2022 Brackets Tax Rate
$0 to $43,070 5.06%
$43,070.01 to $86,141 7.70%
$86,141.01 to $98,901 10.50%
$98,901.01 to $120,094 12.29%
$120,094.01 to $162,832 14.70%
$162,832.01 to $227,091 16.80%
Over $227,091 20.50%

So if you happen to make $90,000 a year, the entire amount does not get taxed at 12.29% tax rate. The first $43,070 is taxed at 5.06%, then the next $43,070.99 is taxed at 7.7%, then the rest is taxed at 10.50%.

Essentially your $90,000 annual income is taxed like below:

Income Tax Rate Tax amount
$43,070.00 5.06% $2,179.34
$43,070.99 7.70% $3,316.47
$3,859.01 10.50% $405.20

You’d be paying a total of $5,901.00 of federal tax on your $90,000 income, or an effective average tax rate of $6.56%. The same tiered tax bracket system is applicable to provincial taxes as well, albeit with different specific percentages for each province.

So no, the $90,000 you received isn’t all taxed at 10.50%. The amount is divided up and taxed at different tax rates.

What if you had an income of $90,000 and your employer decided to give you a $35,000 raise? Should you say no because you’ll move up two tax brackets federally from 10.5% to 14.7% and get taxed way more than your $35k raise?

It’s mind-boggling that some people actually believe this is the case and therefore would say no to any raises!!! Let’s do some quick and easy math to sort this out.

I ran the numbers using Wealthsimple’s 2022 income tax calculator and set BC as the province. Here’s the summary:

Income Federal Tax Provincial Tax (BC) CPP/EI Net
$90,000 $12,643 $5,079 $4,453 $67,825
$125,000 $21,146 $9,320 $4,453 $90,091
Delta $35,000 $8,503 $4,241 $0 $22,266

So, an increase of $35k a year raised your total taxes by $12,744 a year. More importantly, you will be netting $22,266 more than you’d have at the lower income of $90,000 a year.

So ask yourself, would you rather pay almost $13k more in taxes while pocketing over $22k more each year? Or would you rather not get the extra money at all? I think 99.9% of the population – if not more – would want the former.

All things equal, you will always come out ahead with a raise regardless of what tax bracket you end up with.

Fortunately, people that have this misconception are a very small percentage of the population.

#2 “Invest” in RRSP

Every February I hear statements in the line of… “I’m investing in my RRSP.” But when I ask for more clarification, I learn that people are simply transferring money into their RRSPs and letting that money sit in cash. They’re moving money into RRSP simply for the RRSP income tax deduction.

I get the idea of getting the RRSP tax deduction to reduce your overall taxes. But don’t you want your money to compound and grow? Why do you have your money sit inside a tax-deferred account and earn a measly 1% interest rate when you can invest in things like ETFs and stocks?

Some people argue that GICs are way safer than other investment vehicles like mutual funds, ETFs, and stocks because GICs have a guaranteed earning rate and you can’t lose money. Continue Reading…

How to stay motivated while Pursuing Financial Independence

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Image courtesy of Terkel

From setting specific financial goals for success to having someone hold you accountable, here are 18 answers to the question, “What are your best tips for how to stay motivated and disciplined in the pursuit of financial independence?”  

  • Stay Disciplined and Goal-Oriented
  • Tie Your Goals to a Tangible Item
  • Stay Educated
  • Equate Money to Your Time
  • Celebrate Small Wins Along the Way
  • Develop an Action Plan
  • Create a Budget
  • Invest in Yourself
  • Develop a Strong “Why”
  • Have Fun With It
  • Set Specific Financial Goals for Success
  • Balance Spending Now and Saving for the Future
  • Start Tracking Your Progress
  • Focus On the Big Picture
  • Be Present
  • Build a Support System
  • Set Yourself Micro-Goals Along the Way
  • Find a Financial Accountability Buddy

Stay Disciplined and Goal-Oriented

Staying motivated and disciplined while pursuing financial independence requires commitment. One approach to remaining committed is to practice goal-setting, breaking down big goals into smaller goals that are based on achievable objectives. For example, if you want to save $1,000 in 3 months, break your bigger goal of saving money into a series of monthly phases, setting benchmarks each month as you inch closer to achieving your end goal. This helps with momentum and development while moving towards your desired result. — Michael Alexis, CEO, swag.org

Tie Your Goals to a Tangible Item

One often overlooked way to accomplish this is to tie your goals to a tangible item, such as a savings jar or bank account. Visualize yourself with it when planning out what you need to do today and watch as your small contributions add up. 

Having this visual representation can be just the thing you need on days when you feel unmotivated and looking for an excuse not to save money. Taking ownership of your financial goals is the first step towards realizing those dreams – that’s what staying disciplined will help you achieve! — Tasia Duske, CEO, Museum Hack

Stay Educated

Continually educating yourself about personal finance is crucial in staying motivated and disciplined as you pursue financial independence. Of course, this starts with knowing how to budget and set boundaries for yourself. 

As you strive toward financial independence, it’s important that you know where your money is going and identify areas where you can cut back on spending. There are a variety of ways that you can budget your money, so explore those options and find a way that works for you. 

If you are one who likes to invest, stay up to date on current market trends so you don’t take any enormous risks that could cost you a lot of money. As you continue to stay informed and educated about personal finance, you will make informed decisions and avoid costly mistakes, which will ultimately help you achieve your goals. — Bill Lyons, CEO, Griffin Funding

Equate Money to your Time

Whether you make minimum wage or $100 an hour, we all trade time for money. Spending less money is one way to achieve greater financial independence. But when you’re struggling to cut expenses, one way to stay motivated is to understand how much time your money costs you. 

For example, if you’re toying with the idea of a $50 purchase, think of how much of your time it would take to make back that $50. How far would that put you behind? Would you be willing to spend that time getting that item?

Thinking about money in terms of minutes/hours of your life can help you exercise some restraint on impulse buys or unnecessary purchases. If you feel like it would be a waste of time, it’s probably a waste of money, too. — Alli Hill, Founder and Director, Fleurish Freelance

Celebrate Small Wins along the way

Achieving financial independence can be a long and difficult journey, and it’s easy to become discouraged if you only look at the result. You can keep your motivation and momentum going by celebrating minor victories along the way.

Set attainable short-term goals, such as paying off a credit card or increasing your monthly savings by a certain amount. When you achieve these objectives, take the time to recognize your accomplishments and reward yourself‌. 

As a reward for sticking with it, give yourself a small treat or indulge in a favorite activity. This will help you in maintaining your motivation and discipline, as well as making the journey to financial independence more enjoyable. –– Johannes Larsson, Founder and CEO, JohannesLarsson.com

Develop an Action Plan

It is important to develop a plan with realistic goals. Start by setting short-term goals that are achievable, such as saving a certain percentage of each paycheck or paying off the debt within a certain timeframe. 

Then, set longer-term goals for retirement savings or other goals related to financial independence. Having a plan will help keep you motivated and on track to achieving your financial goals. — Martin Seeley, CEO, Mattress Next Day Continue Reading…

AgeTech Careers are EPIC, don’t you know?

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ChangeRangers.com

By Mark Venning, ChangeRangers.com

Special to Financial Independence Hub

Attending three AGE-WELL EPIC conferences on-line since 2020, my level of understanding of Canadian research and development in ageing and technology, or AgeTech (as it is universally called now), has truly deepened. It could be said that AgeTech became epic in 2022 as AGE-WELL, Canada’s technology and aging network established in 2015, spelled out the acronym EPIC – Early Professionals, Inspired Careers in AgeTech.

Updating from my blog post last May – An EPIC AgeTech Adventure Continues, the EPIC-AT is a national health research training platform, designed to prepare graduate students, postdoctoral fellows and early career researchers to be future leaders in digital health solutions for older adults with complex health needs.

Hosted at the University of Toronto EPIC-AT is powered by AGE-WELL, led by researchers from 11 universities and research hospitals from across Canada.

While it could be argued that AgeTech is still in its adolescent stage, as many people I speak with have no idea what it really is, never mind how large in scope it has become so far; it is worthy to repeat how much AgeTech will become more prolific over the remainder of this decade, assuming research is supported and consumer awareness and adoption is widely acknowledged. So the good news is that at this point, the modest $13M funding in EPIC-AT runs through to 2027.

If you are wondering how all this research manifests itself in the marketplace, recently AGE-WELL published its revised AgeTech Startup Map for 2023 and here you will get up to speed on the 114 Canadian companies in eight categories from, for example, Supportive Homes & Communities to Healthcare & Health Service Delivery and Cognitive Health & Dementia.

From Dementia to Deep Space

On further note, sometimes the discussion on AgeTech can take you to far out places, and on Feb.2, 2023 the EPIC-AT Webinar I attended, did just that – it took me to Deep Space, in one of the longest webinar titles ever, “The Challenge of Deploying Large Scale Digital Health-Based Support to Older Adults Aging at Home:  When Deep Space Travel Offers Opportunities.” Actually it was quite uplifting so to speak, to learn how the far out the journey with AgeTech might take us. Continue Reading…