All posts by Jonathan Chevreau

No surprise: living beyond our means is why 38% are in Debt

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Talk about cause and effect: 38% of Canadians admit that living beyond their means resulted in their being in debt. That’s according to a survey being released this week by Manulife Bank of Canada. It also found a third of Canadians aged 20 to 69 with a household income of at least $40,000 say their spending growth outpaces their income, and 19% of those who went into debt cited not being able to break the debt habit. Almost half (49%) on indebted Canadians between the age of 20 and 34 and a majority of those aged 35 to 54 report carrying credit cards with a balance.

No surprise then that one in ten (9%) admit to being “clueless” about how much they are spending each month on average.

Blame YOLO and FOMO

Apparently cultural attitudes like “You only live once” (YOLO) and “Fear of Missing Out” (FOMO) are starting to take their toll on indebtedness. Apart from the 38% who admit their debt arose because of living beyond their means, 12% directly correlated their indebtedness to the outcome of too many costly outings with friends or family.

While 19% of debtors say they can’t break the habit, the survey also reveals that seeing debt paid off can result in joy, which is what 36% of Canadians say.

Manulife CEO Rick Lunny

And once again (see yesterday’s post on the HSBC study), Canada’s high housing prices are seen impacting this country’s Millennials. Millennials are now at the age many want to get on the property ladder and start families, two areas where Manulife is seeing expenses grow. “Housing affordability remains at near-historic highs across the country and child-care costs have risen faster than inflation for Canadians,” said Manulife Bank president and CEO Rick Lunny in a press release, “We have a financial wellness crisis in Canada.”

Obviously debt can limit one’s social life but the survey quantifies this. it found that debt limits activities with family and friends (22%), makes it impossible to spend money on entertainment (18%) and negatively impacts mental health (in 17% of cases.)

Manulife says Boomers feel less affected by debt: one would hope so since any Boomer contemplating retirement should by now have a healthy positive net worth rather than a negative one! In which case, they will be less constrained in spending on entertainment or meeting with family and friends.

Manulife finds that those under 55, women, and those with high levels of debt are most likely to feel stressed by these circumstances. It also found a “gradual yet significant” decline in the proportion of Canadians with mortgagers who express comfort with the payments. “There has been a sharp year-over-year decline in the proportion who claim to feel very comfortable about both the payments (28%, down 8 from Spring 2018) and the amount owing (21%, down 9) on their mortgage.”

The Joy of getting out of Debt

Asked to rate the perceived joy they would get from various financial accomplishments, two thirds of Canadians put getting out of debt (“escaping”) first or second overall, with having a hefty retirement nest egg a distant third.

Of course, reducing debt is easier said than done. Manulife suggests a clear “area of opportunity” is making adjustments to non-essential spending but there are demographic differences. Millennials are much more willing to sacrifice dining out compared to those who are over 35. Women are twice as likely as men to stop shopping for non-essential goods and services. Men and those who are 35 or older are most willing to give up travelling (which I’d say is certainly a non-essential spending activity!)

There are some positives in the survey. it found that three in ten say their debt is under control and they don’t need any help to control it. Others believe there are more effective ways to track debt and curb spending. Manulife cites its own Manulife All-in Banking Package, which includes Saving Sweeps that automatically moves excess funds into savings accounts each night. For more on the Debt Survey, click here.

Millennials value property more than looks when it comes to dating: HSBC study

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HSBC.com

It seems Canada’s soaring real estate market has started to affect Millennial dating patterns. According to a survey coming out today from HSBC Bank Canada 61% of Millennials feel anxious about buying a property, so much so that shared financial (39%) or property (33%) goals are considered more important than looks when daters are considering a potential future partner.

HSBC adds that this obsession with shared property has a downside for Canadian millennials: “They are far more likely to say they had stayed in a bad relationship due to property (16%) than Canadians on average (6%).” Sounds like a possible basis for a new Millennial situation comedy!

All this is contained in Beyond the Bricks, an HSBC-sponsored annual global survey of almost 12,000 adults in ten countries, including 1,077 in Canada.

HSBC says that getting on the property ladder can be both exciting and stressful for Canadian millennial once they’ve found their perfect partner.  Most (62.8%) Canadian millennials said financial considerations drove their last house move, and the top two reasons for the move were getting more house for their money (25.5%) or a lower cost of living (23.4%). And the biggest source of tension was accepting money from parents for the purchase (in 14% of cases.) Continue Reading…

Motley Fool: Best vehicles for an Emergency Fund

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What are the best investment vehicles for holding a safe and highly liquid Emergency Fund? That’s the focus of the third in my latest series of blogs for Motley Fool Canada introducing the basic principles of establishing Financial Independence.

You can find the latest instalment by clicking on the highlighted headline here: One Essential Tip for Achieving Financial Freedom.

In the first two installments of this new series of articles, we looked at two key steps toward Financial Independence: jettisoning debt and, once that is accomplished, applying the resulting surplus to savings and ultimately long-term investments.

As the latest blog argues, you could even argue that an emergency cash cushion should take precedence over both debt elimination and saving/investing.

What should you be looking at in an Emergency Fund? First, you need liquidity: the ability to access the cash at a moment’s notice. Second, you want safety of capital, which really means cash equivalents or fixed income, not equities normally held with a time horizon of more than five years. Third, assuming some sort of fixed income that’s not locked up like a 5-year GIC, you want at least a reasonable rate of interest to be paid on it.

Normally, you shouldn’t regard RRSP investments as an emergency cushion, since you’ll have to pay tax to access the funds. Most people will try to keep relatively high cash balances in their chequing accounts that can serve as a cushion, although typically these accounts pay next to nothing in interest income. One possibility is short-term or redeemable GICs that may pay somewhere between 1 and 2% per annum. Another good place to “park” such funds is a High Interest Savings Account (HISA).

As the name suggests, HISAs pay high amounts of interest, usually more than 2%. According to this source, several pay more than that: as of mid 2019, EQ Bank was paying 2.3%, Motus Bank up to 2.5%, Tangerine was offering a promotional rate of 2.75%, and Motive Financial was paying 2.8%, Wealth One Bank of Canada was paying 2.3% and WealthSimple 2%. Pretty nice returns for liquid cash cushions! Continue Reading…

Retired Money: What to do about falling GIC rates

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PWL Capital’s Ben Felix

My latest MoneySense Retired Money column has just been published. It looks at the reversal the past year in interest rates, which impacts seniors who had started to look forward to at least half-decent GIC rates near 3%. You can find the full piece by clicking on the highlighted headline: Are GICs right for retirees looking for Fixed Income? 

Short of embracing high-yielding dividend paying stocks, the more palatable alternative for conservative retirees might be fixed-income ETFs. The article focuses on a recent video by CFA Charterholder Benjamin Felix, an Ottawa-based portfolio manager for PWL Capital. Felix argues that at a minimum such investors should have a mix of both fixed-income ETFs and GIC ladders.

The latter let you sleep at night because they are invariably “in the green” in investment accounts. But while in the short term fixed-income ETFs can be in the red — just like equity ETFs — Felix makes a compelling argument for the higher potential returns of bond ETFs.

Felix believes that what really matters for investors is total return: “Holding a lower-rate GIC after a rate increase still results in an economic loss.” Bond returns consist of principal, interest payments and reinvested interest, so focusing only on return of principal misses the point. Individual bonds are not ideal for individual investors, as they require extensive research, are relatively expensive and tricky to trade.

Short-term GICs miss out on the term premium

But short-term GICs miss out on the term premium, which is substantial over time. Going back to 1985, Felix says short-term bonds returned 6.51% annualized versus 7.97% for the aggregate bond universe (which includes some short-term bonds).  This shows how much mid- and long-term bonds bring up the overall return. To be clear, this period captures one of the greatest bond markets in history but Felix says it is still reasonable to expect a relationship between riskier longer-term bonds and higher expected bond returns. Risk and return should be related.

GICs are also illiquid, so even if an investor chooses to include GICs in a portfolio, they will generally also include bond ETFs, which – like stock ETFs – can be sold any trading day. Nor do GICs provide exposure to global bonds.

Of course, a nice alternative are those asset allocation ETFs we have often discussed on this site. See for example this excellent overview by CutthecrapInvesting’s Dale Roberts: Which All-in-One, One-Ticket Portfolio is right for you? 

The Felix video can be found at his Common Sense Investing YouTube series here.

 

Franklin Templeton adds pair of actively managed Fixed Income ETFs

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Franklin Templeton staff at opening bell of TSX Monday to launch two more actively managed bond ETFs

Franklin Templeton Canada has announced the launch of two new actively managed fixed income ETFs that will invest directly in two Franklin Bissett mutual funds. Franklin Templeton’s employees rang the Toronto Stock Exchange’s opening bell on Monday morning (July 8) to celebrate the listings of the new funds.

“Investors are looking for actively managed fixed income to provide stability in their portfolios,” said Duane Green, president and CEO, Franklin Templeton Canada in a press release. “Now they can access the compelling, risk-adjusted returns of our Franklin Bissett fixed income mutual funds in either an ETF or mutual fund structure depending on what works best for their portfolio.”

Franklin Liberty Core Plus Bond ETF (FLCP) invests in series O of Franklin Bissett Core Plus Bond Fund, with a management and administration fees totalling 55 bps. It seeks to provide high current income and some long-term capital appreciation through exposure to primarily Canadian fixed income securities, including federal and provincial government and corporate bonds, debentures and short-term notes. The fund is co-managed by Tom O’Gorman, SVP and director of fixed income, Franklin Bissett, and Darcy Briggs, SVP and portfolio manager, Franklin Bissett. They have 29 and 25 years of industry experience, and eight and 14 years with the firm, respectively.

Franklin Liberty Short Duration Bond ETF (FLSD) invests in series O of Franklin Bissett Short Duration Bond Fund.The management and administration fees total 40 bps. The fund seeks to provide income and preservation of capital through exposure to primarily Canadian fixed-income securities, including federal and provincial government and corporate bonds, debentures and short-term notes. The fund is co-managed by Darcy Briggs and Adrienne Young, VP and director of credit research, Franklin Bissett.

You can find more information on the new bond ETFs at Franklin Templeton’s website, here.