Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

Should Millennials prioritize paying down Debt over saving for Retirement?

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Image via Pexels: T. Leish

Paying down Debt versus Saving for Retirement has always been one of those conundrums facing every generation.

As a semi-retired baby boomer myself, I was a bit late to both the housing party and Retirement savings exercise.

Once I got married in my mid 30s, buying a house and paying down a mortgage was our priority, although two reasonable incomes made it possible to do both: pay off mortgage debt while also saving for retirement and enjoying some tax savings through the RRSP.

Certainly, I’ve always believed paying down debt on high credit-card interest is a priority, certainly over TFSAs. I think TFSAs are great but it’s hard to beat the guaranteed return of paying down interest being charged at 20% or so per annum.

Mercer’s latest Retirement Readiness Barometer

Now a new report from Mercer Canada released earlier this week — the fifth annual Mercer Retirement Readiness Barometer (MRRB) —  warns that millennials and younger Canadians who divide their disposable income between saving for retirement and paying down debts could find themselves delaying their retirement by one or two years compared to if they focused solely on paying down debt in the short term.  

The MRRB says that in today’s economic climate of elevated interest rates, a 30-year-old with $30,000 of personal (non-mortgage) debt could retire one year earlier with $125,000 more in savings if they solely focus on paying off debt within 10 years, before then shifting focus to saving for retirement. 

But if that individual instead splits disposable income between saving for retirement and paying down debt for the entire period until retirement at age 65, it can take more than three times as long to pay down the debt. 

These findings assume a 30-year-old worker is earning $70,000 and can allocate 5% of their income either to paying down debt or saving for retirement; with the interest rate on their debt being higher than the expected rate of returns of their investments. 

Higher interest rates may help retiring Boomers

Interestingly, despite the MRRB’s focus on the young, it does mention boomers near retirement age and the importance of financial literacy surrounding decisions on what to do with retirement savings as they transition into a period where they are no longer working.

The second infographic shown below shows that while high interest rates make it tougher for young people to get out of debt, boomers already at or near Retirement may find higher interest rates to be an advantage as they retire. It explains that “in an elevated interest rate environment, retirees may have windows of opportunity, although financial literacy will be required to navigate various retirement income options.”

I recently touched on this in a MoneySense Retired Money column on the need to wind up RRSPs at the end of the year you turn 71: in most cases, cashing out and paying stiff taxes is not advised, so most people either convert to a RRIF and/or  use the funds to buy a life annuity from an insurance company. Part 2 of that column will run later in April.

You can find the full Mercer release from Tuesday here.

Background on Mercer Retirement Readiness Barometer

The MRRB measures the age in which different persons can comfortably retire based on participation in an employer-sponsored Defined Contribution plan and the government-provided CPP/QPP and OAS. Mercer defines Retirement readiness as a 75% probability of not running out of money before death if an appropriate level of income is maintained throughout retirement. For a 30-year-old, that is 66% of pre-retirement income. It assumes that for each year until 65 the interest rate on the debt is 10% per year and the expected rate of return on retirement savings is 6%. For the 65-year-old retiring today, it’s assumed that the investment in a retirement income product is 40% in equities and 60% in fixed income at retirement. By age 80, it assumes this mix grades down to 20% equities and 80% fixed income.

Included is an infographic, the major elements of which I’ve reproduced below.

 

 

Continue Reading…

Vanguard S&P 500 is a third of my portfolio

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Vanguard S&P 500

 

By Alain Guillot

Special to Financial Independence Hub

My investment strategy is to buy more every time I have more money. I don’t time the market. I know that investments (on the long run) will eventually go up.

No one knows when the market will tank or when it will rally. So why waste my brain energy trying to stay informed and anticipate, or react to the market? I just buy and buy some more.

When will I sell? Hopefully never, but the second best answer is: When I retire, when I need the money for personal living expenses. In that case, I will just take the money out when I need it, not when the market conditions are right (we never know when the market conditions are right).

Generally I divide my investment in three parts: 1/3 Canadian stocks, 1/3 U.S. stocks, and 1/3 international stocks.

I don’t know how much money I have made since I don’t know how to account for all the dividend payments I have been getting. But it’s a lot.

Investing in the stock market is safest way to invest your money. Yes, there is day to day volatility. If you learn how to ignore the new, the latest development, the latest emergency crisis, the latest election, you will be OK.

Of course, it’s not easy to avoid all the noise. Media companies spend billions of dollars every year finding new ways to capture your attention. The worst part is that “bad news” is a very potent attention-grabbing tool and many people fall victims of it. I have friends who have their money in cash, gold, or silver because the next financial catastrophe is coming. If they only knew how to calculate all the money they have left on the table, it’s worse than any catastrophe they have envisioned.

The bedrock of my U.S. investment is the Canadian dollar Vanguard S&P 500 Index; here is the symbol, VFV. It trades in the Toronto Stock Exchange. My strategy is to buy some more every December.

The Vanguard S&P is a fund that invests in the stocks of some of the largest companies in the United States.

This is a great investment because it’s well diversified and is made up of the stocks of the largest U.S. corporations. These large corporations tend to be stable with a solid record of profitability.

How much money can you earn?

We are not in the business of predicting the future, but here are some of the past results:

Rate of return investing on the S&P 500

As you can see the rate of return for 3 years is 42%, for 5 years is 66%, and for 10 is 304%. This is the best return you can get for your money. This is a great investment opportunity if you have the patience to wait for it.

How to invest in the Vanguard S&P 500

You can buy shared of the S&P 500 as you buy shares of any stock. Continue Reading…

92% of investors have a better mindset if they do this one thing, research finds

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By Carol Lynde, Bridgehouse Asset Managers

Special to Financial Independence Hub

If you Google “what contributes to positive mental health?,” you’ll find helpful tips on exercise, diet, getting enough sleep and mindfulness. You’ll find advice on connecting with people, building resilience, gaining control over your life and getting help from a mental health professional. You might find mention that reducing your debt and controlling spending can reduce stress. But you’ll find very little about financial planning or that making a financial plan can contribute to positive mental well-being.

It can.

Bridgehouse Asset Managers recently released research confirming a direct link between planning your finances and positive mental well-being. The more financial planning activities you do, the better your sense of security, control, ability to bounce back from life’s challenges and positive mindset. Further, having a financial plan makes you less anxious about today’s financial issues, such as cost of living, debt levels and saving enough to retire.

The Bridgehouse national research project included focus groups and an online survey developed in partnership with the Canadian Mental Health Association (Toronto) and an advisory panel including mental health, legal and financial advisor experts from across the country. The research found that it’s not the amount of money you have, it’s doing something that counts. Planning your finances and creating a plan for the future leads to a sense of hope, security, resilience and control:  all attributes associated with positive mental health.

There’s a compounding effect: the more financial planning you do, the better your mental health. The survey asked participants how many of 10 financial planning activities they had completed and compared the results to their self-assessed mental state.

The research concluded the more activities respondents completed, the better their sense of security, control, ability to bounce-back and positive mindset. Financial planning activities included: calculating retirement requirements, calculating net worth, determining short-term goals, determining long-term goals, determining insurance requirements, establishing an emergency fund, creating a debt management plan, creating a budget, actively finding day-to-day savings and scheduling regular meetings with a financial advisor.

Of respondents who did seven or more financial planning activities:

  • 73 per cent expressed a sense of security about their financial situation.
  • 73 per cent felt in control of their financial situation.
  • 79 per cent felt an ability to bounce back if life throws tough challenges.
  • 79 per cent reported a positive mindset.

Respondents who took even small steps claimed positive mental well-being benefits. Of those who did only one-to-three financial planning activities:

  • 52 per cent reported a sense of security.
  • 54 per cent reported a sense of control.
  • 73 per cent felt an ability to bounce back.
  • 71 per cent reported a positive mindset.

According to regression analysis (a research method to rank contribution weighting), establishing/maintaining an emergency fund and scheduling regular meetings with a financial advisor were the two most important drivers of positive mental well-being and the ability to sleep at night. Continue Reading…

ETF Fees Explained

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By Danielle Neziol, BMO ETFs

(Sponsor Content)

Canadians are facing a lot of sticker shock lately. My grocery bill was how much? My mortgage payment is going to increase by what per cent? Don’t even ask me what it costs to fill up my car these days. With more money going to living expenses, it has become harder to save than ever. One simple way to get ahead is to be more aware of what we are spending — especially in times like these —  and to review our monthly expenses to see where there are opportunities to make cuts.

Our investment portfolios should be viewed no differently. If you are an investor who holds a mutual fund or an exchange traded fund (ETF) there are fees attached to your investments. It would be prudent to review the cost structure of the funds you hold to ensure that the fees make sense relative to the fund’s investment mandate. It would also be wise to review the cost of the funds you hold to see if that fee is competitive relative to similar products in the market. Fees detract from total portfolio returns, so anything an investor can do to manage these costs can help keep more money in their pockets.

Management Fees and MERs

Every investment fund has a management fee. This is the cost a fund manager charges to manage the portfolio operationally (buy and sell securities, rebalance, etc). The Management Expense Ratio (MER) is the bottom-line cost to the investor. It includes any taxes charged to the fund, as well as any added fees (such as leverage). An investor can look up the management fee and MER within the Fund Facts and ETF Facts of their funds. These are regulatory documents that can be found for every fund issued in Canada. Some asset managers advertise very low management fees but have higher, less advertised, MERs, so investors should always do their due diligence on the total fund cost to fully understand the bottom-line payment that they are making every year.

The MER is subtracted from daily returns. Therefore, it has a direct impact on the total return of the fund. And as investors we know that overtime, our total returns help build our overall wealth. Therefore, the lower the fee on the investment, the more money there will be for the investor at the end of their investment period.

Comparing Fees

Once investors are aware of the fees they are paying for their investment products, they have the ability to “shop around” to see if there are any products that may be a better fit in their portfolios or which offer lower fees. When comparing fees it’s important to understand what you’re getting for in return for what you’re paying for. Broad market index funds generally have the lowest fees in the market. For example the BMO S&P 500 Index ETF (ZSP) has an MER of 0.09%. Index funds tend to have the lowest fees because operationally they are easier to manage. A Portfolio Manager will go out and buy the stocks within a particular index, and rebalance when needed.1 Continue Reading…

Lowering the first rung on the housing ladder

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Image courtesy of CMI/Envato Elements

By Kevin Fettig

Special to Financial Independence Hub

 

A recent report by Ontario’s Municipal Property Assessment Corporation (MPAC) highlights the scarcity of homes under $500,000 in Ontario.

In 2013, 74% of residential properties had a value below this threshold. Today,  just 19% of homes are valued below $500,000.  While this situation varies from province to province, it highlights the significant challenges faced by first-time home buyers who find the first rung of the property ladder is nearly unreachable.

Most urban centers would benefit by encouraging lower cost paths to home ownership. One avenue for this is building properties on leased land. In certain areas of Vancouver, we already see this practice, often on First Nations or university-owned lands. Leased land provides two primary paths to homeownership: one involves placing mobile or manufactured housing on the leased property, while the other entails constructing permanent homes on the leased land.

More than 50 years ago, manufactured housing made up as much as 6% of Canadian housing completions. Today, it represents less than 1%. In the U.S., supporting the availability of manufactured housing is a key component of the administration’s effort to ease the burden of housing costs. Most of these initiatives focus on improving mortgage financing for these homes through housing finance agencies Fannie Mae and Freddie Mac. Currently, Americans must rely on personal property financing (chattel lending) rather than conventional mortgages.

CMHC launched Chattel Loan program in 1988

In Canada, we’ve had a mortgage insurance product for these loan types for some time. The Chattel Loan Insurance Program (CLIP) was first launched by CMHC in 1988 as a 5-year pilot program. However, CMHC has never actively promoted the program, leading to a lack of awareness among lenders. Moreover, consumer preference for traditional stick-built housing and resistance from local communities to mobile home park developments have further hindered the adoption of the program.

Although the eligible amortization period can extend up to 25 years, some provinces have not allowed longer-term leases, making it challenging to finance structures on leased land, whether stick-built or manufactured. Even with an insured mortgage product, securing financing for manufactured homes can be difficult. Financial institutions often lack understanding of these structures, and the constraints on amortization period restrict the type of homebuyer. Consequently, the market has primarily targeted retirees seeking to downsize from larger family homes to smaller units. However, with appropriate financing options, these properties could also appeal to first-time buyers.

Building permanent homes on leased land is a second avenue to reducing home-ownership costs. Leased land communities are typically located close to small urban centres. The design ranges from townhouses to single family dwellings, and from traditionally built to manufactured. There are some larger institutional groups in this sector, including Parkbridge, a leading Canadian developer and operator of 106 residential and recreational communities across the country. CAPREIT, a Canadian real estate investment trust, also manages leased land communities but is not a developer. Continue Reading…