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.”

Interview with Harvest ETFs CEO Michael Kovacs on how Retirees can generate income in volatile markets

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The following is an edited transcript of an interview with Michael Kovacs, CEO of Harvest ETFs, conducted by Financial Independence Hub CFO Jonathan Chevreau.

Jon Chevreau (JC)

Thanks for taking the time today, Michael. We all know that 2022 was a pretty bad year as markets were impacted by higher interest rates. That turbulence bled into much of 2023, although the last few weeks have seemed much rosier.

How do you respond to unitholders of funds who are currently down year over year? Does your covered call writing protect retirees?

Michael Kovacs

Michael Kovacs (MK)

Thanks for having me, Jon. It is important to remember that we offer equity income funds. That means that you have to look at the total return of the product, which includes the price of the ETF and its accumulating distributions.

Yes, there has been turbulence in 2022 and through much of 2023. However, over that period, products like the Harvest Healthcare Leaders Income Fund (HHL) have paid consistent distributions.

Let’s look at the Harvest Diversified Monthly Income ETF (HDIF). In terms of actual returns, this ETF is down nearly double-digit percentage-wise in the year-over-year period (as of early November). But, when you look at the distributions paid over that same period, HDIF has delivered positive cashflow for its unitholders, which reduces the decline by more than half.

JC

Are you saying that between the covered calls, the distribution and the leverage plus the underlying equity income, that a retiree could expect annual yields as high as 10% or 12% or higher?

MK

Yes. Yields are anywhere from 1.5% to 3%, depending on the equity category. Then you have option writing. We can go right up to 33% on any of those portfolios, which generates additional yield. So, to be able to generate 9-10% is very achievable. And we’ve been able to do that consistently for a quite a few years now.

Jon Chevreau

JC

What is your view on the current interest rate climate? Have we reached a top? If so, when will they start to come down?

MK

Many of us remember the high interest rates of the 1980s, especially some of your readers who were trying to obtain their first mortgages. We have experienced a big jump in interest rates over the past two years. However, we believe that we have probably seen the top for rates for now. Or, if we haven’t, we are very close to the top. That means there are going to be some great opportunities in fixed-income markets. The next move for interest rates may be down by mid-to-late 2024.

That said, there are still great opportunities that will benefit equities and bonds in the current climate. Our first launch in the Bond area is the Harvest Premium Yield Treasury ETF (HPYT). We’ve launched with a high current yield. We are targeting long treasury bonds in this fund. This is about generating a high level of income while owning a very good credit-worthy security like a U.S. Treasury. So, if rates start declining next year, it is a great time to be holding fixed income.

JC

Findependence Hub readers tend to be retirees who want steady cash flow. What is Harvest’s view of cash flow for retirees?

MK

I think cash flow for retirees is essential. Once your employment income has gone, you must depend on your investments, your pensions, your CPP, and so on. The recent increases in interest rates have been good for retirees in the short term. Higher rates allow retirees to keep shorter-term cash and generate a safe yield of 5% or more.

Our longer-term equity products aim to have that heavy bias toward equities. For example, the Harvest Healthcare Leaders Income ETF (HHL) is typically written at about 25-28% average, with the other 70% or so fully exposed to health care stocks. The covered call option writing strategy allows us to generate a high level of income.

Cash flow is the basis behind our name: Harvest. People have spent decades building up capital, sowing the seeds. Our products allow them to harvest the fruits of their life-long labour.

We believe our equity-income and fixed-income products are a fantastic way to do that. If we can help you preserve capital and generate consistent income, we are doing our job.

JC

There is also interest among investors in asset allocation ETFs. Is HDIF essentially your answer to that demand?

MK

You’re correct. Some people prefer to allocate to specific funds, but the idea behind HDIF is to allocate to the best of Harvest’s top products that generate cash flow. In the case of HDIF, you do have a leverage component. You are increasing the yield but at the same time, you do increase your risk as well. Continue Reading…

15 Favorite Frugal Living Tips for Financial Independence

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Image by Pexels: Dany Kurniawan

To help you on your journey towards financial independence, we’ve gathered 15 frugal living tips from financial advisors, founders, and other professionals.

From delaying big-ticket purchases, to asking for deals to save money, these experts share their best practices for frugality and financial independence.

  • Delay Big-Ticket Purchases 
  • Master Budgeting and Tracking Spending
  • Align Budget with Personal Values
  • Plan Meals to Control Food Budget
  • Distinguish Between Needs and Wants
  • Prepare Lunch at Home for Savings
  • Leverage “Stoozing” for Mortgage Savings
  • Track Expenses for Financial Insight
  • Eliminate Unnecessary Subscriptions
  • Use Technology for Financial Management
  • Prioritize Spending with Budget Tracking
  • Cut Expenses from Seldom-Used Subscriptions
  • Invest in Experiences, Not Impulse Buys
  • Wait a Month Before Impulse Buying
  • Ask for Deals to Save Money

Delay Big-Ticket Purchases 

When climbing the pay ladder, I purposefully delayed purchasing big-ticket items such as a newer or more expensive home, car, or luxury item. When I review my spending in detail, I’ve found it typically isn’t an $8 latte (or several of them) that puts me over the discretionary-spending edge, but rather something like a luxury handbag that I felt I deserved at the time, yet doesn’t bring me sustained happiness. 

That is to say, in hindsight, it would feel better to see my investment portfolio increase than to have a closet of designer wares. It’s important to build a budget for yourself, but equally or more important, to reconcile your past spending and decide whether to make an adjustment to the budget or your spending to be more accurate moving forward. — Morgan Jarod, Financial Advisor, Royal Private Wealth

Master Budgeting and Tracking Spending

There are many clever ways to cut expenses or generate extra income, but there is no replacement for the discipline of budgeting. A budget is the daily application of your long-term goals. It serves as a compass for your financial journey, making sure you are consistently moving towards your destination. 

There are two parts to every great budget: planning and tracking. First, you need to write out a plan for how you are going to spend every dollar of income you will earn in a given month. Then, you need to track your spending to ensure you are following your plan.

It would amaze most people at how much progress they can make toward their financial goals by simply using a budget to align their spending with their goals.

Luckily, becoming a master budgeter is easier today than it has ever been thanks to several budgeting apps that make the process simple and convenient.

When meeting with someone serious about their financial goals, the first recommendation is almost always a budget. — Ty Johnson, Financial Planner, Peak Financial Management

Align Budget with Personal Values

Review your budget so that it aligns with your values, not what society tells you to value. Many of us get trapped in consumerism and in looking the part. Society tells us that, in order to prove that you are wealthy, you must have an expensive car, home, and wardrobe.

What happens if you value none of those things? You spend more money than necessary, proving you have money. Look at your expenses. Do they truly align with what you care about? If they don’t, change it and be free. — Tremaine Wills, MBA, CFEI, Financial Planner | Investment Advisor, Mind Over Money

Plan Meals to Control Food Budget

Plan your meals for the week on the weekend before. Make your grocery list from your established menu. This habit keeps you from buying groceries you don’t need and helps avoid the late-afternoon query, “What should I make for dinner tonight?” that often ends up with something quick and less healthy, or convenient but more expensive. 

Additionally, planning out your menu helps maintain variety. In our home, we have an outline we tend to follow: Sunday’s meal has pork; Monday tends to be a hearty soup or salad; Tuesday is “Breakfast for dinner” (egg bake, blueberry crepes, etc.); Wednesday is a chicken dish; Thursday’s dinner has fish or sausage as a base ingredient; Friday is Pizza night (make yourself or order out), and Saturday is a beef dish. — Keith Piscitello, Certified Financial Planner, S2 Wealth Planning

Distinguish between Needs and Wants

Frugality is about mindset and intentionality more than deprivation. One of the most impactful practices for me has been to shift my mindset around needs versus wants. It’s easy to fall into the trap of feeling like we “need” the latest technology, furniture, clothes, cars, etc. But most of these are simply wants. Focusing on true needs — food, shelter, basic clothing, transportation to work — frees up a lot of money.

I ask myself, “Do I really need this, or just want it? Will this purchase add value and enjoyment to my life, or am I buying it just to have it?” Distinguishing needs from wants has allowed me to dramatically cut discretionary spending. I buy very few material items now, and focus my time and money on experiences, relationships, and personal growth. — Brian Meiggs, Founder, My Millennial Guide

Prepare Lunch at Home for Savings

Wherever possible, prep your lunch at home if you’re eating at the office or somewhere other than your home. Over the course of a month, the savings really stack up! This could be as easy as batch-cooking at the weekends, ready for the week, or just making a homemade sandwich in the morning. — Jordan White, Financial Planner, A Money Thing Happened

Leverage “Stoozing” for Mortgage Savings

In financial strategies, one unique money-saving hack I’ve employed is using an offset mortgage combined with savings. This approach, popularly known in England as “Stoozing,” can significantly reduce monthly mortgage payments. 

Stoozing involves utilizing the funds from 0%-interest credit-card offers. Instead of spending this money, one deposits it into a bank account linked to an offset mortgage. This approach effectively reduces the mortgage balance temporarily, leading to significant savings on mortgage interest. 

As the 0% period on the credit card nears its end, the “stoozer” then pays off the credit card using the deposited funds, having benefited from reduced mortgage costs in the interim. At one point, I had over £100,000 on credit cards, but this was sitting in my bank account, significantly reducing the interest payments on my mortgage. It accelerated my financial independence by at least 10 years. — Shane McEvoy, MD, Flycast Media

Track Expenses for Financial Insight

As a wealth-management specialist, one frugal-living tip I recommend to new clients is to track and record all your expenses. While this may seem time-consuming, it’s a great way to gain insight into where you are spending your money and how much you’re actually saving each month. 

Making sure you can see exactly where your money goes will help keep it in check and prevent impulse purchases that add up quickly. This is especially important when trying to reach financial independence because every dollar saved means more freedom for the future. — Adam Fayed, CEO, AdamFayed.com

Eliminate Unnecessary Subscriptions

Getting rid of subscriptions and simplifying my monthly budget has played a significant role in speeding up my journey towards financial independence.

Subscriptions might seem harmless, but the costs can really sneak up on you if you’re not careful. For years, I was paying over $100 a month for cable. I also was spending $50 on various streaming services, had an expensive gym membership, and would occasionally try services like meal delivery kits. And I hadn’t negotiated my Internet or phone bills in years.

One day, I realized I was spending well over $350 per month on these services, some of which I wasn’t using. I cut cable out completely, got a cheaper phone plan, and moved to a more affordable gym near me. I also scrapped the meal delivery kits and just cook myself now. This saves me $200+ a month easily, and it hasn’t impacted my quality of life.

I suggest other people take a look at their monthly spending to find sneaky recurring charges they can trim quickly. — Tom Blake, Founder, This Online World Continue Reading…

Retired Money: What is Infinite Banking and should I consider it in Retirement?

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Image via MoneySense.ca: karlyukav on Freepik

My latest MoneySense Retired Money column looks at a topic I cheerfully admit I’d never heard of until the editors drew it to my attention: Infinite Banking (IB). Not to toot my own horn, but that’s unusual, as I have been writing about personal finance for the better part of three decades.

In any case, you can find the full MoneySense column by clicking on the highlighted headline here: Infinite banking in Canada: Should you borrow from your life insurance policy?

According to a  useful primer in Policy Advisor, Infinite banking is “a concept that suggests you can use your whole life insurance policy to ‘be your own bank.’ “ It was created in the 1980s by American economist R. Nelson Nash, who introduced the idea in his book, ‘Becoming Your Own Banker.’ He founded IBC (Infinite Banking Concept) in the U.S. and eventually it migrated to Canada.

One of the sources cited in the column evinced some skepticism when he said of Infinite Banking (IB for short): “those who have sipped rather than chugged the IB Kool-Aid say it’s a strategy that may be too complex to be marketed on a mass scale.”

If you’re not familiar with life insurance, Infinite Banking does seem a bit arcane. Rather than put your money in a traditional bank – which until the last year or so paid next to nothing in interest on accounts – you would invest in a Whole Life or Universal Life insurance product, either of which provides some “cash value” from the investment portion of those policies. Then if you want to borrow money, instead of paying hefty interest payments to a bank, you borrow against your life insurance policy.

Watch this YouTube video primer

Those new to Infinite Banking should definitely look at a YouTube primer made by Philip Setter, CEO of Calgary-based Affinity Life (Affinitylife.ca). There he readily concedes that much of the marketing hype is to portray Infinite Banking as some kind of “massive secret for the wealthy,” which essentially amounts to buying a whole life insurance policy and borrowing against it. In the video he calls out some of the conspiracy-mongering that seems to be attached to infinite banking, including the primary message from some promoters that traditional banks and governments are out to rip off the average consumer.  Continue Reading…

Navigating the Student Loan Dilemma: Unlocking Financial Independence with RESPs

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By Andrew Lo, President & CEO of Embark Student Corp.

(Sponsored Post)

The pursuit of higher education is a cornerstone of personal and professional growth for many young Canadians. However, this pursuit often comes at a hefty price, with student loans being a significant barrier to financial independence. The burden of student debt can haunt graduates for years, affecting their ability to save, invest, and achieve financial stability. But there’s good news: opening a Registered Educations Savings Plan (RESP) can lighten the burden of student loans and help you help your children start their adult life debt-free by encouraging regular and early savings, offering valuable government grants, and harnessing the power of compound interest.

The Student Loan Conundrum

Canada is home to a world-class education system, but the cost of pursuing post-secondary education can be daunting. Tuition fees, books, accommodation, and other expenses can quickly add up, leaving many students with no choice but to turn to the most common method of affording post-secondary:  student loans.

What some students don’t fully understand when they use student loans is that they come with interest rates that accrue after graduation. For many young Canadians, this means they start their careers with substantial debt, and few resources to help them repay their loans.

In a recent poll of Canadian students, 79% admitted that the amount of debt taken on to afford post-secondary can be debilitating. This burden of student debt can have a profound impact on a young graduate’s financial journey, with 57% of students surveyed agreeing that graduating with student debt will make it harder for them to become financially independent from their parents.

Unfortunately, the constant struggle to make loan payments often hampers their ability to save and invest in their futures. Despite this, student loans are still the most normalized way of paying for education in Canada.

There’s a better way pay for post-secondary education

One effective way to combat the student loan conundrum is to start saving for education expenses early. It can be hard to think about university and college when a child is a few years old but by beginning to save as soon as possible, families can significantly reduce their need for student loans. You’re probably thinking, “accumulating savings to cover educational costs while managing the rising cost-of-living is no easy feat.” This is where a Registered Education Savings Plan [RESP] comes into play.

RESPs are powerful tools that Canadians can take advantage of to fit the post-secondary bill. They can be opened by the parents or guardians of a child, other family members, or friends, to save over a total period of 35 years. By contributing regularly to an RESP, families can build substantial savings to cover tuition and related expenses. Starting early allows for smaller, manageable contributions over time, reducing the financial stress associated with higher education. The most valuable part of this savings tool is that it opens your savings up to a world of government grants that you can qualify for.

Unlocking “Free Money” with Grants

One of the most compelling features of RESPs is the opportunity to acquire “free money” in the form of grants. The Canadian government provides a generous grant called the Canada Education Savings Grant (CESG) as a reward for saving, allowing you to collect up to $7200.

This grant matches 20% of your contributions on the first $2,500 saved annually. Over the years, if you contribute $2500 annually to an RESP, this works out to an additional 20% being added to your first $36,000 saved without even considering investment gains. By maximizing these grant opportunities, families can alleviate the financial strain of higher education and better prepare for the future. Continue Reading…

Timeless Financial Tip #9: Beware Conflicted Financial Advice

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

There’s only so much you and I can do about life’s many surprises. Some things just happen, beyond our control. Fortunately, to make the most of your hard-earned wealth, there is one huge and timeless best practice you can control: You can (and should) avoid seeking unbiased financial advice from biased sales staff.

How do you separate solid investment advice from self-interested promotions in disguise? Here’s a handy shortcut: Are the investments coming from your friendly neighborhood banker? If so, please read the fine print — twice — before buying in. Due to inherently conflicting compensation incentives, most banks’ investment offerings are optimized to feed their profit margin, at your expense.

Compensation Incentives Matter … a Lot

I’ve been covering the conflicted compensation beat for years, like in On Big Banks, Conflicting Compensation and Bad Behaviour, and my message has remained the same, for all the same reasons:

Compensation drives behaviour.

It’s human nature.  It’s true for Canadian bankers and their investment offerings. It’s also true in the U.S. and around the globe.

For example, a 2017 Consumer Federation of America report, “Financial Advisor or Investment Salesperson?” reflects on this very conflict:

“After all, people expect salespeople to look out for their own interests and maximize profits, but advisors are expected to meet a higher standard. … Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result.”

Let’s imagine I’m a banker, on a bank’s payroll. Pick a bank, any bank. Assume I’m at any level, from teller to VP. Here’s how my compensation package is likely structured:

  1. I can expect to earn more if I promote my employer’s proprietary Widget X products over any comparable, but generic Gadget Y offerings. Sure, Widget X will cost my customers more. But by helping me and my bank thrive, aren’t we both better off?
  2. I and my team may even score special perks if we exceed our Widget X sales quotas. There may be contests, celebrations, or at least positive performance reviews.
  3. In fact, if I don’t sell enough Widget X’s (or if I sell too many Gadget Ys), my performance reviews may suffer. I could lose my job, or at least not rise in the ranks.

Under these sales-oriented conditions, guess which investment product I’m going to recommend as often as I can? As a bank employee, I may well care about my customers. But the bottom line is that they don’t determine how much or little I am paid for my efforts. When my bank’s profits rise or fall, so does my career.

“Our Way or the Highway” Investments

In theory, banks have plenty of flexibility to structure their investment lineup however they please. They could promote the same low-cost, globally diversified, evidence-based mutual funds and ETFs that independent, fee-based, evidence-based financial advisors typically deploy.

Instead, most banks tend to heavily promote their own, proprietary investment products: built, managed, and priced in-house.

In its title alone, a 2023 The Globe and Mail report speaks volumes about this approach: “Pervasive sales culture at Canadian banks designed to push customers into high-fee products.” Its authors observe:

“The commission earned from selling the bank’s products may be five times higher than on a GIC, for example. In this way, the system incentivizes the sale of funds with higher fees, even when a GIC might be a better fit for the client.”

Suitable vs. Fiduciary Advice

At best, your bank’s compensation conundrums may leave you paying more than necessary for sound investments. Worst-case (and from what I’ve seen, more likely), you’ll end up overpaying for the “privilege” of holding investments that fail to fit your short and long-term personal financial goals.

That’s because your banker may be required to offer products that are broadly “suitable” for you, but as I’ve described before, like in What is the Cost of a Financial Advisor?, they don’t have to be the best choice for you.

There’s a big difference between suitable versus fiduciary advice. Your banker’s role as an “adviser” may sound comforting. But make no mistake. Regardless of their title or compensation, they are not in a fully fiduciary relationship with you; they don’t have to always place your highest, best interests ahead of their own. Continue Reading…