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.”

Transforming the mortgage experience during inflationary times

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By Rob Shields

Special to the Financial Independence Hub

In a recent Questrade research study conducted by Leger¹, more than 8 in 10 Canadians (84%) expressed worry about the rising costs of inflation; two in five (39%) said they were very worried.

Rising inflation and the impact on mortgage costs have many worried, especially the younger demographic: approximately 45% of those polled.

The survey also found that Canadians aged 18 – 34 understand the importance of investing early and are much more likely to be investing more in their RRSPs to buy a home. Happily, this generation is committed to planning ahead, and will benefit from programs like the Home Buyer’s Plan when the opportunity is right.

Rebuilding the home ownership experience from the ground up

To ease current consumer anxiety, address pain points associated with home buying and mortgages, and help Canadians on their journey to financial independence, QuestMortgage® has been introduced as a direct-to- consumer mortgage offering to help make home ownership easy and affordable.

Designed as a simple, digital service for those looking to buy a first home or renew their mortgage, it is an alternative to traditional mortgages: available online 24/7, without the need to ever visit a branch. A QuestMortgage BetterRate™ offers low rates at the outset, with a team of dedicated mortgage advisors accessible to guide clients through the entire application process. The new service aims to change the status quo, making the process of home ownership straightforward, transparent and stress-free for Canadians of every age.  Continue Reading…

How Real-Return Bonds compare to Regular Bonds

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ultimate guide to bonds

Real-return bonds pay a return adjusted for inflation. But when you buy a real-return bond, you are only protecting yourself against unanticipated rises in inflation.

Real-return bonds pay you a rate of return that’s adjusted for inflation, but that’s not always as promising as it seems.

When a real-return bond is issued, the level of the consumer price index (CPI) on that date is applied to the bond. After that, both the principal and interest payments are typically adjusted every six months, upwards or downwards from that base level, to compensate for a rise or fall in the CPI.

Look at this theoretical example to understand how a real-return bond works

The Bank of Canada issues $400 million of 30-year bonds maturing on December 1, 2049. The bonds have a coupon, or interest rate, of 2%.

If after six months from the date of issue, the new CPI level is, say, 1% above the level of the CPI on the issue date, then each $1,000 of bond principal is adjusted to $1,010 of bond principal ($1,000 x 1.01). The semi-annual interest payment is then $10.10 ($1,010 x 2% / 2).

If after 12 months, the level is 2% higher, then the bond principal is adjusted to $1,020 ($1,000 x 1.02), and the interest payment rises to $10.20 ($1,020 x 2% / 2).

Consider these three important factors to realize benefits with real-return bonds

  1. The price you pay for real-return bonds reflects the anticipated rate of inflation. In other words, if investors feel that inflation will rise 2% over the long term, the price of the bond will reflect that future inflation increase and its effect on the bond’s principal and interest payments. So, when you buy a real-return bond, you are only protecting yourself against unanticipated rises in inflation.
  2. When the inflation rate falls over a six-month period, the principal and interest payments of a real-return bond fall. In times of deflation, the inflation rate turns negative. In a prolonged period of deflation, the principal of a real-return bond could fall below the purchase price. Interest payments would fall, as well.
  3. As with regular bonds, holders of real-return bonds must pay tax on interest payments at the same rate as ordinary income. That income gets taxed at the investor’s marginal rate. In addition, holders of real-return bonds must also report the amount by which the inflation-adjusted principal rises each year, as interest income, even though you won’t receive that amount until the bond matures. That amount is added to the bond’s adjusted cost base.

If the CPI level falls, that reduces the inflation-adjusted principal. You deduct the amount of that reduction from your taxable interest income that year, and also subtract it from the adjusted cost base.

Download this free report to learn more about how to profit from stock investing.

Find out how real-return bonds compare to regular bonds and if they make better additions to your portfolio

In simple terms, a bond is a form of lending whereby you lend money to a corporation or government. In return, a bond pays a fixed rate of interest during its life. Eventually, a bond matures, and holders get the bond’s face value—but nothing more. Receiving the fixed interest and face value at maturity is the best that can happen. Note, though, that in some cases, corporate bonds can go into default. As well, inflation can devastate the purchasing power of bonds and other fixed-return investments.

Furthermore, bonds also generate more commission fees and income for your broker, compared to stocks, especially if you buy them via bond funds and other investment products. Continue Reading…

6 Expenses that First-time Homeowners should plan for

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Image Source: Unsplash (https://unsplash.com/photos/cqAX2wlK-Yw)

By Beau Peters

Special to the Financial Independence Hub

Becoming a first-time homeowner is an exciting prospect. It’s a chance to have a place you can call your own, where you can make memories for years to come.

With that said, proper planning is necessary, or your dream can become a financial nightmare. The fact is that there are many unavoidable and potential expenses that could occur over time, and if you don’t understand the realities or you don’t save appropriately, then you could be in for some hard times.

To help you out, we have compiled a list of common expenses that most first-time homeowners will experience and how to prepare accordingly.

1. Closing Costs

As you are looking at potential homes and comparing your financial situation, you will want to keep in mind that there are some upfront expenses that you will want to consider, especially closing costs, which may amount to 3-6% of the total loan value. It is important that you have those funds fluid and ready to go when you sign your new mortgage.

If you are short on funds, then consider creating an agreement with the seller to share these costs or look into government programs if you are short.

2. HVAC Issues

No matter where you live, yyour HVAC (Heating, Ventilation, and Air Conditioning) units will likely need to be repaired either soon or down the road. While most units can last 10 to 15 years, if you run your heat or AC all day, every day, then you could be looking at a repair sooner than later, especially if you bought a home with an existing unit.

When preparing for the expenses associated with a damaged air conditioner, you will need to decide if you can have your unit repaired or if it will need to be completely replaced. The first thing you should do is get a quote from a professional to see if the cost to repair is almost as much as the cost to replace. If it is, consider getting a brand new unit because you know it will last a long time and work at high efficiency. Also, consider the fact that if your AC had to be repaired once, it will probably require maintenance again. Include these considerations in your final decision.

3. Appliance Lifetimes

Whether you are moving into a home with existing appliances or you are buying them brand new, you must realize that all appliances have their expiration date. For instance, refrigerators often last about 10 years, and even if they are still usable after that time, their efficiency will begin to dwindle. As far as other appliances:

  • Washers and dryers typically last about 10-13 years.
  • Dishwashers have about 10 years.
  • Microwaves typically last around seven years.

Knowing these dates is important so you can begin to budget accordingly to pay for a replacement.

As a new homeowner, an expense that you may want to incur is the cost of a home warranty. Many of these programs cover a portion of the price of the service calls necessary to fix your appliances, and your annual fee will also help with the cost of a new unit. As soon as you move into your home, look for home warranty programs and find one that suits your needs and financial situation.

4. Roof Damage

The roof is arguably one of the most important aspects of your home, and if it is damaged by weather or general wear and tear, then you will want to have it inspected and repaired immediately. Typical roofs built with asphalt shingles will last about 20 years, so if you have a new home, you may be good for a while, but if you bought a used home, then you will want to see how much time is left. Continue Reading…

What Is a Credit Utilization Ratio and why does it matter?

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By Mihika Ghosh

Special to the Financial Independence Hub

Credit agencies use the credit utilization ratio to understand your credit score. The credit utilization ratio is your total credit to your total debt amount expressed in a percentage format. In simpler terms, it refers to the amount of debt you carry in all your credit cards.

Your credit utilization ratio increases and decreases based on the payments and purchases you make. It is one of the factors that help credit bureaus calculate a credit score and makes up 30% of your credit score. Hence, it is vital to keep your credit utilization ratio as low as possible to avoid debts and maintain good credit scores.

Why does your Credit Utilization Ratio matter?

A high credit ratio negatively impacts your credit score rating process and indicates that the borrower is not great at managing their credit. At the same time, a low credit ratio implies excellent credit management skills.

There are two important factors in maintaining a good credit score – first is your payment history. Late payments and abundant due payments can negatively impact your credit score. The second factor that lays of great importance is your credit utilization ratio. If you are trying to land in the good books of the lender, you need to build good credit by keeping your credit ratio as low as possible.

Most credit experts recommend you keep your credit ratio below 30% to maintain a good credit balance.

How to Calculate your Credit Utilization Ratio 

First and foremost, start by pulling up all your credit cards together, then add up all of your outstanding balances along with your credit limits. Take this figure and then divide it by your total credit limit and multiply it by 100. Your answer will be your total credit utilization ratio which will come out in percentage.

Note that your credit ratio is not the sum total of each of your credit card’s credit utilization ratios. Hence, it is important to calculate the total credit of all your credit cards.

However, if this calculation method is still too complicated for you, or you would just want to let calculators do the math, there are plenty of online credit utilization calculators that can assist you.

How to Improve your Credit Utilization Ratio

Lowering your credit utilization ratio is easy and one of the quickest ways to boost your credit score. Here are a few ways in which you can get started:

  1. Pay All Your Debts

The best way to improve your credit ratio is by paying off any pending credit card balances. Every dollar you pay reduces your credit ratio and total debts, in turn getting you one step closer to a good credit utilization ratio. This even reduces the baggage of interest you had to pay on those balances. Continue Reading…

Big questions about Investing and Personal Finance

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By Michael J. Wiener

Special to the Financial Independence Hub

 

We spend a lot of time worrying about interest rates, stock markets, inflation, gold, and cryptocurrencies, and how they affect our investment portfolios and personal finance.  Here I explain how I think about these issues.

Are interest rates going up?

I don’t know.  But the answer can’t end there.  We have to make choices about our mortgages and investments, and interest rates matter.  Some will express predictions confidently, but they don’t know what will happen.

I prefer to think in terms of a range.  Let’s say that we think interest rates will average somewhere between 0% and 7% over the next decade.  This range is wide and reflects the fact that we don’t know what will happen.  Because current interest rates are still low, the range is shifted toward rate increases more than decreases.  The goal now is to balance potential downside with potential upside over this range.

With mortgages, the main concern is the downside: will we be okay if mortgage rates rise to 7%?  We may not be happy about this possibility, but we should be confident we could handle such a bad outcome without devastating consequences.  This is why it’s risky to stretch for a house that’s too expensive.

Bonds and other fixed income investments are a good way to moderate portfolio volatility.  However, long-term bonds have their own risks.  If you own a 25-year bond and interest rates rise two percentage points, anyone buying your bond would want to be compensated for the 25 years of sub-par interest.  This compensation is a drastically reduced bond price.  For this reason, I don’t own long-term bonds.  I stick to 5 years or less.

But can’t we do better?  Can’t we find some useful insight into future interest rates?  No, we can’t.  Not even the Bank of Canada and the U.S. Federal Reserve Board know what they’ll do beyond the short term.  They set interest rates in response to global events.  They do their best to predict the future based on what they know today, but unexpected events, such as a war or new pandemic, can change everything.

If we get overconfident and think we have a better idea of what interest rates will be than somewhere in a wide range like 0% to 7%, all we’re doing is leaving ourselves exposed to possible outcomes we haven’t considered.

Is the stock market going to crash?

I don’t know.  With stock prices so high, it’s reasonable to assume that the odds of a stock market crash are higher than usual, and that a crash might be deeper than a typical crash.  But that doesn’t mean a crash is sure to happen.  The stock market could go sideways for a while.  Or it could keep rising and crash later without ever getting back down as low as today’s value.

People who are convinced the market is about to crash may choose to sell everything.  One risk they take is that the crash they anticipate won’t come.  Another risk is that even if stock prices decline, they may keep waiting for deeper declines and stay out of the market until after stock prices have recovered.

Those who blissfully ignore the possibility of a stock market crash may invest with borrowed money.  The risk they take is that the market will crash and they’ll be forced to sell their depressed stocks to cover their debts.

I prefer to consider both positive and negative possibilities.  I choose a path where I’ll still be okay if stocks crash, and I’ll capture some upside if stocks keep rising.  If we could fast-forward 5 years, it would be easy to see whether we’d have been better off selling everything to cash or leveraging like crazy.  But trying to choose between these extremes is not the best approach.  I prefer to invest in a way that gives a reasonable amount of upside with the constraint that I’ll be okay if stocks disappoint.

Is inflation going to get worse or return to the low levels we’ve had in recent decades?

I don’t know.  Either outcome is possible.  Higher inflation is bad for long-term bonds, which is another reason why I avoid them.  With short-term bonds and cash, you can always choose to invest these assets in a different way without taking as big a hit as you’d take with long-term bonds.

I choose to protect against inflation with stocks.  When prices rise, businesses are getting higher prices for their goods and services.  However, this protection only plays out over long periods.  Over the short term, stocks can drop at the same time that inflation is high.  Some people like to look at historical data and declare that stocks offer no inflation protection.  These people are usually playing with mathematical tools they don’t understand very well.

All of these considerations play into the balance I’ve tried to strike with my allocation levels to stocks, bonds, and cash.  I’m trying to capture some upside from good outcomes while protecting myself from disaster if I get bad outcomes.

Is gold going up?

I don’t know.  You might think my balanced approach would mean that I’d have at least a small position in gold, but I don’t.  I have no interest in investing in gold.  It offers no short-term protections against inflation or anything else.  And over the long-term stocks have been far superior.

Gold produces nothing, and it costs money to store and guard.  Gold’s price has barely appreciated in real terms over the centuries.  In contrast, millions of people wake up every day to work hard at producing profits for the businesses that make up the stock market, and money invested in stocks over the centuries has grown miraculously. Continue Reading…