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.”

How to reduce your Household bills

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By Jenny Hughes

Special to the Financial Independence Hub

The average American has close to $40,000 [US$ throughout] in non-mortgage debt, also known as “bad debt.” This debt will cost them close to $250,000 in lifetime interest and more than three quarters will die with unpaid balances.

It’s a tragic statistic, and it’s getting worse, which is why so many Americans [and many Canadians too!] are looking into programs like student loan debt relief, tax debt relief, and debt settlement, among others. But as effective as these programs are, the best money-saving methods begin at home.

In this guide, we’ll show you some ways to reduce your household bills, potentially saving hundreds of dollars a year, all of which can go toward clearing your debts.

Get rid of unnecessary subscriptions

North Americans are wasting vast sums of money on subscription services, most of which are underused and unnecessary. It’s such a prevalent issue, that we guarantee everyone reading this will have fallen into the same trap.

Don’t believe us? Here’s a quick test:

Without looking at your bank statements, calculate roughly how much you spend every month on digital subscription services, including TV services, online services, etc.,

If you’re like the average American, you probably calculated a total of between $50 and $80, which is respectable, but probably false.

Did you remember to include Netflix, Amazon Prime, Hulu? What about web domains, Xbox/Playstation subscriptions, loot boxes, and cloud storage services?

The problem with digital subscriptions is that they often cost just a few bucks and are purchased on a whim. The average consumer doesn’t think twice about purchasing them because what’s an extra $5 or $10 a month? But as more of these services are added, that extra $5 turns into $50, and before you know it, you’re spending $600 a year on services you don’t need.

A 2018 survey asked the same question to 2,500 participants and found a massive 84% grossly underestimated how much they spent on digital subscriptions. And this is just the tip of the iceberg, as there are also gym subscriptions, grocery deliveries, and countless other subscriptions that leech money from your bank account every month.

The trick is not to think about the monthly cost but to calculate the yearly one. $5 a month seems like a sensible choice for a new media subscription, especially if it means you can watch that new series everyone’s talking about. But what happens three years down the line when you forget to cancel and only ever watch one episode? You’ve just wasted $150 to consume 45 minutes of TV.

Make your Home more efficient

Install energy-saving lightbulbs, low-flow toilets and shower heads; fix leaky faucets; insulate your doors and windows, and stop relying on costly air conditioning units. All these tips can reduce your monthly bills, but they’re just the tip of the iceberg.

American and Canadian households are filled with electrical devices — TVs, video gaming consoles, computers — and most of these are either active or on standby. They constantly draw a charge, which means you’re paying for them around-the-clock, and those charges can add up.

When a device is not in use, turn it off. This also applies to your heating, cooling, and lighting.

Watch those Food bills

The average family spends close to $3,000 on takeout and restaurant food, and roughly $7,000 on groceries. That’s $10,000 on food, and while it’s a necessity that can’t be avoided, how that money is spent desperately needs to change. Continue Reading…

Yes, you can retire up to 30% wealthier

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Questrade touched a nerve with financial advisors with a series of commercials highlighting how lower investment fees over time potentially means you can retire up to 30% wealthier.

Financial advisor extraordinaire Jason Pereira acknowledged that Questrade was right to go after do-nothing advisors who collect fat commissions, but he claimed the 30% wealthier promise was unrealistic and borderline illegal.

Mr. Pereira’s argument is a good one. Advisors like him (and others who put a client’s best interests ahead of their own) can add tremendous value for clients, but not in the way you might think.

The old school notion of a financial advisor is of someone who adds value through their stock-picking prowess. But that argument falls flat when you see the evidence that the vast majority of actively managed funds fail to beat their benchmarks.

Indeed, investors are better off buying the entire market as cheaply as possible using index funds or ETFs.

PWL Capital’s Ben Felix once told me, “investing has been solved … The way for advisors to add value is on planning, behaviour, and transformation.”

With that in mind, I can get behind the idea that financial advisors with this mindset do have a net positive impact for their clients, even after fees.

Which brings me to the point of this article. Canadians have $1.6 trillion invested in mutual funds, most of which are of the expensive, actively managed variety. Those actively managed funds aren’t adding value: the vast majority will underperform their benchmark. Furthermore, most bank-advised clients aren’t getting value in other ways: financial planning, goal setting and prioritization, behavioural coaching, etc.

Traditional advisors are still selling (and charging for) investment expertise, but failing miserably at delivering excess returns while offering little-to-no value for things that would truly make a difference for their clients.

The easy answer is to pair a fee-only advisor with a low-cost investment solution (either a self-directed portfolio of globally diversified ETFs, or through an automated portfolio with a robo advisor). This way, you get the planning, coaching, and behavioural nudges you need to succeed financially, plus the benefit of lowering your investment fees. Win-win.

But the sad reality is that financial inertia is powerful and it’s easier to keep your investments at your bank, along with your chequing, savings, and mortgage. I get it.

Retire up to 30% wealthier without moving your investments

What if I told you that you can still retire up to 30% wealthier without moving your investments to a robo advisor or a DIY investment solution? The answer is sitting right there on the product shelf at your bank: yet rarely if ever talked about by your financial advisor.

I’m talking about index funds. That’s right. Every big bank has a suite of index mutual funds available to investors. These funds charge between one-sixth to one-half the cost of the actively managed mutual funds that are typically sold to Canadian investors.

I’ve monitored and tracked the performance of big bank index funds and their actively managed mutual fund cousins for more than 10 years, and in every single case (when comparing to identical benchmarks), the lower cost index funds outperform the active funds.

So, all you need to do is walk into your bank branch, sit down with your advisor, and ask (no, demand) to move your portfolio from actively managed mutual funds to their index fund equivalents.

Below, I’ll show you the exact index funds to buy to build a 60/40 balanced, globally diversified portfolio of index funds at each of Canada’s five big banks. I’ll compare those index funds to the commonly sold actively managed “balanced” mutual fund.

RBC Index Funds

If you’re an RBC client, chances are you have the RBC Balanced Fund (RBF272) in your investment portfolio. The fund has nearly $5 billion in assets under management and comes with a fee (MER) of 2.16%. Returns have been decent, with a 10-year average annual return of 5.3%. Continue Reading…

Retired Money: What to do with “Found Money” from the Covid lockdown

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MoneySense.ca: Photo created by pressfoto – www.freepik.com

My latest MoneySense Retired Money column looks at what to do with the “found money” most of us are experiencing during this extended Covid-19 lockdown. Click on the highlighted text to access the full column: What to do with $500, $1,000 or $10,000 right now.

In it, four experts are asked what they’d recommend clients do with an extra $500, $1,000 and $10,000. One was Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc., who suggests any extra savings should be “parked out of sight” for a month or two while you analyze your needs and options.   Repaying debt – particularly high-interest credit card debt – is always a top-notch, risk-free way of deploying cash, Mastracci says.

Certified financial planner Aaron Hector, vice president of Calgary-based Doherty Bryant Financial Strategists, suggests those nervous about their employment status should leave the money parked while they “wait and see” what transpires. “Cash provides flexibility,” he says. You also need to determine if there really are true savings or you are simply experiencing a delayed expense, as may be the case if a planned vacation abroad was cancelled because of Covid. If so, that money will eventually be spent.

Covid-19 has forced everyone to re-think our financial goals and objectives, says fee-only planner Robb Engen, the blogger behind Boomer and Echo, “For some retirees, that has meant putting off large projects such as a home renovation until better times. But for those who have enough income to meet their spending needs and then some, I’d recommend squirreling away any extra cash savings in a high-interest savings account to ensure you can pay cash for your next big-ticket purchase without cashing in any investments.”

Asset Allocation ETFs a good choice for $10,000

Engen — one of the MoneySense experts on the annual ETF All-Stars feature — suggests an asset allocation ETF, assuming all short-term goals have been funded and accounted for. For older folk wanting some fixed income to cushion any further Covid-related market volatility, consider VBAL or VCNS (60% and 40% equities respectively.) Keep in mind that iShares has a similar set of asset allocation ETFs, as does Horizons ETFs, all highlighted in the latest ETF All-stars package. Continue Reading…

Comparing the Cost of Living in Cities and Suburbs

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By Holly Welles

Special to the Financial Independence Hub

Are you torn between the city and the suburbs? While the city may have direct access to public transport and popular restaurants, it’s clear that the suburbs allow you to enjoy more space. Both locations have their perks: but urban life costs more, right? Maybe not. Each area has its own expenses that could affect your decision.

Here’s a quick look at the financial differences between cities and suburbs:

1.) Rent and Mortgages

Whether you want to buy a house or rent an apartment, it’s smart to weigh your options. That said, it’s almost always cheaper to buy or rent farther from an urban area. It typically costs more to live within a city’s 15-minute vicinity. In Seattle, it’s hard to find a house under (US)$600,000 unless you look at places an hour away from downtown.

The same data applies to rental expenses. However, rental costs can vary across the country, so the size and location of the city is crucial. For example, these numbers may differ if you live near a smaller urban hub like Pittsburgh or Omaha.

The last piece of the housing puzzle is size. Urban apartments and homes tend to be smaller with minimal outdoor space, meaning the price per square foot will be higher. Meanwhile, suburban residences will likely be larger and offer yards for renters and homeowners to enjoy. It’s important to consider not just how much you’re willing to pay, but what you’re paying for: a prime city location or more private space.

2.) Entertainment and Groceries

Generally, extra expenses like entertainment and groceries cost more if you live near a city. However, it’s often not as straightforward as that: because cost also depends on availability and choice. Cities with large populations might have a higher variety of grocery stores, but they also might lack access to fresh food. The best way to evaluate cost is not just to look at grocery prices, but also the distance to the nearest store and the number of farmers’ markets.

We can apply the same idea to entertainment. While dining out at bars and restaurants will likely be more expensive in a metro area, there are also more food stands and takeout options for those looking to eat more cheaply. Theatres and venues will charge for tickets, but living in the suburbs means you might have to travel far to attend these events in the first place.

There’s no hard and fast rule when it comes to food and entertainment costs. If you like to see plays and musicals with friends, think about those activities specifically. Does it make sense to drive 30 minutes from the suburbs to see productions throughout the year? Your choice is all about your wants.

3.) Transportation

It costs less to travel throughout cities. Most urban locations have public transport systems that you can access with a monthly pass. You won’t have to own a car unless you need to drive to places a bus or subway doesn’t reach. This perk cuts down on vehicle-related expenses like gas, maintenance and insurance. Most cities are also generally walkable, so you won’t always need to rely on public transport. Continue Reading…

Absurdity in certainty: finding yield during a pandemic

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Franklin Templeton/iStock

By John Beck, Franklin Templeton Fixed Income

(Sponsor Content)

An inverted yield curve, historically a harbinger of a recession, lived up to its reputation this year. The beginning of 2020 saw an inverted curve in both the United States and Canada as equity markets reached record highs. Then came the realization that COVID-19 was not simply a regional issue centralized in Wuhan, China, but a pandemic that would turn the global economy completely on its head.

A precipitous drop in stock valuations followed, reaching a nadir in mid-March, but stocks have rallied strongly since then, recovering many of the losses of that late-February/mid-March period. In the bond markets, unprecedented monetary stimulus and across-the-board rate cuts meant yields remained anemic throughout the crisis. That started to change in early June when better-than-expected job and growth numbers saw bond yields edge up. A steepening yield curve with a wider spread between short and longer duration securities is good news for both fixed income investors and the wider economy.

Across the Atlantic, the European Central Bank (ECB) announced in early June that its bond purchasing program would run to at least this time next year, spurring a rally in European bond markets.

Central bank policy

Any macro forecast must come with the caveat that a prolonged economic recovery is entirely contingent on the pandemic. A second wave of COVID-19 this fall or winter will likely mean further lockdown measures across the globe. The French philosopher Voltaire famously said: “Uncertainty is an uncomfortable position, but certainty is an absurd one.” Apt words for the current environment, but investors can take encouragement from the efforts of governments and central banks throughout this crisis. Continue Reading…