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.”

Questrade Poll find many investors still oblivious on how fund fees hurt performance

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

My latest MoneySense Retired Money column looks at a press release slated for release next week from discount brokerage Questrade Inc. You can find the full column by clicking on the highlighted headline: Canadians are still paying too much in investment fees.

According to the RRSP study commissioned by the independent discount brokerage (a copy of which was provided to me in advance) finds 87% of Canadians don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20+ years).

While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that almost half of mutual fund investors still don’t even know what they’re paying for mutual funds.

There are also disturbing generational differences. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. That’s in contrast to the operative principle behind the surge in indexing and ETFs that “Costs matter,” and the lower the costs the better. Yet Millennials seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (vs  just 18% of the 55+ cohort).

Or as the teaser under the main headline at MoneySense puts it: Millennials and Gen Z missed the memo on how much management fees erode returns over the long term, according to a new Questrade survey.

Questrade estimates a 1% decrease in fees over a typical 30-year investing horizon could result in 27 to 29% more money in one’s retirement kitty, assuming a 7 to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference a 2% fee makes versus a 1% fee’s impact on the value of their portfolio over the long run. 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2 to 1% will have a big impact on returns over 30 years.

Questrade notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.

47% of mutual fund investors still don’t know what fees they’re paying

I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high. Continue Reading…

Coping with the Unexpected: 4 surprise costs and how to deal with them

Image by Michael Longmire/Unsplash

By Nat Juchems

Special to the Financial Independence Hub

Our finances can be a source of stress and frustration at the best of times. For many of us, our budgets account for our expenses for the month, with perhaps a little left over for savings and disposable income. Which can make it particularly difficult when the unexpected occurs.

There are, of course, a variety of solutions to emergency situations. However, in the heat of the moment these can lead us to the financial band-aids that solve the problem in the short term, but perhaps put us at a long-term financial disadvantage. Credit card payments, loans, and financing may well be quick fixes to stressful issues, but you may find it difficult to cope as time progresses and your circumstances change.

We’ll take a look at a handful of the most common unexpected expenses that may arise. What are some useful, intelligent financial responses to these? Are there low-cost preparatory steps you can take to fend off larger-scale consequences?

1.) Medical Expenses

There’s certainly an element of injustice in the fact that people so often go into debt as a result of illness. However, the current US health system isn’t always well designed to provide adequate care without incurring huge bills. So, in the absence of complete systemic overhaul, what are your options for unexpected healthcare?

Of course, the simple preventative answer is to take out adequate health insurance. It can be tempting to just select the plan with the lowest monthly premium, but this could find you seriously out of pocket; particularly as lower premiums are usually leveraged by higher deductibles. That said, if you can mitigate this effect by investing a little from each paycheck into a Healthcare Flexible Spending Account (FSA). The funds paid into these accounts [in the United States] are deducted from your paycheck, but are not subject to tax. The amount accumulated can then be used to help pay for deductibles, co-pays, and indeed anything not covered by insurance in the event of an emergency.

If you have been involved in an accident that was the fault of a third party, it is certainly advisable to seek assistance from personal injury lawyers. While we all want to avoid unnecessary litigation, fair compensation may be obtained in order to cover your emergency and ongoing medical expenses. This may not be an adequate short term solution, so it can also be useful to find ways to minimize your initial outlay. Attend walk-in clinics in place of large hospital emergency rooms if appropriate, look into prescriptions of generic drugs rather than brand names.

2.) Funeral Expenses

None of us like to think about the passing of ourselves or those closest to us. However, we have to accept that death is one of the few guarantees we have in life. That said, for all its inevitability, death can take us by surprise; with the costs associated with it adding additional stress to our emotional pain.

Funerals are notoriously expensive affairs. When an unexpected death occurs, we can understandably tend to opt for solutions that place the responsibilities of organization on third parties such as funeral directors. It’s worth noting that these are usually the most expensive options, and don’t usually provide us with the opportunity to do our due diligence in investigating the necessity of services which drive prices even higher.

The fact is, there is no legal requirement in any U.S. state for a funeral director to take charge of planning and executing a funeral. It is perfectly possible for you to undertake a low-priced, meaningful ceremony. Cremation is usually one of the most cost-effective methods of handling the remains of a loved one, with the cost of cremation urns certainly tending to be lower than caskets. In fact, if you donate the body to scientific study, the remains are usually cremated and returned to you free of charge.

If you are set on burying a loved one, there are certainly options which can keep costs low. Direct burial — a process which forgoes a viewing in favor of almost immediate interment — can be around the same price as cremation, and does not require the additional expenses associated with preparation of the body. Also be wary of “extras,” such as gaskets on caskets; these are ostensibly to protect the remains after burial, and can raise the price of the casket by as much as $800.

3.) Vehicle Problems

Vehicles can represent one of our more substantial investments. Not simply in the material cost of the vehicle itself, but also its maintenance and ancillary charges such as insurance and road tax. It’s no shock, then, that when something goes wrong with our vehicles, it can be a costly affair. Continue Reading…

Don’t let Credit Card debt take over your life: 4 tips for paying it off quickly

By Shiv Nanda

Special to the Financial Independence Hub

Credit cards are great, aren’t they? We can use them to pay bills, buy stuff online or in stores, and travel, even if money’s tight right now. Of course, the ability to buy now and pay later also means it’s easy to get carried away and spend more than we can actually afford!

Many of us have racked up huge credit card bills, and paying them off seems impossible sometimes. If you’re in the same boat, don’t despair. We’ve put together some great tips to help you pay off credit card debt faster.

Here’s what you should do:

1.) Avoid the Minimum Payment Trap: It’s tempting to pay just the minimum due every month, especially when it means paying only a few extra dollars in interest charges.

But have you ever thought about how much this adds up to? Total up the interest you pay in one year, and you’ll know why everyone advises paying in full every month. If full payment isn’t possible, pay as much as you can. It’ll significantly reduce the interest you pay in the long term.

2.) Consolidate High-Interest Debt: Debt consolidation is a good way to reduce the cost of high-interest credit cards, loans and other debt. If you tend to lose track of due dates for multiple cards, it also helps you avoid late payment fees and penalties.

Use a debt consolidation loan or personal loan with affordable interest rates to pay off expensive credit cards and loans, and then make repayments in one place.

3.) Prioritize One Debt at a Time: Speed up debt repayment by focusing on clearing one credit card in full (with minimum payments on the rest). There are two ways to handle this: Continue Reading…

Good news for Savers: We’re in a high-interest savings war!

That meant savvy savers had to look elsewhere to stash their cash and keep ahead of inflation.

LBC Digital

The first shot was fired several months ago when the relatively unknown LBC Digital (an offshoot of Laurentian Bank) started promoting its high interest savings account that pays 3.3 per cent with no minimum balance required and no monthly fees.

That kind of interest rate was sure to draw wide-spread attention, but the sign-up process and user experience has been clunky at best. LBC also must have been getting some high-roller deposits because they recently changed to a tiered structure that pays 3.3 per cent on balances up to $500,000 and 1.25 per cent on balances above that threshold.

Time will tell whether the 3.3 per cent interest rate is here to stay. Colour me skeptical.

Shades of EQ Bank’s launch four years ago, I thought. Back in 2016, EQ Bank burst on the scene offering a chequing / savings account hybrid that paid a whopping 3 per cent interest. Deposits flooded in, and EQ Bank had to temporarily halt new account sign ups until it sorted out its back-end procedures. The 3 per cent rate didn’t last long, settling in at a still competitive 2.3 per cent everyday interest. Continue Reading…

Here’s what Buyers and Sellers can expect in the 2020 Housing Market

By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The long-awaited new decade is now upon us: but what does 2020 hold for Canada’s real estate market? According to a number of forecasts the year is shaping up to favour sellers, with a return to the type of conditions that prop up home prices.

However, with deeply discounted mortgage rates expected to linger throughout the year, not to mention a potential softening of the controversial stress test, home buyers could see a surge in their purchasing power in the near term. Let’s take a look at what could potentially be in the cards for the housing market as 2020 unfolds.

Slower sales in the rear view

While home sales took a tumble over the course of 2017 – 2018, last year saw sustained improvements in buyer activity in most of Canada’s urban centres. Much of this was due to buyers absorbing the shock of the federal mortgage stress test, which was introduced in January 2018, as well as a number of provincial taxes in Ontario and BC designed to reel in the demand end of the market.

While the Canadian Real Estate Association (CREA) notes that growth is uneven across the nation – the Prairie and Maritime markets continue to struggle with sales volume – transactions surged in Ontario and British Columbia in the second half of the year, which helped drive overall national growth.

This year, CREA expects the upward trend to continue, calling for 530,000 sales in 2020, up 8.9%. The national average home price will also tick higher by 2.3$ to $531,000.

The Canada Mortgage and Housing Corporation (CMHC), Canada’s largest provider of default mortgage insurance, and which acts as an overseer of the mortgage industry, has also called for home sales and prices to “fully recover” this year from their 2018 slump.

“Overall, economic and demographic conditions will remain supportive of housing activity over the forecast horizon, halting the declines in starts, sales, and average home prices that followed the highs of 2016 – 2017,” it states in its most recent Housing Market Outlook.

It forecasts home transactions to total between 480,600 – 497,700 sales in 2020, up 6%, with the average price between $506,200 – $531,000, up 5.6 – 6.7% from 2019.

While sales are on the rise, however, the same can’t be said for new MLS listings in Canada – and the resulting supply-and-demand gap could re-stoke unsustainable price growth. According to CREA, the national housing market was in sellers’ market territory in November with a sales-to-new-listings ratio (SNLR) of 66.3%. New supply declined 2.7% year over year, while the total months of inventory – the length of time it would take to completely sell off all available homes for sale – currently sits at 4.7 months, its lowest level since 2007.

This will be most acute in the hottest markets such as the Greater Toronto Area, which boasted a sizzling SNLR of 81% at the end of the year, indicating just under 20% of newly listed homes remained on the market.

That’s a growing concern for Toronto real estate prices; according to the Toronto Real Estate Board, as their Chief Market Analyst Jason Mercer stated, “Strong population growth in the GTA coupled with declining negotiated mortgage rates resulted in sales accounting for a greater share of listings in November and throughout the second half of 2019. Increased competition between buyers has resulted in an acceleration in price growth. Expect the rate of price growth to increase further if we see no relief on the listings supply front.”

Ontario and BC to Lead the Pack

As was the trend throughout 2019, the Ontario and BC housing markets will see the strongest growth, says CMHC; BC, in particular, is anticipated to experience a dramatic 20 – 22.6% surge as the region recovers from recently implemented foreign buyer and non-resident speculation taxes, totaling between 74,600 – 84,400 transactions. Home prices will rise between 2.8  – 3.6% to an average of $675,000 – $749,500. Continue Reading…