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.”

Renting in Retirement

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By Benjamin Felix, for Boomer & Echo

Special to the Financial Independence Hub

Canadians value few things more than a home that is owned outright. This might be especially true for retirees. The thinking seems to be that once your mortgage is paid off, your housing expenses evaporate. Unfortunately, this could not be further from the truth.

The alternative, renting, is often frowned upon. Renting is seen as throwing money away. The reality is that renting in retirement can make a lot of sense, both financially and psychologically, when it is properly understood.

The first step to accepting renting as a sensible housing choice is understanding the financial aspect of the decision. To compare the financial implications of renting and owning we need a common ground. That common ground is unrecoverable costs.

Unrecoverable Costs

Rent is an unrecoverable cost. It is paid in exchange for a place to live, and there is no equity or other residual value afterward. That is easy to grasp.

Owning also has unrecoverable costs. They are less obvious and usually get missed in the renting versus owning discussion. An owner of a mortgage-free home still has to pay property taxes and maintenance costs, both unrecoverable, to maintain their home. Each of these costs can be estimated at 1% of the value of the home per year on average.

In addition, an owner absorbs an economic cost for keeping their capital in their home as opposed to investing it in stocks and bonds. This economic cost, or opportunity cost, is a real cost that an owner needs to consider. Estimating this portion of the cost of owning is harder to do. It requires estimating expected returns for stocks, bonds, and real estate for comparison with each other.

Expected Returns

Estimating expected returns is not an easy task; it starts with understanding historical risk premiums. The market will demand more expected return for riskier assets, and this relationship is visible in historical returns.

For stocks, bonds, and real estate, the Credit Suisse Global Investment Returns Yearbook offers data going back to 1900. Globally, the real return for real estate, that’s net of inflation, from 1900 through 2017 was 1.3%, while stocks returned 5% after inflation, and bonds returned 1.9%. If we assume inflation at 1.7%, then we would be thinking about a 3% nominal return for real estate, a 6.7% nominal return for global stocks, and a 3.6% nominal return for global bonds.

To keep things simple and conservative, we will assume that real estate continues to return a nominal 3%, while stocks return an average of 6%, and bonds return 3%.

The Cost of Capital

With a set of expected returns, we can now start thinking about the cost of capital. Every dollar that a home owner has in home equity is a dollar that they could be investing in a portfolio of stocks and bonds. A retiree is unlikely to have an aggressive portfolio of 100% stocks, so we will use the 5.10% expected return for a 70% stock and 30% bond portfolio. The 2.10% difference in expected returns between the portfolio and real estate is the opportunity cost carried by the owner.

It is important to note that asset allocation, which is a big driver of these numbers, will depend on many factors including other sources of income like pensions, tolerance for risk, and portfolio withdrawal rate.

Comparing Apples to Apples

Adding up the unrecoverable costs, we now have 4.10% of the home value between property tax, maintenance costs, and the cost of capital. This is the figure that we can compare to rent.

A $500,000 home would have an estimated annual unrecoverable cost of $20,500 ($500,000 X 4.10%), or $1,708 per month. If a suitable rental could be found for that amount, then renting would be an equivalent financial decision in terms of the expected economic impact.

Other Financial Considerations

So far, we have looked at pre-tax returns. Taxes could play an important role in this decision. Increases in the value of a principal residence are not taxed. Income and capital returns on an investment portfolio are taxed. Continue Reading…

Like a good neighbour, the Fed is there

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

At last, the July FOMC meeting has come and gone, and the Federal Reserve (Fed) has done what was widely expected: it cut the federal funds target range by a quarter point. The Fed also announced they would be ending their balance sheet reductions in August, two months earlier than previously indicated. With all the Fedspeak, changing market expectations and the recent rebound in the jobs report, the time had come for the policy makers to put an end to the conjecture. While this decrease, of 25 basis points (bps), does fit into the Fed’s ”insurance policy” narrative, it still leaves open the question of what the future may hold.

Let’s get right to that point, shall we? Unlike the June FOMC meeting, this gathering was limited to the usual policy statement and Chair Powell’s presser. In other words, there were no blue dots (the Fed’s own fed funds forecasts) this time around. The policy statement, which is what the Fed views as its official policy stance, was little changed from the June meeting including the key phrase “will act as appropriate,” leaving the door open for additional accommodation this year. In fact, since the 50-bps-rate-cut crowd is somewhat disappointed by the July results, the focus has now shifted to another reduction in fed funds at the September 17–18 FOMC meeting.

Remember, this rate cut was really not predicated on the Fed’s baseline outlook for the U.S. economy; it was the voting members’ way of trying to counter any potential negative impacts from trade uncertainty and slowing global growth. With no pushback from the Fed, the money and bond markets had boxed the policy makers into a corner. Despite the fact that U.S. financial conditions were actually easier prior to this meeting than when the Fed started raising rates at the end of 2015, there was concern that without a rate cut, conditions could have tightened. So, while you could say the Fed is back in data-dependent mode, it appears as if monetary policy is still leaning towards another rate cut this year. Continue Reading…

How many credit cards should you have?

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Photo by Blake Wisz on Unsplash

By Barry Choi

Special to the Financial Independence Hub

If you’ve recently walked into the mall, your bank or even the grocery store, there’s a good chance you’ve been asked if you want to sign up for a new credit card. Your first thought might be to say no since you’ve already got one, but with so many different credit cards that come with a variety of offers, it can be tempting to apply on the spot.

You may also be wondering “how many credit cards should I have” in the first place or “does it hurt me to have multiple credit cards?” There’s no straightforward answer so let’s take a look at when it does and doesn’t make sense to get another credit card.

When it makes sense: Pros

Getting another credit card can actually improve your credit score since it’ll increase your credit utilization ratio, which is one of the major factors that determines your credit score. Your credit utilization ratio is based on the amount of credit you’re using relative to the amount of credit you have available to you.

Let’s say you have a single credit card with a limit of $1,000 and you typically charge about $600 on it; that would give you a utilization ratio of 60%. If you applied for a new credit card and you were given a limit of $1,000, your overall credit utilization ratio would drop down to 30% since you now have access to a total of $2,000 in credit. As a general rule of thumb, your credit utilization ratio should be no more than 30%.

You may also want to maximize rewards by using a combination of cards for different spending categories or scenarios. For example, it would be to your benefit to use one of the best Mastercards in Canada if it earns you more points on grocery or gas spending compared to a Visa card. Alternatively, if you currently only have an American Express credit card, you could also apply for a credit card with no annual fee (Visa or Mastercard) and use it only where your Amex isn’t accepted. Since the card has no fee, you won’t need to worry about paying an annual fee on two different cards.

Sometimes it also makes sense to apply for a new credit card for a specific reason. Let’s say you like to travel, a card that comes with no foreign exchange fees or has airport lounge access would be pretty handy to have. You could also offset the cost of your trip by applying for one of the best Aeroplan credit cards, since the welcome bonus could be enough points to pay for your flight.

The above are great reasons why you should have more than one credit card, but that only applies if you’re responsible with your spending. In other words, if you’re always paying your bills in full and on time every month, then there’s nothing wrong with getting another credit card.

When it doesn’t make sense: Cons

The tricky thing about getting another credit card is that you could be tempted to overspend since you’ll have access to more credit. Studies show that people spend more when using credit cards instead of cash, so having access to a higher credit limit or multiple credit cards could potentially result in more spending.

More credit cards also means having to stay on top of more bills.
Continue Reading…

The rising cost of owning pets

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By Ted McCarthy

Special to the Financial Independence Hub

People are spending more on their pets than ever. No matter the pet type (hamster, dog, snake, etc.), people are willing to pay a pretty penny on their pets. The APPA reported that US$72 billion was spent on pets in 2018.

People are spending so much on their pets, LendEDU wondered if people were willing to go into debt for their pets, or spend more on their pets’ wellbeing than their own?

Pet insurance is becoming more popular with pet owners, with 2.1 million pets insured in 2017.

LendEDU surveyed 1,000 adult American pet owners to see how much they spend on their pets, with or without pet insurance.

Spending breakdown on pets

The survey showed the breakdown of pets:

  • 24% of expenses go to healthcare/vet costs
  • 55% of expenses go to food
  • 13% of expenses go to toys & accessories
  • 8% of expenses go other

These statistics are about in line with the APPA’s statistics, as over US$30 billion out of the US$72 billion spent on pets in 2018 was food alone.

The pet business is massive in America and will continually grow according to the APPA. As consumers treat their pets better and more as part of the family than before, spending per pet will increase, and people are willing to spend that money.

Pet types

Out of the six pet types surveyed, dog owners spent the most acquiring their pet at an average of US$327.13, and fish owners spent the least at an average of $53.58.

Monthly expenses stack up to about the same. Dog owners spend an average of US$157.39 per month, bird owners, an average of $127.38, and cat owners an average if $95.11. Continue Reading…

Small changes that have a big impact on your Credit Score

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By Amanda Huon

Special to the Financial Independence Hub

If your goal is to boost your credit score then it’s important to know what factors affect it. There are a lot of variables that come into play when it comes to getting your perfect credit score. These variables range from payment history to credit utilization. It’s important to always be aware of your credit score because it plays a significant role in weighty decisions, such as purchasing a house, earning an amazing career, and having financial independence!

These quick tips will help you improve your credit score:

Level of Debt 

If you have a high level of debt, you’ll most likely suffer from damaged credit in one way or another. The amount of debt that you owe affects 30 per cent of your overall credit score. That’s a large chunk! However, all hope is not lost. There are always opportunities for you to repair your credit. In fact, there are credit repair companies out there that use personalized methods to help fix damaged credit score.

Payment History 

Another critical determinant of your credit score is your payment history. If you have a long history of on-time payments then your credit score is more likely to be in good condition.  However, missing a payment will negatively impact it. Of course, the longer the bill goes unpaid the greater effect it has on your credit. This is why it is extremely important to always pay your bills on time. 

Credit Usage

This tactic can yield speedy results. It can either quickly boost your credit or quickly slash it. Credit usage mainly focuses on the ratio between the balance you owe and your total credit limit on all you revolving accounts. This ultimately means that using your credit card at a lower rate can result in a better credit score.  Continue Reading…