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 credit cards can help your 2019 budget, not hurt it

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By Hyder Owainati, RateHub.ca

Special to the Financial Independence Hub

Whether your financial resolution for 2019 is to dial back your spending, build up savings or better manage your debts, odds are your credit card – and how you use it – crossed your mind a few times as you were formulating your money goals for the new year. And while knee-jerk thinking leads many of us to jump to the conclusion that credit cards can only hurt our budgeting goals, it’s not necessarily the case.

Below are some key ways credit cards can help you reach your 2019 money resolutions (not hurt them).

Use your credit card to put your spending habits under the microscope

One of the many benefits of a credit card is that all your past purchases can be easily tracked either on paper statements or on your card issuer’s app (in the case of the latter, you can often sort purchases by category). By investing some time into looking at how you spent your money last year, you can get a big picture view of your worst purchasing habits and take action to avoid repeating the same mistakes.

For example, if you find that you’re paying subscription fees for services you rarely take advantage of, it’s time to cancel them and start adopting a more strategic approach to what you sign up for. If your daily latte purchases add up to an exorbitant amount of money every month, you may want to start brewing coffee at home. And if your holiday and birthday purchases led you to carry a large balance from one month to the next, you may want to rethink your expensive gift-giving habits.

Maximize your rewards with a credit card that aligns with your spending habits

By using a credit card that offers bonus rewards on the purchases you make the most often, you can rack up some significant savings. On the other hand, if you carry a card that doesn’t align with your spending habits, you could be needlessly leaving money on the table.

Do you spend big on gas? Then you’ll want to consider a card that offers bonus rewards at the pump (some of the best gas credit cards in Canada offer as much as 4% in cash back). Are you among the many Canadians who eat out at restaurants more than twice a week? With a rewards credit card catered for dining out, you can earn as much as 5% in travel points for every dollar you spend at restaurants (we’ve calculated that can add up to $180 in points over the course of a year; all on just restaurants).

To find the best credit card in Canada for you, it’s best to compare your option across multiple financial institutions and not confine your choices to a single bank.

Use a balance transfer to tackle your past credit card debts

If you’ve racked up significant credit card debt over the past year and your goal for 2019 is to eliminate your interest payments once and for all, a balance transfer credit card can go a long way in helping you chip away at your debts faster. Continue Reading…

How to make the most of your HELOC

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By Sean Cooper

Special to the Financial Independence Hub

A HELOC, short for “home equity line of credit,” is a revolving line of credit secured by your home’s equity. HELOCs have a reputation for being a convenient, flexible and low-cost way of accessing credit. A HELOC can be a great way to borrow money cheaply (it sure beats using your credit card!), as long as you do it responsibly.

Using your HELOC responsibly means using it for something that is likely to increase your net worth and having a plan to pay back the money you borrow. (It can be tempting to make interest-only payments, but you’ll literally find yourself no further ahead.) To address this, most lenders have recently introduced stricter qualification rules for HELOCs. You’re required to pass the mortgage stress test (2% + your HELOC rate), in addition to some lenders making you qualify based on your HELOC limit rather than your current outstanding balance.

The amount that you can borrow by way of a HELOC has also decreased over the years. With a HELOC today, you can access up to 65% of your home’s appraised value. Note that your mortgage balance and HELOC together can’t be more than 80% of your home’s appraised value.

Now that you have a better understanding of HELOCs, let’s take a look at a couple ways to make the most of your HELOC.

Home Renovations

A popular use of HELOCs is home renovations. But before undertaking a major home renovation, it’s important to ask yourself why you’re doing the renovation. Continue Reading…

Fed Watch: The “New” normal is really just the “Old” normal

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

The first Federal Open Market Committee (FOMC) meeting of 2019 is now in the books. While the result did not deviate from the market’s expectations on the rate front, the policy statement did provide further evidence that the Federal Reserve (Fed) is going about things in a different way than investors have been accustomed to over the last few years. Is this decision-making process the “new” normal? No, it is really just the “old” normal, or how the Fed typically conducts monetary policy when the Fed Funds Rate target is not zero.

Since the FOMC began raising rates in December 2015, and picked up the pace during the last two years, the plan was to move the Fed Funds Rate target away from zero, i.e., to normalize policy. Now, with the upper band of the policy rate target at 2.50%, or close to what is considered a neutral rate, the voting members have achieved their goal. So instead of raising rates in a somewhat gradual, but more importantly, predictable manner, further possible rate hikes will hinge upon upcoming economic data. In other words, monetary policy has become data-dependent. This is how the FOMC typically went about its business prior to the global financial crisis/great recession.

With inflation below the Fed’s 2.0% target, the policymakers can afford to be patient and, in the words of Chair Powell, “flexible” as well. Certainly, the decline in risk assets as 2018 came to a close created an environment of tighter financial conditions. The question now is whether that development had any visible, longer-lasting impact on economic growth.

Waters will be muddy for a while

So, where do things stand as the markets look ahead? Unfortunately, the waters will be muddy for a while. Due to the partial government shutdown, both the Fed and the bond market have not been receiving any fresh insights on the economy. The only exceptions have been the Bureau of Labor Statistics and private vendors. Continue Reading…

FP: RRSPs still have at least 3 advantages over TFSAs

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My latest Financial Post column has just been published. It being the height of RRSP season, it looks at some well-known and some less well-known advantages RRSPs still have over the new kid on the block: TFSAs. Click on the highlighted text for the full story online: Three reasons why RRSPs still matter — and one of them you probably didn’t know. The article is also in Wednesday’s print edition on page FP6 under the headline RRSPs still matter despite rise of TFSAs.

The Tax-free Savings Account (TFSA), which was introduced just over ten years ago, is often described as the “mirror imaqe” of the RRSP. That is, the RRSP provides an upfront tax deduction by lowering your taxable income for the year you make the contribution. The TFSA does not, which can be a strike against it in some eyes; on the other hand, once you reach retirement, the TFSA comes into its own by NOT being taxable, and therefore not resulting in clawbacks of Old Age Security (OAS) benefits or (for very low-income seniors) the Guaranteed Income Supplement (GIS) to the OAS.

On the other hand, as many seniors are discovering to their chagrin, all those RRSP tax savings you enjoyed during your (hopefully) high-income earning years come back to haunt you: once the RRSP becomes a Registered Retirement Income Fund (RRIF) at the end of the year you turn 71 (the alternative is the unpalatable act of cashing it all out and being taxed then and there, or annuitizing), then you’ll be on the hook for forced annual — and taxable — RRIF withdrawals. Ottawa giveth and Ottawa taketh away.

But, as the FP piece argues, some decades can elapse between an RRSP contribution and the ultimate RRIF withdrawals, and when you add in the ongoing tax sheltering of an RRSP — on top of the upfront tax contribution — then the experts quoted in the piece believe the RRSP comes out, certainly if you’re at or near the top tax brackets.

Below is the arithmetic provided by Mathew Ardrey, wealth adviser at TriDelta Financial, which was too long to include in the FP version. He cites the example of someone who has $10,000 of income and can invest in either a TFSA or a RRSP:

 

Same tax rate
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 50% $0 ($5,000)
After-tax available to contribute $10,000 $5,000
FV with 5% return for 25 years $33,864 $16,932
Tax at 50% ($16,932) $0
After-tax withdrawal in retirement $16,932 $16,932
Lower tax rate in retirement
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 50% $0 ($5,000)
After-tax available to contribute $10,000 $5,000
FV with 5% return for 25 years $33,864 $16,932
Tax at 25% ($8,466) $0
After-tax withdrawal in retirement $25,398 $16,932
Higher tax rate in retirement
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 25% $0 ($2,500)
After-tax available to contribute $10,000 $7,500
FV with 5% return for 25 years $33,864 $25,398
Tax at 50% ($16,932) $0
After-tax withdrawal in retirement $16,932 $25,398

 

Tridelta Financial’s Matthew Ardrey

“The part of the example I would focus on, is what is a reality for many Canadians, their income is higher while they are working than in retirement. Because of this, there is a clear advantage of receiving the deduction at a higher marginal tax rate and paying tax in retirement at a lower marginal tax rate,” Ardrey concludes.

Foreign income taxed less harshly in RRSPs than TFSAs

But that’s not all! As the FP column mentions, there are at least two other advantages RRSPs have over TFSAs. One is that foreign income is taxed more in TFSAs than in RRSPs: Continue Reading…

Value for Money: Do you always get what you pay for?

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“This $6 bottle of wine tastes awful.” “What did you expect – you get what you pay for.”

It’s true, in most circumstances, that the quality of products and services increases as the price increases. You get what you pay for. When you cheap out on something, be it a bottle of wine, pair of jeans, or a manicure, more often than not you’ll end up disappointed. You might even end up paying more in the long run, having to replace the item or fix the mess you made when you cheaped out the first time.

One of the most common examples is with clothing. In this age of fast-fashion it’s not unheard of to find a t-shirt, pants, and a pair of sneakers – all of it – for less than $20. Anyone who’s ever shopped at Old Navy or Walmart can attest to this. But then what happens? The thin material starts to unravel, it’s improperly stitched, and it quickly wears out. Or, just as likely, it just doesn’t fit properly in the first place and so you never wear it.

I hate the term ‘investment’ when it comes to something that doesn’t have the potential to earn you money, but ‘investing’ in more expensive clothes can pay off. A well-cut suit, a timeless pair of shoes, work-out gear that doesn’t fray or pill after a few washes. Most of us can agree that spending more on a high quality item that will last a long time is worth the money.

Do you always get what you pay for?

But higher price = better product/service doesn’t always hold true. Take investing, for example. It’s widely accepted now that cost is the only reliable predictor of future returns. The higher the cost, the lower the expected return. The reverse is also true.

Canadian investors pay some of the highest mutual fund fees in the world and so it stands to reason that our expected returns will also diminish. We’re not getting what we pay for:  our advisors get paid and investors get short-changed.

Yet I’ve heard advisors use this argument – you get what you pay for – when trying to persuade their clients that low-cost indexing, or a robo-advisor, is an inferior solution to their actively managed model. Ridiculous!

Here are some other, hopefully, less controversial examples from my own personal experience where a higher price doesn’t always mean better quality. Continue Reading…

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