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.”

Priced out of the housing market? 5 creative financial ideas to get In

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By Sean Cooper

Special to the Financial Independence Hub

Are you finding it a challenge to buy real estate in the big Canadian cities? If you’re looking to purchase a home in Calgary, Toronto or Vancouver, even buying with the minimum five per cent down can be tough. (The new mortgage stress test sure doesn’t help.)

Despite rising home prices, millennials haven’t given up on buying homes. In fact, they’re still finding ways to get into the real estate market. Survey after survey shows that younger folks still see homeownership as a good long-term investment.

So how do you actually afford to buy real estate in the more expensive markets? Let’s look at five creative ways to still get into pricier real estate markets:

1.) Tapping the Bank of Mom and Dad

The “Bank of Mom and Dad” may be a term you’re already familiar with. Property virgins are increasingly turning to their parents for financial help with a down payment. Parents often gift their adult children some or all of their down payment. Often, this benefits both parties. The adult children can live closer to their parents in a good neighbourhood and see each other more often. The parents may be able to provide childcare, while the adult children can look after their parents in their old age.

2.) Buying with Family and Friends

Are you finding it tough to qualify for a mortgage if you’re single? You don’t have to necessarily buy a property with a spouse. A new trend is to buy with family and friends. If you know a family member or friend that you trust, why not combine your finances and buy a home together? Two incomes and down payments: sure makes it a lot easier to afford a home in a nice neighbourhood. (However, if you buy with family or friends, be sure to have a written agreement in place so that when someone wants to sell, your expectations are in line.)

3.) Buying in a Satellite City and Renting in the Big City

Can’t afford to buy in the big city, but still want to own a piece of the real estate pie? Why not buy in a satellite city and rent in the big city? This is becoming a lot more common in Toronto and Vancouver, where the cost of homeownership is the highest in the country. When you buy in a more affordable satellite city, you can start build up equity to eventually move into the big city. Continue Reading…

The 5 worst financial decisions you can make

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 By Alana Downer

Special to the Financial Independence Hub

Sometimes when it comes to your finances it can be difficult to know if you’re making the right decision. What bank account should you pick? Should you buy a car outright or pay it off as you go? Are you eating too much takeaway? Every day we have to make decisions that affect our finances and some are harder and more consequential than others. In fact, sometimes one small financial decision can have a lasting impact on the health of your bank account. Here are the five worst financial decisions you can make, so you can avoid making the wrong choice in the future!

1.) Spending more than you earn

Overspending is probably the number one money mistake that you can make. You cannot build wealth or be financially secure if you are spending more than you’re earning. By spending money that you should be saving you are doing serious damage to your finances and stalling your financial progress.

It’s true that not everyone has high-paying jobs or huge inheritances, but this doesn’t mean you can’t build up healthy savings by simply monitoring your spending. Part of spending less than you earn means putting effort into living below your means. Track your spending and take a hard look at your spending habits. Are you buying two or three coffees a day? Do you pay a lot of money every month for a gym membership you don’t use? Or perhaps on a bigger scale, you have a huge house or luxury car that you just don’t need.

2.) Never Budgeting

Creating a budget goes hand in hand with learning how to spend less than you earn. A budget is a blueprint for financial success. Without budgeting, it is nearly impossible to keep track of your expenses and ascertain whether or not you are spending more than you should. By creating a budget to follow week-to-week or month-to-month you can stay on top of your finances and prevent yourself from making financial decisions that you may regret.

When creating a budget, it’s a good idea to look at your whole year and the payments that you have to make, such as your rent, your bills, your car registration and cost of transport. Use bills, your bank statements and receipts to help you understand all your expenses. Once you’ve figured out roughly how much you spend over a certain period, figure out your net income (i.e. the money deposited in your bank account each pay period). Subtract your expenses from your income and what is left should be what you aim to save.

3.) Not creating an Emergency Fund

Many people have the mindset that bad things won’t happen to them and that if they do, they will find some way to deal with it when the time comes. This is not a financially intelligent way to think and could leave you in serious trouble if something goes wrong. An emergency fund is exactly what the name suggests, a bank account that can you use in the case of an emergency without having to dip into your savings or rearrange your budget. It is money set aside specifically for use when things go haywire.

Continue Reading…

Doing the math on investment fees: the math isn’t pretty

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A few weeks ago I invited readers to share their portfolio details with me so I could help ‘do the math’ on their investment fees. Many of you did, and the results weren’t pretty. From accounts loaded with deferred sales charges (DSCs), management expense ratios (MERs) in the high 2 per cent range, and funds overlapping the same sectors and regions, it was a predictable mess of over-priced products.

The worst of the bunch: the number of portfolios filled with segregated funds.

I’ve highlighted segregated funds as the biggest offender when it comes to fees for two reasons:

1.) The MER on segregated funds are higher than most mutual funds (which we know are already high enough). I looked at one portfolio that held a suite of segregated funds from Industrial Alliance called Ecoflex, with MERs of 2.99, 3.26, and 3.29 per cent;

2.) Segregated funds were exempt from CRM2 disclosure rules because they are considered insurance products. Investors receive the fund facts sheet, which still express fees in percentage terms rather than breaking them down and disclosing in dollar terms.

Doing the math on your investment fees

 

Keep in mind most readers were looking for me to do the math on their investment fees for portfolios valued at $250,000 or more. One reader, a soon-to-be retiree, had an average MER of 3.13 per cent for his $412,000 portfolio.

I told him he paid nearly $13,000 in investment fees last year and asked if he thought he was getting good value for his fees. He said he hadn’t met with his advisor in three years, despite repeated attempts to get together to discuss his retirement plan.

Another reader held $300,000 in high-fee mutual funds with Investors Group. She recognized the fees, but was on the fence about switching because she was in the middle of the deferred sales charge schedule:  a penalty that would cost her $10,000 if she sold the funds and transferred to a robo-advisor. Continue Reading…

What is a Mortgage Vacation?

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By Sean Cooper

Special to the Financial Independence Hub

Do you enjoy going on vacation? Who doesn’t? So, the term “mortgage vacation” has to be something similar, right? When you hear mortgage vacation, you’re probably picturing yourself laying on a warm, sandy beach, drinking an umbrella drink. Well I hate to break it to you, but although you got the vacation part right, you forgot the most important part: the mortgage part.

A mortgage vacation is a feature that lets you skip paying mortgage payments for up to a few months, but with a catch. You have to prepay the amount in advance. In an era where savings rates are near record lows and household debt is near a record high, mortgage vacations have become a popular feature with mortgage lenders. Who needs to save for a rainy day when you have a mortgage vacation?

A mortgage vacation can help you out when you run into financial difficulty or when you want to use your cash flow towards something else. But as the saying goes, there’s no such thing as a free lunch. By planning ahead of time, you can avoid taking a mortgage vacation and still be on your way to burning your mortgage.

What is a Mortgage Vacation?

If you’re like most homeowners, you’re introduced to mortgage vacations in this way. You get a letter in the mail from your lender letting you know that you’ve been approved for a mortgage vacation. Yippee! The banks market mortgage vacations like they’re a privilege for their best clients, but as I mentioned earlier, there’s a catch. Hidden in the fine print is what happens when you skip your mortgage payment. Continue Reading…

My journey to Passive Index Investing, Part 2

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By Dr. Networth

Special to the Financial Independence Hub

After reading My Journey to Passive Index Investing – Part 1, you may think that I have it in for financial advisors.  I don’t.   I believe the majority of financial advisors truly want to help their clients, but either their hands are tied or they have misguided beliefs.

The way financial advice compensation is structured creates a situation which, unfortunately, benefits the financial industry more than the individual investor.   There are also some financial advisors who truly believe active management beats out passive index investing over the long-term, despite high commissions/MERs and strong evidence which says otherwise.  Stay away from these financial advisors, since they have “drank the Kool-Aid.”

I believe a financial advisor with a CFP designation should have a fiduciary responsibility to create a comprehensive financial plan.  This includes insurance, estate planning, portfolio management (using low-cost ETFs/funds), as well as “holding your hand” during the inevitable market corrections.

Is advice worth 1 or 2% in fees?

How much is that worth?   This is a difficult question to answer. I don’t think it is worth the typical 1-2% in fees, which most banks and financial firms charge, especially if you have a large portfolio.  With the implementation of “Robo-advisors” and financial advisors that charge flat-fee or hourly-based (not tied to commissions on products), consumers are now beginning to have more choice for financial advice at a lower cost.

As you may recall, Part 1 ended with me as a newbie staff physician  in 2009 with little financial knowledge and an idea planted in my mind to “check out ETFs.”

It wasn’t until 2010 when I came across an article in the Globe and Mail, by Rob Carrick, where he rated the best personal finance blogs of 2010.  One of the blogs caught my eye: “Canadian Couch Potato,” written by Dan Bortolotti, which has been the best resource for index investing in Canada.

 

Through CCP, I came across another Canadian personal finance blogger by the name of Andrew Hallam, and his book “Millionaire Teacher.  The Nine Rules of Wealth You Should have Learned in School“, which was  originally published in 2011 (updated in 2017).

Hallam’s book is worth the price of admission,  since he has read a ton of personal finance/investing books, and has summarized succinctly in his book.  If you still have doubts whether passive investing beats active investing over the long-term those doubts will be put to rest after reading Chapter 3.   Physicians practice evidence-based medicine, because research backs it up.  The same concept should apply when it comes to investing. The enormous amount of evidence in favour of passive investing is, in my opinion, equivalent to a “Grade A” recommendation in evidence-based medicine. 

I have read my fair share of excellent finance books/blogs, but everything that you need to know about personal finances and index investing in Canada can be essentially found in these two resources.   If you read Hallam’s book and CCP’s blog (in particular his “Model Portfolios“), then you will:

  • Know more than the majority of financial advisors out there

  • Understand that the #1 determinant of your long-term investment returns is your asset allocation (% stocks: % bonds)

  • Understand that the #2 determinant of your long-term investment returns is to keep fees/MERs low by using low-cost index ETFs/funds, which will outperform the majority of actively-managed funds

  • Understand how to manage your own portfolio with low cost ETFs with minimal effort/time  

If you spend a bit of your time with these two resources, then you will eventually be able to save 1-2% MER each year by managing your own portfolio. 1-2% savings on a $1 million dollar portfolio will be $10,000-$20,000 per year, every year, for the rest of your life. That is a considerable amount of money which can be used on your family instead, such as taking 1 or 2 nice family vacation trips per year. For the equivalent amount, how many hours would you need to work at your job?

Once everything has been set up, you only require 30 minutes per month to manage this portfolio.  It really isn’t that difficult, as Loonie Doctor explains. However, taking that first step to managing your portfolio can be frightening and may fill you with self-doubt.   Comparable to a medical student learning a new procedure/skill – “See one, do one, teach one”.  These 2 resources will help you with the “See one” part.  At some point, you will need to take the plunge.   Follow that with sharing your knowledge with others, and you will become an “expert” in DIY passive index investing.

Analysis Paralysis

A point I would like to mention is the “law of diminishing returns” when it comes to learning about index investing.   After a certain point, any additional time spent learning about the nuances of index investing will probably not result in better returns, and may in fact, cause analysis paralysis: Continue Reading…