Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Here’s to 2022: Surely it will be better than 2021?

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A quick note to say Happy 2022 to all the Hub’s readers and supporters. We’ll be back to our regular blog-a-day rotation on Tuesday.

In the meantime, I’ll point readers to Dale Roberts’ excellent year-end market wrap for MoneySense, which was published Friday.

Click on the highlighted headline to access, but settle down with a coffee before you do: it’s quite a long read: Making Sense of the Markets: 2021.

It’s a thorough long read that looks at all the major market developments each month in 2021 and you’ll also see a number of prescient market calls made by Dale over the last few years, including an early call on Covid-19 itself, an early call on the Energy and Commodities recovery, and several others.

I’ve followed Dale for some years now: he famously tweets as @67Dodge and I now help edit his weekly MoneySense market wrap, seeing as I became MoneySense’s Investing Editor at Large a few months ago.

Don’t forget to contribute to your TFSA ASAP

Oh, while on the subject of MoneySense New Year’s content, I may as well point those to my own column that ran a few days ago: Why contributing to a TFSA is a good (New Year’s) resolution.

In normal years, I would move new money into the TFSA on January 1st but there’s probably no rush this year until Tuesday, Jan. 4, seeing as the Canadian market is closed Monday. (The US will be open that day though).

I’ve not decided exactly what to invest in but it will likely be inflation-related. Going back to Dale Roberts, you can glean a few ideas from his 2021 market wrap: things like short-term TIPS ETFs, or the Purpose Real Assets ETF, or energy/commodity plays.

Personally, I’ve been researching Ray Dalio’s All-Weather portfolio (google it for videos and articles, or try this Seeking Alpha link on it). I’ve concluded that our own family has sufficient US equity exposure but not enough in commodities or TIPS [Treasury Inflation Protected Securities] plays.

Dalio is a bit heavier on fixed-income than most, with a mix of long-term and short-term bonds. His recommended equity exposure is a bit lower, and he suggests 7.5% commodities and 7.5% in gold. Readers may therefore find Friday’s Hub article on gold of interest: A perfect storm for gold.

Every case is different of course. IF I were looking to boost US equity exposure, I’d certainly be considering the new Canadian Depositary Receipts (CDRs), more on which you can read on the Hub early in the new year. If we didn’t already own Berkshire Hathaway, I’d be tempted to add to it with the CDR version of Berkshire, seeing as it pays no dividends and would be a good value counterbalance to high-priced US tech stocks.

So by all means get your $6,000 (if available) into your TFSA early in 2022 but take a few days to figure out how to invest it.

The wild card is certainly Omicron. If you’ve not yet gotten your booster, I highly recommend it.

So again, have a happy, healthy and profitable 2022!

The Perfect Storm for Gold

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Image courtesy BMG Group

By Nick Barisheff

Special to the Financial Independence Hub

In December 1997, The Financial Times ran an article entitled “The Death of Gold.” Since then, the gold price in US dollars has increased 519% from $288 to $1,780. Today, after many political events and crises we have evidence of the continuous and in many ways spectacular growth of the gold price. This confluence of many current events is creating a perfect storm for gold to increase dramatically more than we imagined.

Currency Devaluation

Typically, currency devaluation is always at the heart of a rising gold price. This has been taking place in all of the major fiat currencies, resulting in an average annual price increase in gold of over 10% since 2000.

“For the naïve there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department.” — Ludwig von Mises

Since 1900, all major fiat currencies have been devalued by over 90%.

To understand currency devaluation, it is necessary to understand that all currency is created by governments issuing debt and then the central bank monetizing that debt by printing the currency. In 1960, the U.S. federal debt to GDP stood at 52.2%, whereas today it has grown to 125.9%. The Federal Reserve has increased its balance sheet by a historically unprecedented amount of over $7.5 trillion since 2008.

Because of this central bank policy, all western currencies are being devalued and this in turn leads to inflation.

“Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through excessive quantity.”

— Nicholas Copernicus – 1525

 “Fed Chairman Powell has pumped trillions of newly printed dollars into the system in order to prop up the financial markets, but in the process has unleashed a tsunami of inflation that is unlike anything we have seen since the 1970s.” — Michael Snyder

“For the first time in history, ALL the major central banks are printing money. One of two things will occur. If they continue to print, their respective currencies will lose their purchasing power, and we’ll have inflation or even hyper-inflation.”

As Currencies are Devalued, Price Inflation will inevitably follow

Inflation, as this term was always used everywhere and especially in North America, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term ‘inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, and that is the tendency of all prices and wages to rise.

In October 2021, consumer inflation jumped to a four-decade high, the highest since the days of runaway inflation in the early 1980s. Headline year-to-year GDP inflation hit a 38-year-plus high of 4.53%.

According to John Williams of Shadowstats.com, if inflation was calculated using 1980s methodology, the CPI would be nearly 15%. Since treasury yields are about 2%, the true inflation-adjusted treasury yield would be about -13%.

Gold Rises Fastest When Real Yields Go Negative

 

Inflation is destined to go even higher in 2022. Many of the biggest corporations have already announced price increases that will take effect in 2022.

Declining GDP — Stagflation

“The…economy is facing a period of stagflation in which both growth and inflation disappoint.” — David Walton, Goldman Sachs

Stagflation is worse than a recession. It’s because stagflation combines the bad economic effects of a recession (stock declines, unemployment increases, housing market dips) with inflated prices. When this is dragged out over the long term, it becomes a problem that can have a big impact on societal habits.

To make matters worse, we are already experiencing declining GDP together with increasing inflation. This is due to an unusual combination of supply chain disruptions and labour shortages due to COVID-19 policies that have been implemented in most western countries.

Supply Chain Disruptions

The COVID-19 pandemic impact and the disruptive government responses continue to have enormous negative impact on global supply chains. Beyond COVID-19, compounding profound governance incompetence, media bias, political conflicts, disintegration of society split by “Covid politics,” natural disasters, cybersecurity breaches, international trade disputes have negatively impacted supply chains leading to product shortages, distribution delays, and manufacturing disruptions. The lockdowns imposed in many countries have led to revenue declines and many bankruptcies, with many more to come. Making matters even worse is the implementation of vaccine mandates, causing over 4 million people to leave the workforce in the U.S. This will lead to other societal problems due to lack of first responders, nurses, firefighters, and police.

Some analysts expect that it will take years for the capacity constraints and backlogs to ease. Continue Reading…

How to crush your RRSP contributions next year

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Many high-income earners struggle to max out their RRSP deduction limit each year and as a result have loads of unused RRSP contribution room from prior years.

While we can debate about whether it’s appropriate for middle and low income earners to contribute to an RRSP or a TFSA, the reality for high-earning T4 employees is that an RRSP contribution is the best way to reduce their tax burden each year.

The RRSP deduction limit is 18% of your earned income from the prior year, up to a maximum of $29,210 in 2022, plus any unused RRSP room from previous years. An employee earning $125,000 per year could contribute $22,500 annually to their RRSP. While that’s straightforward enough, coming up with $1,875 per month to max out your RRSP can be a challenge. An even greater challenge is catching up on unused RRSP room from prior years.

Related: So you’ve made your RRSP contribution. Now what?

Let’s say you live in Ontario, earn a salary of $125,000 per year, and you want to start catching up on your unused RRSP contribution room. Your gross salary is $10,416.67 per month and you have $2,858.92 deducted from your paycheque each month for taxes, leaving you with $7,557.75 in net after-tax monthly income.

Your goal is to contribute $2,000 per month to your RRSP, or $24,000 for the year. This maxes out your annual RRSP deduction limit ($22,500), plus catches up on $1,500 of your unused RRSP contribution room from prior years. Stick to that schedule and you’ll slowly whittle away at that unused contribution room until you’ve fully maxed out your RRSP. Easy, right?

Unfortunately, you don’t have $2,000 per month in extra cash flow to contribute to your RRSP. After housing, transportation, and daily living expenses you only have about $1,200 per month available to save for retirement.

No problem.

That’s right, no problem. Here’s what you can do:

T1213 – Request To Reduce Tax Deductions at Source

Simply fill out a T1213 form (Request to Reduce Tax Deductions at Source) and indicate how much you plan to contribute to your RRSP next year. Submit it to the CRA along with proof –  such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.

Note that you’ll need to fill out and submit the form every year. It’s best to do so in early November for the next calendar year so you have time for the form to be assessed and then you can begin the new year with the correct (and reduced) taxes withheld. That said, the CRA will approve letters sent throughout the year – it just makes more sense to line this up with the start of the next calendar year.

T1213 Form

Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file. Let’s see how that would work using our example from Ontario.

You’ve signalled to CRA that you plan to contribute $24,000 to your RRSP next year. In CRA’s eyes, that brings your taxable income down from $125,000 to $101,000. This will make a significant difference to your monthly cash flow.

Recall that you previously had $2,858.92 in taxes deducted from your monthly paycheque. After your T1213 form was assessed and approved, the taxes withheld from your paycheque each month goes down to $1,990.67 – freeing up an extra $868.25 in monthly cash flow that was previously being withheld for taxes. That’s an extra $10,419 that you can use to crush your RRSP contributions next year. Continue Reading…

Your first New Year’s resolution: Maximize your TFSA contribution for 2022

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My latest MoneySense Retired Money column describes the first New Year’s Resolution most of us can accomplish on or soon after January 1, 2022.

And unlike resolving to go to the gym or to buy (and use) that new Peloton, this is one you can tick off your to-do list within minutes of changing the calendar to 2022.

I refer of course to making your annual TFSA contribution — $6,000 this year — and you can read all about it by clicking on the highlighted text here to go to the full MoneySense column: Why contributing to a TFSA is a Good Resolution.

Every year since the program commenced in 2009, as close to January 1st as possible, each member of our family faithfully adds the maximum contribution amount (initially $5,000, briefly $10,000 and currently $6,000) to our TFSAs. And because we view them not as tax-free savings accounts but as tax-free Investment accounts, they have all grown substantially: to the point my family members do not wish the exact balances to be divulged to this broad readership. Arguably, TFSA is a misnomer: they should have been called TSIAs.

The column describes Robb Engen’s blog, titled “A sensible RRSP vs TFSA comparison” which reprises David Chilton, who said it all depends on:

  1. If you go the RRSP route, don’t spend your refund.
  2. If you go the TFSA route, don’t spend your TFSA.
  3. Whatever route you go, save more!

 

How about the Cash Flows & Portfolios blog entitled Can you retire using just your TFSA? It begins with this glowing commendation for the TFSA: “The opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world.”

The blog’s authors (known only as Mark and Joe) conclude that if you start early enough (like our daughter) you could indeed retire using just a TFSA.

To recap the rules: the cumulative contribution amount as of Jan. 1, 2022 is now $81,500. If you believe in the time value of money, it follows that you should contribute the full $6,000 the moment the new year begins, which is why I always call it “New Year’s Resolution Number 1.” Unlike joining fitness clubs, you can tick this one off your To-do list moments after you sing Auld Lang Syne (assuming you use an online discount brokerage).

Because of the long time horizon, young people could well put only equities into their TFSA, and if they do so from the get-go they will far outstrip the performance of the sadly all-too-common default option of parking TFSA funds in GICs that pay almost nothing relative to inflation.

Not only does an 18-year old have a good 47 years until the traditional retirement age of 65, keep in mind that unlike RRSPs, you can keep contributing to TFSAs well into your 90s or 100s, if you live that long. I knew a lady who was contributing to hers past age 100! Those near retirement could ratchet it down to a conservative Asset Allocation ETF like VBAL, ZBAL or XBAL, all of which cover the world of stocks and bonds in C$ in a traditional 60/40 asset mix of stocks to bonds.

I do try to avoid putting US-based dividend paying stocks or ETFs in the TFSA: put those in your RRSP or RRIF. Canadian dividends and interest belong in a TFSA, as do speculative US or foreign stocks that don’t pay dividends.

Speaking of RRSPs, what about the perennial question of which to fund first: TFSA or RRSP? My short answer is to do both but if you really have to choose, I’d pick the TFSA in most situations. Certainly, young people in a low tax bracket and older folk who are in danger of seeing OAS or GIS benefits clawed back should prioritize the TFSA.

Those in top tax brackets by virtue of high employment income should maximize their RRSPs but if you’re in the top tax bracket then you can probably also afford to maximize your TFSA. If despite such a high income you are encumbered by a lot of mortgage debt and/or credit card debt, I’d even suggest liquidating some of your TFSA to eliminate some of that debt: you can always regain your lost TFSA contribution room in future years and once you are debt-free there should be few obstacles to maximizing retirement savings in all such tax-optimized vehicles.

 

What Time Magazine person of the year Elon Musk has to say about Cryptocurrency

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LONDON, UK – June 2021: Bitcoin cryptocurrency on a Tesla electric vehicle logo.

By Sia Hasan

Special to the Financial Independence Hub

Time Magazine’s Person of the Year Elon Musk — chief executive officer of Tesla, The Boring Company and founder of SpaceX — has helped bring cryptocurrency into the public spotlight. He supports cryptocurrency and has made people more aware of what it is and how it works.

What is Cryptocurrency?

Cryptocurrency, also known as crypto, is a digital currency traded for goods and services. Many companies issue their own cryptocurrencies to be spent specifically for the service or product they provide. A company’s crypto is comparable to arcade tokens or poker chips. People must exchange real currency for cryptocurrency to buy the product or service.

A type of decentralized technology called Blockchain is what powers cryptocurrency. Different organizations (none of which have absolute control of the data) can trace the data through the processes of multiple computer systems. Blockchain manages and records transactions with an online ledger that is very secure. It can be shared and used by anyone with the proper credentials.

Blockchain allows businesses to use shared and protected information for collaboration. It is starting to emerge in almost every industry. It is a good fit for CRM for small business because it provides a secure place to store certified data.

Why do people use Crypto?

Because cryptocurrency is decentralized — not regulated by an authority or issued by a government — it offers autonomy to its users. Crypto is not subject to the boom and bust cycles in a country’s economy. Theoretically, it promises more control to the owner.

Cryptocurrency offers low transaction fees for international payments. Foreign purchases and wire transfers have associated costs and can be expensive. There are no banking fees related to cryptocurrency, such as minimum balance fees or overdraft charges. Continue Reading…