New fee disclosure rules for Canadian investments (CRM2)

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Last July, long-awaited changes to the way fees on investments are disclosed came into effect. Under the auspices of securities regulators and the Mutual Funds Dealers Association, CRM2 finally rolled out. CRM2 stands for Customer Relationship Model 2.

This new model is primarily aimed at mutual funds and exchange-traded funds (ETFs).

the goal of crm2 is to provide better clarity on the cost and performance of investments, but does it really?

Here is what is changing:

some fees will now be disclosed in dollar amounts instead of percentages

Under the new rules, investors will know the dollar value of trailing fees, annual fee-based charges, commissions and administrative fees. Trailing fees are commissions a broker receives for as long as an investor holds a mutual fund or ETF.

This is interesting for D.I.Y. investors. Many banks now offer “low-cost” mutual funds, on the basis that self-directed investors do not ask or receive advice. Yet, they are still paying for it!

performance will be calculated using the money-weighted method

The money-weighted method is more encompassing as it includes all contributions and withdrawals as well as dividends and capital gains. The time-weighted method only looks at the length of time the money is invested. It is the financial industry’s preferred method, as it is a good indicator of a fund’s performance. This method does not give an investor any indication as to how their own portfolio is doing.

Statements will also need to show returns for previous years.

unfortunately, this is only half of the story. crucial info will still not be disclosed

Mutual fees and ETFs -the latter to a lesser extent- both cost money to manage. This is known as Management Expense Ratio, M.E.R. The ratio encompasses various expenses such as professional fees, administrative fees, advertising , accounting and legal fees…etc. These expenses are paid regardless of the fund’s performance.

The new rules do not require fund companies to give a detailed breakdown on the M.E.R. This is where CRM2 is lacking, as it is the most important piece of information! The M.E.R. has the biggest impact on a fund’s return.

investors won’t know how much their ADVISER is paid

The fee disclosed is the one paid to the firm not to the adviser. It is a lump-sum.

CRM2 does not address the elephant in the room

Although it is a step in the right direction in terms of transparency, Canadian investors are still largely kept in the dark when it comes to the true cost of having mutual funds and ETFs.

Most importantly, Canadians pay the highest fees on their investments. CRM2 fails to address this.

 

Travel insurance explained

 

Image result for travel insurance picturesPlease note I am not an insurance agent or broker. This post is to provide basic information only. 

Many Canadians believe their healthcare system is universal, but it is actually not exactly true. It would be more accurate to say it is compulsory, i.e. everyone has to register by law for coverage. In Canada, healthcare administration is a provincial responsibility, not a federal one, meaning there is no unique and unified system.Each province has its own program.

Your health coverage does not work abroad or in another province

While most Canadians are aware their healthcare system does not work abroad, very few are aware that it also does not work in another province….technically. Should you require medical assistance while in another province, you will only be covered at the rates in your province of origin. If the costs of another province are higher, you will have to pay for the difference out of your own pocket.

That’s why it is always a good idea to buy travel insurance if you are going away, even for a few days.

Here are a few tips to ensure you get the right coverage and that it actually works when you need it:

your travel agent is not an insurance specialist, buy from an independant broker instead.

Travel agents are usually not licensed to sell insurance. They will push for you to buy from them as they most likely receive a commission. They are not knowledgable enough to answer your questions, and you could end-up with insufficient or inadequate coverage.

beware of pre-exisiting conditions and disclose them

A few years ago, a story about a pregnant woman who gave birth in Hawaii made headlines in Canada. The couple had purchased travel insurance but the insurer denied their claim, based on a pre-exisiting condition and the fact she hadn’t been cleared for travel by the company’s doctor. The couple found themselves facing a 950K bill. Each insurer has its own definition of a “pre-exisiting condition”. It could be anything from heart surgery to pregnancy or a broken leg 10 years ago. You will most likely have to pay more for them to be covered.

beware of your leisure activities

If you are into scuba diving or bungee jumping and something happens to you while practising these activities , chances are that you won’t be covered.

your doctor’s opinion is not the insurer’s doctor’s opinion

Because your doctor cleared you for travel, doesn’t mean the insurer’s doctor has also cleared you for travel.

make sure you fill the application correctly

For example, don’t forget to include all the names of the people who need coverage.

ask a lot of questions

Ultimately, it is your responsibility to understand your policy and what it covers and what it doesn’t. When in doubt, it is best to ask.

Remember, insurance companies are not charities. If the insurer has an opportunity to deny your claim, it will do so!

Should you ever take a pay cut?

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A reader of the Money Savvy Blog asked when and if it ever made sense to take a pay cut. The surprising answer is yes! There are a few instances when it makes total sense to accept a job offer at a lower salary . Sometimes, there is actually no other option.

You are changing career

If you are moving from Lawyer to Teacher or from Teacher to Mechanic, you can’t expect the same salary, as you probably don’t have any experience in your new chosen field.

you are changing industries or fields

You may still have the same type of job, but if you are moving to an industry you know nothing about, chances are the offer will come with a minor pay cut. Same goes if you move from a technical field to an administrative one, even in the same industry.

you have been out of work for a while

At some point taking the same job with a lower salary makes more sense than remaining unemployed. Unfortunately, the economy has still not fully recovered from the 2008-2009 meltdown. The unemployment rate remains rather high and job prospects scarcer. I get it that salary is important, but if you get too picky, you may have to accept a survival job paying even less!

you need/want more work/life balance or flexibility

If you want to work fewer hours and take more vacation, or work from home, you should expect a cut. Unfortunately, you can’t work 30 hours a week and expect to be paid like you work 100 hours.

you are becoming self-employed

As I previously mentioned here, most of the times your company will not earn money right away. It may also take some time before your clients pay you.

you want to keep your current job

If your employer is having difficulties, you may have to accept a pay cut in order to keep your job.

remember, it is not just the salary

When considering a job offer, also look at the benefits offered such as extended health insurance, bonuses, vacation time, sick days etc…the value of a benefit package can add thousands of dollars to your base salary and save you money.

In my career, I took a pay cut a  few times: when I became self-employed, when I changed careers or when I had to pay for my bills. It did not prevent me from progressing money-wise.

What about you? Have you ever had to take a pay cut?

Four phases to financial freedom

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If I asked 10 people about their definition of “financial freedom”, I would most likely receive 10 different answers.

Financial experts and PF bloggers have identified 4 financial stages that most of us will be in at some point. Most of us will eventually be in stage 3, financial independence, but very few of us will actually land in phase 4, financial freedom.

  • Phase 1, Financial dependence: we all start there. We are first dependent on our parents. Then, we are dependent on our paychecks. Money -or lack thereof- is not really a concern. We may be racking-up debt, not saving anything or both. During that period, we tend to make financial mistakes after financial mistakes after financial mistakes. We are usually jostled out of this phase by a single event, for example a job loss. In my case, it was becoming a homeowner.
  • Phase 2, Financial stability: at this stage, we take our money more seriously. We are focused on paying debt-off, on ensuring our bills are paid in full and on time and on having some sort of financial buffer, a.k.a. emergency fund. We may also start saving for retirement and learn about investing and personal finances.
  • Phase 3, Financial independence: In this phase, we are consumer debt-free. We may still have other debts such as a mortgage. Some will actually be completely debt-free. We also have a significant buffer and are well on track in our retirement savings. In this phase, we start realizing we have more options for our lives. For example, we may be able to change jobs or take extra time-off without any hardship on finances.
  • Phase 4, Financial freedom: This is the ultimate Graal. In this phase, we are free to live the life we want to live. Money is truly not a concern.

A lot of people confuse financial independence with financial freedom. They are not the same. The truth is that achieving financial freedom can be hard and take a long time.

I personally am in phase 2, financial stability, but teetering on phase 3. What about you? What financial phase are you in?

Buying a pre-sale property

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Both the real-estate and construction sectors are hot commodities in Metro Vancouver. New developments are spurting everywhere and everyday. Clever marketing makes it sound and look very attractive to buy a piece of property without actually seeing the finished product. But is it really the case? Let’s explore!

A pre-sale or an off-plan is an agreement between a buyer and a developer, where a developer agrees to supply a property by a certain date in the future. The buyer agrees to pay an initial deposit and then, once the property is built, complete the purchase. Deposits are usually paid in installments over a number of months or years. This is what helps the developer with obtaining further financing.

The major advantage of a pre-sale is that the property will be brand-new and in most cases customized to the buyer’s tastes. The property will also have warranty protection, usually 2-5-10 years . If something goes wrong during that period, it can be fixed at no costs to owners. An important advantage is also the building of equity. As house prices rise so does the contract on the property.

Pre-sales are hugely popular with investors. Pricing is usually a bit lower and they can usually see a profit before the property is built, and because it is brand new, they can rent it for a higher price. There is also a 7-day rescission period, in which the buyer can decide to opt-out.

Now, on to the disadvantages, as yes, there are a few.

  • GST is mandatory, 5% on top of the purchase price, which could mean thousands of dollars more
  • You may not qualify for a mortgage on a pre-sale. A lot of lenders are reluctant to pay for something that does not exist. A lender may also agree to fund only what the property is worth when built. It could be less than your purchase price.
  • Since the property will take a few years to be built, a lot can happen during that time: changes in your circumstances, in the real-estate market, in mortgage rules….you have to be aware of this before committing.
  • There could be delays in construction or in delivery date and you will be required to pay occupancy fees, even when you don’t live in the property. Nothing you can do about that!
  • Once you have signed, you can’t back-out of the purchase. Reassigning the contract could be difficult.
  • You most likely won’t be able to sale your property before the developer has sold all the units/lots.
  • The end-result could be different from what you asked.

As with everything, you need to do your own due diligence and research before buying a pre-sale and assess your risk tolerance. Be sure you have a lawyer or a realtor review the documents from the developer. The majority of developers will try to discourage you from having a lawyer or a realtor assist you. Don’t get fooled by this.

Fun and cheap Valentine’s Day ideas

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I have always been bemused by the sheer amount of money a lot of couples spend for Valentine’s Day to “show” their love for one another. I also find the fact children “have to” give cards or gifts to their classmates downright ridiculous. I probably sound lecturing here, but Valentine’s Day is only one day of the year, just like Christmas, Easter or your birthday.

The best way to save money on Valentine’s Day is to skip it altogether, and treat it like a regular day. Easier said than done, I know. Let’s see how we can all save some money here.

  • Homemade meal: skip the crowded  and expansive restaurants and cook at home.
  • Homemade card or love letter: you don’t need a fancy card, you can create your own or better, write a letter instead. If you absolutely want to buy a card, get one from the dollar store.
  • Homemade cookies: bake goods instead of buying them.
  • Watch a movie at home
  • Play board games
  • Have a scavenger hunt: hide candies or love notes all over your house and have your partner find them
  • Turn-off all your electronics and spend quality-time together: the world is not going to stop because you can’t answer your cell or tweet about your evening. It is actually a great way to show your partner you care.

It is important both partners manage their expectations of this day. The best way to do do is to talk about said expectations. Also, don’t expect your partner or your relationship to be different just because it is Valentine’s Day.

 

When and how to financially cut off your adult children

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As I previously wrote, times have changed. Gone are the days of working in the same company for your entire career as well as receiving a generous pension plan upon retiring. With tuition fees on the rise and employment prospects rather scarce, a growing number of parents found themselves helping their adult children well past their university years.

I will probably sound harsh here but doing so is a disservice both to the adult children and the parents. Let me tell you why:

  • Parents, your children are not going to pay for your retirement. You can’t borrow for this!
  • Parents, if you can’t pay your own bills in order to pay your child’s, you have a problem!
  • Parents, if you are cashing your retirement savings or your home-equity to help your children, you have a problem!

Constantly helping your adult children actually teach them to be helpless and unmotivated. Think about it for a minute or two. If your adult children know you will catch them when they fall, what are they learning? Probably nothing. Do they have any incentive to proceed differently? Probably not.

There is no question in my mind that adult children need to be responsible for their lives, in every way:

  • Adult children, if you need to get 1, 2 or 3 jobs to make ends meet, so be it! Stop relying on the bank of Mum & Dad for your basics.
  • Adult children, if you need to postpone vacation, wedding or home-buying until you can actually afford it, so be it!
  • Adult children, if you are never able to go on vacation, pay for a grand wedding or buy a house, so be it!

What is the best way, as a parent to help their adult children, you might ask.

  • Teach your child about money management. It is never too late to learn! You may find out you need a refresher too, as a parent.
  • Set boundaries and stick to them. Saying no to a child is the hardest thing to do for a parent, but is both liberating and powerful. But by doing so, you are fostering their independence and creative-thinking. If you gave them a move-out or cut-off date, follow through.

My own parents only helped me once, financially, as an adult. It was back in 2009, in the midst of the economic downturn. I was unemployed and had exhausted the little savings I had.  It is the only time they bailed me out…and that’s the way it should be.

I had previously asked for financial assistance for other items, and my parents always declined. I found it hard, but looking back I know it was in my best interest. I made my own mistakes but I also learned valuable lessons, such as the value of a dollar and the value of planning. It also rid me of any sense of entitlement I may have harbored.

Suburban life ain’t cheaper

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Extraordinary real-estate costs in cities like Vancouver and Toronto are pushing people further and further away from said cities.

A single detached house in Vancouver costs close to 1.5 millions. A townhouse costs  about 500K and a condo 350K. No wonder people rush to the suburbs in hopes of snapping-up properties at a somewhat lower price.

The problem with this approach is two-fold: first, it drives prices up in the suburbs as well. Bidding wars and no-subject offers have become the norm there too. Second, it will cost you more if you have to buy a car or two.

A recent study compared the costs of housing in Langley with the costs of commuting Downtown Vancouver for 25 years. There are very few properties assessed at over a million  in Langley. However, the transportation costs would be close to 565K over the course of a quarter century. Staggering! On the other hand, someone living in Vancouver would spend “only” 298K in transportation costs, over the same period of time.

The choice of Langley is not random. Public transit is fairly limited in this city, making a car a necessity. Technically, one could go Downtown Vancouver from Langley with bus/skytrain but it would take them close to 2 hours. There are also fewer job opportunities.

Case in point with my own story: before buying my first condo in Surrey, I rented in North Vancouver and New Westminster. I worked mainly Downtown Vancouver and have been calling New West my workplace for close to 5 years. I never rented Downtown Vancouver, as I simply couldn’t afford it and didn’t want to. Rents are a waste of money in this part of the city!

With some previous salaries I made, I simply couldn’t afford a car, but I also didn’t need one. When I was in North Van and worked Downtown, I would simply take the Seabus. It took me 15 minutes to get to work. The best was when I moved to New West and also found a job there. I would walk to work.

If I needed a car, I was member of a couple of car-share organizations. It was way cheaper than owning one. I would also claim the monthly bus pass as a tax credit. Financially, it looked like an idyllic situation, when it was not necessarily the case.

The black point is that I was renting when it no longer made sense for me to do so, both financially and personally. I am not getting into the rent vs.buy debate here!

Back to my own story, I didn’t qualify for anything in Vancouver or closer suburbs, so I turned to further suburbs, namely Surrey and Langley. With public transit more limited, I had to buy a car, which added $ 800 to my monthly budget. Buying was cheaper than renting, but when I factored in that extra $ 800, I wasn’t so ahead anymore!

The yearly cost of a compact car in Canada is just under $ 10 000. If you have a bigger car or a truck, that amount will be higher. If you have 2 cars, it will be double.

Living in the suburbs used to be a no-brainer. It is definitely no longer the case. Nowadays, suburban vs. urban living is a trade-off between housing and transportation costs. Before deciding to move to the suburbs, whether as a renter or owner, take a look at your transportation costs and commute time.

As for me, I do not regret buying in the suburbs and getting a car, despite the extra expense. My car will be paid off next year and I anticipate my transportation costs to actually be lower for a few years after.

Most importantly, I enjoy my suburban life.

BC home equity partnership, friend of foe?

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Last month, the BC liberal government announced a initiative to “help” first-time home-buyers enter the increasingly expensive real-estate market. The province consistently sees the highest prices when it comes to housing.

You can find all the details about this program here.

Of course, the announcement sent quite a shock wave across the personal finance and banking communities, as basically the program is a loan up to $ 37 500.00 to help with the down-payment requirements. The loan is registered as a second mortgage on the property.

The first five years are both payment and interest-free, but if you sell you will have to pay the full amount back at the time of conveyance. After the five year period, you will have to make payments both on your mortgage and this loan. This is the element that can set people up for a financial disaster, depending on their circumstances. A lot can happen in 5 years, including a raise in interest rates.

Living in British-Columbia is very expensive, not just housing-wise. British-Columbians pay the highest amounts on car insurance, gas and daycare fees. Groceries aren’t cheap either. Unfortunately, salaries don’t always match these high living costs.

Genworth, one of the mortgage-default insurers in Canada, announced this loan would be treated as a non-traditional, borrowed down-payment -which it is- and included into the debt service calculations, effectively lowering the mortgage amount one would qualify for. On top of this, the mortgage default insurance rate will be higher. No doubt CHMC will follow suit as well as a lot of lenders.

So long for improving accessibility and affordability, particularly in Metro Vancouver!

The only tiny advantage I see in this program is that it technically allows homeowners to have a higher equity in their property, as it boosts their initial down-payment. But the equity will never be higher than 19.90%, thus mortgage-default insurance will still be required.

As most people in the PF blogosphere, I don’t think this program is a good idea. Luckily, it is limited to first-time home buyers and also in time.

If you need to borrow money to fund the minimum down-payment requirement and closing costs, you can’t afford to buy a property, period. It also applies to the bank of Mom and Dad.

2017 plans

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Hello Blog and Readers, I am back!

It has been a month since I last wrote, but boy I needed a break. My holidays were quiet and relaxing. I spent $ 227 for Christmas, including food, booze and gifts. I will definitely have a Merry January!

As customary, here is what I want to accomplish this year. I found out that writing plans for the whole world to see kept me accountable.

Finances

  • Save $ 500/month in my RRSP: The calculator from the federal government estimated this is the amount I need to save if I want to retire comfortably. So, here I am!
  • Completely pay-off one of my 2 consumer debts: I currently have a car loan and a consolidation loan. I want to get rid of one of these, which one is to be determined. I want 2018 to be the year of becoming consumer debt-free.

Career

  • Keep moving towards new career: I finally figured out what I want to do and I am moving towards this goal. Sorry, I am not saying more.

Personal

  • Keep taking good care of myself: exercising, eating right, getting enough sleep, not putting off medical appointments etc…This is something I will always need to pay attention to.
  • Date more: as previously mentioned, I am single and no longer want to be.