Thoughts on the financially privileged & the not so privileged

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I don’t necessarily think there is anything inherently  wrong with growing-up in financial privilege. When I was younger I actually wished many times for my own upbringing to be different. Unfortunately, it wasn’t to be.

My parents had -and still have- horrendous money management skills. On top of that, my dad did not believe in the concept of keeping a job, which created further issues. Issues that impacted me both directly and indirectly. But I digress a little here.

being financially privileged can definitely propel you ahead…

There is no question money can open a world of opportunities, in many, many ways: education, business, travel etc…It also takes a lot of worries away.

That being said, now that I am a little bit older and perhaps, a little bit wiser, I don’t envy people who grew up financially privileged.

…but it can also make you lazy and unappreciative

I have seen this countless times with friends whose parents and grandparents had more money than mine.

The friends in question tended to take everything for granted and had no real appreciation for what they had.

I had very little financial resources growing-up, and even as a young adult. I definitely appreciate everything I have and don’t take it for granted.

privilege can take away the sense of accomplishment

Growing-up poor makes me want to get out of poverty, and fast. I worked very hard for everything I have accomplished so far, and I am proud of this.

One of my childhood friends had absolutely no motivation or drive to do anything, because he was lulled by too much family money.

And where is the sense of accomplishment and pride when you never have to work for anything or figure anything out by yourself?

When money is scarce, you become resourceful and creative. You make do.

PRIVILEGED PEOPLE USUALLY can’t handle the slightest discomfort

Life is a bitch at times. Privileged friends and acquaintances of mine have the most difficulties handling any temporary discomfort of curve balls thrown at them. I recall another childhood friend of mine having a panic attack at the airport because her flight had been cancelled! I kid you not.

When money is scarce, you also develop resilience and adaptation. You don’t sweat over the small, insignificant stuff. You learn to prioritize very quickly.

FINAL WORD

With a little perspective, I now see how growing-up in a poor environment gave me great qualities, that have been very useful to me, such as determination, adaptation and resourcefulness.

Maybe I am bashing on privileged people. Maybe not. My point is more that there is a silver lining when you are underprivileged, financially. If you are lucky to be financially privileged, appreciate it and do something meaningful with your life.

The cost of dog ownership

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Over the last year or so, I have been thinking about getting a dog. I took the first step in contacting a reputable breeder in my province. I will not be going through the “rescue road”, in case you are wondering.

I am only interested in a specific breed and I actually did contact several shelters and other rescue organizations. None of them has the breed I want. But this not the point here.

Let’s chat about the financial cost of owning a dog. Many people completely underestimate these or do not really budget for them.

adoption or breeder costs

The SPCA and other rescue organizations will charge you a fee. In BC, it can go up to $ 500.00, depending on the dog and the organization.

If you decide to use a breeder, fees will easily go from $ 1 000.00 to $ 5 000.00, depending on the breed and the breeder.

material costs

Your dog will need a bed, a food bowl, a few toys, a collar/harness, a leash, a crate, poop bags. You should budget $ 200.00 to $ 300.00 for these items. They will need replacing at some point.

Depending on your house, you could need additional supplies like gates.

food

Dry food is cheaper than wet food. It is mostly because you can preserve it for longer and it usually lasts longer.

A 5 lbs bag costs between $ 15.00 to $75.00. If your dog has allergies , lean toward the $ 75.00 price. Same if your pet is big.

Puppy dry food will cost between $ 10.00 to $25.00 for a 5 lbs bag.

Treats will also add up. A bag of high quality treats can cost up to $15.00!

HEALTHCARE

Your dog will need regular check-ups, vaccinations, worm and flea treatments at the very least. If you have a puppy, you will need to have them neutered. This alone can cost up to $ 500.00.

None of the above is covered by pet health insurance. All breeds are also prone to one health issue or another. Some breeds are predisposed to more issues. Some surgeries can cost over $ 5 000.00.

The cost of insurance varies depending on the insurer and the dog, but usually goes from $ 30.00 to $ 60.00/month for basic coverage, i.e. $ 360.00 to 720.00 per year.

grooming

It all depends on the breed. A large dog with long, shedding hair will cost $60.00 to groom. You may have to do it on a monthly basis. A smaller dog with short hair will cost half of this and may only need it every 2 to 3 months.

daycare and boarding

Chances are you won’t be able to bring your pet to work with you. You need to make arrangements, as your dog needs to exercise and walk at least 3 times a day, rain or shine.

A dog walker charges $ 25.00 to $ 30.00 for an hour walk. You might be better off leaving your pet at daycare. Most daycare centers charge $ 20.00 to $ 25.00 per day. A lot have extended hours.

Same if you are going on vacation and can’t take your pet with you. Kennels can charge up to $ 50.00 per day, depending on the dog size.

A lot of people do not realize how expansive this is. Leaving your dog at home or in the back yard is not the best.

training

If you have a puppy, taking an obedience class will be most helpful. This costs on average $150.00.

If you dog has behavioral problems, you may need more sessions.

final word 

There is a lot of variables in estimating dog costs, mostly the breed, the age and where you live.

Having a dog will cost on average $ 100.00 to $ 300.00 per month in BC. Beyond wanting a pet, you need to insure you can actually afford one. Most dogs have a lifespan of 12 to 14 years…..

Curbing Summer expenses

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After one of the snowiest and coldest Winter in Vancouver, followed by a very wet Spring, Summer is finally here. We have been blessed with sunshine and hot temperatures lately.

Along with Summer, usually come higher expenses. Gas prices tend to spike for starters. Then the kids are out of school, you may decide to actually go on a vacation and social invitations are flowing in.

Here are a few tips on how to make the most of Summer without breaking the bank.

plan ahead, save ahead

Just like taxes and death, Summer will always be here, like clockwork . And, just like clockwork, save for it throughout the nine months prior. Planning ahead can lower your costs and even give you discounts, particularly if you are going away.

set your social calendar

When the weather is better, people tend to go out more and to throw more BBQ parties. It doesn’t mean you have to accept all the invitations you receive. Be a little selective. It is perfectly acceptable to say no.

go potluck style

This is the best way to save on eating-out costs when entertaining.

check-out free and low cost activities

Cities and RecCentres always offer low cost or free activities such as outdoor movies or swimming. Libraries also offer reading programs and other crafty activities.

take a staycation

It is no surprise Summer is the most expensive season when it comes to traveling.

Staying home -or close to- will save you a ton of money. If you don’t have children, travel off-season. If you want to go away, try camping or rent via AirBnB rather than a hotel.

You can also take day trips.

KEEP KIDS ACTIVE FOR LESS

Summer camps can rake up hundreds of dollars. Coordinate with other parents to take childcare turns. Refer to above point on free and low cost activities.

go easy on the a/c

A/C units are suckers for electricity. The last thing you want is a huge Hydro bill. Set your thermostat slightly higher; turn-off the unit when you are away; only use it when it is really hot.

final word

The best way to avoid overspending this Summer is to plan ahead and be organized. Doing so is actually fairly simple.

 

Valuing a stock with the Graham formula

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There are several ways to assess a stock, besides the stock table. One of them is the Graham formula, created by Benjamin Graham.

graham is the father of “value investing”

His book, the Intelligent Investor is considered a classic in the financial industry. Despite being published in 1949, its principles still hold true today. Graham hired Warren Buffet so we can safely say the guy knew what he was talking about!

what is the graham formula?

The formula was created to assess how rationally priced a stock is. In today’s market, when it is becoming more and more difficult to find fairly valued or undervalued stock, the formula is very relevant.

For you math-diggers out there, the formula was initially as follow:

V*=EPS\times (8.5+2g)

V as the intrinsic value, EPS as the company’s Earning per Share over the last 12 months, 8.5 being the ratio for a company not making any profit, g being the company’s estimated growth for the next 5 years.

Later, it was revised to: V*={\cfrac {EPS\times (8.5+2g)\times 4.4}{Y}}

Y being the current yield on 20 year AAA corporate bonds. Graham thought taking interest rates into consideration would give a more accurate intrinsic value (V).

how do I use the formula? 

Don’t worry, there are plenty of calculators that will give you the intrinsic value of any stock. There is a good one here.

Once you have the intrinsic value divide it by the stock current price. If the result is below 1, it means the stock is overvalued. If it is above 1, the stock is either fairly valued or undervalued.

final word

The graham formula is an helpful way to assess a stock. That being said, it should not be the only one way used. It is important to do research on the company and to read – and understand-its financial statements.

 

The dog years of compounding (in investing)

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Albert Einstein dubbed compound interest the eight wonder of the world. It truly is when looking at the concept: investing money, earning interests/dividends/capital gains on investments, reinvesting said interests/dividends/capital gains/ thus earning more interests/dividends/capital gains.

It seems simple, yet it is a tad more complicated than it seems

Most people in the financial industry do not talk much about the time factor, when it comes to compounding.

You see, compounding is actually very slow to start. That’s why conventional wisdom says one should start saving as early as possible. But I almost digress here.

with COMPOUNDING, time is actually not of the essence

For the sake of simplicity, let’s assume an initial investment of $ 10 000, with an additional monthly contribution of $ 100. Let’s assume a constant return of 5% for 25 years, and that interest is compounded monthly.

I am aware this is really unlikely to happen in really life, but I am writing for the sake of simplicity here!

After said 25 year-span, the $ 10 000 will turn into around $ 94 364. Great!

But when looking at the timeline, you realize your investment will take over 5 years to double, and an extra 4.5 years to triple.

it takes at least 15 years…

15 years is the mark where your investment starts to grow faster and another 3 years for cruising speed. Before that, progress is actually fairly slow.

patience is the key word

A lot of people become discouraged, long before the 15 year mark. If the market becomes bearish, it can be even easier to give-up, but don’t!

By doing so, you will only have principal with very little interest/capital gains/dividends. Over the years, interest/capital gains/dividends will exceed the principal amount, and that is the beauty of compounding.

Managing lifestyle inflation

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“Lifestyle inflation” is a very popular topic amont financial planners and personal finance bloggers. But what is it exactly?

lifestyle inflation is increasing your spending when your income goes up

This is the very definition of lifestyle inflation. And yes, we are all pretty much guilty of lifestyle inflation.

This is particularly true when transitioning from student to employee. Most students have to get by with very little, and most make do.

But once the first real paycheck arrives, boy, oh boy!

lifestyle inflation is not always bad

Once you make more money, it is perfectly normal and acceptable to want to live and enjoy life more. Actually, it is not expected of anyone to keep living like a student or a pauper for the rest of their lives!

It is normal to think about having your own place, going on vacation, buying new clothes vs.second hand ones etc…and to actually do those things.

Lifestyle inflation becomes a problem when your spending causes you to live paycheck to paycheck, prevents you from paying debt off and from saving for retirement and other goals.

lifestyle inflation can be managed

Yes, you can still have your cake and eat it too. Here are a few tips.

figure out your new compensation to the penny

If you landed a higher paying job or a promotion, figure out how much you will make on each paycheck. Keep in mind salaries are always gross amounts in North America. After taxes, you may be surprised to realize it is not as much as you thought.

revisit your budget, particularly the “fun” category

Give yourself permission to spend a set amount each month on things you really like and that makes you happy. Don’t worry about what other people think. It is their problem not yours.

revisit your goals

I found it also helps to focus on short-term, medium-term and long-term goals. When you have saving goals, your save towards them instead of spending mindlessly.

If you are about to charge something to your credit card, ask yourself whether this purchase is in line with your goals and within your budget.

forget about the joneses

They are probably broke anyway! Not to mention your material possessions do not define who you are as a person.

final word

I personally do not believe lifestyle inflation can be completely avoided. I also believe it is normal to somewhat spend more when earning more. However, it is possible to manage lifestyle inflation. Like everything else, it does require some discipline.

Buying a rental property (or not)

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Unlike my previous post, the criteria to decide whether to buy a rental property -or not- are very different. This post may also shed some light if, for example, you already own and have accepted a job in another city/province.

First, understand the tax implications

Although you can deduce some expenses from it, rental income is taxed at your marginal rate, if the property is registered under your name.

In Canada, selling your principal residence for profit does not result in taxes levied. This is definitely not the case with a rental property!

Upon selling, any profit you make is considered a capital gain. In Canada, 50% of the capital gains are taxed at your marginal rate, if the property is registered under your name.

It gets a little bit more complicated if you elected to deduct the Capital Cost Allowance -CCA-from your rental income. CCA is a “wear and tear”amount set by Canada Revenue Agency depending on the type of property, the year it was built etc….

CCA is a tax-deference mechanism. It allows you to lower the amount of taxes levied on the rental income. Note you can’t use the CCA to trigger a loss or if you are already claiming a loss.

Upon selling, the CCA amounts previously claimed become 100% taxable, are added to your income and taxed at your marginal rate. It is called “recapture”.

As an individual, claiming CCA usually does not make much sense, unless you are in the highest tax bracket.

Second, cash flow is king, forget the 1% rule (or almost) 

When you live in your property, land appreciation is important. This is what increases your property value. As an investor, and although this is nothing to sneeze at, this is not what you should be looking for.

As a potential landlord, you need to look at your investment from a business perspective. In other words, will the income generated from the property be enough to cover all its expenses and taxes?

A common principle used is the 1% rule, meaning the rent should be 1% of the purchase price.

Unfortunately, in North America, real-estate has become increasingly expensive. Rents have not necessarily followed that trend. It has become almost impossible to find properties meeting the 1% rule.

Which does not mean you should not consider becoming a landlord.

There is another formula to help you determine if a property has cash flow potential, the Gross Rent Multiplier or GRM:

(gross annual rent/purchase price) X 100

If the number is above 8, the property has potential, if it is under 8, pass. If it is above 10, cash flow is guaranteed. This quick and easy formula takes out all the guesswork and emotions from the search.

Once you have your cash flow number, dig into the details: proposed rent, mortgage payment, property tax, condo fees if applicable, potential repairs, estimated income tax..etc and see if it still adds-up.

As a landlord, you won’t be able to postpone or skip maintenance and repairs. It is best to budget for them. Some utility costs, such as Hydro can be passed on to the tenants.

Third, vacancy rate

The lower, the better for you! It is pointless to buy a rental property if there is little demand for rentals….CMHC provides info on the matter.

Final word

It is crucial to leave your emotions at the door when deciding to purchase a rental property or to rent out your main residence.

There are also lots of other factors that could influence your decision such as how much equity you are able to start-up with or the amortization on your mortgage. In Canada, you need at least 20% down for rental properties.

“Landlord-ing” is not for the faint of hearts. It is actually a lot of work.

 

Buying vs renting a home

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Don’t roll your eyes just yet. This is not another debate as to whether renting is better than buying or conversely. I am actually not advocating for either option. I have been both a renter and a homeowner. In fact, I have rented more than I have owned.

I noticed there is a lot of calculators out there to help people determine which option would make the most sense financially.

Most of these calculators are flawed for various reasons; the biggest one being that they calculate based on gross income instead of net. They also don’t take into account non-financial factors, which could have a huge impact on your decision.

So, I have come up with my own analysis: non-financial factors and financial ones.

buying a home is a long-term project

Where do you see yourself in five years? As a rule of thumbs, five years is the minimum amount of time you need to stay in a property to break even or be ahead financially.

During the first five years, you pay more interests than principal on your mortgage. You also need to recoup the closing costs you paid.

Don’t get fooled by crazy real-estate markets like Toronto or Vancouver. It can be tempting to sell  after a year or two, but you would actually be losing money by doing so.

if you need to buy a car or two, keep renting

Transportation costs in Canada are very high. They can -and will- eat-up a huge chunk of your income.

if you have student loans or credit card debt, keep renting…

…at least for the time being. Pay-off your debt or significantly lower it before looking at buying. Debt repayments are a huge financial burden.

A lot of recent graduates seem to be obsessed with becoming homeowners as soon as they receive their degrees. It sounds a little bit crazy to me.

So, you have determined the above first point applies to you and the second and third don’t. Let’s do some basic math.

35% of your net income is the maximum for housing costs

Lenders always use gross income to qualify people for mortgages and other loans. The problem with that is your gross income is not what is deposited in your bank account.

Always use your net income and really avoid going over 35%.

compare apples with apples

Compare the cost of renting and buying based on similar properties in similar neighborhoods. Renting or buying a two bedroom apartment will cost more than a one bedroom or a bachelor. You can find rental info on Craigslist or Kijiji.

include very comprehensive costs

Buying costs do not stop at the mortgage payment. Unfortunately, too many people can’t seem to look past this.

If you are buying a condo or townhouse, include: mortgage, strata/condo fees, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of Hydro and monthly portion of maintenance.

If you are buying a single, detached home, include: mortgage, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of maintenance and monthly portion of all utilities: hydro, gas, water….

a word on maintenance costs

As a homeowner, the biggest difference from being a tenant is that you are responsible for repairs and maintenance. And yes, you will encounter these! The costs will be different if you own a condo or a single detached house.

In a condo building, most of the maintenance costs such as landscaping, snow removal, elevator etc…are usually included in your strata/condo fees. Big ticket items, such as the roof, are shared costs. You are only responsible for repairs inside your unit. Costs are overall lower. Take 0.5% to 1% of the proposed purchase price. That’s your yearly costs. Divide by 12.

For a single dwelling, you are 100% responsible for all the costs and they are usually higher. Use 1.5 % to 2% of the proposed purchase price.

You may not spend the amount in a given month or year, but it is best to err on the side of caution.

final word

If the number you end up with is lower than the renting cost AND does not exceed 35% of your net income, happy house-hunting! Otherwise, keep renting and invest the difference.

If home ownership is important to you, you owe it to yourself to do the above basic calculations.

There will always be opportunity costs whether you own or rent. The answer to this old age question is not so clear-cut anymore.

 

Book review: The Wealthy Renter by Alex Avery

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Please note I did not receive compensation to review this book.

The home ownership dream is very alive and well in Canada. The Federal government estimates about 70% of Canadians own their homes. It seems like the remaining 30% is obsessed with joining-in.

If you do some internet search, there aren’t that many articles, posts or books advocating for renting. This book does exactly that and it is geared towards Canada.

Alex Avery is a CFA® and holds an MBA in Finance. He currently is the Managing Director of Institutional Equities at CIBC. This division provides research and analysis on real-estate companies.

the wealthy renter definitely presents a different point of view….

I like that Avery dispels a few common myths surrounding home ownership and tries to best address the unhealthy obsession Canadians have with it.

There absolutely are benefits to renting, particularly in Canada when tenants are not responsible for home maintenance and repairs. Renting is overall, more flexible….but don’t we all know this already?!

The biggest financial benefit of renting presented in the book is when the tenant actually invests the difference between the cost renting and the cost of owning. I wholeheartedly agree with this…provided renting is cheaper than owning.

….but is overall too pushy

The whole point of this book is to advocate for renting, so I get that Avery would really push for it. Unfortunately, at times, his arguments do not make sense. One of his biggest points is that home owners do not know about the actual costs of their properties. He gives the impression owners are naive and think the only cost is their mortgage….unreal.

Avery also claims repairs costs are not known in advance, which is not exactly true either. A home owner can ask for estimates on various items; a strata corporation can obtain a depreciation report.

unfortunately, the answer to renting vs buying is not so clear cut

And even more so if you live in Vancouver or Toronto, where rents are extraordinary high, including in the suburbs.

Anyone contemplating buying a home must do some serious calculations and look at their personal circumstances as well. Renting is more than OK too!

final verdict: pass

Although the book has the merit of presenting a different point of view, it does not do a good job at it.

Instead of aligning numbers and somewhat confusing analysis, it should have focused more on addressing the stigma around renting.

No fee banking in Canada

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Banks and credit unions in North America have the right to charge all sorts of fees on both business and individual accounts. And boy, they do!

Monthly fees on chequing accounts can as high as to $ 30.00. Many financial institutions will waive the fee if you maintain a daily minimum balance in the account.

Said minimum balance has been on the rise and can easily reach $ 3 000.00. Yes, you are reading right, leaving $ 3 000.00 in accounts that usually don’t earn any interest. Ridiculous!

Monthly fees can and will add-up after an extended period of time. I recently changed banks. My ex credit-union charged me $ 7.00/month for 8 years. It adds up to $ 672.00.

I have done some research to find alternatives to monthly banking fees. I have looked for accounts offering unlimited transactions, not under any age requirement, and of course, with no minimum balance.

“NATIONAL” NO FEE CHEQUING ACCOUNTS

ALBERTA NO FEE CHEQUING ACCOUNT

BRITISH COLUMBIA NO FEE CHEQUING ACCOUNTS

MANITOBA NO FEE CHEQUING ACCOUNT

  • Cambrian unfee : this credit union will refund all banking fees with a recurring deposit such as payroll or pension

ONTARIO NO FEE CHEQUING ACCOUNTS

SASKATCHEWAN NO FEE CHEQUING ACCOUNTS

FINAL WORD

I am sure there are other financial institutions offering no fee chequing accounts. The above list is not exhaustive. Feel free to comment if you know of any other no fee chequing accounts in Canada.

Please keep in mind the mentioned institutions do charge other type of fees such as overdraft or cheques orders.