Opportunity cost

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If you are a reader of the blog, you know I decided to obtain an MBA. I have been studying for almost a year now.

Last September, an opportunity came across to study for a semester on the Malaysian campus of my university. After careful budgeting, I decided to accept it.

I have been in Malaysia since January, and it has been a bliss! To get the financials out of the way, the semester is all paid for. It was paid by my personal savings as well as an insurance settlement. I would also like to add that I don’t have any consumer debt, which made it easier as well.

In total, I spent a little over $22K. Since becoming consumer-debt free, retirement has been front and center on my mind.

I had been thinking about transferring $ 20K to my RRSP. Well, it is not going to happen. At least not yet. Why? Because I chose to go to Malaysia instead.

OPPORTUNITY COST

This post is totally related to a concept that I am currently studying in Economics: opportunity cost. It is defined as ” the benefit that is missed or given up when an investor, individual or business chooses one alternative over another”.

In my case, the opportunity cost is the benefits foregone by not contributing to my RRSP. These are: big contribution that would most likely have triggered a bigger tax refund; tax refund that I could have put back in my RRSP; additional dividends and interests; long-term compounding on the latter.

OPPORTUNITY COST IS NOT JUST FINANCIAL

Being a PF blogger, I obviously had to talk about the monetary side. But there are other aspects to opportunity cost, such as time, pleasure or usage.

To go back to my own example, the benefits of going to Malaysia outweigh the opportunity cost of not contributing to my RRSP, including in the long-term.

The truth is that I hadn’t been doing well or feeling well for some time. Last year was difficult. It was the culmination of a few years of growing dissatisfaction with my life. I felt very stuck with no idea of how to unstuck. I was also plagued with health issues.

I needed a substantial change, but not necessarily a drastic one either.  I needed to step-out of my comfort zone for an extended period of time. Being in Malaysia definitely brought me that and much more. My health issues are gone, primarily because my lifestyle here is very different from my lifestyle Canada. I intend to bring it  back with me, as much as possible.

I have a totally different perspective on my life, on Canada and on myself. Contributing to my RRSP would not have given me any of the above…..

FINAL WORD

Opportunity cost happens to all of us on a daily basis. Most of us are probably unaware of it. We all make choices. There is always an opportunity cost behind our decisions, no matter how trivial these decisions are.

 

 

 

 

 

Tips to ask for a pay raise

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A few decades of life experience has taught me that, for the most part, if you want to obtain something, you have to ask for it -besides working for it-. This is particularly true when it comes to pay raises.

Unless you are a government employee or work for a large corporation, it is unlikely your employer will regularly review – and increase-your salary. Most businesses don’t have any procedure in place when it comes to this topic.

In not asking, not only you will not receive, but you will leave thousands of dollars on the table; guaranteed.

KNOW YOUR ACCOMPLISHMENTS

Your manager is probably very busy and doesn’t have time to keep track of everything you do for your employer. This is your job to do this. The worst thing you can do is justifying your request by talking about  how your personal expenses have increased or how you need to save for retirement.

Show how you add value to the company instead, with a focus on the bottom line. Also highlight areas that are above your job responsibilities. Knowing your accomplishments will help you address objections.

KNOW YOUR MARKET

Before approaching your boss, you should do research on what people with your profile are paid in your industry and in your city. Your sources need to be credible. Many professional associations publish yearly guides and reports. Use them if you can.

KNOW YOUR TIMING

Timing counts when asking for a raise. Try to align your request around the company’s financial trajectory. Year-ends could be a good time, as your employer is most likely preparing its budget. You may also wait for your annual review.

Avoid asking for a raise at a high-stress period. Schedule a face-to-face meeting.

KNOW YOUR AUDIENCE

Ultimately, asking for a raise is a business transaction. If you tell your employer how much you love your job or how you don’t want to leave, you are already leaving money behind.

You want to remain positive while at the same time make it clear you are aware your services are so valuable you would be an asset to any company who would hire you. It is not about burning bridges or being arrogant. Ultimately, it is about knowing your worth.

KNOW YOUR OPTIONS

Depending on your employer, you may not be able to obtain your desired raise for a variety of reasons. Salary is not the only thing you can negotiate. Everything is negotiable!

You could ask for a bonus, more vacation, for opportunities to work from home, for tuition assistance etc…. Benefits are also important and they can make a huge difference in your life.

If all fails, you may want to think about whether you want to stay or look for another job. Regardless of your decision or how disappointed you feel, remain professional.

FINAL WORD

It took me some time to master the basics of asking for a raise at work. This process is daunting for most people, but perhaps more for women.

The ability to negotiate our salaries is important. Our level of income will largely dictates our lifestyles.

 

 

That time I decided to work part-time

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As I previously wrote, a few things have changed in my life recently.

I became consumer-debt free, decided to obtain an MBA and recently switched to part-time work.

BUT, WHY DID YOU DO THAT?!

You might ask. Well, studying for an MBA is not the same as studying for a certificate or a diploma. A lot more reading and researching is involved, and it is definitely more challenging.

But it is not the only reason.

i desperately needed better work-life balance 

Working full-time was sucking all my time and energy. For the last 2 years, I would leave my home at 7.00 am and would never be back before 5.00 pm, from Monday to Friday. I was constantly tired and had not much energy for anything else during the week.

I was only living for the week-ends and vacation. A lot of personal matters were put on the back burner and my health also suffered. This is simply no way to live. I started resenting my job.

Other issues within my workplace made me resent my job even more. I reached my breaking point in February.

I FINANCIALLY PLANNED FOR THE TRANSITION

Although I was at my breaking point, I decided not to hastily quit my job. Been there, done that!

While I was paying off my consumer-debt, I also saved money. It was equally important for me to also have some serious savings. My full-time income allowed me to do so.

It definitely took me more time to get rid of my debt, but I also built a nice cash cushion that could allow me to remain without any income whatsoever for several months.

If I made any type of income, I would be able to work part-time for about 18 months with said cash cushion.

If I had kept working full-time, said cash cushion would have paid for my MBA. But I switched to part-time, so it is a moot point.

i waited for the last car payment to go through

I wanted to become consumer-debt free with my income rather than dipping into my savings.

i refinanced my mortgage

Since I had decided I would work part-time, I had to figure-out the tuition payment. I did not qualify for student loans, but I actually didn’t want to take any. I also did not want to do a line of credit or another personal loan.

So, I refinanced my mortgage and slightly leveraged against the equity of my condo.

By doing so, I only have one monthly payment to take care of. A portion of said payment is also going right back to the equity in my condo.

Most importantly, I can afford to pay for my MBA and to work part-time for the next 2.5 years.

final word

I have been working part-time for a month now and am already reaping the benefits. I have more energy and feel  more positive. My health is improving as well.

 

Alternatives to big cable companies in BC

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Please note this is not a sponsored post.

Not so long ago, in the Lower Mainland – and I am sure it applies to the rest of BC as well-, people basically had 2 options when it came to cable, Internet and home phone services: Shaw and Telus. If we were very lucky, we could add Bell to that rooster.

I once lived in a building that was only serviced by Shaw. For many years, I alternated between the 2 above-mentioned providers and my bill kept increasing, despite skimming services to a bare minimum.

The good news is that there are now alternative providers, particularly in the Lower Mainland. These companies will save you moolah.

VMEDIA

VMedia has definitely become a serious player in the telecommunication landscape. The company has grown tremendously over the last 2 years, and now services most of Canada. All their services are delivered via Internet -including home phone-. No contract and unlimited Internet data.

There are a few start-up costs (modem, adapter & TV box), but it is worth the future savings. I recently switched to VMedia and divided my bill by 2. I will write a review in a separate post.

UNISERVE

This company also provides all services at a much lower cost than Telus or Shaw. No contract and unlimited Internet data as well. You will need an Apple TV box.

NOVUS

This company also offers TV, Internet and home phone but their geographical scope is not very extended.

They primarily service Downtown Vancouver and a few select buildings in the Lower Mainland.

COAST CABLE

Another company offering “the triple”. However, they are pricier than VMedia, Novus and Uniserve even with a 2-year agreement. If you don’t sign a contract, your bill won’t be much lower than with Telus or Shaw.

If you are not interested in having “the triple”, or watch TV with a Roku or other streaming box, check these companies:

LIGHTSPEED

This company offers Internet and Home phone services. Their home phone price is unbeatable.

ALTIMA TELECOM

Same as above. Their home phone price is pretty cheap too.

TEK SAVVY

Same as above but their home phone price is higher.

FINAL WORD

Home phones are more and more becoming a thing of the past. With the advent of streaming boxes and VOIP systems, the glory days of cable TV are over.

There are no valid reasons for us, customers, to keep paying an exorbitant price for these 2 services.

It doesn’t seem like any of the big cable companies has taken this into consideration. It may very well be their downfall.

That being said, Canada still remains one of the most expansive countries for telecommunication services….

10 Financial killers

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In my previous post, I shared how F.I.R.E. has an element of privilege to it. I also indicated that for most people, F.I.R.E. will remain a pipe dream.

There are very real obstacles to becoming financially independent and potentially retiring early. Here they are, in my personal order of importance:

FINANCIAL KILLERS # 1 & 2: STAGNANT WAGES AND INFLATION

5 years ago, Statistics Canada published a very interesting study on the evolution of wages in Canada between 1981 and 2011. The study shows, among other things, that hourly wages barely bulged during that period. A full-time worker would earn about $ 21 in 1981 and just under $ 24 in 2011. Not even 15% more.

There were also gaps depending on gender, age and education.

In the meantime, inflation during the same period rose by 149.16%. 

FINANCIAL KILLERS # 3 & 4: DISAPPEARANCE OF JOB SECURITY AND PENSION PLANS

Job hopping is the new normal these days. Most people will have an average of 15 to 20 jobs and 2 to 3 different careers. Sadly said so, most employees are seen as disposables. Job security is a thing of the past, just like companies’ pension plans.

Only 37% of Canadian employees have a pension plan today, primarily in the public sector. It used to be over 50% in the seventies. A company pension plan used to be an important pillar of retirement, making-up for paltry CPP amounts and lack of personal savings. Nowadays, workers need to save more for their retirement. It can be an arduous task when looking at Financial killers # 1 & 2.

FINANCIAL KILLER # 5: POST-SECONDARY EDUCATION COSTS

Canadian students graduate with an average of $ 27 000 in student-loan debt. Depending on the degree and university, this amount can be much higher. Starting adult life and career with such burden is crippling, even more so when looking at the previous 4 financial killers.

FINANCIAL KILLER # 6: UNHEALTHY OBSESSION WITH HOME-OWNERSHIP

Yes, I am aware I am a home owner, thank you very much. That being said, I did not think about buying until I was in my mid-thirties, and after doing thorough calculations. Nothing says you have to buy a property right after graduation or after getting married!

In order to buy, you need to save for both a minimum down-payment and the closing costs. You also need to stay put for at least 5 years, if you want to gain equity and recover from the closing costs you paid.

FINANCIAL KILLER # 7: CAR AND COMMUTING COSTS

A subcompact car will cost on average $ 10 000 per year. This includes car payment, insurance, gas, maintenance and tolls. Since more people have to move to suburbia to find affordable housing and easily need 2 cars per household, these costs can only go higher.

FINANCIAL KILLER # 8: STAGGERING DAYCARE COSTS

If you chose to have children, it is very likely you will have to go back to work, despite the Federal government paid maternity leave and the Canada Child Benefit program.

This is not always a question of personal choice. It is merely based on at least the 5 first Financial killers.

A spot for an infant in a licensed daycare in Vancouver costs close to $ 1 300/month. For a toddler, you are looking at just over $ 1 000.  Prices in other big Canadian cities are similar, with the exception of Montreal. The Quebec government has its own childcare program and costs are way lower.

FINANCIAL KILLER # 9: CONSUMER-DEBT, AVOCADO TOASTS AND LATTES

A lot of people are still trying to keep-up with the Joneses, by constantly upgrading to bigger and shinier things.

That being said, a lot of people are also using credit cards to make ends meet, due to the above financial killers.

FINANCIAL KILLER # 10: LACK OF FINANCIAL LITERACY

Unfortunately, we are not taught at school that we need to save for retirement or for emergencies. We are also not taught how to best do these things. We are not taught how interests on credit cards or loans is calculated. We are not taught about management fees.

This doesn’t help, but it is not what sends someone to a trustee in bankruptcy, contrary to popular belief.

The importance of the emergency fund

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I have heard a lot of names for the Emergency fund: Back-up fund, F-U fund, Opportunity fund, Rainy-Day fund…whatever you want to call it, it is just semantics.

The purpose of said funds is the same: to have some cash in hand when s**t happens. And yes, s**t will occasionally happen, no matter how much we pretend it won’t.

I have written about having an emergency fund before. My views on this matter haven’t changed. With this post, I want to go from theory – i.e. having an emergency fund- to practice -i.e. dealing with an emergency-.

ENTER MY DRIVING WOES

It all started in 2014. That year, I was involved in a minor collision for which I was found 100% responsible. I had to pay a deductible when getting my car fixed. At the time it was $300, no big deal for my wallet.

In British Columbia, it is possible for the at-fault driver to reimburse the insurer for the repair costs to both vehicles, provided there is no injury claim. Doing so also “protects” the insurance premiums of the at-fault driver from increasing.

In my case, the other driver claimed injuries so I could not do this and was assessed a premium surchage over a 3-year period. In any case, I wouldn’t have been able to repay , as I simply didn’t have the extra money back then.

DRIVING WOES-TAKE 2

Fast forward to 2017, I hadn’t had any at-fault accident since then, when I was involved in another minor fender-bender for which I was also found 100% responsible!

My deductible was $ 500 this time, again no big deal for my wallet. However, because of the 2014 accident, I was looking at a hefty premium surchage. The only way for me to avoid this was to pay for the repair costs on both vehicles, AND that the other driver did not claim injuries.

THE CASE FOR THE EMERGENCY FUND

I was extremely lucky that the other driver did not sustain injuries. I was also lucky the collision was minor. The total extra costs came at just over $ 2 800.00, which I was able to repay and this is what I actually did.

All in all, the total amount I forked up-front for my driving mishaps was $ 3 600.00. The upcoming surchage I was looking at was 3 times that amount!

I might be Captain Obvious here, but I am glad  my emergency fund was here to get me out of the hole I had dug for myself! If I hadn’t had one, it would have cost me an extra  $10 000, on top of the regular premiums. That would have been a big chunk of dough!

CONCLUSION

I have yet to hear anyone -including myself- wishing they didn’t have an emergency fund when s**t hit the fan.

Much has been written and said about the good, old emergency fund. There is no question pretty much anyone needs one, including those with a hefty saving rate and those financially independent. A portion of assets should be designated as emergency fund.

Whether one needs $ 10 000, 3 or 6 months of expenses and whether said monies should be held in a plain savings account are discussions for another post.

In the meantime, and in light of these car events, I may need to devote some money for driving lessons….and that is also a discussion for another post!

To combine finances or not?

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When two people are in a committed relationship, the question of moving-in together comes-up at some point. This question actually triggers a series of other questions such as how to share household chores and if all the belongings are going to fit-in in the new place.

However, there are a couple of very important questions that should not be overlooked: how are we going to pay for the bills and are we going to combine finances?

Long before you move-in, you should have had “the money talk”, as a couple. There are crucial details that partners need to know about one another, such as income and debts, as well as goals.

Once you have the basics down, it is time to take your conversation to the next level.

Option 1: partial combination; 1 joint checking-account, 1 joint savings-account

A joint checking-account is used to pay for common expenses like rent, utilities and groceries. More categories can be added, depending on your situation. If you are a one-car household, then car expenses would also be considered as a joint expense.

If you have similar incomes -or close enough-, you can both contribute 50% to the account. If there is a large disparity between your incomes, use the percentage method instead.

Add your respective monthly net incomes. Divide your individual net income by the combined income and multiply by 100. Always use your net income.

For example, if your net combined monthly income is $ 10 000 and one partner earns $ 2 500, their share is 25%.

It is also a good idea to have a 3-month emergency fund for the shared expenses.

Option 2: almost complete combination

With this option, all the money is deposited in a joint-account and a portion is transferred to each partner’s individual accounts.

All the bills are paid from the joint-account, regardless of their nature. The individual accounts work like an allowance.

The most challenging part of this approach is to decide what amount should be transferred to the individual accounts!

Option 3: complete combination

This approach is definitely the most transparent one. When both partners are on the same page financially, it is also the best.

Communication is key. It is best for both partners to sit down and discuss how to consolidate all their accounts, as well as how to manage them on a day-to-day basis. Both need to be actively involved.

As years go by and children come into the picture, the line between “yours, mine and ours” becomes more and more blurry.

Option 4: complete separation

In this scenario, the couple does not combine finances at all and keeps everything separate. I personally find this method counter-productive. Some household expenses are higher than other ones, and it can be tricky to decide who pays for them. It can also be an hindrance to saving goals or paying-off debt.

You may want to revisit why you are not considering combining finances to some extent. Maybe you have done this in a previous relationship and it was a disaster? Maybe you don’t trust your partner? Maybe your partner has an opposite financial style?

Again, communication is key here. Money is a huge stressor for couples and the leading cause of divorces.

Final word

Deciding to combine finances -or not- is a very personal decision. What will work for a couple may not work for another. It is important to find the system that works for both your partner and you. Don’t worry about what outside people think.

Stress-testing your finances

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The Office of the Superintendent of Financial Institutions (OSFI) implemented a new mortgage rule that will come into effect on January 1st 2018.

Any mortgage applicant will have to be put to a financial stress-test, regardless of the down-payment amount. Same goes for renewal and refinancing, unless the lender is the same.

Initially, only high-ratio mortgages were subject to said test, i.e. mortgages with less than 20% down.

Basically, borrowers will need to qualify for a mortgage at a rate 2% higher than the rate they are actually getting or at the 5-year Canadian benchmark rate, whichever is greater.

This measure is put in place to ensure Canadians do not buy properties that they ultimately can’t afford to pay for. We also are in a rising-rate environment, after 7 years of stagnation….and household debt is at an all time high.

Canadians will qualify for lesser amounts, and personally I think it is a good thing.

stress-testing our personal finances is always a good idea

Life is never a straight line. Sometimes, shit happens; things don’t go according to plan. Suddenly, we are out of a job; or we are involved in a car accident.

So, what do we stress-test our finances? Let’s take a look at a few items.

liquidity 

How liquid are you? if something bad happens, you will most likely need some cash right away.

If you are sick, you will probably need to pay for your medication before submitting an expense claim. If you apply for E.I. benefits after being let go, there is a one-week waiting period. It will take 2 to 3 weeks before money is actually deposited in your bank account.

And no, a credit card is not considered as liquidity! Sure, you can charge expenses to it and earn rewards, but at some point, you will have to pay the credit card company back.

Your house and RRSP are not liquid either. It will take weeks, if not months to liquidate these.

insurance

Having adequate insurance coverage can be a life-saver and may avoid you bankruptcy or foreclosure on your home. I wrote this article a while back. Use it to assess whether you have sufficient coverage (shameful plug, I know!).

mandatory expenses

These include shelter, food, debt repayment at the very minimum. Depending on your situation, you will probably have more categories such as transportation and/or various insurance policies.

Don’t think for one second you will be able to skip these. Vacation and entertainment, however, can -and should- be put on hold. This is the basis of your bare-bones budget.

net worth

In extreme circumstances, you may have to sell all your assets to pay for what you owe or to avoid becoming homeless. Your net worth equals all your assets minus all your liabilities.

if after doing the math, you don’t have anything left, or you owe more than you own, you have a problem. Having some net worth is another good safety net.

Final word

Everyone should stress-test their finances at least once a year. Review your savings amount and allocation; review your insurance coverage; live on a bare-bones budget for a month. You don’t need to wait for an emergency to do so.

Why I don’t automate all my finances

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If you are the forgetful type or if organization is not your strong suit, I totally understand why you would choose to have all your bills automatically paid.

After all, once it is set up you can just forget about it. You also don’t have to worry about late fees and interest charges.

Automating finances is hugely popular in the personal finance blogosphere. However, I personally beg to somewhat differ.

nOT worrying and forgetting are precisely the problem

Automating all finances can make you lazy. You don’t necessarily check your statements and bills anymore. It can make you spend aimlessly and overspend too.

service providers do make mistakes

Since they have access to your bank account or credit, it may be difficult for you to get your money back or a credit if you notice a mistake in your bill.

If money is tight, it could put you in a delicate situation if you overpay due to incorrect billing. You may not have the funds to pay for other items.

paying for a bill can mean you agree with the charges

Before setting up an automatic payment, please read the terms and conditions set by the service provider. It is not uncommon to see a full payment means acceptance of the charges.

if you don’t have the money in your account, you will pay fees and interests

Banks are notorious to charge overdraft fees and interests until your account is back in the black.

Your payment will go through but you will be dinged. Most bills are due at different times of the month, and are not always linked to your paydays.

these are the main reasons i don’t automate all my finances

Manually paying my bills forces me to check them and to pay attention to my spending.

The only bills I had to automate were my mortgage, my car payment and car insurance. I wrote “had to” because it is pretty much impossible to send cheques for these expenses.

What about you? Do you automate your finances?

Retirement planning mistakes- part 2

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In part 1, we examined 5 common retirement planning mistakes. Here are a few more:

mistake # 6: not investing

Saving is not enough. The most you can earn by leaving your money in a Canadian high interest savings account is 2%. Most savings accounts barely pay 0.5%.

Inflation is the biggest money eater. $ 1 000 today will not buy the same amount of goods 5 years from now, let alone 30.

Historically, the stock market has always recovered and outperformed anything else. From 1900 to 1999, the average return was a little over 10%. This number does not account for inflation and taxes, but it is definitely better than 0.5%.

mistake # 7: paying too much for your investments

A 2% MER charged annually on a mutual fund can eat up almost a third of you have invested in said mutual fund over a 20 year period.

Beware of how much your investments cost you. Do not rely on your financial adviser to be upfront about this. Look for deferred sale charges as well as redemption fees and the likes.

mistake # 8: not taking advantage of tax minimization opportunities

In Canada, the RRSP and TFSA are your two best friends when it comes to retirement planning.

The RRSP is a tax-deferral mechanism, whereas the TFSA does not levy tax on dividends, capital gains and interests received from your investments.

mistake # 9: counting on an inheritance

This is banking on money that you don’t have, and that you may never receive. If you are an actual beneficiary, the amount you receive could be smaller than you think after probate.

MISTAKE # 10: THINKING YOU WILL NEVER RETIRE

No matter how much you love your career, your business or your job, there will be a point in time you will no longer be able to do it. Aging is real!