Category: Planning

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.

 

 

F.I.R.E. explained and debunked

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F.I.R.E. is a very popular acronym is the Personal Finance blogosphere. It stands for Financially Independent Retire Early. Over the years, this concept has become more and more appealing, and no wonder. With major changes in the workplace, such as stagnant wages, the disappearence of pension plans and a higher unemployment rate, a growing number of people aspires to quit the grind….myself included.

F.I.R.E. IS NOT A GET-RICH-QUICKLY SCHEME

Unfortunately, it will take some time before anyone is in a position of pulling the plug on their dreaded job, as a sufficient amount of money needs to be saved first.

Said amount will require thorough calculations first. Conventional wisdom says it should be 1 million or 25 times your yearly expenses. I say conventional wisdom needs to be challenged! I will save this for another post.

In order to save for the magic number, you need to make money, there is simply no way around this!

F.I.R.E. HAS AN ELEMENT OF PRIVILEGE IN IT

When you take a look at F.I.R.E. bloggers, most of them were making a decent income – well into the 6 figures, combined or not- before becoming financially independent (F.I.) . Some of them don’t have children or had them long after being F.I. Others chose not to buy properties or graduated with no student debt or had no debt at all.

The above definitely gives a head-start to anyone choosing F.I.R.E. It doesn’t mean you can’t achieve F.I.R.E. if the above-mentioned doesn’t apply to you. However, it may be more challenging and take longer.

The harsh truth is that F.I.R.E. will remain a dream for a lot of people.

F.I.R.E. HAS AN ELEMENT OF FRUGALITY IN IT

In order to achieve F.I.R.E., you not only need to earn money, but also to cut down on expenses.

By doing so, you may realize you need less than you initially thought to live on.

Being frugal can be borderline with being cheap at times.

Frugality is not for everyone either. That being said, not being frugal does not prevent anyone from reaching F.I.R.E. either. It will just take longer.

F.I.R.E. IS MORE ABOUT FINANCIAL INDEPENDENCE THAN EARLY RETIREMENT

A lot of people achieving Financial Independence actually do not retire or stop working. They choose to pursue different career paths instead, the most popular being becoming a writer and/or a blogger.

This is where the problem lies, in my not-so humble opinion. A lot of people blogs about retiring early and never working again, when they are actually still earning income instead of drawing from their savings!

The core concept is that F.I.R.E. gives you the ability to choose when and where to work as well as what to work on. Money is no longer part of the equation. This is what I personally find really attractive.

FINAL WORDS

I would love to reach Financial Independence sooner than later. That being said, I don’t know if it is a possibility right now, and it is OK. I fully acknowledge my economic reality and the limitations of the F.I.R.E. concept.

I would also caution anyone not to take at face-value anything read on the Internet from people claiming to be F.I.R.E. We never have the “full picture” of their situations. We don’t have access to their bank accounts, investment portfolio or tax returns. We can never be sure where their income comes from.

 

 

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.

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!

Retirement planning mistakes- Part 1

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Planning for retirement is a very complex task. For many, including myself, it can be daunting. The road to retirement can also be paved with traps. Let’s look at a few of them.

Mistake # 1: not having a (retirement) plan

What makes retirement planning so daunting and difficult is that we have to think about a future that does not exist.

But, in order to plan for your retirement, you need to think about what you would like it to look like: when, what, where. If you want to travel or live in an upscale retirement community, you will need more money than if you plan to live in a condo and spend time with your children and grand-children.

If you are a couple, communication is crucial, as your retirement goals and dates may be different. Both of you need to be involved in the process.

Once you have an idea of what you want your retirement to be, you can start planning financially.

mistake # 2: assuming the process will be linear

Unfortunately, times have changed. Gone are the golden days of steady employment, regular salary increases and generous company pension plans. Today, only 20% of Canadians have a pension plan through their employers. Job hopping is the norm and wages are stagnant.

Be realistic and ready to adjust your plan a few times over the course of your life. There will be times you won’t be able to save anything, perhaps due to a job loss or an illness. Other times, you will be able to save more.

mistake # 3: solely relying on the federal government

The average monthly CPP pension amount Canadians receive is $600.00. Both the OAS and GIS are subject to claw-back and income threshold, i.e. if you make more than a certain amount of money, you either have to reimburse the government (OAS), or no longer qualify for the benefit (GIS).

Want to take your CPP pension before 65? It will be minored. Retiring overseas? Your GIS payment will be suspended after 6 months. Spend less than 40 years in Canada? Your OAS amount will also be minored.

Beyond the paltry amounts, there is no way to know for how long the system will be viable.

mistake # 4: underestimating longevity and healthcare costs

With progress in medicine and living conditions, a lot of people live well into their nineties, if not 100. In my humble opinion, longevity is what you should focus on when planning your retirement. You should assume income needs of at least 35 years post-retirement if you retire in your sixties. If you retire early, you need to increase that number.

Contrary to popular belief, you will still have expenses when you retire, including big ones such as a new car and home repairs if you own. You will also need some new clothes and shoes from time to time.

One of the expenses that is guaranteed to increase is healthcare. Even if you eat healthy and exercise daily, aging will result in various health issues. The older you become, the higher your insurance premiums will be. As a reminder, many items are not covered by provincial health plans, such as vision and dental.

mistake # 5: waiting for too long to start saving

The best time to start saving for your retirement is in your twenties. If you start young, you actually don’t need to save that much on a monthly basis, as time is definitely on your side. You can also take more risks with investing and earn higher returns.

The longer you wait, the more you will need to save in a reduced time frame. You may not be able to do it. You will have to take on more risks, which could result in greater losses you may not be able to recover from, if the markets tank.

final word

Stay tuned for part 2!

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.