Category: Saving

Return since inception vs. yearly return

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I recently received my December statement for both my RRSP and TFSA portfolio. This portfolio is for retirement purposes only, therefore I don’t plan to draw from it until I retire.

As an information, its breakdown is as follow: 75 % equities, 20% bonds, 5% cash. Its geographical allocation is predominantly North American, but I have made efforts to diversify as much as possible, and also have investments in Japan, Europe, China and emerging countries. The equity portion of my portfolio is across pretty much all sectors.

Disclaimer: I am not a Financial Adviser and the above information is just that. Information. You should always do your own research before deciding on how and where to invest your hard-earned money.

Back to my returns, my RRSP return for 2019 was an astonishing 22% and my TFSA’s was 19%.

I didn’t let these numbers dazzle me

Why, you may -rightfully- ask.

Well, first of all, these returns are only “paper-returns”. What I mean by this, is that these returns are unrealized. In order to actually “bag” those numbers, I would need to sell my entire portfolio.

Remember, as long as you haven’t sold, you are not actually making or losing money.

Secondly, these returns are only for one point in time, aka 2019. 2019 has come and gone.

So what number to look for instead?

Look for return since inception instead

Return since inception simply means return since you first started your portfolio. Most brokerage firms will give you that number, the same way they give you monthly and annual returns.

Returns since inception take into consideration all time-periods, as well as the associated market fluctuations. I find that number to be more realistic than a monthly or yearly return.

Returns since inception don’t tell the whole story either

Actually, none of the various rates of return ever do.

As a time-weighted return, the return since inception doesn’t take into considerations any movement within your portfolio such as withdrawals and contributions.

For that, you need to look at your money-weighted rate of return.

And also keep in mind that any return rate never accounts for inflation or taxes, making it further complicated to figure-out your real rate of return….

Mindful consumption

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No, this post is not about me lecturing you on how you should completely change your habits overnight, such as becoming a vegetarian or only use public transit. These, quite frankly makes me cackle more than anything else.

 What I would like to accomplish with this post is the start of an internal -or not- dialog when it comes to our excessive consumption. Being more mindful of what we consume is definitely good for the environment, but also very good for our wallets!

FIRST, SOME BASIC RECYCLING STATISTICS

  • Plastics: at best twice. 90% of plastics in Canada aren’t recycled, even when you put them in the applicable recycling bin. Most plastics are actually not recyclable. 
  • Batteries: once. it is crucial to recycle these, as some of the metals they contain are highly toxic and polluting. 
  • Electronics: once. Most materials are 100% recyclable. 
  • Paper: maximum 10 times. I used to think paper could recycle indefinitely, this is not the case.
  • Metals and glass: infinite, including cans.
  • Never recyclable: Styrofoam (polystyrene), aerosols, ceramics, Pyrex, household glass (mirrors), standard incandescent bulbs

The above can help anyone make better choices when shopping. Have you noticed how much stores love plastic packaging? or packaging in general? They can charge you more money for that! 

SECOND, SOME pollution STATISTICS

Most polluting sectors:

  • Energy: transporting people and stuff accounts for the majority of greenhouse gas emissions due to the burning of fossils (aka fuel)
  • Electricity: particularly if produced with coal
  • Industries in general: what we produce and how much we produce 
  • Agriculture: yep, what we eat too has an impact on our environment. Livestock account for a large portion of methane production
  • Land use: the way we use land can be either polluting or helping the environment. 

the real questions IS “how much”? 

North Americans are trapped in an excessive consumption cycle. Their European counterparts are also racing close by.   

The single most important question we need to start asking ourselves is “how much stuff do I really need?” This needs to cover all aspects of our life, from our closets to our home, from our garage to our fridge, our annual vacation, our gift-giving habits and so on. 

The best part is that we actually don’t need to drastically change our habits to help the environment….and our wallets at the same time. 

  • Do you really need to eat meat 2 or 3 times a day? Could you reduce it to once a day? You are not asked to become a vegetarian.
  • Could some of your errands be done by walking or taking public transit? You are not asked to ditch your car. 
  • Do you really need 2 cars? if not, you can definitely ditch -sell!- one. 
  • Do you really need to take far-away vacation every year, or several times a year? Could you find a closer spot? You are not asked to stop taking vacation. 
  • Do you really need 10 pair of shoes? Could you do with 3 or 4 instead? You are not asked to stop buying shoes. 

What we are all asked is to be more mindful of our consumption, and to reduce it when appropriate. In order to do so, honesty is required, as well as the ability to distinguish “want” from “need”. 

FOLLOWED BY “WHERE” AND “WHO”

If we all collectively did the above, the environment would be in better shape. And so would people. Behind our excessive consumption, also come the questions of “where” do the products come from and, most importantly, “who” made the products we are about to consume? 

The majority of items we use on a daily basis are made in China or neighboring Asian countries such as Vietnam or Sri Lanka. The quality is usually pretty poor, meaning we have to throw away and replace these products more often, and yes consume more!

But most importantly are the labor conditions. How much are the employees paid in these countries? Are they provided with benefits? How many hours a day do they work? Could children be working? 

These are tough questions most of us, in our quest for the cheapest bargain, do not want to face.  Our consumption habits contribute to and subsidize modern slavery. This is a very inconvenient truth….

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.

 

 

 

 

 

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.

My personal tips to save money

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At the Money Savvy Blog, we regularly receive questions on “how to save money”.

Here are my own personal tips to do so. They may surprise you!

DON’T BUY OR RENT TOO MUCH HOUSE

You can save hundreds of dollars each month by doing so. Everything is negotiable, and that includes both rent and mortgage. Not all rents are the same amount. It may be cheaper to move to a different neighbourhood.

Same goes for home prices. Despite being in a raising-rate environment, you can still find low-rate mortgages. It is also important to buy the right amount of space for your needs. Unless you plan on having 10 children, you most likely don’t need a 10-bedroom mansion.

And because a lender qualified you for $ 500 000, does not mean you have to buy a $ 500 000 property! You actually would be better off buying a $ 250 000 one.

DON’T BUY OR LEASE TOO MUCH CAR

A car is a depreciating asset. It starts loosing value the minute it leaves the dealership. I never understand why people would spend thousands and thousands of dollars to buy such item.

And I shake my head when I hear people calling their cars “an investment”….

CAA has a very nifty little tool to estimate car costs. This depreciating asset also happens to cost a lot of money to maintain!

For example, a compact or subcompact car will cost around $ 9 000/year in British Columbia. A pick-up truck will cost around $ 14 000, and an “executive” vehicle (BMW, Audi) will cost around $19 000.

You will see a lot of the latter two in the Lower Mainland….Unless you work in a farm, in forestry or image is a crucial component of your income, you don’t need these types of car.

If you ditched the pick-up truck for a compact car, you will save $ 5 000, right off the bat.

If you are in a multiple-car household, try to see if you could live on 1 or 2 cars, instead of 2 or 3. You will save even more money!

SHOP AROUND

In this day and age, comparing costs of products and services has never been so easy. Unfortunately, most companies also do not reward loyalty anymore. It is always worth obtaining several quotes before purchasing, particularly on products like insurance, cable, cell phone or services like home repairs.

You could save big time. Case in point with my own home insurance: my former provider, with whom I had been for several years, kept increasing my rates; this despite me never filing a claim. I shopped around and switched to my current provider for half the price.

COOK MORE OFTEN

Much has been said about the latte factor and the avocado toast. While I agree that occasionally indulging in these will not put you in financial jeopardy, I believe it is problematic when indulgences become a daily, new necessity.

On the very first post I wrote on this blog, I had estimated someone eating 3 meals out 5 days a week would spend about $10 000 per year.

You can slash that amount in 2 by cooking and eating at home more often. You would still be able to eat out from time to time, just not on a daily basis.

FINAL WORD

By cutting expenses on big-ticket items like housing, transportation and food, you can save 10 to 20K per year fairly quickly and easily.

In comparison, how much do you think it would take to save the same amount of money on your own, solely relying on your income?

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.