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?

Annuities basics

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Please note I am not a licensed insurance agent. This post is for information purpose only. 

Upon retirement, many people decide to convert their savings into an annuity. But what is an annuity?

AN ANNUITY IS A CONTRACT GUARANTEEING AN INCOME FOR A SET PERIOD OF TIME

Basically, you buy it with your savings and the money is returned to you in the form of set payments as well as any interest earned.

There are different contracts that can match your needs: straight-life, term, prescribed, indexed, insured, variable, joint-life (for couples), guaranteed minimum..etc

ANNUITIES ARE GREAT IF YOU ARE CONCERNED WITH OUTLIVING YOUR SAVINGS

If you buy a straight-life annuity, payments are guaranteed until you die. A number of term annuities can make payments until you are 90.

ANNUITIES TAKE AWAY INVESTMENT CONCERNS

With an annuity, you don’t have to worry about selling stocks, bonds and re-balancing your portfolio. The insurer will do it for you.

ANNUITIES CAN BE A SOLUTION IF YOU ARE SINGLE WITH NO DEPENDENTS

Most annuity contracts will stop payments upon your death and will not necessarily return the excess funds to your estate. If leaving a legacy is not a priority, you can choose a higher payout instead.

ANNUITIES MAY NOT WORK IF YOU ARE IN POOR HEALTH

if you are not expected to live a long retirement due to health issues or a terminal illness, an annuity may not be the best solution for you.

ONCE YOU BOUGHT THE ANNUITY, YOU ARE LOCKED IN

This is the biggest drawback of this product. Once you have signed the contract, you cannot go back. You no longer have control over the money you handed over, nor can you choose how to invest the money.

THE INCOME IS CALCULATED AT THE TIME YOU BUY THE ANNUITY

If interests rates are higher upon purchasing, you can expect a higher payout. If they are lower, your payment will also be.

Age, gender, life expectancy and the amount of money you have also influence the payout.

As a rule of thumb, you are better off buying an annuity when you are 70 or older.

ANNUITIES ARE TAXABLE

If you buy your annuity from an RRSP or a RRIF, you will be taxed at your marginal rate.

If you buy from a non-registered account, you only pay tax on the interest portion of the payment. As you age, the income received will gradually shift to the principal, lowering your tax bill overtime.

A good tax advantage is with a prescribed annuity. The insurer will pay an even amount of both principal and interest,evening out the portion subjected to tax.

YOU NEED TO CHECK THE INSURER’S FINANCIAL POSITION

As annuities are guaranteed contracts, the insurer needs to be in a solid financial position.

Should the insurer become insolvent, Assuris will provide 85% or $ 2 000 of the monthly payout.

FINAL WORD

Annuities are complex products, but they are definitely worth a look. An annuity can be a great part of your retirement plan, but it should never be your entire plan.

Book review: Stock Investing for Canadian for Dummies

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My first introduction to investing was horrendous, to say the least. It took me many years to finally take the plunge -into the stock market- and become a DIY investor. I certainly regret taking so much time to do so, as I have missed on, on one of the longest bull market in history.

When I decided to educate myself on stock investing, I bought the above-mentioned book, written by Andrew Dagys and Paul Mladjenovic. Dagys is a Chartered Professional Accountant (CPA) and Mladjenovic is a Certified Financial Planner (CFP). I can safely write these two know what they are talking about!

the “dummies series” REGULARLY gets updated

This is one of the reasons I bought this book. It is currently at its 5th edition so you do have up-to-date information.

the book uses plain and simple language

Another good reason to read this book is that it does not confuse you more, quite the contrary.

The book uses plain language and gives a lot of tips, examples, references and resources.

the canadian twist is nice

There aren’t that many personal finance books for Canadians. It is good to read a book that talks about the Canadian Financial landscape. Although stock markets operate the same way everywhere, the tax implications and investment vehicles vary from country to country.

 if you are not a novice, this book is not for you

If you already know the basics of investing, you won’t learn anything new here.

final word: buy

I give this book a definite buy. It is the perfect and easiest way to get started with stock investing!

 

 

 

 

 

 

 

 

 

 

 

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!

Labor sponsored investment funds explained

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In Canada, labor-sponsored investment funds -LSIF- were introduced in the 80’s to encourage Canadians to invest in small companies and start-ups.

A LABOR SPONSORED INVESTMENT FUND IS BASICALLY A SMALL CAP MUTUAL FUND…with a few twists

This type of funds is composed exclusively of small businesses and/or start-ups companies that are looking for capital and financing.

It can be bought from an investment firm or directly from the fund company.

Like any small cap fund, these funds are fairly speculative and riskier. The companies they invest in are in early stages of development, and may fail.

the (only) advantage of these funds is the tax credit

If you invest $ 5 000 in a labor sponsored fund provincially registered, the Federal Government will give you the maximum $ 750 tax credit.

The province where the fund is registered will also give you an additional tax credit. For example, British Columbia will also give a 15% credit for $ 5 000 invested.

Tempting, but there is a big catch.

most funds lock your money in for 8 years

You can always redeem before that, but if you do so, you will have to repay the tax credits back. Same goes if the fund is sold or goes bust.

The fund company can also stop redemption at any time. You may not get your money back when you need it.

the mer on these funds is EXTREMELY high

It is fairly common to see a Management Expense Ratio -MER- of 6% to 8% on Labor Sponsored Investment funds.

The MER directly impact the fund’s return, as expenses are paid regardless of the fund’s performance, which brings me to my next point.

labor sponsored funds are under performing

It is actually not surprising given their core nature. When you take into account the high MER, most of the times, investors are loosing money.

final word

Personally, I would not invest in a labor sponsored investment fund. If you choose to do so, carefully read and understand the prospectus.

Any investment decision should never be solely based on obtaining a tax credit.

The Conservative Federal Government had actually scrapped the tax credit before loosing the election to the Liberals….who then decided to restore the credit.

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.