Tag: personal finance blog

When and how to financially cut off your adult children

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As I previously wrote, times have changed. Gone are the days of working in the same company for your entire career as well as receiving a generous pension plan upon retiring. With tuition fees on the rise and employment prospects rather scarce, a growing number of parents found themselves helping their adult children well past their university years.

I will probably sound harsh here but doing so is a disservice both to the adult children and the parents. Let me tell you why:

  • Parents, your children are not going to pay for your retirement. You can’t borrow for this!
  • Parents, if you can’t pay your own bills in order to pay your child’s, you have a problem!
  • Parents, if you are cashing your retirement savings or your home-equity to help your children, you have a problem!

Constantly helping your adult children actually teach them to be helpless and unmotivated. Think about it for a minute or two. If your adult children know you will catch them when they fall, what are they learning? Probably nothing. Do they have any incentive to proceed differently? Probably not.

There is no question in my mind that adult children need to be responsible for their lives, in every way:

  • Adult children, if you need to get 1, 2 or 3 jobs to make ends meet, so be it! Stop relying on the bank of Mum & Dad for your basics.
  • Adult children, if you need to postpone vacation, wedding or home-buying until you can actually afford it, so be it!
  • Adult children, if you are never able to go on vacation, pay for a grand wedding or buy a house, so be it!

What is the best way, as a parent to help their adult children, you might ask.

  • Teach your child about money management. It is never too late to learn! You may find out you need a refresher too, as a parent.
  • Set boundaries and stick to them. Saying no to a child is the hardest thing to do for a parent, but is both liberating and powerful. But by doing so, you are fostering their independence and creative-thinking. If you gave them a move-out or cut-off date, follow through.

My own parents only helped me once, financially, as an adult. It was back in 2009, in the midst of the economic downturn. I was unemployed and had exhausted the little savings I had.  It is the only time they bailed me out…and that’s the way it should be.

I had previously asked for financial assistance for other items, and my parents always declined. I found it hard, but looking back I know it was in my best interest. I made my own mistakes but I also learned valuable lessons, such as the value of a dollar and the value of planning. It also rid me of any sense of entitlement I may have harbored.

Suburban life ain’t cheaper

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Extraordinary real-estate costs in cities like Vancouver and Toronto are pushing people further and further away from said cities.

A single detached house in Vancouver costs close to 1.5 millions. A townhouse costs  about 500K and a condo 350K. No wonder people rush to the suburbs in hopes of snapping-up properties at a somewhat lower price.

The problem with this approach is two-fold: first, it drives prices up in the suburbs as well. Bidding wars and no-subject offers have become the norm there too. Second, it will cost you more if you have to buy a car or two.

A recent study compared the costs of housing in Langley with the costs of commuting Downtown Vancouver for 25 years. There are very few properties assessed at over a million  in Langley. However, the transportation costs would be close to 565K over the course of a quarter century. Staggering! On the other hand, someone living in Vancouver would spend “only” 298K in transportation costs, over the same period of time.

The choice of Langley is not random. Public transit is fairly limited in this city, making a car a necessity. Technically, one could go Downtown Vancouver from Langley with bus/skytrain but it would take them close to 2 hours. There are also fewer job opportunities.

Case in point with my own story: before buying my first condo in Surrey, I rented in North Vancouver and New Westminster. I worked mainly Downtown Vancouver and have been calling New West my workplace for close to 5 years. I never rented Downtown Vancouver, as I simply couldn’t afford it and didn’t want to. Rents are a waste of money in this part of the city!

With some previous salaries I made, I simply couldn’t afford a car, but I also didn’t need one. When I was in North Van and worked Downtown, I would simply take the Seabus. It took me 15 minutes to get to work. The best was when I moved to New West and also found a job there. I would walk to work.

If I needed a car, I was member of a couple of car-share organizations. It was way cheaper than owning one. I would also claim the monthly bus pass as a tax credit. Financially, it looked like an idyllic situation, when it was not necessarily the case.

The black point is that I was renting when it no longer made sense for me to do so, both financially and personally. I am not getting into the rent vs.buy debate here!

Back to my own story, I didn’t qualify for anything in Vancouver or closer suburbs, so I turned to further suburbs, namely Surrey and Langley. With public transit more limited, I had to buy a car, which added $ 800 to my monthly budget. Buying was cheaper than renting, but when I factored in that extra $ 800, I wasn’t so ahead anymore!

The yearly cost of a compact car in Canada is just under $ 10 000. If you have a bigger car or a truck, that amount will be higher. If you have 2 cars, it will be double.

Living in the suburbs used to be a no-brainer. It is definitely no longer the case. Nowadays, suburban vs. urban living is a trade-off between housing and transportation costs. Before deciding to move to the suburbs, whether as a renter or owner, take a look at your transportation costs and commute time.

As for me, I do not regret buying in the suburbs and getting a car, despite the extra expense. My car will be paid off next year and I anticipate my transportation costs to actually be lower for a few years after.

Most importantly, I enjoy my suburban life.

It is not just the latte (factor)

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David Bach popularized the “latte factor” term. The concept emphasizes the long-term cost of small, everyday purchases such as coffee, cigarettes, magazines and so on. There are lots of debates in the PF community as to whether this concept is valid. I personally believe it is, to some extent.

The very first post I wrote was about the cost of eating-out. I had estimated that someone eating 3 meals out five days a week will spend over $ 8 000 per year on food. For simplicity, let’s say this amount never changes for a period of 25 years. The cost will be $ 200 000. I sure could find a lot of better uses for that amount of money!

For simplicity again, let’s say that half of it is invested, i.e. $ 100 000, for 25 years at a conservative 5% interest rate. At the end of the 25 years, it would turn into close to $ 194 000. I don’t know many people who can pass up $94 000. Do you?

No, the latte factor won’t make you a millionaire, but it can certainly help your financial goals. That being said, in order for this to work, you need to actually save and invest the money. If you spend it somewhere else, it will get you nowhere financially.

You also need to look at bigger expenses, namely house and car. Don’t buy too much of these, they can drain your accounts in no time and prevent you from replenishing them. It is also a good idea to review and compare insurance quotes or call your cable to company and ask for a discount. You will be surprised at how much money you could save by doing all the aforementioned.

To put together a successful financial plan, you need to look at the bigger picture and at other elements such as your income – does it exceeds your expenses?-.

Spending an occasional $ 4.00 on a fancy latte will not derail your retirement plans. Spending $ 8 000/year on take-out or taking on a too large mortgage might.

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Financial things to do (and not to do) in your 30’s

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The 30’s are definitely an interesting decade. Chances are they are a mixed bag for most people in them, including myself: wedding, kids, house, career…etc. This decade is probably the most taxing on hard-earned dollars.

The good news is that your 30’s are also your top-earning decade. Without further ado, here is what you should – and shouldn’t- be doing in your 30’s:

  • become established in your career. You probably have a few years of experience under your belt by now. Make the most of them to negotiate your salary and promotion or to find a better job. If you are considering a career change or want to become self-employed, you will need to plan for this. Keep reading.
  • make use of work benefits: benefits are basically free-money, and even more so when they are employer-paid. If your employer offers extended health and/or disability insurance, please enroll. Same goes for a pension or a group RRSP plan.
  • track your expenses and income. There is no way you can budget and set goals if you don’t do this.
  • have a sufficient emergency fund. Whether you want to call it a back-up fund or an opportunity fund, it is all the same. It needs to be adequately funded. Chances are $ 1 000 are not going to cut it anymore, particularly if you have dependents. Most people aim for 3 to 6 months of living expenses. Aim for what is right for you, given your circumstances.
  • have adequate insurance coverage. Unless you are loaded with cash you need insurance. Check my previous entry on this subject.
  • plan and save for items: whether it is car repairs, your wedding or your annual vacation, these are neither emergency nor a surprise. If you are unable to save the money, then you may have to postpone or consider other options.
  • don’t keep-up with Joneses. You should be way past this.
  • you are really saving for your retirement. This should be the top-priority, before your kids’ education, if you have them. Ultimately, your children won’t pay for your retirement.
  • you are investing in the stock market. You still have a few decades before retiring. The stock market has always provided the highest returns. Educate yourself and invest your money. Do not let it sit in your savings account earning 0.5% interest.
  • you have your debt under control. It is unlikely you will be able to completely avoid debt in your 30’s. Your student loans should be on their way out, if not paid off. You are not racking-up credit card debt to buy stuff or to pay for living expenses. When borrowing, it should be to buy an appreciating asset, when the cost of the loan does not impact other saving goals and will be paid off before retirement. Anything not under that category should be off-limit.
  • Don’t buy too much house. If you decide that home ownership is for you, do not become cash poor over it. Too many Canadians make their home their entire financial plan, including to retire. This is a mistake. You also need highly-liquid, easily disposable assets.
  • have your legal affairs in order. You need a will, even more so if you are married and/or with children. Ensure you designate a beneficiary for your life insurance and other registered accounts.

 

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RRSP myths debunked

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As 2016 is slowly but surely coming to a close, it will soon be tax season again.

I want to broach on the biggest RRSP myths that are still circulating around.

  • A contribution equals a tax refund. Sorry to disappoint you here, but this is simply not true. A contribution will lower your income tax payable, but does not necessarily trigger a refund. It depends on your income and situation in general. Also, your refund will never be for the full amount you contributed.
  • RRSPs are tax free. No, they are not. An RRSP is a tax-deferred account. It is like “contribute now, pay later”. You only pay taxes when you withdraw from the account. The only 2 exceptions when you won’t pay taxes is within the Home-Buyer Plan or the Lifelong Learning Plan. That being said, under these 2 programs, you have designate a minimum repayment amount each year when filing your tax return. If you don’t, you will be taxed accordingly.
  • Dividends and capital gains within an RRSP are not taxable. This is by far the biggest myth around. If you have stocks, ETFs or mutual funds, you may be paying taxes on any dividends or capital gains. It all depends on the country the stock/ETF/mutual fund is from. If Canadian, then yes, you will not pay taxes on any dividend or capital gain. Canada also has an agreement with the United States regarding dividend-paying US stocks held in a Canadian RRSP. These are not subject to taxes either. For the rest, the area can definitely be more gray. Many countries levy a tax on dividends paid to non-residents. If there is no tax treaty with Canada, CRA will levy additional taxes. Because an RRSP is a registered account, you won’t be able to claim the Foreign Tax Credit.
  • Everyone needs an RRSP. If you are in a low tax bracket or have a pension plan at work, you won’t benefit from an RRSP. If you are in a high tax bracket, you need to figure out what your tax bracket will be when you retire. If it is expected to remain the same, the RRSP is probably not the way to go either. With the clawback on the Guaranteed Income Supplement, you may end-up paying more income taxes! The RRSP is best suited for medium or high earners whose tax bracket will be lower upon retirement, and who don’t have an employer pension plan.
  • An RRSP loan is a good idea. Not necessarily. As I indicated above, your refund will never equate the amount you contributed. Unless you can reimburse your loan in full quickly, you will pay interests on said loan. You also can’t deduct the interests paid on the loan, because you can’t do so on registered accounts. Your RRSP also needs to return quite a bit more than the interest rate on your loan.

There are plenty of other misconceptions about RRSPs, but these 4 are probably the most common ones.

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Building your net worth

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A net worth is everything you own minus everything you owe, in other words, assets minus liabilities.

More often than not, people owe more than they own, meaning they do not have any net worth.

In order to build your net worth, you need to focus on 4 elements: “income-ing”, saving, investing and simplifying your life.

Income-ing: yes, it is a word I have just created. Making money is the basis of building net worth. There are many ways of making money: through a job or a business, but also from investing or earning royalties. The list is pretty much infinite!

Saving: next, you need to save some of your income. You can make a whack load of $, but if you don’t stash some away, you will never build any net worth.

Investing: once you have some cash, put it to work for you. Educate yourself about the various investments out there. It really isn’t rocket science! Make sure your investments are in line with your risk tolerance and the stage you are at in your life, as well as your goals.

Simplifying your life, a.k.a. spending less: This one is the toughest for most people, including myself. Our brains are wired to spend and seek instant gratification. It is about balancing immediate pleasure with long-term goals. It is about consciously creating a lifestyle in which you need less money to live on. The money freed can be used for saving and investing, thus building net worth.

The best way to see and commit to your net worth is to regularly track and review it.

Free or low-cost exercise options

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One of my plans for 2016 is to take better care of myself. This includes exercising everyday. I have been doing this since Christmas, and so far so good.

Beyond the physical benefits, it helps me with stress as well as de-cluttering my mind.

That being said, a gym membership can be fairly expensive. In order to break even, you need to make use of it several times a week. Gyms make the most money with absentees and adds-on. If you can’t commit, then don’t bother with a gym membership.

Here are a few cheaper options:

  • Walking, running, hiking: these are the easiest and cheapest forms of exercise. You do not need expensive gear either. All cities have parks and trails. Some public schools also allow visitors to use their field tracks or football field.
  • Stair-climbing: a surprising work-out with several benefits. Totally free.
  • Gardening: another calorie-burner. I have noticed that since I bought my condo that came with a yard.
  • YouTube fitness channels: very convenient when the weather is bad or if you are more of “the indoor type”.
  • DVDs or Wii fitness: same as above, but you have to pay for the DVDs and equipment. It is cheaper than the gym in the long-term though. Some gyms charge up to $ 25.00 for a drop-in yoga or Zumba class.
  • Biking: you don’t need to buy a fancy bike. If you don’t have one, you can rent one.
  • Swimming at the RecCentre

If you live in a building that has a gym or a pool, please use them! There is no need to pay for these when they are already included in your strata fees/rent, and when they are right here. Sure, it may be smaller and the equipment may not be the newest, but it may be exactly what you need.

Perceived wealth vs. actual wealth

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On my way to work the other day, I found myself stuck in traffic (not unusual). In the lane next to mine, was a Porsche Cayenne.

The base cost of this car is around 68K in Canada. It does not include any options. When I saw this car, my first question was: “Can the driver actually afford this?”, followed by “How much does this cost every month”?

I didn’t always have this line of thinking. Not that long ago, I would have been in awe and perhaps envious. I would have automatically assumed the driver was rich. Not anymore.

I finally realized that because someone has a fancy car, a big house or designer clothes, doesn’t mean they have the actual money to buy them. It doesn’t mean they are wealthy either.

Being able to buy something and affording that something are 2 different things.

The truth of the matter is that if you can’t pay for it cash and in full, you can’t afford it, period.

Yes, it sounds harsh, but it is the (harsh) truth. Nowadays, anyone with a credit card or a line of credit can buy anything.

The problem with perceived wealth is that it does not take into consideration the liabilities associated with the assets, i.e. the mortgage behind the mansion, the lease payment behind the sport car etc….It only focuses of the material goods.

Actual wealth, on the hand, does take these into consideration. It is called “net worth”. To calculate it, list all of your assets and their value (house, car, RRSP, TFSA, savings accounts) and deduct all the liabilities ( mortgage, car payment, personal loans, lines of credit, student loans).

For example, if you have a $ 150 000 house with a mortgage of $ 140 000, your net worth is $ 10 000.

It puts things in perspective, doesn’t it?

 

 

 

 

Condo-buying mistakes

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I have been re-assessing my living situation lately. I mentioned in a previous post my building underwent major repairs that directly impacted my unit. The bulk of the work is done, but deficiencies have yet to be addressed. That was not a fun experience, and the contractor doing the work was just plain dreadful.

Unfortunately, this was only the first of a series of repairs our building needs. It has been estimated each unit will have to fork $ 29 000 over the next 10 years or so to fix the building envelope and the roof. This does not include any repairs of the mechanical components such as the furnaces or the pipes.

Needless to say I am thinking about selling my unit, which was not exactly what I had planned on doing just yet. Back in 2013, when I bought, the engineers had just started doing the building envelope assessment. Their final report and recommendations came in in April 2014. There was no way I would have known the condition of the building before buying.

That being said, I realize I made a few mistakes and oversights when buying my condo:

  • Getting a 5-year fixed rate mortgage: The majority of first-time home-buyers do this. I thought it would be easier to have a fixed payment each month, but I am paying a wack load more in interests. The Bank of Canada lowered its rate twice….I didn’t benefit from it. If I want to break my mortgage, I will be faced with a stiffer penalty (I.R.D.).
  • Buying with a 5% down-payment: Unfortunately, 5% is really low. I had to pay for mortgage insurance and it will take me more time to see some significant equity in my condo. I may have to hold-on selling or turn down offers if I can’t “break even”.
  • Not paying sufficient attention to the Contingency Reserve Fund (CRF): Each strata corporation must set money aside each month to fund for larger repairs. When I bought my condo, the CRF had about 10K, and no major repairs had been done.
  • Buying into a “rental building”: Almost half of my building is tenanted and there is no rental restriction. The majority of owners is uninterested in the building and don’t want to spend any time or money on it. The turn-up at our AGMs is very low, except when money is asked for. Tenants don’t care and have no problems damaging the property.
  • Not fully considering whether condo living actually suited me as an owner: in a condominium building, you cannot choose your neighbors or do what you want. More and more things are just irking me. I bought on the ground floor, meaning constant pacing, stomping, vacuuming from the unit above. When buying, I didn’t meet with any Council member or other owner. Most people don’t.

After being a Council Member for over 2 years, I can also add the following points to consider:

  • Most Council members have no clue what they are doing: this probably sounds very negative. What I mean by this, is that Council members usually volunteer their time and come from all walks of life. They are not necessarily licensed Realtors, property managers, engineers etc…No formal or informal training is provided on how to manage a strata corporation. If you think it is scary, you are right!
  • Consultants, contractors and other agents are not always acting in the strata’s best interest.

This definitely gives me a lot to ponder. If I sell my unit, I may not be able to buy again in Vancouver. On the other hand, I am not sure I want to fork $ 29 000 over my building.