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Saturday, October 31, 2009

Talking About Money

Why is money still a taboo in our society? I have read countless financial books and all of them say two things: that it is difficult to talk about money and that financial education should be brought into the schooling system. I am trying to do the second (in my own small way), but even among adults (or anyone), discussing their financial situation is a difficult matter.

Why is this? Are people insecure? Maybe embarrassed? For myself, I tell all my students that my goal is to one day be a millionaire. Then whenever the topic of money comes into the staff room, a teacher or two will always say "I heard about your million dollar plan" with a snide remark or comment. Until people realize that money problems or goals cannot be short term but long term progress this will be difficult.

My philosophy is to inch away towards my goals, as anyone who has read this blog will know. Every paycheque I update my net worth and set my goals to always have my assets going up and my liabilities falling. This has worked fairly well for me over the past few years in solidifying my financial position. I don't feel embarrassed that I am still in debt, and am slowly making changes in order to remedy this. I don't feel ashamed or uncomfortable discussing this with other people, in order to receive ideas or give suggestions to people. Money isn't intended to be rocket science, and I truly believe that all can be financially well off in the long run.

So what is causing the financial problems for most people? The concept of instant gratification is a major one. Why wait to save for something when you can borrow for it? Why should I not have a beautiful home and car and big screen television when so many other people have it? If you can't afford it, then you shouldn't have it.

Suze Orman has a personality that I have conflicts with, but she has a few good points about money. She claims that if you are unable to contribute 10% to your retirement and carry a credit card balance, that you are living above your means. She also throws in (in at least the current book of hers that I am reading) that you should also have 8 months of expenses saved up, which may be excessive but very helpful if you lose your job. She claims that the average American from age 35-45 carries $1900 on their credit card. If this isn't instant gratification, then I don't know what is. Personally I try to spend cash whenever I can. Then when my cash runs out, I don't buy anything else.

In my class I talk about financial issues that are important to me (saving, borrowing, financing your education, purchasing your first vehicle, renting your first apartment, buying your first house), and many students say to me that this is far more information then they get from their parents (concerning how expensive things are). That is a scary thought. If you are uncomfortable discussing finances with your family, then how are you going to deal with them when problems inevitably arise?

Finally, I want to point out to people that prosperity is a long term goal. I am writing this post because it is a little frustrating for myself to be inching along towards my financial dreams, but we all must realize that these are 20 year goals. As Robert Kiyosaki said in his excellent book "Rich Kid, Smart Kid", you have to look long term. His example was real estate relating to Monopoly. His "Rich Dad" purchased a piece of property and likened it to buying a property in Monopoly. He asked the kids "How long will it take me to turn this property into four green houses and then a hotel?". The answer was twenty years. Remember that when thinking about your financial goals.

Monday, October 26, 2009

Suggestions for Real Estate

I went with my girlfriend to a wedding yesterday afternoon. We were sat at a table for brunch with a younger couple and we asked what they did. Adam said that he was a real estate agent, and he became one because he got his real estate license so he could save himself fees as he bought and sold properties for himself. My ears of course perked right up.

He said that he owned thirteen properties and did so because he started working right out of high school and decided that he didn't want to (work that is). It took him five years to get going but he had his first place by age 24.

I asked him after a bit what he would recommend for someone looking to get started, as far as the type of property. What he said really surprised me. He said to get a fourplex if possible right off the start. The advantage is that he said, as compared to renting out a single family home, is that even if one or two spots are vacant, you won't be taking the entire financial hit. He also suggested that it might be better to purchase a place outside of my local area and hire someone to look after it for me (as that is what he is trying to do now). Again, all logical things that make sense. I was worried about the cost and he said that his girlfriend just bought her first fourplex for $209,000 (which is considerably less than I thought it would be).

He also mentioned the snowball effect that real estate has: that once you start making money off of it, it becomes easier and easier. The more money that you have, the easier that it is to get finance and refinance loans. He also mentioned that it is important to pay for a good team around you: mortgage broker, lawyer, accountant and real estate agent.

This was a good inspirational weekend for me financially and pointed me to the path of success I think. Now its just time to save for some down payments and begin my financial dreams!

Saturday, October 24, 2009

Net Worth Update - October 24th, 2009

I truly believe that my listing your goals and tracking your goals it is much easier to make progress. Here is the usual update!

Every time I get paid (every two weeks), I update my net worth. The idea behind this is that my goals are that my liabilities drop every two weeks, and by tracking them in this way, I am able to get a nice picture of where I stand financially. Its not a perfect balance sheet that I have (because of student loans I have a negative net worth), but the progress is what I am looking for.

ASSETS:
- up $233.61 from October 9th, 2009
- up $7652.85 from October 23rd, 2008(one year ago)

These assets include my house (I give it 1% appreciation each year in my appreciation), my RRSP and my TFSA. Even with the markets slipping a bit, my regular contirbutions continue to push me to an all-time high in assets each update.

LIABILITIES:
- better $677.13 from October 9th, 2009
- better $12,949.91 from October 23rd, 2008(one year ago)

These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). I am now up to five tutoring jobs, where the extra money that I earn goes to paying off my liabilities. I am quite happy with this number each week. We'll see how this continues as Christmas creeps up, although I am saving some money on the side for that as well.

NET WORTH:
- better $910.73 from October 9th, 2009
- better $20,602.76 from October 23rd, 2008 (one year ago!)

The numbers aren't as good as the previous week, but let's face facts...improving by upwards of $20,000 in a single year I think is still phenomenal. I've also had nine straight updates (even before this blog started) when my liabilities dropped, which is all I can ask! In the calendar 2009, I have improved by assets by around $7000 and my liabilities by about $12,000!

The last thing I am going to track is the value of the TSX. I have some asset allocation goals that are dependent on the value of the TSX.

TSX Graph
Current Value: 11,382.13
Highest Value in Last 2 Years: 15073.13 June 18th, 2008

Tuesday, October 20, 2009

Legally Deferring My Taxes

Just an update on my tax situation. A few months ago, I filled out a T1105 form from the Ontario government that would allow me to pay less income tax off of each paycheque. The idea is simply this: rather than get a large cheque back come income tax time, to get a little more for each paycheque throughout the year. Over the course of the year, I will still earn the same amount and pay the same amount, but rather than have the government hang onto my extra taxes paid, I would pay less for each paycheque. The math behind this is that I can use this extra money immediately to either invest, or to pay loans or whatever. It is a better use of my money to have it now rather than to have the government hang onto it for the better part of a year.

So my plan was to have half of my RRSP deductions taken off each paycheque. So if I contribute $200 per paycheque to RRSPs, I would have the government tax me on $100 less of my salary. In this way, I will still get some money back come tax time, but also get a benefit now.

It works perfectly so far (we'll see what happens come income tax time). I went to the bank and got a letter saying what my RRSP contributions were and then the government agreed to reduce my taxes each paycheque. If I want to do this for 2010 (which I do) it was recommended that I get all my paperwork in by November 1st of 2009 (which I will immediately do).

Some people like getting a big cheque back at tax time. It's almost like a Christmas bonus or a lottery winning. I would much rather have more disposable income throughout the year and have more control of my money, so I will continue to do it this way.

Friday, October 16, 2009

Contribute to your RRSP or Pay Off Consumer Debt

A question was put to me the other day is it better to contribute to your RRSP or to pay off your consumer debt. The benefits to RRSP contribution are clear: more money for yourself when you retire, tax-free growth in these investments, and the most immediate: a tax deduction. If I contribute $1000 immediately, I will get $350 (approximately) back at income tax time. All of these factor lead you to believe that you should contribute to your RRSP as much as possible (up to 18% of your salary I believe is the most up to date figure).

But what about consumer debt? What should you do if you owe $50,000 on personal loans (non investment and non-mortgage loans)? My philosophy is always to make small changes based on when you have extra money coming in. I personally have a lot of school debt, and although the interest rates are low now, it still burns me to have to pay so much out of each paycheque towards loans.

I believe that some debt is fine. If you are purchasing an asset that will leave you with positive cash flow (ie. a rental property, or a cottage or a loan to an RRSP, etc.) then that debt is fine and will take care of itself in the long term. But consumer debt (credit cards, don't pay for 18 months, etc.) should be paid immediately. When I retire I want to make sure that I have plenty of assets and no debt of any kind to show, giving me total freedom to do what I want.

I believe that people should contribute to their RRSPs and get rid of their debt whenever possible. For me, when I get a raise, I always up my RRSP contributions and also increase my debt repayments. Doing exclusively one or the other won't help as much. Only repaying your debts may make you feel slightly better, but getting money back at RRSP time or looking at your portfolio and smiling will encourage you to continue.

Saturday, October 10, 2009

Net Worth Update - October 10th, 2009

I truly believe that my listing your goals and tracking your goals it is much easier to make progress. Here is the usual update!

Every time I get paid (every two weeks), I update my net worth. The idea behind this is that my goals are that my liabilities drop every two weeks, and by tracking them in this way, I am able to get a nice picture of where I stand financially. Its not a perfect balance sheet that I have (because of student loans I have a negative net worth), but the progress is what I am looking for.

ASSETS:
- up $450.53 from September 25th, 2009
- up $7777.54 from October 8th, 2008(one year ago)

These assets include my house (I give it 1% appreciation each year in my appreciation), my RRSP and my TFSA. I put a little more aside this week (see a future post on how I lowered my taxes and increased my paycheque for 2009).

LIABILITIES:
- better $678.26 from September 25th, 2009
- better $12,479.33 from October 8th, 2008(one year ago)

These liabilities include my mortgage, student loans and a consolidation loan (mainly for my Masters Degree for teaching). Once again, my four tutoring jobs help in this. It is a little worse than usual because of prescriptions carried forward on my Mastercard.

NET WORTH:
- better $1128.80 from September 25th, 2009
- better $20,256.87 from October 8th, 2008 (one year ago!)

Excellent statistics as usual. Of course I am a numbers guy, so this looks great. To think that my net worth has increased by $20,000 in a single year makes me tremendously happy. As well, in 2009 I have decreased by liabilities in every paycheque but two (when I paid for my summer school course and when we went on holidays). For me right now, where paying down my debt is a high priority, this is extremely exciting.

The last thing I am going to track is the value of the TSX. I have some asset allocation goals that are dependent on the value of the TSX.

TSX Graph
Current Value: 11,436.92
Highest Value in Last 2 Years: 15073.13 June 18th, 2008

Sunday, October 4, 2009

The Rebalancing Act

In today's post I am going to try to explain my long term plan for rebalancing my portfolio. I find it easier (financially) to have things planned out, so that even when my portfolio runs hot (or cold) if I stick by the rules that are decided long beforehand everything will work out well in the long run.

Rebalancing your portfolio (in my case) is just making sure that I have a certain percentage in each asset class. In my simple portfolio, I have two asset classes: stocks and bonds. Stocks would be considered to be the more risky asset (as those who have had money in the stock market lately would agree with me) and bonds would be considered to be more conservative.

One of the old financial sayings is the 90 minus your age rule. That is, the percentage of your portfolio that should be in stocks is 90 minus your age. I am currently 31, so that should mean that I have 59% stocks and 41% bonds. This is far too conservative for me, so I decided to make my own splits that will become more conservative over time, allow me to reap the gains of the stock market (regardless of my age) and even in the case of an economic down turn (if one hits 20 years from now when I am planning to retire) I will still be able to retire when I want.

My basic rebalancing act is this. Each paycheque I deposit 90-95% of my investment money into stocks and 5-10% into bonds. The reason for this is that in the long term, I believe that there will always be money to be made in the stock market. When the Toronto Stock Exchange hits a two-year high (that is, the highest value in the last two years), I will rebalance by portfolio to a 50-50 split of stocks and bonds. My doing this, I will still have money in the stock side of my portfolio, but I have claimed a lot of the profits along the way.

Will this be maximizing my profits along the way? Probably not. If the stock market were to rise nonstop for 5 or 6 years (pretty much from 2002-2008) I would not have as much money in this scenario as if I had all my money invested in the stock market. But, I will be less affected by a 10% drop in the market in one year, as I have taken a lot of my profits along the way. All investment books that I read say that you should be buying when people are selling (obtaining stocks when the prices are low) and selling when others are buying (selling stocks in a hot market). This plan will allow me to keep money in the market always, and minimize my chances of risk in the long term (as the money will tend towards 50% stocks and 50% bonds).

Friday, October 2, 2009

Happiness for the future...

At the end of math class, one of the girls in my class was complaining that all she had to do is work this weekend at Tim Horton's. She said that she had to work from 6am - 4pm every day this weekend and had tonnes of hours in the week. I asked her if she was saving any of the money, and she said that her mother made her put a percentage of it into savings and a percentage into saving for school and some she was allowed to spend. I told her that if she would save 10-20% out of every paycheque, she would be very rich in the future. I didn't get into the math of it (that will come later in the semester), but it sounded good that her mother was helping her get a head start in her financial life.