Showing posts with label philosophy. Show all posts
Showing posts with label philosophy. Show all posts
Wednesday, February 16, 2011
Rebalancing
The TSX hit over 14000 today so I rebalanced my portfolio, taking 20% of my TSX fund and switching it over to bonds. 100% of my contributions will be in the TSX fund and I will rebalance 20% again when the TSX hits 15000.
Saturday, February 12, 2011
First Update In A While...
With a new baby on the way in a few weeks, I should maybe give an update on what has happened to us financially in the past six months or so, and give a few of my financial goals that I have for myself.
Goal #1: Put $25 per paycheque towards baby's RESP
This is a no-brainer. Right now I contribute $225 towards my TFSA each paycheque, so I will just chop $25 off this and put it into the RESP. Until I am financially comfortably able to retire (whether I do or not), it will stay at $25. Most financial books say for parents to take care of themselves before they take care of their kids and that's what I will do for now.
Goal #2: Every 1000 point gain on the TSX means 20% contribution into Bond Index
I need to get this into writing so that I have it. When the TSX gets to 14000, 20% of my TSX money will go into bonds (whatever the current value). When the TSX gets to 15000, another 20% of the TSX money will get transferred over. Let's say I have $10000 in TSX and $5000 in bonds, it will change to $8000 in TSX (20% reduction) and $7000 in bonds. All of my regular contributions will go to the TSX.
Goal #3: Increase my passive income
I re-read "Rich Dad, Poor Dad" over Christmas (come on...I'm about to become a father) and one of his statements was that you are wealthy when your passive income meets your expenses in a month (or a year or whatever). That is, if you have $2000 per month in expenses (food, mortgage, hydro, whatever), if you have $2000 per month coming in and you don't have to get off the couch, you are wealthy. This is my goal. So the question is how to get passive income. One of my friends has solar panels installed, and claims that a $30000 investment will net him $300 per month over the next 20 years. Another option for me is to take an RRSP loan out and then get a huge chunk of money back, increasing my net worth a lot. The problem is that there would be no passive income. The third option would be to start the "Smith Manouevre", which is to take a loan out for investments and then get the tax benefit for the interest paid. The passive income is your tax benefit, but I can't make it work in my head because the interest paid each month would obviously be higher than your tax benefit. The hope/dream would be that your investments would increase faster than the loan that you take out. I have some thinking to do about that.
Goal #4 - Take a vacation to Hawaii
Although she won't say it, I think that frugala was a bit disappointed that we didn't go someplace warm for our honeymoon (although the Ice Hotel in Quebec City was fabulous!). So we decided that when our collective net worth is $100,000 we will go on a holiday to Hawaii. She has family there so we may be able to stay more frugally than most people, but it is an expense for sure.
Goal #5 - Buy a new house
We will be moving in the near future (probably the next year or so), so I should probably be starting to save some money towards a bigger down payment. The current mortgage is dropping quite nicely for me, but probably the mortgage will be at least $100,000 more than it is now.
What I Have Accomplished
In the last bit, I have a Visa bill of $0, increased my investments and paid off one of my student loans (there is still one left). My cash flow is rising, which is why I am at decision time as far as what to do. Obviously with a baby there will be changes in all aspects of my life and maybe things will be tighter, but I set these goals for myself in September when I took the extra tutoring jobs. A big thanks to frugala who took over one of my loans (in exchange for me paying for most of the monthly bills and all the mortgage payments) that allowed me to get into the black much more easily.
Goal #1: Put $25 per paycheque towards baby's RESP
This is a no-brainer. Right now I contribute $225 towards my TFSA each paycheque, so I will just chop $25 off this and put it into the RESP. Until I am financially comfortably able to retire (whether I do or not), it will stay at $25. Most financial books say for parents to take care of themselves before they take care of their kids and that's what I will do for now.
Goal #2: Every 1000 point gain on the TSX means 20% contribution into Bond Index
I need to get this into writing so that I have it. When the TSX gets to 14000, 20% of my TSX money will go into bonds (whatever the current value). When the TSX gets to 15000, another 20% of the TSX money will get transferred over. Let's say I have $10000 in TSX and $5000 in bonds, it will change to $8000 in TSX (20% reduction) and $7000 in bonds. All of my regular contributions will go to the TSX.
Goal #3: Increase my passive income
I re-read "Rich Dad, Poor Dad" over Christmas (come on...I'm about to become a father) and one of his statements was that you are wealthy when your passive income meets your expenses in a month (or a year or whatever). That is, if you have $2000 per month in expenses (food, mortgage, hydro, whatever), if you have $2000 per month coming in and you don't have to get off the couch, you are wealthy. This is my goal. So the question is how to get passive income. One of my friends has solar panels installed, and claims that a $30000 investment will net him $300 per month over the next 20 years. Another option for me is to take an RRSP loan out and then get a huge chunk of money back, increasing my net worth a lot. The problem is that there would be no passive income. The third option would be to start the "Smith Manouevre", which is to take a loan out for investments and then get the tax benefit for the interest paid. The passive income is your tax benefit, but I can't make it work in my head because the interest paid each month would obviously be higher than your tax benefit. The hope/dream would be that your investments would increase faster than the loan that you take out. I have some thinking to do about that.
Goal #4 - Take a vacation to Hawaii
Although she won't say it, I think that frugala was a bit disappointed that we didn't go someplace warm for our honeymoon (although the Ice Hotel in Quebec City was fabulous!). So we decided that when our collective net worth is $100,000 we will go on a holiday to Hawaii. She has family there so we may be able to stay more frugally than most people, but it is an expense for sure.
Goal #5 - Buy a new house
We will be moving in the near future (probably the next year or so), so I should probably be starting to save some money towards a bigger down payment. The current mortgage is dropping quite nicely for me, but probably the mortgage will be at least $100,000 more than it is now.
What I Have Accomplished
In the last bit, I have a Visa bill of $0, increased my investments and paid off one of my student loans (there is still one left). My cash flow is rising, which is why I am at decision time as far as what to do. Obviously with a baby there will be changes in all aspects of my life and maybe things will be tighter, but I set these goals for myself in September when I took the extra tutoring jobs. A big thanks to frugala who took over one of my loans (in exchange for me paying for most of the monthly bills and all the mortgage payments) that allowed me to get into the black much more easily.
Sunday, November 7, 2010
Financial Update
It has been a while, so here is the most up to date information on what I have done (and what I plan to do) before the baby comes:
- frugala paid off a loan for me, so rather than charging her the equivalent of rent, she keeps her entire paycheque and I pay for all tbe mortgage and bills (minus half groceries, car stuff and dog stuff)
- I have received two raises since September: for the first one I increased my mortgage payment and increased my RRSP. For the second one I increased my RRSP and my TFSA (the TFSA increase will turn into the baby's university savings)
- I save $300 every two weeks now: $225 goes into my TFSA and $75 goes into my RRSP. From the $225, for every $1100 I accumulate, I take $1000 and pay something off (be it a loan, or a credit card, or a mortage or hopefully one day into the RRSP). The idea is to minimize the loans and to slowly build up an emergency fund (from the extra $100 that get put into there)
- I have started two part time jobs, where to money gets funnelled into my TFSA (for the purposes mentioned above). I work for Homework Help, where I get paid to tutor math in the evenings. I also tutor 3-4 students each week (it was supposed to be 4 but the last one has cancelled the last three weeks, so I am counting on three now). The idea of these extra jobs is to use the money for savings and/or paying things off, not for the regular expenses for week to week. This is important, because when second semester starts (February), we are getting close to baby time and my energy will (properly) go to my family rather than gaining extra cash. The plan is to have my credit cards at zero and another student loan paid off by the time the baby is born.
- When the TSX hit around 12500, I dumped half of my Canadian Index fund into a bond index, with all of my current contributions going into the Canadian Index fund. The TSX has continued to rise, but I have taken my profits from it. Long term I think this is going to work. I will only re-balance next when the TSX hits 13500.
- Finally I have been thinking about using the Smith Manoeuvre (this will be once my student loans get paid off). The idea is that you borrow for investment purposes, and then the loan is tax deductible, and with the tax benefits you put that towards your non-deductible loans. It makes a lot of sense as you gain equity in your house. The plan for me would be to pay minimal on your loans, and then increase the loan for the amount of equity that you have on your house. Theoretically, when you are done paying your mortgage, you can either pay off your Smith loan, or continue to keep it and keep the deductions and increase your investments with the extra money. There will be considerable more planning as we get closer, but it makes a lot of sense. There will be little change in the daily handling of my finances, but there will be a much larger tax deduction and more investments in the long haul.
Thanks for reading!
I have been updating our net worth on spreadsheets, and will update the post either later today or this week.
- frugala paid off a loan for me, so rather than charging her the equivalent of rent, she keeps her entire paycheque and I pay for all tbe mortgage and bills (minus half groceries, car stuff and dog stuff)
- I have received two raises since September: for the first one I increased my mortgage payment and increased my RRSP. For the second one I increased my RRSP and my TFSA (the TFSA increase will turn into the baby's university savings)
- I save $300 every two weeks now: $225 goes into my TFSA and $75 goes into my RRSP. From the $225, for every $1100 I accumulate, I take $1000 and pay something off (be it a loan, or a credit card, or a mortage or hopefully one day into the RRSP). The idea is to minimize the loans and to slowly build up an emergency fund (from the extra $100 that get put into there)
- I have started two part time jobs, where to money gets funnelled into my TFSA (for the purposes mentioned above). I work for Homework Help, where I get paid to tutor math in the evenings. I also tutor 3-4 students each week (it was supposed to be 4 but the last one has cancelled the last three weeks, so I am counting on three now). The idea of these extra jobs is to use the money for savings and/or paying things off, not for the regular expenses for week to week. This is important, because when second semester starts (February), we are getting close to baby time and my energy will (properly) go to my family rather than gaining extra cash. The plan is to have my credit cards at zero and another student loan paid off by the time the baby is born.
- When the TSX hit around 12500, I dumped half of my Canadian Index fund into a bond index, with all of my current contributions going into the Canadian Index fund. The TSX has continued to rise, but I have taken my profits from it. Long term I think this is going to work. I will only re-balance next when the TSX hits 13500.
- Finally I have been thinking about using the Smith Manoeuvre (this will be once my student loans get paid off). The idea is that you borrow for investment purposes, and then the loan is tax deductible, and with the tax benefits you put that towards your non-deductible loans. It makes a lot of sense as you gain equity in your house. The plan for me would be to pay minimal on your loans, and then increase the loan for the amount of equity that you have on your house. Theoretically, when you are done paying your mortgage, you can either pay off your Smith loan, or continue to keep it and keep the deductions and increase your investments with the extra money. There will be considerable more planning as we get closer, but it makes a lot of sense. There will be little change in the daily handling of my finances, but there will be a much larger tax deduction and more investments in the long haul.
Thanks for reading!
I have been updating our net worth on spreadsheets, and will update the post either later today or this week.
Friday, April 30, 2010
Students and Money
This week we started our Finance unit in MCR3U at the school that I teach at. I decided this year to began our unit with a discussion of how much University would cost, what the ways would be to obtain money for school, and how much debt you could have and how you can best deal with it.
University tuition has jumped on average 4.5% per year over the least decade, to the point where it is expected to cost almost $17000 per year for residence, books and tuition. This should be frightening for parents and their teenagers alike.
We then talked about the ways to get money for school: gifts, working, OSAP, personal loans and so on. The students sat in disbelief as I explained about OSAP and how it would be paid back and how much their loans would cost them on a monthly basis (and in return why I cannot afford a car).
We then spent the second day talking about more positive things: how to save your money to be a millionaire, how real estate and starting your own business have fundamentally been the most successful ways to become rich. Finally, the big picture is if you spend less than you make, you will end up being rich. We talked about stocks, bonds, RRSP, TFSAs, mutual funds and all the rest of the jargon.
Finally we talked about ways to reduce your debt. I gave the example of a mortgage, and by increasing your mortgage by any amount shaves the time and the interest off what you owe. I hope every time that I do this that at least a few people get something out of this and that students learn to save.
University tuition has jumped on average 4.5% per year over the least decade, to the point where it is expected to cost almost $17000 per year for residence, books and tuition. This should be frightening for parents and their teenagers alike.
We then talked about the ways to get money for school: gifts, working, OSAP, personal loans and so on. The students sat in disbelief as I explained about OSAP and how it would be paid back and how much their loans would cost them on a monthly basis (and in return why I cannot afford a car).
We then spent the second day talking about more positive things: how to save your money to be a millionaire, how real estate and starting your own business have fundamentally been the most successful ways to become rich. Finally, the big picture is if you spend less than you make, you will end up being rich. We talked about stocks, bonds, RRSP, TFSAs, mutual funds and all the rest of the jargon.
Finally we talked about ways to reduce your debt. I gave the example of a mortgage, and by increasing your mortgage by any amount shaves the time and the interest off what you owe. I hope every time that I do this that at least a few people get something out of this and that students learn to save.
Wednesday, April 7, 2010
What To Do With Your Tax Return...
So tax season is pretty much over now and people are starting to get some money back from the government (if you have been reading this blog and have put some money into RRSPs and donations and education anyway). So the question is, what are the best options to do with your tax return?
Option 1: Get a lower tax return next year
Remember that when you receive a return from the government it means that the government has overtaxed you in the previous year. They have hung onto an extra chunk of each pay, with you getting no benefit. So next year, get less taxes taken off each paycheque, so your cash flow improves.
Option 2: Reinvest in RRSPs (or an RRSP loan)
The next best option is to re-invest in RRSPs any money that you get back from the government. So if you get back $1000, immediately contribute that into your RRSP for next year. If you do your taxes (or estimate them) and find out that you will be getting $1000 back, take out an RRSP loan from your bank for $1000 and pay them this back with your return. The advantage to doing this is that you will get an extra $350 back on your return (depending on what your marginal rate is) so you have extra money regardless. I haven't tried this yet, but "fatcatc" has this planned for the future. Don't just pick a random amount though: make sure that you only borrow what your previous potential tax return was, so that this loan can be repaid immediately, rather than linger over the year.
Option 3: Pay off bills
If you have credit card debt, that is another option for your tax return (although still less preferable than options 1 and 2).
Option 4: Build an emergency fund/planned spending
What can also be done is to build an emergency fund with your return or planned spending. What planned spending means is if you know that you spend $500 for Christmas each year, rather than putting it on your credit card this upcoming year, pocket aside $500 from your return so that money is available to you at this time.
Option 5: Upgrades on your house
I rate this a little higher than my last option because this is something that is building value. Although I always think of "Christmas Vacation" where Chevy Chase is counting on his Christmas bonus to put in a pool. You can't really plan "in 2011 I will spend my return on a new deck and in 2012 I will spend my return on hardwood floors", etc. in case things don't happen as expected.
Option 6: Random spending
Some people decide to buy a big screen television or new furniture with their tax return...they treat it like a lottery winning each year. If all of your bills are paid, your TFSA is maxed and your RRSPs are maxed out, then I say "go ahead", but for the other 99.999% of Canadians (at least that I know), there are better fiscal ways for this.
As far as what I did with my tax return, most of mine went to bill payments, although about 10% of my return went to emergency fund contributions and 10% went to "random spending". "frugala" is planning to take her money and "throw it on the pile", which is her way of saying that she will keep it in her emergency fund.
Option 1: Get a lower tax return next year
Remember that when you receive a return from the government it means that the government has overtaxed you in the previous year. They have hung onto an extra chunk of each pay, with you getting no benefit. So next year, get less taxes taken off each paycheque, so your cash flow improves.
Option 2: Reinvest in RRSPs (or an RRSP loan)
The next best option is to re-invest in RRSPs any money that you get back from the government. So if you get back $1000, immediately contribute that into your RRSP for next year. If you do your taxes (or estimate them) and find out that you will be getting $1000 back, take out an RRSP loan from your bank for $1000 and pay them this back with your return. The advantage to doing this is that you will get an extra $350 back on your return (depending on what your marginal rate is) so you have extra money regardless. I haven't tried this yet, but "fatcatc" has this planned for the future. Don't just pick a random amount though: make sure that you only borrow what your previous potential tax return was, so that this loan can be repaid immediately, rather than linger over the year.
Option 3: Pay off bills
If you have credit card debt, that is another option for your tax return (although still less preferable than options 1 and 2).
Option 4: Build an emergency fund/planned spending
What can also be done is to build an emergency fund with your return or planned spending. What planned spending means is if you know that you spend $500 for Christmas each year, rather than putting it on your credit card this upcoming year, pocket aside $500 from your return so that money is available to you at this time.
Option 5: Upgrades on your house
I rate this a little higher than my last option because this is something that is building value. Although I always think of "Christmas Vacation" where Chevy Chase is counting on his Christmas bonus to put in a pool. You can't really plan "in 2011 I will spend my return on a new deck and in 2012 I will spend my return on hardwood floors", etc. in case things don't happen as expected.
Option 6: Random spending
Some people decide to buy a big screen television or new furniture with their tax return...they treat it like a lottery winning each year. If all of your bills are paid, your TFSA is maxed and your RRSPs are maxed out, then I say "go ahead", but for the other 99.999% of Canadians (at least that I know), there are better fiscal ways for this.
As far as what I did with my tax return, most of mine went to bill payments, although about 10% of my return went to emergency fund contributions and 10% went to "random spending". "frugala" is planning to take her money and "throw it on the pile", which is her way of saying that she will keep it in her emergency fund.
Saturday, March 27, 2010
How Tight Is Too Tight?
As someone who is selfly admitted as "frugal" (and reminded constantly by his friends and family), the question comes up to me is when are you setting yourself up without enough "wiggle room" in your finances. I have my finances balanced so that a certain percent goes to savings, a certain percent goes to mortgage, certain to monthly bills, certain to spending, etc.
By setting an emergency fund up, this allows some wiggle room, so that you may be tight with your weekly spending allowances for yourself, but if something comes up that is unexpected you can still handle it. Also a key to remember for the "frugal" among us, who are frugal because they have to be, rather than that they want to be, is to remember that life always gets easier, especially in a financial sense. There is never any competition between where the average 25 year old and the average 45 year old should be financially. This is the difficulty that some young people have, accepting that things are tough for everyone when they start out and get easier over time.
When I purchased my house, I was literally "house poor". This means that I had a house, and my assets and liabilities were working quite nicely, but I had no disposable income at all. Two years later, because of an increased cash flow based on increases in income, I think to myself "Why didn't I buy a house sooner?", but advice like this is easy to give on the other side. My advice will be to give yourself a plan, and stick to it. I personally revisit my plan every time I get a raise (annually for me) and modify it then, but whenever a significant life event changes things it is time to revisit your plan.
FatcatC commented the other day to me that although my net worth has improved by whatever amount over the last year do I know if that is good or bad or what (because I have nothing to compare it to). My response is that because I am saving at least 10% of my income towards my retirement, am building a emergency fund, and paying off all my debts (plus more than the minimums) that I am doing well for myself and living within my means. Does this mean that my plan is perfect and that it couldn't be improved? Obviously not, because I have nothing to compare it to, but the plan fits my goals and that is enough for me.
By setting an emergency fund up, this allows some wiggle room, so that you may be tight with your weekly spending allowances for yourself, but if something comes up that is unexpected you can still handle it. Also a key to remember for the "frugal" among us, who are frugal because they have to be, rather than that they want to be, is to remember that life always gets easier, especially in a financial sense. There is never any competition between where the average 25 year old and the average 45 year old should be financially. This is the difficulty that some young people have, accepting that things are tough for everyone when they start out and get easier over time.
When I purchased my house, I was literally "house poor". This means that I had a house, and my assets and liabilities were working quite nicely, but I had no disposable income at all. Two years later, because of an increased cash flow based on increases in income, I think to myself "Why didn't I buy a house sooner?", but advice like this is easy to give on the other side. My advice will be to give yourself a plan, and stick to it. I personally revisit my plan every time I get a raise (annually for me) and modify it then, but whenever a significant life event changes things it is time to revisit your plan.
FatcatC commented the other day to me that although my net worth has improved by whatever amount over the last year do I know if that is good or bad or what (because I have nothing to compare it to). My response is that because I am saving at least 10% of my income towards my retirement, am building a emergency fund, and paying off all my debts (plus more than the minimums) that I am doing well for myself and living within my means. Does this mean that my plan is perfect and that it couldn't be improved? Obviously not, because I have nothing to compare it to, but the plan fits my goals and that is enough for me.
Tuesday, March 9, 2010
Cashflow Reminder
This post is just a quick reminder for myself (and my loyal readers) on the three potential ways to increase your cash flow from paycheque to paycheque. Everyone wants their financial life to be easy, and there are three options to do so.
1) Make more money: to do this you either to make more money at your current job, or find alternative ways to make income. If you have a job where you can get bonuses, are you doing enough to get the maximum bonus. If you aren't, ask your boss what you can do to be more effective. If you are in a union, are you at the top of the pay scale? If not, what can you do to get there. Can you work overtime? If not, what can you do to earn some extra cash in your spare time. For myself, I am taking courses to get myself to the highest level for my job, and tutoring on the side to make some extra cash.
2) Spend less: the other easy way to have more cash flow is to spend less money. You can do this by trimming your fixed expenses (find somewhere cheaper to live, cut down/out television/internet), cutting down your variable expenses (trying to go out less, or limit your free spending in a paycheque, or shopping around before you buy something), or go on a budget. A budget is difficult to work with, but for myself, I use the "bucket" technique, where I have a set amount of money set aside for groceries, spending, holidays, house maintenance, etc. coming out of each paycheque which physically goes into buckets. When I run out of cash, I stop spending that month. Another tool that I use is to not bring my wallet or credit cards/debit cards with me when I shop. If I only bring cash with me, it is impossible to go over in my spending. At school each day, I know that I am weak so I leave my wallet at home.
3) Have no debts: Easier said than done, but imagine if you didn't have a mortgage, or a Mastercard bill, all of the extra money that you would have. We all have these dreams, so to improve our long term cash flow it is always in our best interest to minimize our debt. Our goal should be to be debt free at retirement, but for myself I will be debt free as soon as possible. Right now a large percentage of my paycheque goes towards student loans, mortgages and personal loans. If I didn't have those loans, my paycheque would go to exciting things like RRSPs and early retirement, or a new house.
1) Make more money: to do this you either to make more money at your current job, or find alternative ways to make income. If you have a job where you can get bonuses, are you doing enough to get the maximum bonus. If you aren't, ask your boss what you can do to be more effective. If you are in a union, are you at the top of the pay scale? If not, what can you do to get there. Can you work overtime? If not, what can you do to earn some extra cash in your spare time. For myself, I am taking courses to get myself to the highest level for my job, and tutoring on the side to make some extra cash.
2) Spend less: the other easy way to have more cash flow is to spend less money. You can do this by trimming your fixed expenses (find somewhere cheaper to live, cut down/out television/internet), cutting down your variable expenses (trying to go out less, or limit your free spending in a paycheque, or shopping around before you buy something), or go on a budget. A budget is difficult to work with, but for myself, I use the "bucket" technique, where I have a set amount of money set aside for groceries, spending, holidays, house maintenance, etc. coming out of each paycheque which physically goes into buckets. When I run out of cash, I stop spending that month. Another tool that I use is to not bring my wallet or credit cards/debit cards with me when I shop. If I only bring cash with me, it is impossible to go over in my spending. At school each day, I know that I am weak so I leave my wallet at home.
3) Have no debts: Easier said than done, but imagine if you didn't have a mortgage, or a Mastercard bill, all of the extra money that you would have. We all have these dreams, so to improve our long term cash flow it is always in our best interest to minimize our debt. Our goal should be to be debt free at retirement, but for myself I will be debt free as soon as possible. Right now a large percentage of my paycheque goes towards student loans, mortgages and personal loans. If I didn't have those loans, my paycheque would go to exciting things like RRSPs and early retirement, or a new house.
Monday, March 1, 2010
Learning To Say "No"
One of the difficult things in life is learning to say "no" to your friends and family, especially when it comes to money. There is nothing wrong when someone says "do you want to go out for supper" to respond with "Oh, I have ____ pulled out for supper, how about you come over?" or "How about we have drinks after". You don't have to say "Sorry I'm broke..." (unless you have the self-confidence to do that), but everyone knows that it is far more expensive to go out and I think that everyone is a little guilty of taking to ease of going out for supper rather than cooking for themselves from now or then.
So what about the legitimate celebrations? (Marriages/babies being born/birthdays/etc.) What I personally do is have a "bucket" for this and take money out of it for birthday gifts/Christmas and those times that we should go out for. If you have a slush fund (either in a bucket like me, or several hundred/thousand sitting in a chequing/savings account somewhere), when you do go out, it shouldn't go on a Mastercard/Visa. If you are doing that, then clearly you can't afford it.
This leads me into income taxes (don't ask how I got onto this). Hypothetically, if you get $500 back from the government, is this free money? Technically, no, because it is extra money that the government has taken from you over the year and that they owe you. If I get money back this year, there unfortunately won't be any extravagant purchases, but I will continue to pay things down, as that is my priority for frugala that I get out of debt so we can buy the house of our dreams. Another use for this money could be creating an emergency fund, or a Christmas fund so that when these requests come that they can be met with a smile rather than thinking "I can't afford this", or with a grimace when the Visa bill comes in at the end of the month.
So what about the legitimate celebrations? (Marriages/babies being born/birthdays/etc.) What I personally do is have a "bucket" for this and take money out of it for birthday gifts/Christmas and those times that we should go out for. If you have a slush fund (either in a bucket like me, or several hundred/thousand sitting in a chequing/savings account somewhere), when you do go out, it shouldn't go on a Mastercard/Visa. If you are doing that, then clearly you can't afford it.
This leads me into income taxes (don't ask how I got onto this). Hypothetically, if you get $500 back from the government, is this free money? Technically, no, because it is extra money that the government has taken from you over the year and that they owe you. If I get money back this year, there unfortunately won't be any extravagant purchases, but I will continue to pay things down, as that is my priority for frugala that I get out of debt so we can buy the house of our dreams. Another use for this money could be creating an emergency fund, or a Christmas fund so that when these requests come that they can be met with a smile rather than thinking "I can't afford this", or with a grimace when the Visa bill comes in at the end of the month.
Monday, December 21, 2009
Financial Education This Week
This week in class we did our Financial Unit in my Grade 11 University math class. The intention was to do lessons on series (the summing of a set of terms that are added or multiplied by a fixed rate over a long period of time). This nicely relates to the concepts of compound interest and savings and borrowing, which I would discuss with my class.
One of the things that I wanted to show my class was that small amounts of savings can make huge impacts on the long term. My first example was the classic where there are three brothers/sisters who begin investing at different times. The first person invests $1000 from age 15-24. The second person invests $2000 from age 25-35. The final person invests $3000 from 35-65. You can guess I think with compound interest who comes out ahead. Depending on the interest rates (shown by me in an Excel spreadsheet), you can show the differences between a 5% or a 10% or a 12% interest rate over 30 years what the change will be.
Another example I gave was the "latte" example. Specifically, if instead of going to Tim Horton's you instead invest this $3 per day at 9% for 34 years (I word it that you are 16 today and you do this until you are 50), how much will you have? The idea is to have the students think how this small spending can affect them in the long run. (For the non-students in the audience, the answer is $247,220.76).
The other question that we like is "If _____ has 37 years until he/she retires, and is able to invest at 7.8% compounded weekly and wants to have $1,000,000 at that time, how much must (s)he save each week? How much of this is interest?". The answers are $88.85 per week savings and $829,052.60 interest earned. I like this example for the class because we can discuss the reality of 7.8% interest over 37 years, and how the small savings make an impact.
My final example I give to the class is on borrowing money. I tell them the main ways to pay back loans are to get lower interest rates, to round their payments up to the nearest $20 or $100, and to make lump sum extra payments that will go directly to the principle. I give examples with all of these to show the effect that it has (I have a neat spreadsheet for it).
The numerical example I give them to demonstrate is this: "_____ purchases a house for $220,000 when (s)he graduates high school. If the interest rate is 5.2% compounded monthly and (s)he can afford a payment of $1000, how many months will it take him/her to pay this loan?". This question generates a lot of ooh and aahs because of the answer and the follow-up. The answer is 709 months (or almost 59 years) for this to happen. The amount of interest charges would be $489,000!!!
My continuation is to ask the class if the monthly payments go up to $1100, how much more quickly the loan will be paid off. The answer is it will now take 466 months (or almost 39 years). Still not that impressive, but by raising your payments $100 per month, you have saved $218,400 in interest (charged $292,600 interest)
Here is the rest of the calculations:
Payment: $1200 - Time: 366 months (30 years) - Interest Charged: $219,200
Payment: $1500 - Time: 233 months (20 years) - Interest Charged: $129,500
Payment: $2355.01 - Time: 120 months (10 years) - Interest Charged: $62,601.20
Obviously I picked these numbers for a reason: for the $1000 payment, initially $953.33 is interest (only $46.66 paid against the loan). Additionally, to show the class that even though $1000 sounds like a lot of money on a loan you have to check the numbers.
One thing that sort of shocked me about the class was that they didn't understand the concepts of savings and borrowing and how it is related to a bank. If they are able to give you a savings account at 2% and then loan your money out to someone else at 5%, that is profit for the bank and how it is done.
Finally, the concept of tradition was still alive in my class. That being if they have banked with Royal Bank all their lives, that they will continue to go to get their mortgage through Royal without doing any comparisons of what is available. I used to have an assignment where the students would go to two "traditional" bank, and then one international and one online bank to compare rates and I will go back to this next year.
One of the things that I wanted to show my class was that small amounts of savings can make huge impacts on the long term. My first example was the classic where there are three brothers/sisters who begin investing at different times. The first person invests $1000 from age 15-24. The second person invests $2000 from age 25-35. The final person invests $3000 from 35-65. You can guess I think with compound interest who comes out ahead. Depending on the interest rates (shown by me in an Excel spreadsheet), you can show the differences between a 5% or a 10% or a 12% interest rate over 30 years what the change will be.
Another example I gave was the "latte" example. Specifically, if instead of going to Tim Horton's you instead invest this $3 per day at 9% for 34 years (I word it that you are 16 today and you do this until you are 50), how much will you have? The idea is to have the students think how this small spending can affect them in the long run. (For the non-students in the audience, the answer is $247,220.76).
The other question that we like is "If _____ has 37 years until he/she retires, and is able to invest at 7.8% compounded weekly and wants to have $1,000,000 at that time, how much must (s)he save each week? How much of this is interest?". The answers are $88.85 per week savings and $829,052.60 interest earned. I like this example for the class because we can discuss the reality of 7.8% interest over 37 years, and how the small savings make an impact.
My final example I give to the class is on borrowing money. I tell them the main ways to pay back loans are to get lower interest rates, to round their payments up to the nearest $20 or $100, and to make lump sum extra payments that will go directly to the principle. I give examples with all of these to show the effect that it has (I have a neat spreadsheet for it).
The numerical example I give them to demonstrate is this: "_____ purchases a house for $220,000 when (s)he graduates high school. If the interest rate is 5.2% compounded monthly and (s)he can afford a payment of $1000, how many months will it take him/her to pay this loan?". This question generates a lot of ooh and aahs because of the answer and the follow-up. The answer is 709 months (or almost 59 years) for this to happen. The amount of interest charges would be $489,000!!!
My continuation is to ask the class if the monthly payments go up to $1100, how much more quickly the loan will be paid off. The answer is it will now take 466 months (or almost 39 years). Still not that impressive, but by raising your payments $100 per month, you have saved $218,400 in interest (charged $292,600 interest)
Here is the rest of the calculations:
Payment: $1200 - Time: 366 months (30 years) - Interest Charged: $219,200
Payment: $1500 - Time: 233 months (20 years) - Interest Charged: $129,500
Payment: $2355.01 - Time: 120 months (10 years) - Interest Charged: $62,601.20
Obviously I picked these numbers for a reason: for the $1000 payment, initially $953.33 is interest (only $46.66 paid against the loan). Additionally, to show the class that even though $1000 sounds like a lot of money on a loan you have to check the numbers.
One thing that sort of shocked me about the class was that they didn't understand the concepts of savings and borrowing and how it is related to a bank. If they are able to give you a savings account at 2% and then loan your money out to someone else at 5%, that is profit for the bank and how it is done.
Finally, the concept of tradition was still alive in my class. That being if they have banked with Royal Bank all their lives, that they will continue to go to get their mortgage through Royal without doing any comparisons of what is available. I used to have an assignment where the students would go to two "traditional" bank, and then one international and one online bank to compare rates and I will go back to this next year.
Thursday, December 10, 2009
Financial Education
Earlier this week, we had our first lesson of the year on personal finance. It is part of my unit on series, which is the sum of terms of a sequence. This leads nicely into the mathematics of savings and borrowing on loans.
The main concepts that I went through in the class were pretty much what we mention in here:
- the cost of school (about $16,000 per year with an annual increase of 4.5%)
- OSAP (government loans that are paid over ten years)
- bursaries and scholarships
- how to pay of loans more quickly (lower interest rates, lump sum payments, round up your payments to the nearest $20 or $100)
- good loans versus bad loans (good loans are things that give you the potential for more assets, such as a house, or an education or a loan for a business. All of these give you the potential to make more money. Bad loans are everything else: cars, trips, big screen televisions. Although these things are fine to have, if you are able to save for them, it makes more sense)
- saving and investing (save 10% of your salary and you will be rich. As well, try to save half of your raises. This is an extremely easy way to increase your savings and not notice it)
- the three main ways of getting rich: savings (slow and steady and guaranteed), real estate, and starting your own business.
We will go through the mathematics of savings and borrowing in this class, but the idea for that lesson was the discussions that came out of it. They couldn't believe that banks would give you interest to save your money. I simplified it for them and said that banks will give you 2% interest on your money, and then go loan your money out to someone else for 4%. They have made money on your money. This was unbelievable to the kids in the class, but I hope that logically they got it.
I will post more frequently throughout this unit (if the snow ever stops...we have had two snow days in a row) when the students have good questions or comments. One of the students in the class said that I can be her financial planner, which although I am vastly unqualified for, made me feel good.
The main concepts that I went through in the class were pretty much what we mention in here:
- the cost of school (about $16,000 per year with an annual increase of 4.5%)
- OSAP (government loans that are paid over ten years)
- bursaries and scholarships
- how to pay of loans more quickly (lower interest rates, lump sum payments, round up your payments to the nearest $20 or $100)
- good loans versus bad loans (good loans are things that give you the potential for more assets, such as a house, or an education or a loan for a business. All of these give you the potential to make more money. Bad loans are everything else: cars, trips, big screen televisions. Although these things are fine to have, if you are able to save for them, it makes more sense)
- saving and investing (save 10% of your salary and you will be rich. As well, try to save half of your raises. This is an extremely easy way to increase your savings and not notice it)
- the three main ways of getting rich: savings (slow and steady and guaranteed), real estate, and starting your own business.
We will go through the mathematics of savings and borrowing in this class, but the idea for that lesson was the discussions that came out of it. They couldn't believe that banks would give you interest to save your money. I simplified it for them and said that banks will give you 2% interest on your money, and then go loan your money out to someone else for 4%. They have made money on your money. This was unbelievable to the kids in the class, but I hope that logically they got it.
I will post more frequently throughout this unit (if the snow ever stops...we have had two snow days in a row) when the students have good questions or comments. One of the students in the class said that I can be her financial planner, which although I am vastly unqualified for, made me feel good.
Friday, November 6, 2009
Emergency Funds
Until recently, I never really saw the need for an emergency fund. Financial experts (and financial book writers) always stressed the need for three to twenty-four months of expenses to have saved in the case of an emergency (like losing your job). Others call it the "sleep well at night factor", that you feel better about yourself and your finances if you have several thousand dollars at hand.
I have started an emergency fund, which I have yet to touch. It will only end up with a few thousand dollars in it at the absolute most, because I have a tough time conceiving an emergency that will cost more than that. Why did I decide to do this? For a few reasons, but mainly because I always feel it is better to be ahead than behind, and my old emergency fund plan would put me behind financially.
What was the old plan? Probably the same as most peoples: credit cards and lines of credit. What I did several years ago was dip into a line of credit or a credit card whenever I needed money, whether it was an "emergency" or not. If I needed money for something, I would either borrow it (from family or my "emergency" fund) and then be behind financially. By just having a few thousand set aside, if I need this money for anything I will just be able to access it.
My old self would say "how can you just leave the money sitting there? Shouldn't you either be using it to pay off a bill or to invest in an RRSP?". My lines of thought have changed that if you don't have at least $1000, the potential for large hits on a credit card or line of credit in a year are inevitable. My money goes into my Tax Free Savings Account, so it is still invested in low-cost mutual funds, so I'm not losing any savings potential.
I give regular contributions to this fund. When I get significantly over $1000 (or whatever number I choose...I am approaching $1000 now) I can then choose to do something with the excess money (an extra pay on my mortgage, a last minute investment in my RRSPs, a down payment on a second property (hint, hint)). By not having an emergency fund, I open myself up to the possibility of constant borrowing, and we all know that you can only get ahead by savings (and investments) rather than borrowing.
I have started an emergency fund, which I have yet to touch. It will only end up with a few thousand dollars in it at the absolute most, because I have a tough time conceiving an emergency that will cost more than that. Why did I decide to do this? For a few reasons, but mainly because I always feel it is better to be ahead than behind, and my old emergency fund plan would put me behind financially.
What was the old plan? Probably the same as most peoples: credit cards and lines of credit. What I did several years ago was dip into a line of credit or a credit card whenever I needed money, whether it was an "emergency" or not. If I needed money for something, I would either borrow it (from family or my "emergency" fund) and then be behind financially. By just having a few thousand set aside, if I need this money for anything I will just be able to access it.
My old self would say "how can you just leave the money sitting there? Shouldn't you either be using it to pay off a bill or to invest in an RRSP?". My lines of thought have changed that if you don't have at least $1000, the potential for large hits on a credit card or line of credit in a year are inevitable. My money goes into my Tax Free Savings Account, so it is still invested in low-cost mutual funds, so I'm not losing any savings potential.
I give regular contributions to this fund. When I get significantly over $1000 (or whatever number I choose...I am approaching $1000 now) I can then choose to do something with the excess money (an extra pay on my mortgage, a last minute investment in my RRSPs, a down payment on a second property (hint, hint)). By not having an emergency fund, I open myself up to the possibility of constant borrowing, and we all know that you can only get ahead by savings (and investments) rather than borrowing.
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.
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.
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.
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.
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).
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, September 25, 2009
Taxes Now or Later
I just received a letter from the government approving my request to have my taxes reduced at the source. My theory is that since taxes are earning no interest anyway, that if I take half of what my last year tax return was and reduce it from my taxes this year, then I will get the money back sooner.
An example to clarify: If I got back $2600 last year on my tax return (for ease of calculation), I would want to get back this year an extra $1300 over the year on my paycheque and still get $1300 back on my return.
The way I calculated this was to use my tax bracket (38%), and divide the $1300 by 0.38 to get $3421.05. I tell the government that I want to be taxed at a level$3421.05 lower than I am actually getting paid (over the year), giving me an extra $1300/26 = $50 per paycheque. In theory this is good, but my brother discussed two potential problems with this.
First is the timing. My claim is to be taxed at a level $1950 lower. What the government did is approved this, but asked the $1950 to be taken off my last six pays of the year. I anticipated this over the entire year (giving me an extra $28.50 per pay using the 38% above), instead of $123.50 that it will work out this way. Money is money I guess, but it is a nice luxury for the rest of the year.
Second is the wording. My brother thinks that instead of my taxable income dropping (which is what I want) that my taxes will drop $1950 for the rest of the year. Divide this by 6 and you get an extra $325 cash each paycheque and the likelyhood that I will have to pay into taxes in March. I still don't think this is the case, but the seeds of doubt have now been planted.
I will post two weeks from now (when my paycheque has been changed) and let you know how it worked out from me. If it works the way I think it will, I will do this every year, as a few extra bucks during each pay make the cash flow (and loan payments/etc.) nicer and I don't think I need that huge cheque from the tax office each spring.
An example to clarify: If I got back $2600 last year on my tax return (for ease of calculation), I would want to get back this year an extra $1300 over the year on my paycheque and still get $1300 back on my return.
The way I calculated this was to use my tax bracket (38%), and divide the $1300 by 0.38 to get $3421.05. I tell the government that I want to be taxed at a level$3421.05 lower than I am actually getting paid (over the year), giving me an extra $1300/26 = $50 per paycheque. In theory this is good, but my brother discussed two potential problems with this.
First is the timing. My claim is to be taxed at a level $1950 lower. What the government did is approved this, but asked the $1950 to be taken off my last six pays of the year. I anticipated this over the entire year (giving me an extra $28.50 per pay using the 38% above), instead of $123.50 that it will work out this way. Money is money I guess, but it is a nice luxury for the rest of the year.
Second is the wording. My brother thinks that instead of my taxable income dropping (which is what I want) that my taxes will drop $1950 for the rest of the year. Divide this by 6 and you get an extra $325 cash each paycheque and the likelyhood that I will have to pay into taxes in March. I still don't think this is the case, but the seeds of doubt have now been planted.
I will post two weeks from now (when my paycheque has been changed) and let you know how it worked out from me. If it works the way I think it will, I will do this every year, as a few extra bucks during each pay make the cash flow (and loan payments/etc.) nicer and I don't think I need that huge cheque from the tax office each spring.
Monday, September 21, 2009
Debt and Freedom
A few days ago my friend left his job. He was offered a different job at his place of business and turned it down and now decided that he isn't going to look for a job for the rest of the year.
The first question that he was asked is how can he afford to do this. He stated that he has enough money put away that he can handle two years of expenses. His life was set up though to have minimal expenses: no education loans, no mortgage, no vehicle, etc.
How does this affect me? I have lots of expenses/bills/loans and would never have the freedom to take four or five months off to re-evaluate my life because of this. I guess what I am asking (or wondering) if I should stop saving and put all my money into paying off loans to achieve this freedom?
I know that long term you have to look at the potential returns, but by paying off loans you are paying off a fixed rate, and thus its a fixed investment that you are paying. This year, with my raise, I put 25% into investments, and 50% into debt repayment (leaving 25% float for myself), so I think I am concerned about paying off my debt, and I have decided that any tutoring money that I get this year will also go towards debt repayment. Realistically though, I am about three and a half years away from this kind of freedom. The only difference between my friend and me is that I have decided to take on a mortgage, and because of this my net worth is better, but my short term freedom is reduced.
The first question that he was asked is how can he afford to do this. He stated that he has enough money put away that he can handle two years of expenses. His life was set up though to have minimal expenses: no education loans, no mortgage, no vehicle, etc.
How does this affect me? I have lots of expenses/bills/loans and would never have the freedom to take four or five months off to re-evaluate my life because of this. I guess what I am asking (or wondering) if I should stop saving and put all my money into paying off loans to achieve this freedom?
I know that long term you have to look at the potential returns, but by paying off loans you are paying off a fixed rate, and thus its a fixed investment that you are paying. This year, with my raise, I put 25% into investments, and 50% into debt repayment (leaving 25% float for myself), so I think I am concerned about paying off my debt, and I have decided that any tutoring money that I get this year will also go towards debt repayment. Realistically though, I am about three and a half years away from this kind of freedom. The only difference between my friend and me is that I have decided to take on a mortgage, and because of this my net worth is better, but my short term freedom is reduced.
Saturday, September 19, 2009
My first money lesson of the year...
In my Grade 11 University math class, we are in the sequences unit. A sequence is an ordered list of numbers. Specificially we deal with sequences where each term in the sequence is multiplied by a common number to get the next number in the sequence. An example is 2, 4, 8, 16, 32, ... (the sequence is doubling each time).
A great application of this is compound interest. If you multiply the interest each time, you can find out the future value of your money. So in our class yesterday, we started talking about savings and borrowing and compound interest.
First of all, the class quickly discovered that this is the way to get me off topic, as I got a lot of great questions from the class and happily answered them all to the best of my ability. We talked about more frequent compounding periods than annually, although the interest rate is listed as annually and how the more frequent that compound period, the more money that is charged/earned. When I explained that credit cards charge daily interest, it prompted the response, "those guys are jerks...I'm never getting a credit card!". We'll see if this person in the future lives by these words, but not getting a credit card immediately should be good advice for any teenager.
Then we talked (briefly) about purchasing a car. I told the class that I don't have a car, getting a cheer from the vegan in the class. We talked about a person that I know that purchased a fancy automobile immediately after getting their first job, and then was saddled with lease payments, insurance and all the rest, when they really couldn't afford it. I didn't have time to get into much more than that, but hopefully they will think about that (I'll return to planning and deciding if you can afford something when I get to the finance unit in the course).
Then I wrote on the board that the interest rate on mortgages is charged every six months. A student asked "what's a second mortgage". After first explaining what a first mortgage was, I explained that a second mortgage is borrowing against the equity in your home. Then I (quickly) explained this was one of the problems in the United States, where people would leverage their homes and end up borrowing more money than their home was worth. Then when they tried to sell their home, they wouldn't have enough money to cover their loans. Someone asked, "If you lose your job, and you still owe half the money on your house, or on your farm, what happens?" I answered as honestly as I could, and I'm not sure if this is exactly right, but I would think that you would be forced to sell your house if it got foreclosed. The portion that you owe the bank would be taken out of how much money that you got for the sale of your house.
My last math lesson of the day was in the staff room when a fellow teacher asked me what a reverse mortgage was. I tried to explain that it was when the bank gives you money in exchange for equity in your house. It is intended for retirees who have a lot of assets in their house, but have little or no cash. The problem is that when they die, a large amount of the value of the house can go to the bank.
All in all, it was a fun lesson for me, and although I have an excellent class, there may be some financial strain at home for me to be getting questions about foreclosures and second mortgages. I explained to them that one of my goals was to be a millionaire and that I would explain how I would do that when we talked about savings and borrowing later in the course. Every year I hope that some of this financial stuff sinks in, and I hope that because I am passionate about it that some will take an interest.
A great application of this is compound interest. If you multiply the interest each time, you can find out the future value of your money. So in our class yesterday, we started talking about savings and borrowing and compound interest.
First of all, the class quickly discovered that this is the way to get me off topic, as I got a lot of great questions from the class and happily answered them all to the best of my ability. We talked about more frequent compounding periods than annually, although the interest rate is listed as annually and how the more frequent that compound period, the more money that is charged/earned. When I explained that credit cards charge daily interest, it prompted the response, "those guys are jerks...I'm never getting a credit card!". We'll see if this person in the future lives by these words, but not getting a credit card immediately should be good advice for any teenager.
Then we talked (briefly) about purchasing a car. I told the class that I don't have a car, getting a cheer from the vegan in the class. We talked about a person that I know that purchased a fancy automobile immediately after getting their first job, and then was saddled with lease payments, insurance and all the rest, when they really couldn't afford it. I didn't have time to get into much more than that, but hopefully they will think about that (I'll return to planning and deciding if you can afford something when I get to the finance unit in the course).
Then I wrote on the board that the interest rate on mortgages is charged every six months. A student asked "what's a second mortgage". After first explaining what a first mortgage was, I explained that a second mortgage is borrowing against the equity in your home. Then I (quickly) explained this was one of the problems in the United States, where people would leverage their homes and end up borrowing more money than their home was worth. Then when they tried to sell their home, they wouldn't have enough money to cover their loans. Someone asked, "If you lose your job, and you still owe half the money on your house, or on your farm, what happens?" I answered as honestly as I could, and I'm not sure if this is exactly right, but I would think that you would be forced to sell your house if it got foreclosed. The portion that you owe the bank would be taken out of how much money that you got for the sale of your house.
My last math lesson of the day was in the staff room when a fellow teacher asked me what a reverse mortgage was. I tried to explain that it was when the bank gives you money in exchange for equity in your house. It is intended for retirees who have a lot of assets in their house, but have little or no cash. The problem is that when they die, a large amount of the value of the house can go to the bank.
All in all, it was a fun lesson for me, and although I have an excellent class, there may be some financial strain at home for me to be getting questions about foreclosures and second mortgages. I explained to them that one of my goals was to be a millionaire and that I would explain how I would do that when we talked about savings and borrowing later in the course. Every year I hope that some of this financial stuff sinks in, and I hope that because I am passionate about it that some will take an interest.
Monday, September 14, 2009
Kids and Money
As you have probably read, I teach high school, and last week I had cafeteria duty. Generally, this involves telling grade 9's to pick up their garbage and to push in their chairs and such, but I started looking at the lines and doing some calculations.
There was a lineup of at least 200 students at the beginning of lunch going to the cafeteria, assuming that they spend $5 there (pretty reasonable considering the food there), that is $1000 per day that the cafeteria earns (or the students waste). On top of this, there is a 25 cent fee for using Interact at the cafeteria.
This pains me when I think of the future of our economy. Teenagers have more disposable income than anyone (if you don't believe me check out the number of hats, cell phones and ipods that the vice-principal confiscates and then aren't even collected at the end of the year). Perhaps some thought should be to teaching them about savings.
Theoretically, what's wrong with getting your kids to save 10-20% for their retirement already (no matter what their age). You don't have to tell them that, just tell them its a savings account, and then when they are 18 years old, roll it over to an RRSP. In this way, they will have some RRSPs started for themselves when they get started (and even potentially for their First Time Home Buyers credit if it is still there in the future), and they get a big tax break for their first income tax that they pay.
In all my math classes, I try to give these sorts of ideas to the kids, of the power of savings, and that they can save $40 per week at their age to be a millionaire, when I have to save $100 per week for it to happen at my age. Some are wowed by the numbers, but I hope that these ideas stick with at least one from each class. I also talk about credit cards, mortgages, buying your first car, how much university will cost, and how much it costs when you finally move out on your own. These are things that I enjoy discussing with the class from time to time, but ultimately these are lessons that if they aren't shown at home, you have to experience for yourself before you really understand.
There was a lineup of at least 200 students at the beginning of lunch going to the cafeteria, assuming that they spend $5 there (pretty reasonable considering the food there), that is $1000 per day that the cafeteria earns (or the students waste). On top of this, there is a 25 cent fee for using Interact at the cafeteria.
This pains me when I think of the future of our economy. Teenagers have more disposable income than anyone (if you don't believe me check out the number of hats, cell phones and ipods that the vice-principal confiscates and then aren't even collected at the end of the year). Perhaps some thought should be to teaching them about savings.
Theoretically, what's wrong with getting your kids to save 10-20% for their retirement already (no matter what their age). You don't have to tell them that, just tell them its a savings account, and then when they are 18 years old, roll it over to an RRSP. In this way, they will have some RRSPs started for themselves when they get started (and even potentially for their First Time Home Buyers credit if it is still there in the future), and they get a big tax break for their first income tax that they pay.
In all my math classes, I try to give these sorts of ideas to the kids, of the power of savings, and that they can save $40 per week at their age to be a millionaire, when I have to save $100 per week for it to happen at my age. Some are wowed by the numbers, but I hope that these ideas stick with at least one from each class. I also talk about credit cards, mortgages, buying your first car, how much university will cost, and how much it costs when you finally move out on your own. These are things that I enjoy discussing with the class from time to time, but ultimately these are lessons that if they aren't shown at home, you have to experience for yourself before you really understand.
Wednesday, September 9, 2009
Links and Thoughts
I was walking home from the first day of school and it just hit me, no matter where you live how can you consider your town to be poor? There are 22,000 people living in the community that I am in. Let's assume (for the sake of easy calculations) that there 5000 houses in my community. Let's also assume that each house is worth $200,000. That makes the assets just in real estate to be one billion dollars. Something to think about...
Check out the Carnival of Money Hackers here as well.
Check out the Carnival of Money Hackers here as well.
Friday, September 4, 2009
Donations
The one part of my investment plan that I haven't followed through with that much yet is donations. In Canada, if you donate up to $200 you get a tax deduction at the lowest rate, and then get a tax reduction at the highest rate for any donations over $200.
My plan would be to pick my favourite charity and then (like everything else in my financial life) to make it automatic. Every month (or every paycheque more likely) I will automatically donate to my favourite cause. Being frugal I will also get some money back in tax time.
My other suggestion is that whenever you donate to a charity, please check the "Send a tax receipt" check when you register. Even if the receipt is for $20 or whatever your donation is, it will help yourself in the end. The Canadian government is encouraging us to donate so we should take advantage.
Check out the website for more information.
My plan would be to pick my favourite charity and then (like everything else in my financial life) to make it automatic. Every month (or every paycheque more likely) I will automatically donate to my favourite cause. Being frugal I will also get some money back in tax time.
My other suggestion is that whenever you donate to a charity, please check the "Send a tax receipt" check when you register. Even if the receipt is for $20 or whatever your donation is, it will help yourself in the end. The Canadian government is encouraging us to donate so we should take advantage.
Check out the website for more information.
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