There is no shortage of debate over whether certain debts are good or bad or whether there is even such a thing as good debt. Million Dollar Journey says that good debts exist , and Big Cajun Man comes down on the all-debt-is-bad side . I think a large component of the disagreement is semantic. Debt comes paired with something positive. Borrowing to go to school gives you an education and a debt. The education part is good and the debt part is bad. When people say that this is a good debt, they mean that you’re better off with both the education and the debt than you are with neither. But by itself the debt is still bad. So am I just playing semantic games? I don’t think so. By getting the semantics right, we can change behaviour in a positive way. We should say that debt is bad, education is good, and that (most of the time) the advantage of education outweighs the disadvantage of having student loans. Phrased this way, it’s clear that minimizing the debt is desirable. ...

Conventional wisdom is that the Guaranteed Income Supplement (GIS) is clawed back 50 cents for each additional dollar of income. However, with the GIS top-up introduced in 2011, the total clawback rose to 75% within a range of income. This makes it even more important to take into account the GIS clawback when helping low-income seniors plan their finances. Service Canada provides a set of tables to help seniors determine their GIS and Allowance payment amounts . These tables apply only to seniors who are receiving the maximum Old Age Security (OAS) amount. Starting with your yearly income excluding OAS, GIS, and Allowance, you can look up your monthly GIS or Allowance. However, the tables won’t give you a simple picture of how GIS works. The Service Canada tables make it easy for seniors to look up the GIS payments, but they’re cumbersome for planning out different scenarios. Rather than focusing on yearly income, I prefer to think about monthly income. And for couples, in...

Despite the fact that I’m interested in the debate about whether we’re in a housing bubble and whether we’re headed for a housing crash that takes down our economy, I have no opinion myself. I care what happens, but I don’t know what will happen. Two of my favourite writers on this topic are Larry MacDonald, who likes to shoot down housing bear arguments , and Potato, who likes to shoot down MacDonald’s arguments . I won’t enter their debate except to make some observations about housing affordability metrics. Housing bears tend to focus on debt-to-income ratios. They look at how many years of income your mortgage (and other debts) represent. Of course, you can’t spend all your income on debt repayment; there’s interest to pay, and you probably need to eat. So, the actual number of years needed to pay off a debt is much higher than the debt-to-income ratio. If we focus on just the debt-to-income ratio, the situation in Canada seems dire. The average ratio in Canada keeps hit...

Guess what’s in this picture. I’ll give you a hint. It’s not a board for either of the old games Bridge-It or Chinese Checkers. It’s also not your skin after seeing an allergy doctor. Another good guess would be an overhead shot of one of those man-made forests with trees all planted in a grid, but that’s not it either. It’s a pie chart of my asset allocation in an RBC RRSP. This account holds less than a dollar and it’s apparently 100% cash. I got a 5-page statement of my account. My wife got a similar statement for her pennies. Way back when banks used to pay interest on cash balances, my wife and I cleaned out these accounts, but there was a small rounding error due to interest payments. Now we get yearly statements along with a newsletter containing RBC’s market outlook . I sure hope things pick up soon. My returns for nearly 20 years have been zero. I keep thinking that one of these decades RBC will contact us about closing these accounts. More likely they’ll ...

Big Cajun Man explains the steps to get tax breaks related to having a disabled child. Parents generally want the best for their children, including disabled children. Special schooling and other types of programs for these children can be very expensive. Taking advantage of all available tax breaks is important. The Blunt Bean Counter looks at the important decision for small corporate business owners of whether to pay themselves salaries or to draw dividends. In part 2 he crunches the numbers, and in part 3 he explains further issues to consider. Preet Banerjee interviews Ben Rabidoux in his latest podcast. The topic is the current state of Canadian real estate. Retire Happy Blog gives some statistics to allow you to compare your financial position to averages, but goes on to explain the problems with this sort of comparison. Jonathan Chevreau reviews the book Pound Foolish by Helaine Olen.

Casinos are proof that governments love money more than people. As the Ontario Lottery and Gaming Corporation (OLG) continues with plans to overhaul and expand their casinos and other gambling operations, I’m struck by how irrelevant it is to discuss whether this is good for the people. We debate the wisdom of making gambling available everywhere, but we always end up expanding more so governments can get more revenue. I have no religious or philosophical objection to gambling; I enjoy a little gambling myself once in a while. But how many casinos do we really need so that people can satisfy their gambling itch occasionally? The answer is that this question is irrelevant. What matters is that expansion will bring in more money. Never mind that casinos are a net loss to the country as a whole. Casinos cost money to operate, so government revenue is less than gamblers’ losses. Casinos create some jobs, but take away more jobs because gamblers buy fewer good and services. In ...

A few weeks ago, a reader I’ll call Jeremy asked a question about how to handle HST for a practice run with a partner I’ll call Sandy . Sales tax specialist Andrew Davis (contact details below) was good enough to help me sort out HST rules for Jeremy. Here is Jeremy’s situation: Sandy runs a business in Ontario offering an HST-exempt service out of an office she rents. The service Jeremy offers is HST-taxable. Because Jeremy offers a different but complementary service to the public, Sandy suggested that Jeremy offer his service out of Sandy’s office space. To compensate Sandy for directing customers to Jeremy and providing office space, supplies, computers, etc., Sandy suggests that Jeremy pay her 40% of his revenues. The complication comes with how to handle the HST. Jeremy must charge his clients the HST, but how should it be split between Jeremy and Sandy. How to handle HST starts with exactly who is contracting with the customers. Here are some possibilities: Case 1 : J...

Recently, Million Dollar Journey had a post showing how to calculate investment returns using the spreadsheet function XIRR . After reading a few questions in the comment section of that blog post and thinking about how I compute my own returns, I realized that this is trickier than it seems. This post gives step-by-step instructions (with actual spreadsheets) for how to calculate your investment returns. Throughout this post I’ll use the following fictitious example of an RRSP account opened in 2011. 2011 Feb. 22: Open account and deposit $10,000 cash. 2011 Mar. 11: Buy 400 ABC shares ($23/share + $10 commission). 2011 Aug. 17: Deposit $2500 cash. 2011 Sep. 12: Buy a $3000 bond paying 2%/year interest. 2011 Dec. 30: ABC pays 50-cent/share dividend. 2011 Dec. 30: Bond pays $60 interest. 2012 Jan. 16: Sell bond for $2960 (includes embedded commission). 2012 Mar. 20: Withdraw $3500 cash. 2012 Dec. 31: ABC pays 55-cent/share dividend. To compute yearly returns, we need to ...

I found a misfiled receipt in the folder hanging next to my tax folder. It might have been there for a while – I’m not sure. I’m no fan of overpaying my taxes, so I looked for the transaction date to see if it’s from 2012 and I can use it in my next tax filing, or if I messed up on a previous year’s tax filing. A few seconds of scanning revealed 11/01/12 Seriously? Somebody thinks this string of characters conveys useful information. Or maybe this person just hates other people. There are 6 possible ways to reorder the year, month, and day in a date. Fortunately, 3 of these orders are not in widespread use. The ones that are widely used are year-month-day day-month-year month-day-year So the plausible dates for my receipt are 2011 January 12 11 January 2012 November 1, 2012 So, either I messed up my 2011 taxes and can file an adjustment request, or I can use this receipt on my 2012 taxes. Great. Maybe I’ll try to invent some parallel-universe technology, try ...

Rob Carrick discusses the fact that our spending tends to drop throughout retirement in a video interview with Fred Vettese, Chief Actuary at Morneau Shepell, Inc. Vettese quoted studies in Germany and the U.S. showing that our spending at age 75 is 20% lower than at age 65, and our spending at age 85 is one-third less than at age 65. Unfortunately, he did not give enough information to locate the studies. I wonder whether these studies took into account that people’s pensions decline with inflation and some retirees simply run out of savings. Declining retiree spending would hardly be surprising if the main reason were that their income declines. Tom Bradley at Steadyhand considers a new marketing strategy based on how Steadyhand treats clients when they choose to leave. Million Dollar Journey explains how to easily and accurately calculate your portfolio return using the XIRR() spreadsheet function. Potato gives us some clear thinking on Canada’s high debt-to-income r...

Much has been made of the fact that the family debt-to-income ratio has hit 164.6% . In a funny off-colour joke, Preet Banerjee made the point that this is an average and that young people tend to have a higher debt-to-income ratio than older people . Boomer and Echo made a similar point that young people tend to have large mortgages and that their debt-to-income ratio is misleading . I think there is truth in these arguments, but that young people need to be very careful using these arguments to justify taking on enormous debts. An important goal is to eliminate debt before retirement. Not everyone will succeed, but we can expect the debt-to-income ratio for retirees to be low. Young people buying a house tend to start with large mortgages and smaller incomes than they will have later in life. It’s normal to expect that debt-to-income ratios will be higher among the young than the old. So, young people whose ratio is higher than the national average can relax. But don’t rel...

I have a habit of sticking my nose into a stock-picking contest several bloggers have been running for the past 4 years. Fresh from working out my 2012 return of 8.03% , I’m ready to crash their 2012 contest. Each year my actual portfolio return has been above average among the contest entries and this year is no different. (For discussion of the 2011 results see the last paragraph here , and for 2010 see here .) The big winner this year was Preet Banerjee at Where Does All My Money Go? with a 35.6% return! In fact, Preet has the best 4-year record by far among all the bloggers in the contests. This is amusing because Preet seems to take it the least seriously. In one contest he “picked some three letter words at random and then found the ticker symbols to match those words.” With FUN, HAT, ADD, and CAR in 2010, Preet came in second place. His disclaimer tells people considering buying his picks to “RAISE YOUR RIGHT HAND BEFORE PLACING THE ORDER AND REPEAT, ‘I AM A NUTBAR’....

It’s important for active investors to carefully measure their portfolio returns periodically. If you don’t compare your results to an index, how can you know if you’re wasting your time or not? Mental accounting allows many investors to lose to the index but think they’re actually beating it. The only trading I do now is to add new money to my portfolio and occasionally rebalance my holdings to my chosen target percentages. But, I like to calculate my yearly returns anyway. My 2012 portfolio return was 8.03%. This is less than you’d expect from an index portfolio given 2012’s asset class returns. My portfolio is 100% in stocks and is actually only just over 90% in index ETFs. So, you might suspect that the non-indexed part must have performed poorly this year. But, this isn’t the case. The only individual stock I own is Berkshire Hathaway which returned 16% in 2012 measured in Canadian dollars. So, what happened? To start with, some of the best asset classes for 2012 wer...

Is there any phrase in the title of an article or a speech that signals useless content with higher probability than “Market Outlook”? No doubt clever readers could come up with some worse phrases. Hopefully, I’m not adding to the poor track record of “Market Outlook” with this brief article. People worry about the future of their investments, their jobs, and the interest rate on their debts. When someone promises to predict the future, people listen. It doesn’t seem to matter that so many previous prophets got it all wrong; people listen to the next one anyway. We’re wired to see patterns. The sun comes up each morning at a predictable time, and we expect this to continue. The problem is that we see patterns that aren’t there as well. When gamblers start winning money at a craps table, they think they’re on a “heater” and start betting more. But this is a case where patterns don’t really exist; past dice rolls tell you nothing about the future. The movements of planets a...

Rob Carrick gave us an excellent perspective on how the mutual fund fee structure was formed. One quibble I have with his prescription for the future is that I don’t see why trailing commissions should be replaced “with a fee that is set by the adviser as a percentage of the client’s assets.” Separating out the fees for advice makes a lot of sense, but I don’t see why these fees should be directly proportional to the size of the client’s portfolio. It isn’t 10 times more work to provide advice on a million-dollar portfolio rather than a $100,000 portfolio. Some costs are variable, such as potential liability for mistakes, and richer clients may have higher expectations. But, many costs are fixed. Rather than a fixed percentage advice fee, it makes more sense to charge a fixed dollar amount plus a smaller percentage. Advisors aren’t likely to think much of this idea much because dollar amounts sound big to their clients and percentages sound small. Canadian Mortgage Trends rep...

Fresh from my near random performance in 2012 , here are some predictions for 2013. I’d prefer to convince people that economic predictions are useless no matter who is making them, but that seems mostly futile. Without any serious thought and no confidence whatsoever, here are some random predictions. 1. Interest rates will go up a little. 2. Housing prices will come down a little. 3. Canadian and U.S. stock markets will have an above average year. 4. Bonds will have a below average year. 5. The U.S. government deficit will be less than the 2012 deficit of $1.1 trillion. 6. Berkshire Hathaway will have a strong year. You might notice that 5 of these 6 predictions are the same as the ones I made last year. To that I say quit complaining – it’s not like this blog is behind a paywall. Remember that financial markets already reflect a consensus of predictions. Trying to out-predict this world consensus is largely futile. Do not rely on my financial predictions or those of...

To start the year I made some random economic predictions with confidence level zero . Keeping in mind that you should ignore all economic predictions whether they are mine or anyone else’s, let’s take a look at how well I throw darts blindfolded. 1. Interest rates will go up a little. Fail. The Bank of Canada target rate stayed at 1% throughout 2012. Score: -1 2. Housing prices will come down a little. Fail. According to the Teranet - National Bank Composite House Price Index, as of November house prices had risen 3.46% so far this year. I’ll concede that it’s unlikely that December will wipe out all of those gains. Score: -1 3. Canadian and U.S. stock markets will have an above average year. Using XIU as a proxy for Canadian stocks, the 2012 return with dividends was 8.0%, or about 6.3% above inflation. I’m not sure I’d exactly call that an above-average year, but it seems acceptable. Using VTI as a proxy for U.S. stocks, the return with dividends was 16.4%, or...

The only virtue of simple interest is that it is easier to calculate the amount owing than when we use compound interest. However, in today’s world, computers do our calculations for us and this advantage means very little. Despite its name, I’ll show that simple interest is far more complex than compound interest in important ways. A Basic Example Let’s start with an easy example to illustrate the difference between simple and compound interest. You borrow $10,000 from Uncle Jack to be paid back in 10 years. Uncle Jack isn’t a very loving uncle and knowing you have no other options he charges you 10% interest each year. If Uncle Jack charges simple interest, then your debt rises by $1000 each year for a total of $20,000 after 10 years. The 10% interest is always charged “simply” on the original principal amount. To put this into a formula, if the interest rate is r =0.10 per year, the number of years is t =10, the initial loan amount is M =$10,000, and the future value aft...

In my quest to critique everyone else’s financial goals (an example here ), I move now to the Big Cajun Man who recently tossed out a few financial resolutions . Here is a paraphrase of his list (you’ll have to click through to his blog for the funny parts I left out): 1. Stop spending so much. 2. Be more honest about our money. 3. Stop being so hard on myself about money. 4. Write down every purchase. I would call this a guilt list rather than financial goals. Many people have guilt lists like this about money, their weight, working out, and other areas of their lives. The problem is that all this guilt doesn’t help people very much. For financial goals to actually help you handle money better, you need to begin with a clear picture of where you are financially and where you want to be. Numbers must be attached to this picture. Then you can define specific goals (again with numbers) that take you from where you are to where you want to be. The goals are likely to be r...

Potato explains why the pressures on CMHC’s automated housing appraisal system push it toward systematically over-valuing real estate. Money Smarts Reports his 2012 investment returns. All investors should work out their overall portfolio return each year. This is particularly important for active investors who try to beat the market themselves or by following the advice of an advisor. If your active investing isn’t beating the market, maybe you should try low-cost index investing. Where Does All My Money Go? was the big winner in the 2012 blogger stock-picking contest, which is funny because he seems to take it the least seriously. Million Dollar Journey announced the winners of the big giveaway that included some investment newsletters. I’ve had my fill of investment newsletters; hopefully the winners will find them more useful than I did.

Skiing can be fun, but heading downhill is no fun for investors. So, why do so many of them do it anyway? The following chart shows how performance chasing can turn into investor skiing. Most investments are volatile, which means they go up and down. Whenever an investment like a mutual fund is at its peak, it has a great recent track record and is considered “hot”. The blue fund above jumped from $25 to $39 in only 3 months. It doesn’t get much hotter than this. Our skier poured $39,000 into 1000 units of the hot blue fund, but the party was over by then. He rode it down to $23.50 by April. But, fear not! A new hero has emerged. The red fund doubled in only 3 months. The skier switched to the hot red fund at exactly the wrong time and rode that down to $12. A final switch to the high-flying green fund in July gave disastrous result, too. By October, our skier had only $3000 left. So much for hot funds. This is an extreme example, but it illustrates what happens ...

I’ve never really set financial goals for myself, but I do find the goals others set for themselves interesting. I used to make projections about future savings based on my income and spending to see when I’d have enough money for a house down payment or a car, but this is different from setting goals. One thing that is usually missing from people’s financial goals is a goal related to overall debt. My day job is related to online security. I spend a lot of my time looking for ways to get around security systems so that we can make them better. So, when I look at someone’s financial goals, I immediately look for easy ways to achieve the letter of the goals without meeting the true spirit of the goals. Once we see the problems, it’s possible to make the goals more robust. Krystal Yee at the blog Give Me Back My Five Bucks posted her 5 financial goals for 2013 . Her first goal to “earn $85,000 to $90,000” isn’t easily gamed. The fourth goal to “diversify my investments” away f...

At least dealing with a hangover isn’t too expensive :-)