Decades ago, it was common for people used to say “I can’t afford it” when discussions came to big things like houses or cars and even for small things like going out to dinner. However, as Mark at My Own Advisor observed, we don’t often say we can’t afford things any more . I think the culprit is easy access to debt. When people used to say they couldn’t afford things, what they meant was that they didn’t have enough cash in their wallets or bank accounts right now. However, today’s salespeople are well-trained on how to get past this objection by steering you towards debt. Try telling a car salesperson you can’t afford a certain car. He’ll scramble to work out lease details to get the payments down to an amount you can afford. You’ll end up with a debt and a stream of payments you don’t want. Even a dinner out may go on your credit card and become debt if you can’t pay it off at the end of the month. The next time someone is trying get you to spend money you don’t want to...

Most people’s personal finances don’t measure up to the typical advice from experts. This is particularly true for young people who haven’t had a chance to build up retirement savings or an emergency fund. Knowing that your finances need improvement can make you feel guilty and worried every time you spend some money. The remedy for this is some planning and setting yourself on the right path. I think of my savings as three categories: long-term savings, medium-term savings, and an emergency fund. Each serves a different purpose in keeping your finances on track. Long-Term Savings Most experts call this “retirement savings,” but I prefer “long-term savings” for a couple of reasons. For one, it can be difficult to motivate people to save for their much older selves. Another reason is that you may end up using the money for some other purpose. You shouldn’t use it for consumer purchases like cars, but you may use some of it to fund a career change or a move to another countr...

Here are my posts for the past two weeks: “Household Savings Rate” is Highly Misleading Test Your Debt Savvy Tax-Free Contributions to a Group RRSP are not a Special Tax Break Crappy Retirement Here are some short takes and some weekend reading: Kerry Taylor explains mutual fund fees for investors who think they don’t pay any fees. The challenges she describes in helping people understand the fees they pay is something I’ve encountered myself. Can I Retire Yet? has some clear thinking on long-term care insurance. He analyzes the important parts of policies and shows how he made his decision of whether to buy or not. Preet Banerjee explains why you should calculate your net worth annually in his latest Drawing Conclusions video. Canadian Couch Potato explains the recent changes to Vanguard’s All-World ex Canada (VXC) ETF to include mid and small cap stocks. The Blunt Bean Counter takes on the questions of whether rich people will leave Canada or cut back on h...

I finally read one article too many about how people’s expenses decline as they age . This is used to justify saving less for retirement and spending more money early in retirement. Here I analyze this line of thinking with the technical concept of retirement crappiness. It’s fair to say that some people have enough money to have good retirements, but others are more strapped for cash and have crappy retirements. The typical retirement is only somewhat crappy. Let’s consider what will happen to the typical retiree destined for a somewhat crappy retirement. Some of these people will see the moderate crappiness coming and will control their spending to a not-too-painful level. However, most typical retirees won’t see the crappiness coming or won’t admit it to themselves and will initially spend enough for a good retirement. At some point they’ll be forced to cut spending and start experiencing some crappiness. A common experience as funds dwindle is continued spending cuts and...

It’s common in high tech for employers to pay annual bonuses to most employees. Those who run a company’s group RRSP like to make an enticing offer: “transfer your bonus into your group RRSP TAX-FREE!” They make it sound like this is a special privilege where you’re getting some huge tax advantage, but this isn’t true. To start with, any amount you transfer into your group RRSP counts against your RRSP limit, so be careful not to contribute too much. The next thing to understand is that the only tax advantage of transferring a bonus to a group RRSP is the timing of your tax refund. Let’s look at an example. Suppose Alice and Ben are both in a 40% tax bracket and both get a $10,000 bonus. Alice puts hers in a personal RRSP account, and Ben contributes to his group RRSP. Alice’s employer will deduct $4000 in taxes from her bonus and give her $6000. If Alice has another $4000 kicking around, she can make a $10,000 RRSP contribution and get her $4000 back as an income tax refun...

As the saying goes, there are more opinions about debt than there are people. Here’s short quiz to test how much you know about debt. 1. A few years ago, newlyweds Emma and Liam decided to buy a house. Their combined income was $100,000 and the bank said they qualified for a $450,000 mortgage. They borrowed $50,000 from their parents as a down payment and were the proud owners of a $500,000 house. The mortgage payments were a stretch, and all the house costs they didn’t know about in advance added to the financial pressure. Even before Liam lost his job, they were starting to run up their credit cards. By the time Liam found new work at lower pay, their high-interest debt was spiraling out of control. They held on for a while, but eventually declared bankruptcy and lost the house. Where did Emma and Liam go wrong? a) Emma married a loser. b) Their cheap parents should have given them a larger down payment. c) They did nothing wrong. Mortgages are good debt and they were...

When I first heard that the “household savings rate” is 5%, I thought this meant the average family saved 5% of their income toward retirement. Maybe you thought the same thing. Boy was I wrong. Malcolm Hamilton’s recent criticism of the Ontario government’s assertion that Canadians save too little got quite a bit of attention. I’m still unsure of whether Canadians have a retirement savings problem, but I’m confident that the household savings rate measure is very misleading. Hamilton describes a number of problems with this measure, but to see that it is misleading you only have to understand one of the problems. After people retire and begin to draw retirement income from their RRSPs, this counts as a negative household saving rate. So, even if I saved 25% of my income throughout my working life, I count as a spendthrift after I retire. This makes it clear that “household savings rate” doesn’t mean anything close to the average percentage of income that Canadians save tow...

Here are my posts for the past two weeks: “I Don’t Pay Any Fees” Climate Change Mutual Finds The Wrong Investing Goals The Two-Income Trap  Here are some short takes and some weekend reading: Zack Kanter has some fascinating predictions about how driverless cars will change our economy and completely reshape the way we live. Malcolm Hamilton says the Ontario government is wrong about Canadians’ savings rate and that the new ORPP is not a good idea. Life Insurance Canada has some excellent suggestions for improving the life insurance industry. This plain-spoken piece will open your eyes to some of the risks associated with life insurance. Andrew Hallam explains a study into how money affects our morality and the implications for financial advisors. Canadian Couch Potato calls out Google Finance for a number of types of misleading financial data. Tom Bradley at Steadyhand has some sound thinking on investing and debt for the young. Big Cajun Man celebr...

Common belief is that those who declare bankruptcy lack the self-discipline and morals to live within their means and pay their debts. After extensive studies of people who declared bankruptcy in the U.S., Elizabeth Warren and Amelia Warren Tyagi paint a very different picture of the reasons why people go bankrupt in their 2003 book The Two-Income Trap: Why Middle-Class Mothers and Fathers are Going Broke . If we go back to the 1970s, the typical family with children had a father who earned an income and a mother who stayed home. Thirty years later, the typical family with children had both parents working. It’s natural to assume that this means the modern family is better off financially, but the authors show that this isn’t true. According to the authors, U.S. families entered into a bidding war for housing in good neighbourhoods near good schools to give their children a safe place to grow up. Between the explosion in housing prices and other higher inflation-adjusted costs,...

Big Cajun Man published an amusing list of “frustratingly correct” answers to financial questions . Some of these questions and answers illustrate nicely that most people have the wrong ideas about financial goals. The big man’s first question and answer: Question : When is the best time to sell my stock? Answer : When it reaches the highest price. One criticism of this answer is that it offers no prescription for how to determine when a stock is at its highest price. But, apart from this, the answer is correct for active investors who try to beat the market. This is the way most people think about investing. However, the majority of active investors must underperform the market. We see this play out year after year. The vast majority of investors would benefit if they stopped trying to beat the market either by themselves or by finding an advisor or fund managers to try to beat the market for them. For investors who embrace passive investing, the first answer to the qu...