From my CBC radio national column, August 27, 2009:
Between the plunge in the stock market and a drop in home prices many Canadians saw their nest eggs shrivel over the past year. Now with talk that the recession may soon be over, some are so keen to make up lost ground, they're taking out loans to throw money into investments, a strategy that concerns me.
How much is this trend is catching on?
The conditions right now - interest rates are low and stock and real estate markets that have been considered low and on the upswing, creating a breeding ground for the return of leverage. Some can’t resist the lure of easy quick money.
Plus as they contemplate the end of their working lives, people in the baby boom generation are keen to maximize their retirement income
Their thinking is that their return will be greater than the interest on their loan. In addition, if they invest in an investment that produces possible income or a capital gain, the interest on the loan is tax deductible.
A lot of the evidence about the number of people doing this is anecdotal right now. In a recent story on advisor.ca--which is a website for those working in the investment industry--that referred to financial advisers having to discourage some clients from borrowing to invest.
www.advisor.ca/advisors/news/industrynews/article.jsp?content=20090820_145107_9112
I did manage however to dig up some numbers that might be indicative of a trend. In June of this year, the Investment Industry Regulatory Organization reports that Canadians had approx $10.5 billion in margin accounts. Just so you know - a margin account applies specifically to money that’s borrowed from a broker to purchase stock. That’s up nearly 15% from the low in December of 2008.
Should people borrow to invest?
There was a recent that was written about on another website - investopedia - that compared buying on margin to borrowing money to gambling at a casino. And that pretty much sums up my reaction.
Borrowing to invest in anything magnifies your risk plus remember, if your investments drop, you’re still on the hook for the loan payments or even a dreaded margin call when you may have to come up with big bucks to keep the strategy going
So remember that there’s a fine line between investing and gambling, and in my view, buying on leverage kicks you into gambling territory, where the chances of big gains are offset by big losses.
Buying on margin is not for someone who has a low tolerance for risk, someone who needs their money soon, or someone just fed up with low interest rate GICs. It's a very speculative and risky adventure that might work for some, but the percentage of those who should consider leveraging is very, very small
Now, some people will borrow to top up their RRSP. This can be a good strategy, because you get a tax refund that you can use to help pay off your debt quickly, and that can help your retirement savings grow. Because RRSP loans tend to be small and short-term, most experts would categorize them as leveraging.
But I feel strongly that if you have any debt in your life, you should focus on paying that off first before ever taking on more in the hopes of a profit. It’s always a guaranteed return when paying off your current debt.
With stock markets increasing over the past few months, does this signal that someone interested in borrowing to invest should do so now?
You might think it says that markets are headed up and this is a great buying opportunity.
But while that might have been true a few months ago when markets were at rock bottom, there’s no guarantee now that they’re going to keep going up at this rate. So betting on a further increase in the markets is by no means a sure thing.
And keep in mind that whether you're getting in or out of the stock market, this should always be done with a plan - one that suits you, your risk tolerance and more...not just because it looks like a quick buck can be made. Actually, it's usually an investor's biggest mistake jumping in an out. If the pro's can't do it and make money consistently, there's little chance the average investor can
Final words of advice
If you are considering borrowing to invest, don’t get caught up in the hype of short term market spikes and the possible tax incentive. Make sure the person recommending the strategy is qualified, is a CFP and provides all recommendations in writing. Then, take that to your accountant or a reputable 3rd party for validation.
Remember, if someone is pushing for you to borrow money to invest, they’re benefiting from you doing so. And if you’re an investor that likes to sleep at night, err on the side of caution.
Saturday, August 29, 2009
Saturday, August 22, 2009
Saving for your child's eduction - RESP vs. the Tax Free Savings Account
From my CBC radio national column, August 20, 2009:
While they're trolling the malls looking for new backpacks and back-to-school clothes, parents need to remember that they need to prepare for life after high school.
The back to school scramble. It's a dance parents know all too well. But between trips to the mall, I'm reminding moms and dads that they need to squeeze in some time to think about how
they're going to pay for their child's post-secondary education.
But with all the demands on family budgets this year in particular, isn't it asking too much of parents to take on another financial burden ?
I sympathize that this is a difficult time for many people, but when you consider that one year of university including tuition, books, room and board costs approximately $12,500 or $50,000 for a four year degree, you should really try to put some money away-even if it's less than you would like.
What's the cost?
It's amazing how much your savings can build over time. And that's important when you consider how much the cost of education is expected to grow. The Bank of Montreal estimates that the cost of a degree could grow to close to $100,0000 by 2021.
The other thing to realize is that there are a variety of options to consider when you're deciding on the best way to save. So even if you can't manage to set aside money this year, there's nothing stopping you from drawing up a long-term plan that you can start putting into place
next year when your financial situation is a little better, let's say.
What are my options?
Let's start with the obvious one-the RESP, or Registered Education Savings Plan. Basically, it's a tax shelter allowing you to save for your child's education. When I say shelter, what I mean is that the amount you put into an RESP grows tax deferred until your child takes it out for their
schooling. The idea is that the tax won't be much as it's taxed in their hands and they're not earning much income at that stage.
You can contribute up to $50,000 per child over the life of a plan and there is no longer an annual limit.
There's no tax deduction as there is with an RRSP, but there is a government grant
The government will provide 20% on the first $2,500 contributed each year to an RESP, up to $500 a year ($7,200 to your child's resp in a lifetime).
Is there another option that exists?
Something else you should think about is a tax-free savings account. With the tax-free savings account (TFSA), you can put $5,000 a year and not pay tax on its growth or what it returns. You need to keep in mind though that the account holder must be at least 18 years old, so you
can't start an account for a small child.
One big advantage though to this account is that there's no restriction with how the funds are used, unlike an RESP, which must be used for educational purposes.
So a tax-free savings account might make sense if you wanted to say purchase a condo or house to use while your child's at school, for example - this account would offer that flexibility. But of course, you'd be forgoing the guaranteed 20% grant from the RESP.
Many advisors suggest maxing out the RESP contribution first because you're guaranteed the 20 per cent minimum from the government grant and then if you're able to save more, allocate it to the TFSA.
What kinds of investments are eligible for RESPs?
Just as with an RRSP, most investments are eligible, such as GICs, mutual funds and more. If you wish to purchase individual stocks and bonds for your child's RESP, you will need to open a self-directed account. Check with this financial institution to see what options exist for your plan.
Are there any that you would recommend in particular? Or to stay away from?
Time is of the essence with an RESP. If you're starting when your child is say at the age of two, you have time to be a bit more aggressive. If they're much older, you'll need to reduce or eliminate exposure to equities or more risky investments.
Remember, as with your own investments, it's essential to understand the risk level you should take or not for your child's RESP.
And you should review your investments over time...you don't want to be moving in and out of stocks or mutual funds willy-nilly, but don't feel like you have to stick with an investment for 20 years if it's not working for you.
What happens if my child doesn't end up going to college or university ?
Any money the government added to the RESP will have to be paid back. But income generated from that money remains within the plan. There are also rules about what happens to the money that grew tax-free. You can transfer up to $50,000 to your RRSP - or your spouse's - if you have the contribution room.
A final word of advice
Remember that it's essential that you as a family survive first, then save for your kids next. During your child's early years, there's a great deal of debt and demands on your savings. So although yes, it's ideal if you can start early, don't feel that you can't catch up as your children are older and your debts are reduced.
Lastly, an effective strategy could be to invest in your RRSP and use the tax refund that it generates to then invest for your child's education.
While they're trolling the malls looking for new backpacks and back-to-school clothes, parents need to remember that they need to prepare for life after high school.
The back to school scramble. It's a dance parents know all too well. But between trips to the mall, I'm reminding moms and dads that they need to squeeze in some time to think about how
they're going to pay for their child's post-secondary education.
But with all the demands on family budgets this year in particular, isn't it asking too much of parents to take on another financial burden ?
I sympathize that this is a difficult time for many people, but when you consider that one year of university including tuition, books, room and board costs approximately $12,500 or $50,000 for a four year degree, you should really try to put some money away-even if it's less than you would like.
What's the cost?
It's amazing how much your savings can build over time. And that's important when you consider how much the cost of education is expected to grow. The Bank of Montreal estimates that the cost of a degree could grow to close to $100,0000 by 2021.
The other thing to realize is that there are a variety of options to consider when you're deciding on the best way to save. So even if you can't manage to set aside money this year, there's nothing stopping you from drawing up a long-term plan that you can start putting into place
next year when your financial situation is a little better, let's say.
What are my options?
Let's start with the obvious one-the RESP, or Registered Education Savings Plan. Basically, it's a tax shelter allowing you to save for your child's education. When I say shelter, what I mean is that the amount you put into an RESP grows tax deferred until your child takes it out for their
schooling. The idea is that the tax won't be much as it's taxed in their hands and they're not earning much income at that stage.
You can contribute up to $50,000 per child over the life of a plan and there is no longer an annual limit.
There's no tax deduction as there is with an RRSP, but there is a government grant
The government will provide 20% on the first $2,500 contributed each year to an RESP, up to $500 a year ($7,200 to your child's resp in a lifetime).
Is there another option that exists?
Something else you should think about is a tax-free savings account. With the tax-free savings account (TFSA), you can put $5,000 a year and not pay tax on its growth or what it returns. You need to keep in mind though that the account holder must be at least 18 years old, so you
can't start an account for a small child.
One big advantage though to this account is that there's no restriction with how the funds are used, unlike an RESP, which must be used for educational purposes.
So a tax-free savings account might make sense if you wanted to say purchase a condo or house to use while your child's at school, for example - this account would offer that flexibility. But of course, you'd be forgoing the guaranteed 20% grant from the RESP.
Many advisors suggest maxing out the RESP contribution first because you're guaranteed the 20 per cent minimum from the government grant and then if you're able to save more, allocate it to the TFSA.
What kinds of investments are eligible for RESPs?
Just as with an RRSP, most investments are eligible, such as GICs, mutual funds and more. If you wish to purchase individual stocks and bonds for your child's RESP, you will need to open a self-directed account. Check with this financial institution to see what options exist for your plan.
Are there any that you would recommend in particular? Or to stay away from?
Time is of the essence with an RESP. If you're starting when your child is say at the age of two, you have time to be a bit more aggressive. If they're much older, you'll need to reduce or eliminate exposure to equities or more risky investments.
Remember, as with your own investments, it's essential to understand the risk level you should take or not for your child's RESP.
And you should review your investments over time...you don't want to be moving in and out of stocks or mutual funds willy-nilly, but don't feel like you have to stick with an investment for 20 years if it's not working for you.
What happens if my child doesn't end up going to college or university ?
Any money the government added to the RESP will have to be paid back. But income generated from that money remains within the plan. There are also rules about what happens to the money that grew tax-free. You can transfer up to $50,000 to your RRSP - or your spouse's - if you have the contribution room.
A final word of advice
Remember that it's essential that you as a family survive first, then save for your kids next. During your child's early years, there's a great deal of debt and demands on your savings. So although yes, it's ideal if you can start early, don't feel that you can't catch up as your children are older and your debts are reduced.
Lastly, an effective strategy could be to invest in your RRSP and use the tax refund that it generates to then invest for your child's education.
Saturday, August 15, 2009
Avoiding bankruptcy
From my CBC radio national column, August 13th:
Fed up with creditors calling? Before you turn to a bankruptcy trustee, you'll want to read some words of advice.
You've probably seen them on TV, the ads from firms specializing in bankruptcy using soothing tones to tell you THEY are the solution to your debt problems. However,there are plenty of things you should know before you pick up the phone to call for help.
New numbers out earlier this week showed that personal bankruptcies rose 54.3% compared to June of last year, which is not surprising in a recession like the one we're living through. But bankruptcy is an issue even in good years. On average, about 100,000 people a year file for bankruptcy.
Why? We tend to increase our level of debt as life improves, but then when we have a life altering event such as a job loss, divorce or disability, we rely on credit to replace income. Or, simple overspending. Unless income can be replaced or expenses slashed - which many people aren't willing to do - bankruptcy may seem like the only option.
But what about those bankruptcy ads? Many of them present bankruptcy as simply a chance to start over, with no mention of consequences.
Bankruptcy should be a LAST RESORT - not the first call when financial troubles hit. My message is this: if you or loved ones have debt problems, you're not alone. But, many times, you can and should look to yourself, not bankruptcy, as the starting point.
Also, one should keep in mind that by filing for bankruptcy, even though it drops off your credit bureau after 7 years, it may limit one's career potential for life especially in the financial industry for example.
And not every debt obligation such as student loans or child support payments would be discharged for example.
You should know that there are many costs associated with declaring bankruptcy that depend on your income, assets and other factors. The trustee fee varies from province to province. But all fees are paid by the person filing for bankruptcy. If not through their liquidated assets, then over time to the trustee. In addition to the provincially set bankruptcy fee, there is the money you have to pay back to creditors. That amount will depend on your income and assets. . Bankruptcy doesn't just mean walking away from debts free...unless one has absolutely no assets and is very low income.
What about credit counselling agencies. How do they differ from bankruptcy trustees? Or do they?
It's all very confusing. There are non-profit credit counselling agencies. But some of these agencies are in fact bankruptcy trustees who brand themselves as "credit counsellors" in their advertising. The problem again is that the rules vary so much from province to province.
So to help you along, here's a website where you can find a government listing of all the counsellors nationwide. Go to www.creditcounsellingcanada.ca to find a credit counsellor in your area.
Once you've got some names in hand, check with your Better Business Bureau to ensure they're a reputable counsellor. Then when you're making the call , at that point find out if they're for profit or not-for-profit.
And a couple of final resources:
1. www.bankruptcy-canada.ca. They have a fantastic free ebook explaining all the options from lowering your interest rate with your creditors, consolidation, consumer proposals and of course, if there's no other option, the process of bankruptcy.
2. www.nomoredebts.org. Although a western Canadian resource, anyone in Canada can call them any time with a credit question free of charge.
Fed up with creditors calling? Before you turn to a bankruptcy trustee, you'll want to read some words of advice.
You've probably seen them on TV, the ads from firms specializing in bankruptcy using soothing tones to tell you THEY are the solution to your debt problems. However,there are plenty of things you should know before you pick up the phone to call for help.
New numbers out earlier this week showed that personal bankruptcies rose 54.3% compared to June of last year, which is not surprising in a recession like the one we're living through. But bankruptcy is an issue even in good years. On average, about 100,000 people a year file for bankruptcy.
Why? We tend to increase our level of debt as life improves, but then when we have a life altering event such as a job loss, divorce or disability, we rely on credit to replace income. Or, simple overspending. Unless income can be replaced or expenses slashed - which many people aren't willing to do - bankruptcy may seem like the only option.
But what about those bankruptcy ads? Many of them present bankruptcy as simply a chance to start over, with no mention of consequences.
Bankruptcy should be a LAST RESORT - not the first call when financial troubles hit. My message is this: if you or loved ones have debt problems, you're not alone. But, many times, you can and should look to yourself, not bankruptcy, as the starting point.
Also, one should keep in mind that by filing for bankruptcy, even though it drops off your credit bureau after 7 years, it may limit one's career potential for life especially in the financial industry for example.
And not every debt obligation such as student loans or child support payments would be discharged for example.
You should know that there are many costs associated with declaring bankruptcy that depend on your income, assets and other factors. The trustee fee varies from province to province. But all fees are paid by the person filing for bankruptcy. If not through their liquidated assets, then over time to the trustee. In addition to the provincially set bankruptcy fee, there is the money you have to pay back to creditors. That amount will depend on your income and assets. . Bankruptcy doesn't just mean walking away from debts free...unless one has absolutely no assets and is very low income.
What about credit counselling agencies. How do they differ from bankruptcy trustees? Or do they?
It's all very confusing. There are non-profit credit counselling agencies. But some of these agencies are in fact bankruptcy trustees who brand themselves as "credit counsellors" in their advertising. The problem again is that the rules vary so much from province to province.
So to help you along, here's a website where you can find a government listing of all the counsellors nationwide. Go to www.creditcounsellingcanada.ca to find a credit counsellor in your area.
Once you've got some names in hand, check with your Better Business Bureau to ensure they're a reputable counsellor. Then when you're making the call , at that point find out if they're for profit or not-for-profit.
And a couple of final resources:
1. www.bankruptcy-canada.ca. They have a fantastic free ebook explaining all the options from lowering your interest rate with your creditors, consolidation, consumer proposals and of course, if there's no other option, the process of bankruptcy.
2. www.nomoredebts.org. Although a western Canadian resource, anyone in Canada can call them any time with a credit question free of charge.
Intelligent frugality tip #4 - saving money on your grocery bill
I admit it. Financial guru or geek, I've not always been a conscientious shopper when it came to purchasing groceries.
Since my eyes have been opened, or, produce has simply sky rocketed in price, I've been more careful where I shop. Although living in a central location has it's perks, driving to the outlying areas of town to find a Superstore doesn't make much sense either.
Recently, I've found an urbanites dream spot - the Italian Centre downtown in Little Italy (Edmonton).
Not only have they recently renovated, making their store a refreshing environment from the old cramped one of the past, they also offer locally grown produce at a fraction of the price of Savon or Safeway.
Check out my recent grocery purchase:
Since my eyes have been opened, or, produce has simply sky rocketed in price, I've been more careful where I shop. Although living in a central location has it's perks, driving to the outlying areas of town to find a Superstore doesn't make much sense either.
Recently, I've found an urbanites dream spot - the Italian Centre downtown in Little Italy (Edmonton).
Not only have they recently renovated, making their store a refreshing environment from the old cramped one of the past, they also offer locally grown produce at a fraction of the price of Savon or Safeway.
Check out my recent grocery purchase:
All of this for a cost of $43 and change. Most notably, the red and yellow peppers which fetch a much high price at other retailers. Plus, the large bag of coffee at $10 obviously added to the bill.
For my price, I was able to purchase: 3 extra large red peppers, 3 yellow peppers, 3 exotic light yellow peppers, 4 long hot peppers, 5 red onions, 2 apples, 4 vine ripened tomatoes, 6 zucchini, 5 packages of pasta, a package of dates, biscotti, chocolate wafers, a large package of coffee and a pack of butter.
What I also love about the Italian Centre is their organic feel with most of their produce supplied by local farmers. Check them out and surprise yourself with their selection and savings.
Happy shopping!
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