Car Insurance Liability Coverage - Do you Have Enough?

If you're a car owner, I'd like you to take a look at your liability coverage on your insurance policy. Is it only a paltry $500K, or is it $1 million or hopefully higher? A lot of car owners just blindly keep renewing their policies year after year without considering how much actual liability coverage they have. In my opinion, $1 million is no longer enough and you should really be taking it up to $2 million, which will cost you around $20 per year more than the $1 million level. This is even more important if you occasionally drive into the USA, since our dollar has fallen to about the 80 cent level.

Deflation "Grows" Your Existing Debt

In a recent column in the Globe and Mail, Avner Mandelman points out that we're likely in deflationary times. In normal times of inflation, money slowly loses its value as it gets diluted. If you're in a negative monetary position ie. carrying debt, inflation will slowly make the debt less and less significant while your wages likely rise as well. During deflation, the opposite occurs. Your debt becomes more and more significant as your wages likely sit flat or possibly decline. On top of all that, the stuff you bought with the borrowed money is likely to be dropping in value too, faster than just the usual depreciation. I'm a big proponent of retiring your personal debt quickly, but in times of deflation I can't emphasize this enough.

Christmas Gift Cards - Be Careful!!!

We're now coming into the Christmas gift-giving season, and gift cards tend to be very popular. Stores love them since they get cash in advance, and overall the full value purchased on them tends not to be completely redeemed. They get lost, set aside and forgotten, or damaged leaving behind stored value that simply never gets spent. Due to there being no simple way to tell how much money is left on them, they get set aside. Always keep the last register receipt with your gift card, else it's like having store specific cash that has all the ink faded off except for the serial numbers. Some stores do have websites that let you check the money remaining on the card, but who wants to have to go running to the web to find out that there's $0.50 left on a card?

Next year, 2009, is not looking very good for retail, so store closings and bankruptcies are likely to be quite common. Don't be left holding useless gift cards, and I also don't recommend giving gift cards that are likely to become worthless. Assume that any gift card is not going to be redeemed in one fell swoop, and that your "giftee" is going to take six months or more to spend it down. In light of this, only buy gift cards from solid businesses that are highly likely to be around through 2009.

Finding Secure Money Mattresses

In these turbulent financial times, cash is king. Even gold doesn't seem to be doing all that well. So in this brief post, I'd like to just take a look at where one can securely park their money.

Money market funds, traditionally, have been great places to park your cash. They have generally paid pretty good rates of interest. But just how secure are they? They are not covered by CDIC insurance, and do you really know what paper is held by them? I'm going to define a secure money "mattress" as a place to park cash where the interest rates are top notch, and where this cash is insured. So just where are these mattresses? I'm listing the top three that I'm aware of, in order of my perceived quality of the insurance backing them.

1. Pretty much any high paying Canadian bank account with CDIC insurance qualifies. The insurance covers you up to $100,000 per depositor per bank. An RRSP account qualifies separately and so does a joint account. The downside is that if you have a lot more than $100K in cash to protect, you are having to open accounts at more than one bank, spreading around your $100K amounts. Such high interest accounts are ING Direct, President's Choice Financial's Interest Plus, ICICI Bank, and HSBC Direct. Do your homework though, some of these banks are easier to deal with than others.
2. CIPF Insurance covers investment brokers. If an investment broker goes bankrupt, your cash on hand with them is covered up to $1 million. But can you find a broker in Canada that will pay you more than a laughable rate on idle cash? I'm aware of only one right now, Etrade Canada with their new cash optimizer account. I believe that this is CIPF insured up to $1 million and they pay slightly better than ING Direct right now. This can save you having to maintain multiple $100K accounts at different banks. But it is still prudent not to have everything in one pot anyway. However, as always, do your own due diligence here and don't rely on what some guy has typed in his blog. Yes, even me. ;)
3. Manitoba Credit Unions. I'm not sure what the rules exactly are for opening accounts in Manitoba, but their credit union bank accounts are insured to unlimited amounts even for non-residents. Such credit unions are Achieva Financial and Outlook Financial. They will typically service charge the hell out of you unless you just use the accounts as mattresses and don't transact on them. But they pay really high rates of interest. Do lots of your own due diligence here.

My Idea Became a Billion Dollar ($945 million) Company

Back in 1999, three Nortel employees, namely myself, Claude Bouffard, and John Shannon were enjoying beers after work at the Royal Oak pub in Kanata, Ontario. We bantered about some ideas around micropayments on the internet. Why couldn't we pay small amounts of money, such as 25 cents for the newspaper, and have it just show up on our phone bill? We worked in the DMS division of Nortel and had some idea of how the billing system worked. After all, telcos have very well established billing systems for handling tiny line items, and they have an established system for reconciling these amounts amongst themselves. So the idea was essentially that you'd click on a link, a secure transaction box would pop up and prompt you for your "Go Pin". Well, the name Go Pin would come later but it serves to help you understand how it would work. The 25 cents or whatever it was would simply show up on your phone bill.

Our VP at the time, Bob Tipple, was convinced enough by John and Claude to allow Claude to run full-time with the idea. Claude being the infectious ball of energy that he is, drove the idea forward to the point where it had enough legs for the internal incubator folks to take the whole idea seriously. John and Claude sold it to the incubator folks, I was occasionally cheerleading from the technology side. Nortel created the business as GoPin Inc, and venture capitalists were found, and finally a CEO, Gary Marino, from the banking industry in the US came on board to lead. The company underwent a number of name changes, to Pinmoney then I4Commerce, then BillMeLater and it moved to Baltimore. Also, as you likely already figured out by now, the original idea morphed into BML doing realtime credit checks and handling the billing, as opposed to trying to herd the cats we like to call telcos.

Ironically the company sold for $945 million, more than Nortel's total market capitalization today. What did I get? Well, I do have a nice mug, a great story, a sense of pride, and I'm a little older and a bit wiser now. Maybe it's time to try another idea, but this time actually get some money out of it. I do not know how Nortel itself fared, they likely cashed out to a VC early.

Update: This has been picked up by the mainstream media, I have made the front page of the Ottawa Citizen today (Oct. 9). Why does everyone have to misspell my last name?

Don't Catch a Falling Knife

Today I would simply like to say that one should wait until the stock market stabilizes and begins a sustained upwards trend before you decide to buy in. While you may look at those low stock prices and start to salivate, please hold off, unless of course you prefer to just roll the dice with wild abandon, or have gambling money you want to spend now. By holding off, you might not end up buying the absolute bottom, but don't be greedy, have some prudence in these times of uncertainty. If you prefer, buy in on a regular basis over time (dollar cost averaging), that's a better idea than trying to grab at some of these falling knives.

The Race Has Begun for TFSAs

Today, the race has begun in Canada to get you to sign up for a tax free savings account. Since TFSAs don't actually come into effect until Jan 1, 2009, ING Direct has decided to simulate it from now until the end of the year by paying you double the interest. As of Jan 1, 2009 they will automatically register a TFSA with the government for you (based on the early simulation account), and transfer up to $5000 from this early simulation into it.

I urge any of you with any money just sitting in a savings account somewhere, and you probably do since the equity markets are in turmoil, to consider opening your TFSA now. If you do it today, and fund it to the full $5000, expect a nice bonus interest payment on Dec. 31 of this year of about $35. Earning 6% on your money (as of today's rates) is pretty darn good and beats any GICs out there. I don't want to sound like a complete fan boy for ING Direct, I'm sure that there are similar offers at other progressive financial institutions too. Feel free to share by leaving a comment.

The $700 Billion Bailout

So let's say that they strike a deal and the government buys up all that bad paper. Then what? People still can't make the mortgage payments and the defaults continue? I don't understand why the lenders don't just renegotiate or freeze the interest rates to keep people from defaulting on their mortgages. Propagate the lower earnings from those mortgages up the food chain into the ABCP. Everybody ends up getting less, except the little guy ie. the homeowner gets to continue living in their home and make payments towards eventually owning it. Have the government issue coupons attached to the mortgages, the value of such coupons dropping each year. This allows both the homeowner and lending institution to be weaned out of the situation slowly. This also avoids needing to have all the $700 billion up front, apart from having to buy up enough of the currently worthless paper to keep the system afloat right now

Scary Financial Times

With the collapse of so many financial institutions looming in the US, and the Fed stepping in with $100 billion+ dollars of prop-up funding, one has to be very worried. The US is already running yearly deficits close to $500 billion, so this extra prop-up cash has to be coming from the printing presses (ie. from out of thin air) and/or via loans from other countries such as China. The Fed did not cut interest rates this week, so that tells me that they're likely worried about the printing presses fueling inflation.

Some people may see these times as a great buying opportunity, but I don't recommend trying to catch a falling knife. Wait until things settle out, and cross your fingers that they do. If you're looking for a decent GIC rate, ING Direct just came out with a 1.5 year GIC at 4%. I think it's a time limited promotional rate since it beats the rates on all their other GICs except for the 5 year which also has the same 4% rate.

Saving Money on Cell Phone Use in Canada

Since there's been a lot of hype recently in the cell phone market with the launch of the iPhone, I thought I'd point out an easy way to potentially save yourself a couple of hundred dollars on your cellphone bills every year. It essentially hinges on how much you use your phone and when. If you're a heavy user, just continue to regularly examine your cell phone use and shop around, assuming you're out of contract of course. If you're a light user, then consider using a pay as you go or prepaid plan. For example, I'm on Roger's Paygo. I use their virtually unadvertised $100 (+ tax) prepaid card, since it has 365 day expiry time. I'm also on their 1 cent evenings and weekends "plan" with it. This does last me an entire year. So I'm paying $8.33 (+ tax) a month for a cell service and it includes call display and optionally voicemail. If I put more money into the account before the time expires, it all rolls over into the next 365 days. They allow you to build it up to a maximum of $500 I think. Any Roger's phone can be turned into Roger's Paygo, once out of contract of course. They may even give you some free airtime to get you going.

I'm not running a Roger's commercial here, but they do use the technically superior GSM for their network. I wish we had another GSM competitor in this country. But there's also a few other reseller deals using Roger's network that are also very good value. The first is 7-11 stores, with their Speak Out Wireless offering. The second is Petro-Canada Mobility.

If you're stuck with no option but to use Bell's network, then please have a look at Virgin Mobile.

How Much Do You Spend on Coffee?

Starbucks has just announced that they're closing 600 locations in the US. While you might joke that this only represents one city block, it is actually significant and impacts a lot of their employees. When times start to get tough, people start to cut back on discretionary spending. But rather than deny themselves some of those simple pleasures, they tend to look for cheaper alternatives. Today I'd like you to take a moment and think about how much money you're dropping on coffee in the course of a work day. If you are spending $5 a day on coffee at work, then that's $100 a month. Over the course of a year, that's $1200. For many people, that's a week on a beach in Cuba.

You can make your own delicious cup of coffee quite cheaply. For example, a kilo can of Hills Brothers medium roast coffee is under $5 at Price Chopper. Use 18% cream (not 10% coffee cream) and you can have a cup that will be at least as good as Tim's if not better.

It's Almost Official: The Dow is now in a Bear Market

As reported Friday in the Globe and Mail here, the Dow has now fallen 20% past its peak. But it closed on Friday just above that mark, so while technically it is not the official start of a bear market, it is highly likely to happen this week. I remember being in Spain in March 1999 when the Dow first cracked the 10,000 mark. It is now going on close to ten years, and it only up about 10% from there. I do wonder how long this bear market is going to last, since the price of oil and the Iraq war are fueling inflation. Add in the subprime crisis, and it isn't looking good, at least for our largest trading partner. But there is speculation that our housing market is headed for a large correction as well. One has to wonder if there's enough foreign demand for our commodities to keep the TSX out of bear territory. I guess basically what I'm trying to say in today's posting is be very prudent with respect to your finances right now. Things aren't looking very rosy.

It's BBQ Season. Save Money on Propane

Here in Ottawa I notice a proliferation of places that sell "swap" propane BBQ tanks. The idea is that you simply drop off your empty tank and take a full one in its place. A lot of places have these tanks including many gas stations. They are stored outside of course, typically in a locked cage. Cost to swap your tank at one of these places is about $27. Cost to fill your tank instead of swapping it is about $16. That's a 70% premium folks! Many people think that once they have a swap tank, they have no choice but to go and swap it when they need a fill up. But many places will refill swap tanks, as long as the date stamp on it indicates that it is less than 10 years old, same restriction as any other tank.

Actively Managed Funds Continue to Lag

In today's Globe and Mail there is an article pointing out that fund managers continue to do poorly compared to index funds. There really isn't any reason to invest with active managers, and the data continues to support that. Of index funds, I personally like the TD Efunds due to their low MERs and green approach of not mailing out paper. Also the iShares exchange traded funds are extremely good value if your investing patterns cause the brokerage fees to not be an issue. ING's Streetwise Funds are ok too but they do have MERs close to double what they should be.

Buying a Desktop Computer? Save a lot of money.

Here in Canada, the best deal by far on a "new" desktop computer is a refurbished HP Media Center machine on sale. You cannot even build one yourself for less money. These HP machines also use solid good name brand components such as ASUS motherboards, and Seagate hard drives. By refurbished, they simply mean that the computer has had to go back to factory for some reason. If the box is simply opened in the store, then back it goes to factory for refurbishment. By factory, I mean an authorized outlet for examining/troubleshooting the machine. These machines are also current, meaning that they are not "lease returns" that have been used for a couple of years.

So where do you find such machines? Futureshop and Best Buy both carry them on a regular basis. But like I said earlier, wait for them to go on sale, where you can scoop one for less than half the price of new, saving you upwards of $500. Yes, it is well worth paying the shipping charges.

Also, the refurbished HP Pavilion and the Compaq machines are also good deals, but nothing beats the sheer value of those Media Center machines with their better graphics cards and hdtv tuners built in, and typically huge hard drives.

The only downside I see with buying refurbished is the shorter warranty period of 90 days. But misbehaving components usually show up within the first 30 days anyway. Also, HP should be using beefier power supplies in their machines.

Need Foreign Cash for a Trip?

We are entering the summer here in Canada (northern hemisphere to be correct) and it is the main travel season for many people. This travel is often far overseas, as much of the charter aircraft used for Caribbean travel are shifted instead to Europe. So you are headed overseas and need a few hundred dollars worth of foreign cash? Many people don't feel comfortable travelling without having some foreign cash on them. This is a prudent move, as you may have problems finding an atm that works with your bank card upon landing in the distant land. And then there are the service charges. Ten years ago I used bank machines in places such as Poland and Austria, and was only charged $2.20 per PLUS system transaction. Today, that same transaction will probably cost you between $5 and $10 dollars just in transaction fees. So much for technology making things cheaper. But of course these transaction costs are simply a bank gouge. They also get you on the exchange rates although those rates are usually pretty decent.

If you decide to bring a lot of foreign cash with you, please consider going to a foreign exchange place instead of your bank. Here in Ottawa we have Accu-Rate. They fairly consistently beat the bank exchange rates, and you can pay with your bank card as an interac direct payment. By going there, you can easily save $10-$20 or more depending on what you're buying and how much. Also, the foreign exchange place is likely to have the foreign notes that you're looking for. The banks only carry a small selection and it is not uncommon for small branches to run out of the popular currencies such as Euros.

To somerize, all I'm trying to say is do shop around a bit, as most of these places including the banks do post their rates and update them throughout the day. If you spend 20 minutes online and find a $20 saving, then your time was well spent at $60 per hour, as long as you don't have to drive a long way to the establishment. Also ask your friends and coworkers if they have any favourite place to exchange money. Sometimes friends have some foreign cash that they haven't exchanged yet and are willing to give you a good deal. You can both win on such transactions as the buy/sell spread is usually a few percent.

Mutual Funds: Cutting the Number of Unitholders Lowers the MER

In today's Globe and Mail, columnist Rob Carrick points out that mutual funds with a high barrier to entry have better returns. By a high barrier to entry, we typically mean a large initial investment. Are these fund managers any better than the norm? Perhaps yes, but Rob does point out that these particular funds do have smaller MERs. He speculates that such funds have fewer investors, and so mundane costs such as statements and mailings are less and thus is reflected in the lower MERs. In my opinion, this finding just provides more support for funds such as TD efunds which cut the paper mailings to zero and passes the savings on to investors in the form of low MERs. I have heard that a typical mutual fund account incurs printing/mailing costs on the order of about $50 per account per year. Seems high, but does anybody out there have a better number? On an average investment of $5000, that's a full percent.

Velocity of Money Theory for this Round of Inflation? I Don't Think So

In today's Globe and Mail, Avner Mandelman has a column which you can read here. Avner Mandelman is president and chief investment officer of Giraffe Capital Corp. He is stating that inflation is very under reported in the US right now, then goes on to explain why he thinks that inflation is raising its ugly head again. He states that he believes that it is due to the velocity of money. In previous postings, I have stated that money has to move in order to do work, and if it is not moving (equivalent of being stuffed in a mattress for example) it may as well not exist. Avner thinks that this round of inflation is mainly due to money moving faster than it has in the past. He claims that this faster movement is being caused by technology. Click a mouse and voila, money has moved. While I agree to some extent that yes, money can move faster and thus might contribute to some rise in commodity prices, I feel that this effect is a minor one. Money has been moving a bit faster for quite a few years now, but I don't think anything radical has happened here to explain inflation.

I'll tell you what I think is happening. I think that large pools of offshore US dollars are making their way back into the mainstream US economy. If US dollars are used extensively as a medium of exchange in other areas of the globe, especially areas that don't do a lot of trading with the US itself, then those dollars may as well not exist as far as the US is concerned. US dollars are widely accepted all over the planet and have been used as a major medium of exchange outside the US. For example, El Salvador uses the US dollar as its official currency. Those dollars can flow all over El Salvador as a medium of exchange, and as long as El Salvador doesn't chase US goods or services or bids up commodities (such as oil) that the US is also trying to buy, then those dollars may as well simply not exist as far as the US is concerned. Of course El Salvador does a lot of trade with the US so in reality this example doesn't really apply, I just use it as a hypothetical one to illustrate my point.


So why are these previously isolated dollars now starting to find their way home? Well, in one simple word, the Euro. The Euro is a relatively new currency that is an alternative to the US dollar since it is also being widely accepted worldwide as a medium of exchange. A lot of foreign entities, formerly holding US dollars, are now opting to hold some Euros instead. Those displaced US dollars are now starting to come home to roost. Also remember all the spending on the Iraq war, much of it done in newly "printed" US dollars? Those billions of dollars spent overseas are also finding their way back to the US. This whole thing has been fairly obvious as we watch the US dollar fall with respect to the Euro.

To "somerize" lol, all this, the money supply doesn't have to actually grow to cause inflation, it just has to effectively grow with respect to the particular economy where you are measuring the inflation. Velocity changes just don't cut it, in my opinion anyway.

Getting More Out of a Tank of Gasoline

With the price of gasoline reaching ridiculous levels of over $1.30 a litre, I thought I'd share with you a few tips to stretch your mileage. The usual motherhood statements of drive less, and plan your routes to minimize travel, still obviously apply.

• Optimal mileage is reached at about 80 kph (50 mph). So slow down when you're on the freeways. Get in the rightmost lane and do the speed limit or a bit under.


• Acceleration costs you gas, significant gas. Try to time your speed as you approach red lights to avoid actually having to stop, and thus reduce acceleration. Yes, this means coasting. Coast as much as possible instead of active braking. Active braking is a indicator that you stayed on the accelerator pedal too long. Simply try to time things such that you're doing less active braking, more coasting, and thus less accelerating.


• Maintain your momentum as much as you can without compromising safety. Try to know your car and don't unnecessarily slow down when you don't have to, especially around corners.


• Use the downslope of hills to your advantage to help you get up the other side. Allow your speed to bleed down somewhat on the upslope, don't press down a lot more on the accelerator just to maintain your speed going up hill. Gently accelerate back up to speed once you're over the crest.


• Keep your tires inflated to the level indicated by the sticker in your car. Under-inflated tires will hurt your mileage.


• Check and change your car's air filter at least every 6 months. Reduced engine airflow will hurt your mileage.


• Use your air conditioning sparingly. Turn up the temperature in your cabin by a couple of degrees. The compressor puts a significant load on your engine.


• Accelerate gently. Hard acceleration sucks a lot of gas.


• Only fill your tank to the halfway point. By leaving out those extra 25-30 litres of fuel, you have effectively taken 40 lbs out of your car. In fact, if everybody did that, it would create a temporary glut of fuel and prices would come down, at least for a little while.

As always, never compromise your safety. Don't zoom around corners if you don't feel safe doing so, and when you're coasting keep your foot ready to hit the brake and pay attention to the road. Also, be aware of drivers behind you and try not to piss them off with your frugal moves.

Save Money, Drink Imported German Beer

With temperatures here in Ontario starting to significantly warm up, I'd like to bring up a subject near and dear to most of our hearts: BEER!

So I was at the LCBO today and bought 8 assorted cans of imported German beer for almost exactly $16 including a total of 80 cents deposit on the cans. It was actually slightly under $16. I bought 4 litres of beer (500 mL cans) total. German beer is arguably the best stuff on the planet. By the way, the lowbrow comedy movie "Beerfest" is really funny....I laughed my ass off. Those who have seen me in person know that I have no ass so it must be true, but I'm starting to really digress....A case of Labatt's Blue is $38.50 at the beer store for 24 bottles of 341 mL, including deposit. That's a total of 8.18 L of beer. The equivalent price of German beer would be about $32.75, almost 20% cheaper. Given the strength of the Euro, and the shipping cost of those suds, I'm somewhat dumbfounded. Perhaps our big brewers spend crazy amounts of money on advertising/promotions and pass the lack of savings on to us. While I can certainly appreciate those girls-in-bikini ads on tv, I do not want to actually pay for them while there's other suckers out there who don't mind doing so.

Yes, more money can be saved by buying some of the "buck-a-beer" + deposit brands like Lucky or Lakeport and those are good beverages too. I do recommend buying those brands as signifcant money can be saved over the course of the summer. But even at $1 per beer, as much as 50 cents of that flows to the government as taxes. Yikes. Also, the lack of retail competition in Ontario likely has something to do with it. Prices in Quebec are lower, but one has to be careful when comparing. In Quebec, the prices do not include deposit, PST, and GST. When added in, you are still slightly cheaper, but not by much. Costco in Quebec sells beer and you can save some money, but again not huge amounts, but hey, every little bit counts. If you live in another province, feel free to do your own comparisons and report back.

Beat the Stupidity Tax - Play the Lottery For Free

We've all heard the term "stupidity tax" as it applies to playing the lottery. You have better odds of being struck by lightning as you do winning the lottery, at least the big jackpot. I do applaud you lottery players for keeping my overall tax bill down a bit though. And of course, you can't win if you don't play is a slogan often heard around the lottery. Many of you play small amounts of money responsibly and get a bit of entertainment excitement out of it. This is reasonable and ok. Hey, I'm not here to chide you about wasting money on the lottery, I'm here to help you play for free!

Now that I have your attention, I want you weekly lottery players to please consider this scheme. Every week, cut your lottery expenditures in half. Yes, I mean in half. For example, if you're spending $4 a week buying two $2 tickets, then please just buy one ticket instead. Put the weekly $2 into a tax free savings account (TFSA) that will become available to you starting January 1, 2009. This amounts to $104 a year. Put the toonies in a change jar if you have to, and get it into the bank a couple of times per year. The more frequently you deposit it, the better. Invest this money in a low MER Canadian Index fund such as TDB900. If you're in another part of the world, use the equivalent investment for your country. Over the course of 15-16 years, this money will have grown (assuming 10% annual tax free compounding) to about $4000. This should now allow you to play the weekly lottery to the same level for free, for the rest of your life. It should earn about $400 per year, but the lottery will likely be more expensive to play by that point.

If you're spending $10 per week on tickets, then instead save $5 a week into your account. This is $260 per year saved. Over 15-16 years, you will likely have over $10,000 there. If instead of gambling at all (except through the low MER mutual fund if you consider that gambling) you invested the entire $10 a week, after 30 years you'd have over $100,000 in the account.

In my defense, I didn't say the free lottery play was going to be immediate! lol . And the use of the term free is a bit liberal, considering that it fundamentally is your own money that you're playing with. But you would have, in all likelihood, lost that money anyway, that's why I feel justified in using the "free" label. I just directed you to set it aside to build a future annuity to use to play the lottery.

Eating the Sales

I recently stopped to think a bit about my grocery buying habits. What did I tend to buy and when? I came to the realization that I am not really in charge of creating my own menu. Every week, I spend a few minutes visiting the flyermall to see what the supermarkets have on sale. Loblaws for some reason doesn't like them linking to their flyer. The sales are basically dictating, to a major extent, what I'm going to be eating over the course of the week. You know what? I actually like it! I don't have to really bother thinking about assembling a menu for the week. I just buy enough of the various meats on sale, and vegetables highlighted in the flyers, to assemble my meals. Sure there are some staples like bananas and dairy products that I'm always buying but if one pays attention you can often find them on sale at one of the stores that week. Thankfully, the stores cycle through putting different things on sale all the time and that keeps my menu interesting and balanced. I figure that by doing this, I probably save around $100 a month as compared to assembling a menu ignoring prices. That's significant coin!

However, we are now in the era of high gasoline prices so I shop for food close to home. I won't bother driving to far away stores anymore for the sake of saving a few dollars, it just isn't worth it.

Drinking the "Peak Oil" Kool-Aid

In a brief posting today, I just wanted to point out that the term "fossil fuel" is really nothing but a theory. There is no absolute proof that oil derives from dead dinosaurs or other ancient biomass. In fact, there's a fair bit of evidence that oil is created by geologic processes deep within the earth's crust. Thomas Gold wrote about this alternative theory before knowing that the Russians had already come up with it themselves. That's what he claimed anyway, some people think that he plagiarized. Gold predicted that this theory would show microbes living deep within the earth, and recently more evidence in support of that keeps appearing.

If Gold and the Russians are correct, then oil may be extremely plentiful at layers below the crystalline basement, extractable by deep drilling. Russia sure has been successful at finding new oil in strange places. More reading on the subject here.

By making us all believe that oil is limited and is reaching a peak in production, the oil conglomerates can keep the "black gold" speculators on board thus keeping oil prices high and protect their obscene profits. They will likely seek to squash any information or theories which tend to make oil possibly be much more plentiful than they want us to think.

Estates and Probate Fees

Another blogger asked me recently to take up the subject of estate planning and probate fees. I am not a lawyer (IANAL) but I have been the executor of one estate that managed to avoid probate and associated with another estate that also managed to avoid it as well. First off, let's examine what it means to probate an estate. In general, when a person dies, their assets are all frozen. In order to release the assets to the next of kin, an estate has to be probated. Probate means getting a court to agree that an executor has the legal right to do so. It is often just a rubber stamp, that comes along with the court demanding a small cut of the gross amount of assets that are frozen. In Ontario, it is around 1.5-2%. In Alberta, it is virtually nothing. Lawyers' fees are on top of this as well. On an estate worth close to a million dollars in Ontario, the government wants the value of a new car in order to deliver its stamp.

Keep in mind that in Canada there are no inheritance taxes, or taxes on gifts for that matter. People receiving estate money, or large amounts of gift cash from a relative do not have to worry about any tax consequences. This is important in terms of understanding the strategy.

One way around probating an estate is to put everything you own into a trust. The trust is set up such that you control everything, but the trust doesn't freeze when you die. The articles of the trust stipulates what happens in that event. Trusts don't get tax deductions like individuals do, so it gets complicated fairly quickly. People who are significantly wealthy may go this route and have lawyers and financial advisors take care of all of this complexity for them. This is about all I'll say on this particular topic.

For the rest of us, what we want to do is to make as much of our assets as possible not freeze upon our death. One way to do that is to make sure that all bank accounts, GICs, etc. be joint with someone who can be completely trusted such as a child, with right of survivorship explicitly stated. Then upon the death of one party, the other has complete unfettered access to the money. There's no income tax consideration here either as all income from the investments can be split in any way between the parties. So if you're joint with your parent, then the income can be accrued to them until their death. Then it starts accruing to you.

Upon death however, all income (from non-joint assets) received by the dead individual from that moment on, has to go into what's called an estate trust. As executor, you cannot disburse money from an estate trust (with a few exceptions as we'll see) unless you probate. As such, you want to minimize what has to go into the estate trust. For example, the CPP death benefit pretty much has to go in there. Life insurance payouts (without a living beneficiary listed on the policy) has to go into the estate trust. Without having a certificate of probate, as executor you can direct the bank to disburse money from this account (or any frozen account) to a funeral home to pay for the funeral. They will also allow other disbursements to pay utility bills etc. on a home if it would cause hardship to the survivors. But the key here may be to work with the funeral home to pay a little way down the road via directed disbursements through the bank. What you want to do here is to drain the frozen estate accounts all the way to zero without going through probate. Another approach to getting frozen accounts drained is to not pay all the income tax owing on the estate. Yes, you'll be hit with penalties and interest but you can direct the CRA to the frozen accounts and hound them to seize the balance. As executor you're still personally on the hook to ensure that all taxes are paid including interest and penalties. So hound them until they seize the accounts.

If the deceased owned a house when they died, then it is very hard to avoid probate. They could gift the house to somebody before they die, but if that new owner doesn't live there, then there is likely tax consequences to the new owner. Cottages or other non-primary residences will likely trigger a large tax bill for the owner if they give it away to next of kin, since it will be a deemed disposition.

One thing, however, to keep in mind is that jointing assets can cause all kinds of problems if the next of kin don't get along with each other. Sometimes probating a will is a good thing, even though it may cost a lot more. This way, the court makes sure that assets are divided according to the wishes of the deceased. If the next of kin are few, and get along well with each other, then jointing assets may well save a lot of money.

So to sum this whole thing up:

• Make sure that anything that allows a beneficiary such as life insurance and RRSP accounts have at least one living beneficiary listed. If the number of equal next of kin is small enough, then list them all. The establishment will divide the payout equally for you.
  
• Anything else should get jointed with right of survivorship. The primary residence and other real estate may be an exception here, talk with a lawyer/financial planner.
  
• Try to minimize any money landing in estate bank accounts. Those accounts cannot be jointed. Remember that you can drain this money out, via the bank, to pay funeral homes. CRA can seize these accounts (to your benefit) to pay outstanding taxes. After all that is done, any money left in an estate account will have to be obtained through probate. Do the math, probate may be cheaper anyway once CRA penalities and interest is factored in.
  
• Die in Alberta. ;)
  

Another thing to keep in mind is that if you ever agree to be an executor to an estate, you are personally responsible for getting the taxes paid. I would recommend avoiding agreeing to be executor if you think the estate may be complicated with respect to taxes.

If you have a mentally infirm parent in a nursing home, and have their power of attorney (POA), then you can use that to joint yourself on all the accounts if you haven't already. The POA dies with the parent, don't expect to be able to use the POA after the fact. The POA may have limited power to change beneficiaries on life insurance policies though. Talk to your bank regarding RRSP beneficiaries.

Scotiabank's New "Bank the Rest" Savings Program

Perhaps you have heard about this nifty new "savings" program that Scotiabank is offering to its customers. It's called "Bank the Rest". The way it operates is like an electronic change jar. Every time you do a debit payment, such as when you buy groceries, it can round up your purchase amount to the next dollar or five dollar level and transfer that additional amount into a savings account. The way Scotiabank spins this, is that by spending money you can actually end up saving a bit, and will hardly notice that little extra amount per transaction.

Well, what is really going on here? Banks exist to make money, often by taking it away from you without you realizing it. Hmmmm. Out of the goodness of their hearts they are creating a way for you to transfer a bit of money over to an account where they are going to pay you more interest. At first blush, it sounds like the bank is going to lose money on this scheme while helping their customers save a bit of money. Well, let's dig into this a bit further.

To whom is this savings scheme really targetted? Well, it really is a nickel and dime approach to getting a tiny bit of money set aside. Is somebody with a fat bank account going to bother doing this? Is somebody who already knows how to save 10% or more of their paycheque going to bother doing this? The answer is a resounding no. This scheme is targetted at people who normally drain their bank accounts all the way to zero or close to zero between pay periods. They're led to believe that they can get ahead by tossing aside a bit of money into another account where they won't have easy access to spend it. But what is happening here is that a large number of these people have their accounts drifting into overdraft between paycheques as it stands today. This extra bit of so called savings is really coming out of their overdraft where they are paying a bit over 10% per annum interest. And it goes into an account where the bank is paying them just 2.75%. The bank itself is pocketing the approximately 8% difference on this money. Even though the "bank the rest" amount will not be taken once the account is in overdraft or will send the account into overdraft, don't be fooled. It's all about grinding the accounts down to the overdraft limit faster in a clandestine way.

Let's crunch a few numbers just to get a handle on this. Let's say the average person using this scheme saves about $20 a month. Over the course of a year, the pot ends up at say $250 to make the math easier. For the sake of the calculations, assume that it all comes out of overdraft. It doesn't really, since the user's regular chequing account will drift in and out of overdraft as paycheques arrive and payments come out (ie. the 10% overdraft rate isn't being paid all the time), but for the sake of the numbers just say it all comes out of overdraft. How many such customers might the bank sucker into this so called savings scheme? Well, the country has 35 million people in it, let's say that Scotiabank has a million customer chequing accounts. It's probably a conservative number but let's go with it. Let's say that of those million customers, they can convince 5% (all overdraft drifters) to go with this scheme. So that's 50,000 chequing accounts that are likely in overdraft for quite a bit of the year. So $250 x 50,000 accounts = 12.5 million dollars. At 8% (difference between overdraft rate and the savings rate) that amounts to exactly 1 million dollars per year. This also doesn't take into consideration the juicy service charges when overdraft is triggered in accounts that wouldn't normally hit overdraft except for these greater amounts now coming out. It also doesn't take into consideration all the new services charges that will be triggered out of the new savings accounts. If you look into those new "Money Master" savings accounts you can't dip directly into them via ABM or direct payments without it costing you $5 per transaction. You can transfer to your chequing account for free, but how many of these customers are going to bother to do that or accidentally trip over the fee the first time?

So, Scotiabank, you found a new way to pull at least a million dollars out of your poorest customer base by spinning it as something good. Wow, way to go, you are my new hero. Pat yourselves on the back.

The Housing Market

If you've been checking out the mainstream media lately, the softening Canadian real estate market has been making headlines. After years of crazy price increases some sanity appears to be finally creeping back in. Let's explore some concepts behind real estate and perhaps also explore where the market may be going.

First off, let's look at some historical data on real estate. According to Yale economist Robert Shiller, real estate prices historically just track inflation. Inflation is just the dilutive growth in the money supply from more money being created out of thin air. This creation of money is driven by borrowing. Borrowing, in my opinion, is primarily driven by population growth. So housing prices ultimately, over time, track growth in the population. This makes sense and should come as no shocking surprise to anybody. Here's Robert Shiller's chart on historical housing prices in the US, priced in constant dollars. Constant dollars already have the dilutive effect of inflation factored out of them. Given that real estate only tracks inflation, many people would say that buying a house is not really an investment, it should be seen as just an inflation hedge. I'd just like to point out that back in 2006, that graph shows a massive bubble in prices. Fast forward 2 years later and that bubble, driven by speculation and sales based on subprime mortgages, is finally bursting. How low will prices go? In my opinion, markets always over correct, be it to the upside or to the downside. The chart refers to the US housing market, but I'm told that Garth Turner's book "Greater Fool: The Troubled Future of Real Estate" has something similar which covers Canada. Essentially, if you're currently renting but are thinking of buying a home, you probably want to just continue to sit on the sidelines building your downpayment and watch prices come down to something sane.

So if buying a house is really nothing but stuffing an inflation hedged mattress with your money, why do it at all? Well, in general, you have to live somewhere and isn't it better to be stuffing your own mattress rather than a landlord's? Once your house has been completely paid for, that frees up a lot of monthy cash that you can use elsewhere, be it for retirement savings or just enjoying life. Also, the inflation gains on your money are tax free when you eventually sell, if the house is your primary residence. My advice, when shopping for a first house, is to buy primarily based on your needs, not your wants. Keep it affordable so you can pay it off faster! You can feed your "wants" and upgrade sometime in the future when you've already paid off your first home. Keep in mind that the bigger the mortgage, the longer it is going to take to pay it off and hence more interest money flows out of your pocket in the process.

Another point about real estate is that it costs a lot of money to simply possess. Municipal taxes can be as high as 1-2% of the value of your home. Also, homes "rot" if not maintained. Somewhere around $1000 per year or more should be set aside for maintenance fees not including landscaping costs. Condo fees can easily exceed $200 per month for a modest townhome, to over $400 in a highrise situation with elevators and a swimming pool to maintain. But to be fair, some utilities may be included in those fees. My point is, what other so-called "investment" has such a high cost of ownership? Sure, precious metals may have some safe keeping fees associated with them and some actively managed mutual funds have high MERs, but the "money pit" aspect of home ownership should be understood and not ignored.

A fully stuffed inflation hedged mattress can be a wonderful thing to have as lenders will fall all over themselves to loan you money using your home as collateral. If you invest that borrowed money (certain rules apply) the Canada Revenue Agency will let you write the interest off your regular income. If you're in a high marginal tax bracket, this can come close to cutting the cost of borrowing this money in half. Personally, I'm not a big fan of doing this, but some people do swear by it. As always, your mileage may vary. This may be a good future topic for other bloggers who have experience with some of these borrow-to-invest type of schemes.

Update: I just came across a fairly recent paper by Shiller exploring the speculative bubble aspect of the housing market.

Money, Time, and Inflation

Have you ever stopped to wonder how money and capitalism actually work together to provide prosperity? One of the big reasons is simply time. I said in my last posting that money can be seen as a kind of insurance product. Insurance generally has a time limit or deadline on it, and money does too. Money is a lot like electricity, it does no work unless it is flowing, meaning changing hands for the provision of goods or services. Money stuffed into your mattress does no work, and it will actually decline in purchasing value or useability over time. It may as well simply not exist. This decline in purchasing value is what we call inflation, and it is primarily due to more money being created over time, thus diluting its potentcy.

Inflation is actually very good for capitalism. It means that you just can't sit on your money. Your money will rot over time, unless you can get it invested so that you can grab a piece of the dilutive new money being created. Another alternative to keep it from rotting is to buy an inflation hedge which is generally some physical asset whose value tends to keep up with inflation such as land. While mild inflation is good for capitalism, high inflation is quite bad. When inflation is high, investment returns (production) can't keep up with the dilution. People are also incented to spend their money rather than invest it as they watch prices climb. Individuals on fixed incomes end up suffering as the dilution outruns their ability to save and invest. So what we want is inflation that's high enough to incent people to invest yet low enough to allow production returns to keep up. This is what the Bank of Canada and Fed in the US try to accomplish through setting the overnight interest rate which translates into what you and I are charged to borrow money. Borrowed money gets created out of thin air and is the source of inflation/dilution which I mentioned earlier. In this author's opinion, population growth is at the root of money supply growth.

So what happens if the population stops growing? In such a non-growing modern society with a high standard of living, the amount of borrowing doesn't exceed the amount of money already in existence. No growth in money supply means no inflation. In fact, taken a bit further, that society can be facing deflation. Deflation is when the money supply starts to shrink. Loans are paid back and that money isn't reborrowed by anybody. Money just sitting there and not flowing, as I said earlier, may as well not exist. It can be seen as simply disappearing. As the money supply shrinks, and there is less in circulation, it becomes worth more in terms of buying power. Prices start to decline. Money no longer rots if it isn't used, so people just sit on their money and don't spend it as they watch prices decline. This can cause an awful downward spiral in an economy and the term deflation can cause an economist to have nightmares.

Japan is an example of a society facing this right now. They have tried lowering interest rates all the way to zero at one point to try and get people to borrow money. To get older people to borrow money they have created the concept of multi-generational loans. But this hasn't really worked all that well to up the borrowing. So the government decided to just start printing money and fed it into the economy via social spending and bad loan bailouts. Businesses that can't properly sustain themselves are being kept on government life support to preserve jobs. Japan's government debt levels are now so high as a percentage of GDP that there's serious worries about a possible Bank of Japan collapse. Artificially fueled inflation is nothing but a time bomb. Japan has to import so much stuff that it can ill afford other nations or banks to no longer want to accept its currency.

So what are we capitalists going to do down the road when the population stops growing as the laws of physics eventually dictate? I do not know. All I know is that no generation wants to be the one left holding the bag. We can already see this slowly approaching as interest rates slowly decline as the baby boomer cohort ages. Immigration certainly helps, but can it be stepped up to the point where it can compensate for the low birth rate and the eventual accelerating death of the boomers?

One way to simulate population growth is to have other people in the world willing to borrow your nation's money with, of course, a demonstrated capability to pay it back. The dilutive effect of this borrowing has to be seen by your nation, meaning the money has to flow back in to purchase things such as production equipment. Perhaps the way out of this mess is to become bankers to the second and third world. Maybe there is method to the madness of creating the "Amero" and getting it slowly adopted by Central and South America as well as North America. It wouldn't surprise me to see, in the further out future, the Euro getting adopted by small third world nations as the EU tries to manage to keep away the deflation demon. Whether this scheme will work or not, who knows?!?

As a final note, what I've written here is extremely simplified as it doesn't, for example, address the impact of foreign exchange and foreign trading. Countries don't exist in isolation.

Insurance

Inspired by Michael James' posting on insurance today, I'll add my 2 cents on the subject.

Let's go back to basics. Just what is insurance? In a nutshell, insurance is simply hedging the future. It's about being able to obtain something with better certainty down the road. Since time is always moving forward, the notion of the future permeates our entire existence. As such, insurance is everywhere. In its simplest form, anything with a future promise attached to it is insurance. Reach into your wallet and pull out some paper money. What is that? It's insurance. It is a promise to provide a good or service in the future. Without it, you will have a harder time obtaining that good or service. It is a form of a promise, or a contract if you will. This contract we call money mitigates your trading risk in not being able to obtain a good or service.

So what exactly is risk? Risk is about the future not unfolding the way you need it to occur. It exists because the future is not predictable with absolute certainty. What is one of the least predictable things that has the biggest impact on mankind? The weather. Can you buy weather insurance? Of course you can. The agricultural industry relies upon it. Farmers buy crop insurance all the time. Your house is likely insured against catastrophic weather damage. You have heard of the futures or commodities market, right? That's a bunch of people trading a form of agricultural insurance. By insuring themselves against supply abundance and demand collapse, farmers can plan and successfully run a business. The futures contract removes his risk of not getting enough money for his crop. Removing risk is a valuable service, and thus insurance costs money, often big money. Insurers are usually quite sneaky about hiding the real cost of it from you. Also, most insurance has a date or other condition on which it ends, and thus usually becomes less valuable as the end condition approaches in the absence of the insured risk.

You can find insurance embedded in almost everything. Did you buy something with a warranty attached to it? Insurance. Did you take out a loan with a fixed interest rate? Insurance. Sports gambling can be seen as happiness insurance if you bet against your team. Many credit cards have insurance products built into them as well. Service insurance, unless it involves money refund and a impartial ombudsman, can be somewhat useless. If somebody screws up performing a service (eg. a haircut) are you likely to give them another chance even if it is free? If they have somebody else who is competent to fix the problem, then perhaps.

How do you put a value on insurance? Well, if you're an insurer, it is all about calculating the risk, and putting a value on the potential payout. Then they'll add a profit margin on top of that, the amount of which depends on supply and demand curves for the insurance product, basic econ101 stuff. The risk calculation can be extremely complex, involving intricate mathematical models with closely guarded markov chains. The potential payout is also subject to complex calculations potentially obfuscated with all kinds of exclusion clauses.

What do you, as a consumer, need to know about valuing insurance? Well, if the law requires insurance, such as car insurance, then you have no choice. Shop around, and potentially raise the deductible to the maximum amount you can afford should the worst happen. But in general, don't buy insurance if you can afford to deal with the bad future event actually happening. Extended warranties, especially on electronics, are seldom worth buying. If they cover accidental damage and you have young children, then perhaps you do want to consider them since the odds of payout will be high. If you feel that your circumstances are different from most consumers such that the odds of payout (check exclusions!!!) is quite high in your favour, then perhaps you should buy the insurance. Also, look at insuring yourself. Be it for a mortgage (see my previous post) or for insuring electronics, put the extra payments into a savings account and use it for repairs or replacement. Also by insuring yourself, you don't put a deadline on when your insurance would expire. Your money remains with you and is not lost.

Mortgage Advice - Go Variable

I have often wondered why so many people opt for 5 year fixed rate mortgages. Yes, they want the security of knowing exactly what their payments are going to be over those 5 years but they sure are paying through the nose for that security. As I write this, interest rates on a 5 year closed variable rate mortgage are 4.15%. Take that instead to a fixed 5 year closed mortgage and you are looking at 5.65% or more. Yes, a whole extra 1.5 points for the privilege of knowing what your payments are going to be over those 5 years. Essentially you are buying an insurance product. 1.5/4.15 x 100 = 36% . Yes, you get to pay 36% more interest in order to cover your "insurance" premium. So just how much is that? On a $200,000 mortgage, that 1.5% extra interest = $3000 per year. Over 5 years, that is close to an additional $15,000 assuming interest rates don't change and ignoring principal reduction. You're effectively giving up a new car every five years!!!

But of course interest rates don't stay unchanged, they could go shooting way up. Sure, but they could also go down too. So why does anybody go with the 5 year fixed? Simple, because somebody convinced them that they could get screwed and not be able to make their mortgage payments if interest rates go shooting up. Fear can be quite the motivator. But there is a feature of most variable rate mortgages that they don't want you to know about. Most of them allow you to convert them to a fixed rate mortgage at any time. So if interest rates start to rise and your payments on your variable rate mortgage jump up and you get all scared, then simply convert it to fixed. But there is another tactic that I'd rather you use.

Take out a variable rate five year mortgage, but at the same time ask them to tell you what your payments would have been if you had've taken out the five year fixed. You are effectively going to insure yourself with this scheme. Take the difference between your mortgage payments and the hypothetical fixed rate payment, and place that amount into a savings account. In fact, place it into a new Canadian tax free saving account (TFSA) that becomes available to us taxpayers on Jan. 1, 2009. This amount, of course, depends on the size of your mortgage and the difference between the variable and fixed mortgage rates, but could easily be around $125 per month for many of you. As interest rates fluctuate, so will your payments into this account. If your payments ever reach the point where they exceed the hypothetical five year fixed payments, then simply draw money out of the account to cover the difference. At the end of the five years, when your mortgage now needs to be renewed, simply liquidate your savings account and put that extra money down on the mortgage. Alternately you could use this money to top up your RRSP and put the tax refund against the mortgage. But in either case you should be immensely better off by using this do-it-yourself approach to a "five year fixed" mortgage rather than the bank's conventional way of simply charging you a much higher fixed rate.

How to Invest Your RRSP for the Long Term

Today I'm going to tell you how to invest your RRSP for the long term, and beat the returns of about 75-80% of the mutual funds out there. This addresses long term investments only, not RRSP funds that you plan on liquidating in 2-3 years for the Home Buyer's Plan (HBP) for example. If you're saving for the downpayment on a home, you will want very low volatility on those savings, so go with a decent GIC or Altamira's Cashperformer or other money market type funds. Once you start paying your HBP withdrawal back to yourself, then you can follow this long term approach.

This approach in the industry is often called the couch potato portfolio or other names which implies a passive technique to your investments. I'm giving you my little spin on it as well. The idea behind the approach is to simply buy a set of low cost index mutual funds. What do I mean by low cost? Well, I mean low cost in terms of how much the fund manager charges the fund to do his job. These management charges are referred to as the MER (Management Expense Ratio) of the fund. The MER is expressed as a percentage, which reflects how much of the fund is bled off every year by the fund manager to pay himself. The beauty of index funds is that there is very very little work for the fund manager to do since it's the index (eg. DOW Jones Industrial Index, or S&P 500) which dictates exactly what the fund will hold. Since there is hardly any work for the manager to do, he charges a very low MER for the fund. This leaves more money in the fund to experience compound growth.

The common stock market indices typically reflect a large diverse basket of high quality stocks. Active fund managers typically buy and sell stock within their managed funds to try and beat the index. Some years they do, other years they come up short. But every year they bleed off the MER from the holdings. The net result is that over the long term, 75% of active fund managers fail to beat the index. They would rather you not know this!

So armed with this new knowledge that index funds beat most managed funds in the long term, let's go forward with the couch potato portfolio approach. The approach is simple, with the main rule being "take your age in years and put that percentage of your RRSP into a Canadian bond index fund (DEX Universe Bond Index)". For example, if you're 40 years old, then 40% of your RRSP should be in a Canadian bond index fund. The idea is that as you age, you should have more of your holdings in bonds which are typically much less volatile than stocks. The rest of your portfolio (in our example, 60%) should go into the stock market via index funds, and you have a few choices here.

Approach 1: All Canadian
Buy a Canadian stock index fund. Your complete portfolio only contains two index funds, namely your bond fund and the stock fund. In our example of a 40 year old, his RRSP consists of 40% Canadian Bond Index (DEX Universe) and 60% Canadian Stock Index (S&P TSX Composite)

Approach 2: North American
Split your stock component equally between Canadian and American index funds. With American funds, there are typically two to choose from, namely the Dow Jones and S&P 500. So the 40 year old example would look like:
40% Canadian Bond Index
30% Canadian Stock Index
30% Dow Jones Index or S&P 500 Index. Or you could instead do 15% each for more diversification.

Approach 3: Global
Split your stock component equally in three pieces, namely Canadian, American, and International. So the 40 year old example would look like this:
40% Canadian Bond Index
20% Canadian Stock Index
20% American Stock Index (could be 10% each Dow and S&P)
20% International Stock Index (eg. MSCI EAFE Index)

It's called "couch potato" because you have nothing to do except once a year, near your birthday, rebalance the holdings so that the percentages are back to where they should be. Let me make this even easier for you, and point you to some specific funds. I like the TD efunds, since they are essentially setup exactly for this. The "e" means that they are environmentally friendly (or electronic) in that no paper will ever be mailed to your door. Instead, they send transaction slips to you electronically. The paper/printing/mailing savings are passed on to you in the low MER. Also, they offer no advice/personal contact and again the savings are passed on to you.
https://www.tdcanadatrust.com/mutualfunds/prices_EF.jsp
They also have currency neutral versions of some funds if you don't want to expose yourself to other currencies such as the US dollar or Euro. But one can argue that it is good to diversify yourself a bit out of Canadian dollars. The beauty of these funds is that you can hold a bit of each type if you like, namely the currency neutral and non-neutral version. By blending the two versions of any given non-Canadian index fund, then you can precisely control your exposure to foreign currencies. This may make a good future blog topic.

There are other index funds you can use to accomplish the technique, including exchange traded funds (ETFs). Ishares are one such example: http://www.ishares.ca . But keep in mind that you will need a brokerage account to buy and sell these units, and that will add some extra cost on top of the (albeit very low) MER.

Other banks and fund companies offer similar index funds, but I recommend that if you cannot easily find the MER for such funds listed on their website, then just take a pass. It irritates me that some fund companies make you download a prospectus and go searching through it to try and find the MER. It smacks of them having something to hide.

I hope you found this interesting and educational. Investing doesn't have to be hard. Oh, and by the way, you can apply this same investing technique to your holdings outside your RRSP. There is nothing really RRSP specific to this technique except that it is geared to the long term. Please don't forget to rebalance your holdings near your birthday!!!

More Financial Advice - Intermediate Level

Today I'd like to provide a bit more financial advice, but this time it's a little less basic in nature. Thanks to some discussions with my friend Christine, I thought of these three common tactics and now want to lay them out in the blog. While these approaches apply to Canada only, your particular country may have similar programs.

Saving for Down Payment on Your New Home

Seriously look into using the Home Buyer's Plan (HBP). This allows you to borrow money from your RRSP interest free to apply to your home purchase. You can borrow up to $20,000 and have up to 15 years to pay yourself back. If you buy with a spouse, you can each pull out the $20,000 if you qualify. While aimed at the first time home buyer, it can apply to others. Read the rules carefully here. One of the great things about using this approach is that your savings grow tax free inside the RRSP, but the biggest advantage is the tax refund your RRSP contributions produce. Your $20,000 of RRSP contributions can trigger $6000 or even more of tax refunds, which you can apply to other debt or use towards next year's RRSP contributions.

The RRSP vs Mortgage Conundrum

Many people struggle with what to do with extra money. Should they put the extra money down on their mortgage or put it into their RRSP? In general, always maximize your RRSP contributions and apply the tax refund to your mortgage. Your likely marginal tax rate of 30-40+% far outstrips your mortgage rate. By making those contributions, you "make" a rate of return equal to your marginal tax rate which is huge. Plus those contributions remain in your control and start earning tax free compounding growth on top of it all. Of course this is an oversimplification since an RRSP is really just a tax deferral account, but over the long term the tax free compounding growth is what really matters to your net personal worth. If you crunch the numbers for yourself, you should see that you are much better off doing this rather than just paying down the mortgage. However, you must be diligent in using the RRSP tax refund against the mortgage.

Interest Free Loans

If you have interest free loans such as student loans, do NOT pay them off early before they start to charge interest. The best scenario has you paying off such loans in full the day before they start charging interest. Instead, save your payment money in a decent no-fee high interest savings account such as ING Direct or President's Choice Financial's "Interest Plus" account. At the last interest-free moment, liquidate these accounts and pay down the loan. Depending on the amounts here, this can put a few hundred dollars into your pocket. Starting Jan 1, 2009 you can save up to $5000 in a new tax free savings account (TFSA) and save tax on these earnings, making it even more worthwhile to apply this approach.

Liquid Assets and Loans at the Same Time?

Normally you should keep 3 months worth of your normal expenditures in liquid assets such as savings accounts for a rainy day. Anything beyond that should be applied to your debt, in order of the highest interest rates first. But what to do if rich Aunt Mabel gives you a tidy sum of money such as a basket of mutual funds that she stipulates must not be touched until you retire? She wants to see your yearly statements so you can't pull a fast one on her. Use this technique: sell all the funds and apply the proceeds to your debt. Then borrow that same amount of money at the lowest rate you can and invest it by buying those exact same funds. The interest on this money you have borrowed to invest is now tax deductible. Congratulations, you have effectively made a portion of your mortgage or other loan interest tax deductible and kept Aunt Mabel happy. Keep immaculate records. More information is here. Please note that the investment purchased cannot be something which will only potentially generate capital gains.

Basic Financial Advice

Today, I'd like to speak to a few points about finances. In general, borrowing money so that you can have something now, will, of course, cost you extra. That's the whole concept of interest which is paying to have access to money. Nobody likes to pay more for things, but when it comes to getting something earlier, people seem willing to cough up a lot more money without actually realizing it. Stop doing this! Get a dose of patience, save your money and adopt a pay as you go mentality. 10% or more of your paycheque should automatically go into savings, and you should consider it to be untouchable money in terms of your monthly budget.

In general, avoid borrowing money to buy depreciating assets.

The first big thing that you likely borrow money to buy is a new car. This is a rapidly depreciating asset. Instead, buy a used car. Get one that is just coming off a three to four year lease. Make sure that it is a make and model of car that has an excellent quality history. This car will still be a depreciating asset but the depreciation will not be as rapid as in those first few years.

The next big thing you will likely buy is your home. This is an asset that will likely not depreciate, but should track to inflation over the long term. Shop for your mortgage and negotiate! By getting the lowest interest rate that you possibly can, you will likely save tens of thousands of bucks if not more, over the life of the mortgage. This can equate to a 1000 dollars per hour of effort you put into this. So don't be an idiot, put in the effort and pay yourself this massive amount of money! Duh!!! If you can't manage this effort or detest negotiating, then at least consider going to a mortgage broker. Also, go with a variable interest rate if you feel secure enough doing so. Fixed interest rates are simply an insurance product. Insurance isn't free, this will cost you in terms of higher rates. But know the risks involved in going with variable rates. With the baby boomers no longer borrowing money but instead are investing, there is less demand for borrowed money these days and thus rates should remain relatively low for the forseeable future. Thus, in my opinion, the risk of going with variable rates is fairly low. Also, do not mortgage yourself to the hilt. Get something you can easily afford and strive to pay it off early.

My last point for today is bank accounts and credit cards. Are you paying money to a bank in terms of service charges or a service plan just to have an account? Please stop doing this and open up an account with the likes of President's Choice Financial here in Canada. This can save you well over a $120 per year in service charges. Also, if you are not paying off your credit cards in full every month, then cut them up. You are being severely gouged. Look at consolidating your credit card debt under a personal line of credit for a fraction of the interest you are being charged now.

The Banking System

I thought I'd start off my first post with an editorial on the banking system. It all begins somewhere in the depths of time, when possibly a caveman or dirt farmer needed something urgently such as food and was unable to immediately trade for it. Some kind soul, call him KS, decided to give him the food, say, a chicken on a promise to replace the chicken at some point in the future. Thus was born the concept of credit, a pivotal point in the development of mankind. The dirt farmer, call him DF, gave KS a marker which could be exchanged for a chicken next year when DF would successfully have raised a flock. In the meantime, KS needed something else, and traded DF's marker for it. The person accepting the chicken marker knew DF and felt secure in DF's ability to provide a chicken in the future. Guess what? The marker just kept changing hands and nobody came to DF to collect the chicken. DF was no idiot, and saw what was happening. He issued more markers, traded them for goods, and never had to pay the debt back. In reality, he noticed that only about 10% of his markers ever came back to him with people collecting their chicken, so if he had 100 chickens he felt secure issuing 1000 markers. This approach is known as a fractional reserve system. As you have almost certainly figured out by now, DF became what we today call a banker.

Instead of using chickens and markers, a modern banking system used gold and notes/coins. The really early systems just combined the two and used coins made out of precious metals such as gold and silver. Nixon took the USA and thus the world off of the gold standard in the early 1970's by decreeing that the US dollar would no longer be gold backed. It is simply now backed by the economic might of the USA. "In God we Trust" has never been more literal. Money only has value because somebody else is willing to accept it for goods or services provided. By definition, this money is called "fiat currency", since its value is only based upon a declaration that it should be accepted for payment. Again, there is nothing tangible backing it, there are no chickens. I am constantly surprised by how many people believe that gold still backs their money.

Going back to the concept of fractional reserve, banks can lend out more than they have on deposit. Let's say that a bank has $100 in deposits, it can lend out $1000 if the reserve is at 10%. If the person borrowing the money turns around and deposits it all back in the same bank, then the bank's deposits have grown to $1100 and now they can loan out $11000. This money just gets created out of thin air. By controlling interest rates, the central banks can control the demand for money, and thus control the supply of more money. Low interest rates encourage people to borrow. Borrowing creates more money, and thus aids in liquidity. When borrowing gets greatly curtailed, as is happening now with the subprime crisis in the US, the money supply takes a hit, and liquidity becomes a problem. The central bankers in the US, namely the Federal Reserve, are lowering interest rates in an attempt to entice people to borrow money, thus getting more into circulation to deal with the liquidity crisis. Fractional reserve is kind of a necessary evil, due to charging interest on money. Paying interest means that the money supply has to grow somehow, else there won't be enough in circulation to make paying interest possible. There would be a major liquidity crisis.

Inflation really is simply the growth in the money supply. When lots of people are borrowing money, as happened when the baby boomers were borrowing money to finance their homes in the late 70s and early 80s, inflation goes up and the central bank raises interest rates to try to contain it.

I'll end this post with the comment that historically fiat currencies fail because they get abused by the people in power, past the point of no return. This type of money is also extremely vulnerable to a crisis in confidence, since nothing really backs it. Let's hope that the world banking system has learned from the past and survives this latest liquidity crisis.