Sunday, 20 December 2015

Mutual Funds: What Are You Actually Paying?

What fees do mutual funds charge?

Mutual funds are still incredibly popular in the investment world, and I'm sure many of you have at least a portion of your investment portfolio in funds (I do). As of May 2017, there was $1,428 billion of assets under management in mutual funds. There's some hate against mutual funds in the finance community but, in my opinion, they can be a good option, especially for beginner investors or those who are not willing to put in the time researching other options themselves. 

Think of a mutual fund as a collection of other investments such as stocks and bonds. Most funds will have a specific mandate that they follow that will limit them to a specific risk tolerance or market sector; for example, you'll get funds that are based in Canadian equities, US small cap companies, corporate bonds, or dividend generating investments. The fund will be run by a fund manager who decides what to hold and when to buy and sell particular holdings. That expertise is what you're paying for, and I'm ok with that. Part of being a responsible investor is understanding how these fees work and ensuring you are getting your money worth. There are a couple of different fees you will be charged by a mutual fund; sales charges and MER' let's get into what those actually are. 

Sales Charges
There are a few different ways you can pay to buy a mutual fund and which option you choose will be determined you and your advisor. 

The first versions are front end (FE) or initial sales charge (ISC) funds. For these, you will pay your investment advisor a commission to purchase the fund for you; this can range anywhere from 0% to about 5%. FE funds would be used in accounts where you don't pay your advisor an additional management fee; they would get paid via the commission and the trailer fee (more to come on that). Feel free to negotiate this fee with your advisor but do keep in mind what sort of other work they do for you. If you are getting retirement or tax planning advice at no extra charge, then FE funds could very well be how you are paying for their services. 

Next up are back end or deferred sales charges (DSC) funds and, for these, you won't pay anything up front for the fund, but you will have to pay a penalty if you pull your money out of the fund too soon (in the 5-7% range). Usually, you have to keep your money in the fund for 5-7 years to avoid the penalty, but a lot of companies let you take out 10% of your holding free of charge each year and switch between funds in the same company over that same period. DSC funds are the black sheep of the mutual fund world, and many companies are eliminating them altogether. Other than potentially avoiding a commission charge, there is no benefit to investors in choosing DSC funds over FE funds...there's only downside with the locked-in component. If your advisor is recommending DSC funds, you should absolutely question the advice and potentially look elsewhere for help. 

There are also low load (LL) funds that are very similar to DSC funds (penalties to withdraw), but with shorter terms. Most LL funds will charge you about a 3% penalty and will fully mature after three years. Again, not an option I would necessarily recommend so make sure you understand the reasoning behind why your advisor would be suggesting. 

Finally, there are no load (NL) funds. These won't charge you any sales charges to buy or sell and also have lower MER's than the above alternatives. Sounds ideal right? There's a catch though. These are only offered in fee-based accounts where you would be paying a management fee directly to your advisor. 

For most mutual funds you will be able to buy the same fund by any of the above means. For example, you could buy Cdn Bond Fund-DSC, Cdn Bond Fund-FE, Cdn Bond Fund-LL, or Cdn Bond Fund-NL and they will all be the same except for the sales charge you pay (hold the same investments and be managed by the same person). 

Management and/or Operating Expenses (MER's)
The mutual fund also has certain expenses that they have to pay (salaries, bookkeeping, reporting, etc.) so they pull the cost of these expenses straight out of the fund's earnings. Usually, these charges will go unnoticed by the investor as they don't show up on your account statements. Instead, they just lower the rate of return of the fund. There has been a push for more transparency in the industry (especially regarding fees), so you will now receive what is called a 'Fund Facts' document prior to purchasing a mutual fund. The 'Fund Facts' will list information on the fund including current holdings, the risk level, and the associated fees. 

Most MER's are between 1% and 3%. This depends on the type of fund and how actively traded it is. For example, bond funds tend to be more conservative with less volatility, so there isn't as much trading done by the manager, and they would have a lower MER than a mutual fund with more stock holdings. Usually the more conservative a fund, the lower the MER. If a fund you hold is charging an MER of 2% and that fund had a rate of return of 9% for the year, the actual rate of return you would see after fees would be 7%. 

The majority of the MER goes to operating expenses for the fund, but there is also a trailer fee that is paid back to the advisor who sold the fund. Usually, the fee is between 0.25% and 1.25% and is kind of like a finders fee for bringing you in as a client for the mutual fund company. The trailer fee would be eliminated if you are buying the no load version of a fund and would be replaced by the management fee your advisor would charge you directly, however, the rest of the MER would still be charged. 

There's no escaping fees if you are investing in mutual funds but understanding what and how you're being charged can help you in determining the best options for your portfolio. 

What fees do mutual funds charge?

Tuesday, 15 December 2015

Government Pensions (CPP, OAS & GIS)

Canadian Government Pensions

Last week we talked about the basics of pensions that are provided by your employer so now we are going to focus on the government pensions that are available to you (us Canadians anyways). The most significant is usually the Canada Pension Plan but there is also Old Age Security and the Guaranteed Income Supplement that can help out retirees. 

Canada Pension Plan (CPP)
If you work in Canada you most likely contribute to CPP (one of those pesky deductions off your pay cheque) and that means you will be eligible to receive a CPP payment in retirement. The norm is to start receiving CPP at age 65 but you can also take a decreased pension as early as age 60 or an increased pension if you delay past age 65. In most circumstances it makes sense to start collecting CPP at whatever age you retire; the extra tax you would pay if you are still working (increased income) often cancels out any benefit taking it early. The penalty for taking your CPP early is increasing, so that's something to keep in mind; for 2015 it is (was) 0.58% per month prior to age 65 and for 2016 it will be 0.60%. 

The amount of CPP you will receive is dependent on how much you have contributed and how many years you have worked in Canada. Makes sense right? The longer you've worked and the more you've contributed the higher your CPP will be. Just to give you an idea, the maximum CPP payment for 2015 is $1,065/month and this does increase each year. There are however a couple of factors the CPP includes that may increase your CPP. The first is the 'General Drop-Out Provision'. What happens here is that some low (or no) earning years can be ignored to help boost your CPP amount. If you were a student, unemployed, etc. you can drop some or maybe all of those years so they won't have an impact. Probably the most common situation that would keep you out of the workforce for an extended period is having children, so CPP has a specific provision to deal with this. The 'Child-Rearing Provision' can be used if you stopped (or worked less) because you were the primary caregiver for your kid(s). The one big difference between the two provisions is that the drop-out happens automatically whereas the child-rearing has to be requested, so if it applies to you make sure you do that. 

Now that just focuses on the retirement pension but CPP also includes disability benefits and a survivor benefit. These will help to cover you if you have a disability that keeps you out of the workforce long-term or if your spouse passes away. For more information on CPP you can check out this site

Old Age Security (OAS)
Next up is OAS which can also play a pretty important role in the income of retirees. Unlike CPP, OAS is available to all legal Canadian residents and is dependent on how many years you have lived in Canada and not on contributions. You can apply to start receiving OAS at age 65. The age had been pushed back to 67 under the Harper government but that has since been reversed back to age 65. Check here for the details. 

To receive the maximum OAS amount you need to have lived in Canada for at least 40 years (after you turned 18) and have resided in Canada for the 10 years prior to applying. The current maximum OAS benefit is $569.95/month and this amount is reviewed quarterly and is indexed to rise with inflation. 

One thing to remember is that if you have a high income in retirement your OAS may be clawed back (or as the government likes to call it, OAS recovery/repayment). For 2015 the income threshold is $72,809 and this also increases with inflation and the clawback rate is 15%. This means that for every dollar over $72,809 you will have to pay back $0.15. If you have an income over $118,055 your OAS will be fully clawed back. This is important to keep in mind if you'll have a big pension in retirement, you will want to look at maybe pulling money out your RRSP's prior to age 65 and making use of income splitting. 

Guaranteed Income Supplement (GIS)
The final government pension that is available is the GIS but it is only for those with low income in retirement. The GIS is based on your annual income (if you are single) and on a combined income if you are married. For a single person your income has to be below $17,280 to be eligible. For more information on the income levels and payment amounts you can check the tables at the bottom of this page

Side-note: The Service Canada website has been pretty awful lately, so if you are having trouble opening the links provided above you may have to try back a little later; I promise the links are correct (at least as of the date this was posted). 

Canadian Government Pensions

Wednesday, 9 December 2015

The Basics on Workplace Pension Plans

Workplace pension plans

Pensions are kind of the golden ticket in retirement planning as they have such a huge impact on how much money will be coming in the door after you retire but not all pensions are created equal. Today I'm going to break down the basic kinds of pensions that may be offered through your employer. This doesn't include government pensions like CPP and OAS; we'll tackle those another day. 

Defined Benefit Pension Plans
DB plans are the real winners in the pension world, and when most people think of a pension, this is what they're thinking of. A DB pension will pay you a guaranteed monthly pension after you retire that will be based on your years of service, salary and a bunch of far more complicated calculations. This means that you will get a pension cheque every month after you retire until you die (depending on the option you choose your spouse may even still receive your pension payment after you die). This is the ultimate in security (guaranteed), and you would need to have a lot of money invested to come anywhere near the amount your pension will pay out. 

Let's look at a quick example. Say you receive a monthly pension of $2,500/month that will be paid out from when you retire at age 60 until you pass away at age 90. In this scenario you would get: $2500 x 12 months per year x 30 years = $900,000. 

Some defined benefit pensions also have indexing built into them. This means that they will increase over your retirement to either completely or partially keep up with inflation. As we're all aware, prices tend to go up over time (that's inflation) so $2,500 today will not have the same buying power as $2,500 in 20 years, that's what indexing tries to solve. A fully indexed, defined benefit pension plan is the best and safest option you can have in retirement, the problem is, not many jobs come with that benefit anymore because it's incredibly expensive for employers. Keep in mind though, if you do get a DB pension with your job, make sure you weigh that if you're considering a job switch. You may get a higher salary somewhere else, but that payment in retirement could be enough to make a lower salary worth sticking with. 

Defined Contribution Pension Plan
The other big option (and much more common these days) in pensions are DCPP's. These plans have both you and your employer contributing a portion of your salary into a retirement account that is similar to an RRSP but with some extra restrictions. The big difference between the two types of pensions is that the DB plan will pay you out a guaranteed amount until you die,  and the DCPP will provide you with money only until you run out. If you end up with $500,000 in your DCPP at retirement and you spend it all in the first 10 years of retirement, that money is goners, so you need to make sure you plan your withdrawals accordingly. 

There are a couple other factors of DCPP's that many people do like. You can usually move your funds out of the plan at retirement (and sometimes before). That gives you the chance to make your own investment decisions (just as you would a personal RRSP). Another thing is that if you die that account will remain with your estate and pass on to whoever you have listed as the beneficiary. Except for your spouse (if you choose a joint pension option), your DB pension will stop paying if you die. If you don't live that long after you start collecting your pension you wont receive that much money...of course, this is impossible to know. 

Now, when I say DCPP's go into an account similar to an RRSP this is true, but you do need to be aware of certain limitations. The accounts are usually called Locked-In RRSP's and they are exactly as they sound. Except for some exceptional situations (hardship or shortened life expectancy), you cannot pull any money out of the account until you are retired and even then there are yearly minimums and maximums. The government does this so you don't do what I said above and go out and spend the whole $500,000 (or whatever) in the first few years of retirement...they force you to be at least somewhat responsible. 

Group RRSP's
Now group RRSP plans aren't actually a type of pension, but since they are also often offered by employers, I thought I would include them here too. Similar to a DCPP, your employer would match a set amount of your own contributions to the RRSP. Many of these plans still have restrictions on moving the funds to a different place while you are still working with the company but would abide by the same rules as a regular RRSP after you retire. The limitations on withdrawals is not an issue with RRSP's as it is with DCPP's. 

Ok guys, those are the basics. Any type of pension is a great added benefit, and if it is offered with your company, you should definitely sign up. Do you have workplace benefits or are you on your own when it comes to saving for retirement? 

Workplace pension plans

Thursday, 3 December 2015

Estate Planning Basics

Creating an estate plan

No one ever likes to talk about death, but today we're doing it. It's not exactly a subject that comes up at the family dinner table every often, but it is a conversation that you need to have with your loved ones, just in case a tragic event strikes. It is always better to be overly prepared than be forced into a situation where you have to make life or death decisions with no background information. 

When you're young (and you know, invincible) the last thing on your mind is what would happen to your assets if you passed away. This is especially true when you may not have much in the way of assets, but that doesn't mean it's not important to plan for the future. You don't necessarily have to get your full estate plan in place if you don't have much in the way of assets and no children to make decisions for but there are some advantages of getting a head start. The one biggie is life insurance. The younger you are the cheaper your life insurance premiums will be. Learning about estate planning can also help you if you have ageing parents who might need a little nudge to get their affairs in order. If you already have your own children, you definitely need to start the process and get an estate plan in place. 

So what exactly is an estate plan and what do you need to get done to ensure you have a functioning one in place?  

The Will 
This is the big one, and you want (need) to make sure it is done properly. Sure you can buy a 'Write your own Will' kit off the internet but just don't ok? I really recommend having a lawyer take care of this for you, no matter how simple you think it might be. The last thing you want is for your family to be arguing over non-specific language in your will after you're gone, and this happens more often than you would think. No matter how close you think your children may be, conflicts over an estate happen, and the one way you can control things from the grave (ok, that's a little creepy) is by having a clear and concise Will. Yes, it's going to cost you to have a lawyer prepare your Will, but I promise you it is worth it in the long run. Your Will is where you are going to indicate who gets what of your assets (investments, property, and possessions) and also where you will appoint a guardian to any underage children. Have these conversations before you meet with a lawyer and make sure that people who are getting assigned a job are informed. Sure, that scene it 'Manchester by the Sea' where Casey Affleck finds out his brother chose him to take care of his son might have been funny in a dark and painful sort of way but that's a movie...not real life. Most estate lawyers will provide you with a questionnaire or worksheet to help you plan all things out before you actually meet. 

Enduring Power of Attorney 
It makes sense to get a Power of Attorney done while you are getting your Will done. An enduring POA will allow you to choose someone to make decisions about your finances and your property when you are no longer able to make such decisions yourself. Don't worry about hurting anyone's feelings here; you don't have to choose someone just because they are family. This is not an easy job for anyone (and it could potentially be long-term), so you are looking for someone who can function under stress and make the decisions you would make if you were able. 

Personal Directive (Living Will)
A personal directive is similar to a POA in that it gives someone the decision making power when you are no longer able, but the PD covers decisions regarding your health and personal well-being. This includes such things as medical treatment, where and how you will live, and what happens to your children. Often it makes sense to choose the same person for your POA and PD, but it doesn't have to be. You know your people so do what makes the most sense for your situation, and remember, you can always change your mind in the future. 

Life Insurance 
You will want to ensure your debts are covered and your loved ones can continue to live comfortably if you die suddenly and life insurance can be a major factor in accomplishing that. If you all your debts are paid up, and you already have enough assets saved up to ensure any potential beneficiaries are taken care of then insurance isn't as necessary. However, if that's not the case, then it becomes almost an essential. I would look at getting a term insurance policy for an amount that will cover the cost of any outstanding debts (mortgage, loans, credit cards, etc.), the cost of your funeral, and enough additional money for your spouse to live on and raise any children you may have. Slight side note here...when you are getting a mortgage your bank will try to sell you mortgage insurance; don't do it. It's actually kind of a scam, and I've talked about it more here. Term life insurance is the way to go. 

Ok, those are the big important documents that you want to make sure you have in place. Now I'm going to include a few extra tips that aren't exactly estate planning per se but will make things easier for your loved ones. 
  • Make sure your spouse is listed as an account holder on any accounts/policies you have, or is at least given permission to make decisions; for example, your spouse should be listed on your utility, phone, and cable bills to make any necessary changes if you're not around. If you don't have authorization on an account and your spouse has passed away you may have to jump through some ridiculous hoops to get answers and make any changes to the account. 
  • Keep a file with copies of your relevant documents (all of those we talked about above as well as bank and investment statements) and tell your loved ones where that is so it's easy for them to find. If you are the executor of an estate, it can be a real task trying to hunt down where the deceased had money. I like to keep things simple myself but that's not always the case, some people are all about not keeping all their eggs in one basket and have bank accounts and/or investment accounts at numerous different institutions. 
  • Make sure the beneficiaries listed in your will match up with the beneficiaries you have listed on your insurance and investment accounts to avoid any confusion and keep those beneficiaries updated! There are rules in place for this (life insurance trumps Will but Will trumps investment accounts), but it's an easy change to make and helps avoid any conflict. Imagine how you might feel if you think you're the listed beneficiary on a large RRSP account only to find out the Will specifies otherwise...
  • If you are lucky enough to have a pension, make sure you (and your spouse) know your pension options. When you are retiring, you will be most likely be given different options on how and when your pension is paid out which can include how much your spouse would receive in the event of your death and potential guarantees for set terms. You might get a higher monthly amount if you choose an option where your spouse gets a reduced pension with no guarantee after your death but that might not make sense in the long run. Taking the slightly smaller pension now could save your spouse from suffering money troubles in the future.
  • So much of our lives are online now that it can be helpful to have a record of usernames/passwords that can be accessed to shut down online services. I'm sure if you take a look through your credit card statement you likely have a few online services that you are paying for (Netflix, Spotify, etc.) and those would all need to be cancelled. There are also things like email accounts, online banking, and social media accounts that may need to be accessed for monitoring or to shut them down. 
  • If you have pets, you'll want to make sure you have someone who is willing to take care of them. You can even set aside a portion of your assets to whoever gets the job to make sure your furry friends are given all the spoiling they deserve. 
  • Do you want to be an organ donor? If so you'll want to make sure you've discussed this with your family, so they have a heads up. Then you can sign the back of your Alberta Health Care Card (if you live here), register online, or register the next time you get your driver's license renewed at a registry. 
There you have it. Hopefully, you're now ready to get your estate plan in place and make sure your loved ones do the same thing. As always, feel free to post any questions down below. 

Creating an estate plan

Wednesday, 18 November 2015

Why NOT to Get Mortgage Insurance

Why you should turn down bank offered mortgage insurance.

If you have (or have ever had) a mortgage, you'll know that the bank will often push mortgage insurance on you when you're signing on the dotted line. Now to be clear, this is the additional insurance your bank will offer you when you get a mortgage and not the CMHC insurance that is required when your down payment is less than 20%. Sometimes the bank will even go so far as to assume you'll get the coverage and you'll actually have to opt-out. They'll throw out some small premium amount that will just get tacked into your mortgage payment, and you'll think sure, sounds great...but does it. Ok, I already spoiled this with the post title...but no, it shouldn't sound so great. 

Now don't get me wrong, insurance is necessary, especially when it comes to covering your debt but there is a better way of doing it. Let's first figure out what exactly mortgage insurance is. Sounds simple enough, it's insurance to cover your mortgage. If you pass away the mortgage insurance will step in and cover the balance of your mortgage. The problem is that the balance you owe on your mortgage continues to go down as you make your payments, but the premiums you pay will remain the same. See the problem? You're basically paying the same amount for less and less coverage. At the beginning of your mortgage term this isn't so bad, but the more you pay off, the less money the bank will have to pay up. Plus, the payout goes straight to the bank, so you have no control over it. Not so great now huh?

A better option is to look at getting term life insurance in an amount that will cover your mortgage. A term life insurance policy will more than likely be cheaper than mortgage insurance, the payout will not decrease, and that payout will go directly to the beneficiary who can then use it for whatever they want. The amount of term insurance you get is also not tied to your mortgage, so if you want to get coverage for more than just that you can. This can be especially helpful if you have children and would like to leave money for their care and/or education. Life insurance will also stick with you for as long as the term whereas you will need to reapply for mortgage insurance anytime you move your mortgage. Cheaper, guaranteed payout amount and no need to renew if you change mortgage holders...lots of positives! 

Let's work through an example just to highlight this. Pretend you took out an original mortgage for $300,000 and paid it down to $200,000 after 4 years before tragically passing away. If you had mortgage protection insurance through your bank, they would eliminate that remaining $200,000 balance, and your beneficiary wouldn't have to worry about. Not bad, but what if you had skipped the mortgage insurance and instead gone with a term life insurance policy for $300,000. In that case, your beneficiary would (let's assume it's your husband) receive a cheque from the insurance company for $300,000. With that money, he could decide to pay-off the mortgage or continue making mortgage payments as before and invest that money, or set some aside for any children you have, or go on a fancy trip. Maybe some options are better than others ;) but you get the jist...more money overall and more flexibility on what happens to the money.

If you thought mortgage insurance initially sounded like a good idea and did sign up for it through the bank, don't worry. Most policies can be cancelled, you'll just need to give them a call. If not then just make sure you don't reapply at your next mortgage renewal. 

Why you should turn down bank offered mortgage insurance.

Friday, 13 November 2015

Credit Cards: Best Bang for Your Buck

Which credit card is the best for you?

A couple of weeks ago I talked about whether or not using cash or credit cards was a better option. As you know from that post, I'm not against using credit, as long as you pay off your balances in full each month. A big perk of plastic is that many cards have added features that get you cash back or travel rewards to save you money. Today we're going to look at a few of the available credit cards that have some of the best bonuses. You'll first want to decide which category will work best for you. If you're still catching up on debt and carry a balance, you'll want to go with a low-rate card, but if you're pretty good at paying them off every month, you'll want to start reaping those rewards. If you travel a lot, you should look at a card that pays out in travel rewards. Otherwise, a cash back card is likely the best option. 

Best Low-Rate You should try as hard as you can to not carry a balance on your credit card but if you absolutely must (I get it, things happen) you should look into a low-rate card. Even paying a small annual fee can be worth it if you carry a balance. The American Express Essential card will get you an interest rate of 8.99% with no annual fee. Just remember, if you're paying off your card every month don't even consider a low-rate option, move right on down to something rewarding. 

Another option to look at if you're paying off debt is to take advantage of a balance transfer. This will allow you to get a promotional interest rate on a new credit card that will likely be even lower than the lowest interest rate card you can find. One of the best balance transfer cards is the MBNA Platinum Plus Mastercard, which gives you 0% interest on balance transfers for the first 12 months. There is no annual fee for the card, but you will have to pay a 1% fee on the amount you transfer. No interest payments for a year is an excellent way to jump start your debt repayment.

Best Cash Back If you spend a lot on your credit card but aren't a big traveller, then you should look at an option that pays you a percentage back. The Tangerine Money-Back card will get you 2% cash back and has no annual fee. Another good option is the SimplyCash Card from Amex with 1.25% cash back and also no annual fee.

Best Travel Rewards If you're an avid traveller (or would like to become one), then getting yourself a travel rewards credit card can get you off on trips more often. A lot of cards also have sign-up bonuses that can equal a free flight or hotel stay right off the bat. There are people out there who hack travel reward programs like it's their job. If you're interested in getting into that then check out Rewards Canada, they'll keep you updated on available offers. 

As for card options, the Scotiabank Gold American Express card and the BMO World Elite Mastercard are both good options that aren't tied to a specific airline. Both have an annual fee, but you'll likely get that back and then some

Best Retail Rewards If you're not much of a traveller another option is to earn rewards to use at places you spend money. The PC Financial World Mastercard will earn you PC points to save money on your grocery bill. If you shop at Superstore (or other Loblaws stores) and already collect PC points this, no fee option might be a good choice for you. Another good option, if you're a Rogers customer, is the Rogers First Rewards Mastercard. This is another no fee option that can earn you money off your phone bill. The Scotiabank Scene Visa is also a good option if you're a frequent movie goer, but they did just increase the number of points you need to get into Imax or other premium movies so keep that in mind.

If you want more details on these or some other good options check out the RateHub website. They give detailed breakdowns of all the credit cards and how much you can earn in rewards. 

Which credit card is the best for you?

Tuesday, 10 November 2015

Your Investment Options

What investments are out there?

Investing can be overwhelming for beginners, especially when it comes to deciding what type of investments will work best for you. You've likely heard terms like mutual funds, stocks, bonds, and maybe even ETF's, but do you know what each one is and the differences between them? Before buying anything with your hard earned dollars, you need to understand it and how it can benefit you. 

If you are just starting to save money the first thing you want to do is save up an emergency fund. That will cover you if any unexpected expenses come up and will prevent you from having to dip into your long-term savings. You want to keep your emergency fund safe and easily accessible, so I recommend putting it in a high-interest savings account. You won't earn much return on it, but you'll never lose money, and you can get at it right away. For longer term savings (we're talking 5+ years out), it makes sense to start investing that money to get it to grow. Remember, anytime you have money in the market it can be volatile, so you need to have an idea of how much risk you are willing to handle. Higher risk can often mean higher returns, but it also means increased volatility and more potential for loss. 

I'm going to talk about a few of the most common investment options to help you determine which ones are the best fit for you. And remember, you're not tied to any one can always mix and match to get a well-balanced portfolio. 

GICs (Guaranteed Income Certificates)
GICs are the ultimate in safety when it comes to investments because, just as the name suggests, they guarantee your return. Now that sounds great, right? Sure, but the downside is that you're not going to earn much growth on them. That is especially true in today's low-interest environment...think 1.50% on a 5-year GIC. The concern with such a low return is that your money may not even beat inflation, which means you're actually losing money in the long term. You know how a dollar doesn't buy you as much today as it would have done 50 years ago? That's inflation. The Bank of Canada tries to keep inflation between 1% and 3% every year, so if you're only earning 1.5%, then your money might not be keeping up. The other concern with GIC's is that most are locked in for the entire term, so you can't get access to your money if you need it before the maturity date.

Now onto more complicated matters...bonds. There are many types of bonds, but they are all basically debt investments. You loan the issuer money, and in return, they pay you back your principal investment with added interest. Bonds are usually a low-risk investment, but it really depends on the type of bond you buy and the trustworthiness of the issuer. You can get government bonds (think Canada Savings Bonds) or corporate bonds that could be backed by very solid companies, but there are also less established bond issuers who have a higher chance of going under. With that said, even if a company goes under, bond holders get paid out before stock holders which make them inherently less risky.

Bonds are also a lot more challenging to buy as they aren't traded in the same manner as stocks. For most retail investors, the easiest way to hold a bond component in your portfolio is through a mutual fund that invests in bonds. 

If you're familiar with any type of investment, it is likely stocks. Like bonds, stocks are issued by companies looking to raise capital. The difference is that instead of loaning a company money like you do with bonds, stocks allow you to actually buy a share in the company. Stocks are a riskier option, but they are also where you can earn the highest returns. High risk, high reward right? Stocks don't always have to be high risk, it really depends on what company you are investing in and how well situated they are. Even big companies you might think of as super successful (think Twitter), can have disappointing results in the stock market.

Making money in stocks is simple in theory, but actually choosing companies with enough upside and not too much downside is really hard. Even the experts often get it wrong. What you want is to buy shares in a company, hold them for a bit, then sell them at a higher price. It doesn't always work out that way, but that's the goal. That difference in purchase price and sell price is called a capital gain (or loss). You can also earn money from a stock through dividends. Many companies (but not all) will pay you to hold their stock so monthly, quarterly, or annually they will pay you what is called a dividend just for maintaining your stock position. A lot of people out there (dividend investors) seek out stocks that pay high dividends instead of focusing solely on growth. 

Mutual Funds 
Mutual funds are basically just a collection of stocks that are chosen by the fund manager, packaged together, and then sold to the investor. You can buy a mutual fund that covers just about any part of the market, whether it be targeted to a specific risk level, geographical region or corporate sector. Because you are buying a whole bunch of stocks instead of just one or two, mutual funds are more diversified and often less volatile than individual stocks. You do, however, have to pay for the expertise that the fund manager brings they come with higher fees than other types of investments. The guys and gals that run mutual funds are good at their jobs and have all possible research, analytics and models available to them to help them succeed. Stock picking can be fun, but you just aren't going to have the time or resources to do the job they do. Many people are against mutual funds because of the high fees, but I'm OK paying them so I can be less involved. If you are a new investor with limited assets, funds can also be a way to get into a few sectors of the market with smaller amounts of money.

Index Funds and Exchange Traded Funds (ETFs) 
Index funds and ETFs are created to mirror an index (such as the S & P 500) which basically means they hold the stock positions used in that specific index. Like mutual funds, they are a good way to diversify your account, but they won't cost you as much because they simply buy what's in the index and aren't actively managed. Just remember that while you won't do any worse than the index, this doesn't mean you are always going to have positive returns. The markets aren't always up and can sometimes be a lot.

Hopefully, this helps you understand some of the different components you can use in building an investment portfolio. It can feel really complicated and overwhelming when you're a newbie investor, but if you keep things simple by investing in balanced funds or ETF's or a few large-cap companies you have confidence in, then you can learn the ropes without taking a ton of risk. 

What investments are out there?

Tuesday, 3 November 2015

Tipping Etiquette

To Tip or Not to Tip?

What do you guys think about tipping? When do you do it and how much do you give and what makes you tip a lot or a little?

I feel like I'm a pretty generous tipper in most situations, but sometimes I get cranky at how many places now prompt for tips....I'm looking at you Starbucks and your annoying push notifications on my phone. 

I've been a server/bartender in the past, so I know it's a tough job and you definitely depend on tips. Because of that, I almost always tip about 20% (unless the server is straight up rude). Lots of things can happen that are completely out of your server's hands, so as long as they're polite, relatively efficient and helpful if anything does go wrong, I think they've done their job and deserve to be rewarded. I always say that everyone should be a server at least once in their life because you learn a lot about how that dish actually makes it to your table and gain a whole lot more empathy for those working in customer service. So, in a restaurant...tip generously and don't necessarily blame your server for everything bad that happens.  

Recently there's been a few restaurants that have opened that have eliminated tipping and pay their staff a higher wage. What do you guys think about that? I've never eaten at such a restaurant but I kind of like the idea. I wouldn't mind paying slightly more for food items instead of tipping, but wonder if the service level would suffer? It must be nice for the staff to have a more consistent income though. I know when I was serving, during my broke student years, it was stressful walking out after a bad night. One thing many people don't know is that in most restaurants servers actually have to give a portion of their tips to hostesses, bussers and kitchen staff...and that's based on their sales, not tips. 

What about food delivery? We actually hardly ever order food. Once in awhile, we'll get pizza, but we have lots of great restaurants near our house and usually just go there. Even with my lack of first-hand knowledge, I do know that food delivery has become more and more popular with services like Skip the Dishes and Uber Eats. But what does that mean for tipping? From what I know, Skip the Dishes charges a delivery fee that goes directly to the driver but does that mean they don't expect a little extra when they actually show up? I hate this...what if they are super slow or don't secure your food and it spills? That actually happened to a co-worker of mine when he ordered lunch recently. I thought the whole point of tipping was to reward good service if it's not optional then it kind of defeats the point. 

I also tip for spa type services like haircuts, massages or when I get my nails done but less, usually around 10%. I know it can get confusing at some hair salons when you're supposed to tip all sorts of different people but luckily for me, my hair dresser does everything herself. Massages are always a bit weird because they feel more like a health care thing, but I guess it depends on where you go. I used to work at a physiotherapist clinic, and there were massage therapists on staff and tips were rare. It seems more normal to tip if you get a massage at a spa but my go to therapist is at a non-spa place, and there's always a tip option (which I do use). 

Ok, so those places are all pretty standard for tipping but what about all those places (like Starbucks, Booster Juice, etc.) who have tip prompts. For places like that, I very rarely tip, and if I do it's usually a $1 or less. I figure that tipping is for excellent service, and how exemplary can your service be in the 30 seconds of contact we have when I'm pulling through the drive thru. Sorry but no.

Am I totally offside on any of this? Let me know your thoughts and if you ever get frustrated by tipping. 

To Tip or Not to Tip?

Wednesday, 28 October 2015

Highlights of the Alberta Budget

The Alberta Budget (2015)
Things in Alberta are a little crazy right now. We voted for the NDP's with an overwhelming majority and now that they're taking action we're all freaking out a little. 

As I'm sure you all know the government put forward their budget for Alberta yesterday and there has been some serious debate. They are basically looking at running pretty massive deficits over the next couple of years with the first surplus not coming until 2020. That's scary, I get it. However, I also get that the economy in Alberta sucks right now because of the decline in oil prices but at the same time we have social programs that are struggling and need money. I for one am not ok with the government further sacrificing our education and healthcare needs to keep the province out of debt. 

Let's take a quick look at some of the main points of the plan: 

1. Individual and corporate taxation: farewell to the flat 10% tax rate for all Albertans. Those earning over $125,000 will now see their taxes increase for this year and again for next year (see rates listed below) and the corporate tax rate was increased from 10% to 12% (as of July 1, 2015). 

2. Sin Taxes: the markup on liquor will increase by 5%, and a carton of tobacco will go up by $5. I have no problem with this (probably because I don't smoke and am not a big drinker) and still won't cover the huge cost to the healthcare system that heavy users bring about. 

3. Healthcare: increase spending by 4% in 2016 with additional money going to support long term care facilities, home care and mental health services. I'm good with this one. With our ageing population, there is really no way out of spending more money on healthcare, and I like their goal of expanding home care. 

4. Education: reverse the 3% decrease in funding that was put in by the PC party. I don't have kids yet but I'm sure I will one day, and it's so important to ensure they have access to good education and safe schools. This will allow the province to hire almost 400 new teachers to help prevent class sizes from getting even larger.

5. New job creation program: they will give an incentive of $5,000 to employers for each new employee they hire. This one I'm not sold on, sure it's a perk if you have to hire someone, but I don't see a company going out of its way to add staff that they'll have to pay (let's say $50,000/yr) just to get $5,000.

6. Infrastructure: increase infrastructure spending by 15% to improve roads, schools and hospitals. This plan is similar to Trudeau's federal plan and is based on advice from Dave Hodge (former Bank of Canada governor) that you should spend during bad times and save during good. I ultimately do agree with this but worry we might be spending TOO much. 

Those are the key points I took out of the budget and my opinions on it, what are you guys thinking?

The Alberta Budget (2015)

Tuesday, 27 October 2015

Cash vs. Credit

Should you use cash or credit?
I'm going to go ahead and assume that at one point in all our lives we've been given the advice that we should only use cash and avoid credit cards at all costs. Probably the advice came from an older relative or a personal finance pro like Gail Vax-Oxlade, but is it actually that helpful? Well, I would argue that both have a time and place. If you are fighting to get yourself out of debt and have a problem with spending then yes, cash is likely the best solution, but credit cards can provide you with cash back or travel rewards that are very worthwhile if you can keep your bill paid in full at all times. That's the real key...paying off your credit cards every month means you can take advantage of the rewards but even coughing up the interest once or twice can eliminate any benefit. 

To break this down even further we're going to chat about the pros and cons of both cash and credit cards to make your decision easier. 

Cash - Pros 
  • Accepted pretty much everywhere
  • No additional fees 
  • Makes you consider large purchases (usually there would be a time lag between wanting something and having to go to the bank to pull out enough cash)
  • Easier to budget with because you have a visual representation of how much is left
Cash - Cons
  • If it's stolen it's as good as gone
  • Doesn't help build your credit 
  • Easier to waste cash on small purchases (I'm more likely to stop and grab a coffee if I've got $5 in my purse than if I'd have to put it on a card) 
  • Can't use to shop online 
Credit Cards - Pros
  • Many come with cash back or travel reward programs 
  • Helps build up your credit 
  • Can cancel if stolen and many cards have programs in place to refund fraudulent purchases 
  • You can buy stuff online and have more options available to find the best price
  • Easy to track your spending by looking through transaction history
Credit Cards - Cons
  • High-interest rates mean big payments if you don't pay your balances
  • Easy access to a high limit you may not be able to afford 
  • Encourage impulse buying 
  • Can damage your credit
  • Ever tried to pay for something but the store's credit/debit machine is down? That's a pain.
Knowing all of the pros and cons is great but you really need to know yourself. If you've had problems with credit card debt in the past then you may want to stick with using cash, or ensure your card has a LOW credit limit to keep you out of trouble. 

Some personal finance gurus (Dave Ramsey and Gail Vaz-Oxlade) are strong proponents of an all cash budget and I think for people trying to pull themselves out of debt that's a solid plan. For those who have control of their spending, I think the benefits of credit cards can be really great. The most important thing is to make sure you can pay off your balance EVERY month (have I made that clear yet?). I use credit cards for almost all of my purchases and I do so for many of the perks I listed above. I find they are more convenient than always ensuring I have cash on hand and the travel rewards I earn mean free stuff down the road. I also like to online shop. I find I can often find better deals on the internet and I only buy what I need instead of browsing at the mall. 

The takeaway is that credit cards can be a great way to get added benefits from your purchases, but you must know your limitations and use them properly.

Should you use cash or credit?

Wednesday, 21 October 2015

The Liberal Win and your Finances

What the Liberal means for your wallet

With the big Liberal win on Monday, there is a lot of talk about what this means for the country and for all of us that live in it. There were, of course, a lot of election promises made, and it will take some time to see how everything plays out and what is actually put into practice. Here's a look at some of the policies the Liberals put forward that would impact your personal or household finances.

As I've written before, I did vote Liberal in this election, and I'm in support of most of the policies listed below, but now we'll have to wait and see what/when things get introduced. 

Income Tax Changes
The biggie is a change to the income tax rates where the wealthiest Canadians would pay more, and the middle class would pay less. A new tax bracket would be introduced for those earning more than $200,000/year, and the rate on that would be 33%. Right now the highest tax bracket is 29% and is for income over $138.586.

The marginal tax bracket for those with incomes between $44,700 and $89,401 is currently 22%, and that would be dropped to 20.5%. This would also help out those earning more than $89,401 as that portion of their income would be taxed at the lower rate. If you need a refresher on marginal tax rates, check out this post.

Starting this year the Conservative's increased the annual TFSA contribution limit from $5,500 to $10,000 and the Liberal's have said they would roll this back to the original amount. This would also tend to hurt higher income earners as they are more likely to be maxing out TFSA's each year. As a bit of a side note, it will be interesting to see how this actually plays out as many people have already contributed the $10,000 for 2015. If it is reversed for this year instead of just going forward, it will certainly be an annoyance for all of us in my industry ;)

Income Splitting 
The Conservative's also introduced income splitting where families with children under 18 can shift up to $50,000 from the higher income earner to the lower income earner for a maximum tax benefit of $2,000. The Liberal's have said they would also get rid of this.

Child Tax Benefits
The current Universal Child Care Benefit and all other child tax credits/benefits will be halted and a new Canada Child Benefit will be introduced. This will be available for all families with children under 18 who have a household income of less than $150,000. The proposed Liberal plan (compared with Harper's UCCB) would actually give higher payments to those eligible families.

Home Buyer's Plan 
The Liberal's have said they would expand the Home Buyer's Plan to allow additional tax-free withdrawals from your RRSP when purchasing a house if a significant event has occurred (divorce, move for a job, having an elderly family member move in). Right now you can only take advantage of this for your first home purchase.

The current eligibility age for OAS is 67 Trudeau has said they would bump this back down to age 65. There has also been talk about enhancing CPP, but not many details are known about that.

Student Loans
Finally, the terms and conditions for student loans would be lightened up a bit. The available grants would be increased and the income requirements to meet such grants would also increase making them more readily available. Repayment of student loans would also be delayed until an income of $25,000/year was attained.

What the Liberal means for your wallet

Tuesday, 13 October 2015

5 Ways to Earn Extra Money Right Now

Tips for earning extra money

Everyone would be happy to have a little extra money in the bank, but you usually have to put in at least a bit of effort to bring in money. Sure, you might win the lottery but let's be real...that's not going to happen! Increasing your income means putting in the work, but there are some relatively simple ways to bring in a few extra bucks that don't require you taking on an extra job or selling your soul. 

In this post, we're going to talk about a few ways you can earn some extra money. Maybe you have some debt to pay off or are looking to boost how much you save every month? Whatever your motive, it's never a bad idea to try out a few of these tips.  

1. Sell your junk 
Ok, I don't mean actual junk...nobody wants your garbage! Chances are pretty good that you have a basement, garage, or closet overflowing with a few things that just aren't getting used in your house. This is the perfect opportunity to haul it out, clean it up, snap a few pictures and post your stuff on Kijiji, Craigslist or eBay and make some quick cash. I really hate clutter so a couple of times a year I go through the house and get rid of anything that we longer need. You can sort everything that will be exiting your house into a garbage pile, a donate pile, and a sell pile. Make sure the things you are selling are still in usable condition and post away. I find Kijiji is the quickest and easiest service to use for selling your items but depending on what you're selling you might have better luck elsewhere. If you've got a lot of brand name clothing you can also check out a local consignment store, it's not instant cash, but it tends to be a better option for clothing than Kijiji. This won't be a consistent source of income but can be a nice boost a few times a year, and will keep your house tidier! 

2. Swagbucks 
Swagbucks is a great service if you spend quite a bit of time on the internet. You can earn points (Swagbucks) for doing this like searching online, doing surveys, watching videos, playing games, etc. and then use those points to purchase gift certificates. If you shop online, you can also earn extra points that way. Many stores have partnered with Swagbucks, and by linking to their sites through the Swagbucks website, you will earn points based on your purchases. It does take awhile to build up enough for a redemption but if you're doing these things online anyways then why not earn something for your time. They have lots of options for gift cards that work in Canada and the US, such as Amazon, Starbucks, Old Navy, etc. so you shouldn't have a problem finding a way to spend your points. 

3. Market a skill or hobby 
There's a pretty good chance that something you do just for fun could actually earn you money. Maybe you like to knit or crochet, or take pictures, or make fancy greeting cards...any of these hobbies could start bringing in some money. Even if it's not much, just earning enough to pay for the hobby can save you money in the long run. Plus, if you have people to sell to then your house won't become overwhelmed with your creations. I like to crochet and trust me, there are only so many crocheted products I can wear and only so many times I can give scarves and blankets to my family. Build up a bit of a stockpile and look into setting up a booth at a local craft fair or farmers market. You could look into getting a table at a local market to sell your items (there's always lots of markets that pop up before Christmas). 

If crafting isn't really your thing then maybe you can do some manual labour for others. You could set up a side business doing basic landscaping or snow removal in your neighbourhood or offer your services as a handyman. Everyone has some sort of talent, it's just a matter of figuring it out and finding a way to market it.

4. Ask for a raise 
Asking for a raise can be nerve-wracking (I hate it!), but it's often the best way to get a real (and permanent) increase in your available funds. Most of the ways you can earn extra money might bring in a few extra bucks periodically but a decent raise can make an instant impact on your budget, just make sure you don't increase your spending and offset the benefit. In my opinion, asking for a raise annually is completely fair but make sure you are prepared with a list of reasons and specific examples of why you deserve it and have a figure in mind that you can realistically justify. It can be disappointing to hear no but don't just take the rejection...make sure you ask what you can do going forward to earn a raise. I wrote more on how to get a raise here if you'd like some more info. 

5. Lower your bills 
This is another good way to see a substantial decrease in the amount of money going out the door every month. Start by pulling up your last few months of bank account and credit card statements and see what you are actually paying every month. Then think really hard about whether or not there is anything you can simply cancel and get rid of all together. Maybe you're ready to go cold turkey and cancel cable? Ok, maybe not (it's always the sports!)...that doesn't mean you are out of luck. It's still worth a phone call to your provider to see if there are any extra services you don't actually need or maybe they will give you a promotional rate for being such a super awesome customer. It helps to be prepared with a few quotes from competitors and don't be afraid to switch companies if your current provider isn't willing to work with you. It costs companies more to bring on new customers than it does to maintain existing customers so they should want to do whatever they can to keep your business. Do this with your cable, internet, TV, insurance, streaming services, etc. Getting even a few dollars knocked off each bill will add up over time, and all it takes is a few minutes of your day. 

There you have it, five things you can do to have a bit more money in your pocket (bank account). What are your favourite ways to save money, earn money, or lower your budget? 

Tips for earning extra money