Thursday, April 17, 2014

Short Takes: Aging Financial Brain, Buying Nothing, and more

With Easter upon us, I’ve compiled my short takes a day early. Here are my posts since my last set of short takes:

Bad Advice on Retirement

Is it OK to Pay Off Your Mortgage before Saving for Retirement?

Personal Financial Education Can’t Solve All Problems

Here are some short takes and some weekend reading:

Jason Zweig explains some of the things that happen to an aging brain and how they affect investing decisions. I’m guessing that most of us are sure this won’t happen to us, but we’re almost all wrong.

Mr. Money Mustache says that while spending on experiences makes us happier than buying things, buying nothing at all makes us happiest.

Preet Banerjee was a victim of financial fraud recently. He describes what happened and how he solved the problem.

Potato announces his new “Automagical Financial Planning Ballparkinator” to answer the question of how much you need to save. I like the fact that he advertises clearly that any such calculation is necessarily just an estimate.

Alexandra Berzon explains the hidden game behind professional poker where players invest in each other.

Canadian Couch Potato explains that tracking the adjusted cost base is different with U.S. listed ETFs than it is with Canadian ETFs.

Squawkfox offers a rule of thumb for fixing or replacing: if it costs less than half the original purchase price to fix the item then fix it.

The Blunt Bean Counter lists some of the common mistakes his clients make on their taxes.

Big Cajun Man got way out of date with his data in Quicken. I found the same thing happened to me in my brief experiment with Quicken. I prefer to track a few things with spreadsheets.

My Own Advisor has some advice for his younger self.

Million Dollar Journey explains that the Canadian tax deadline has moved to May 5 among other tax advice.

Wednesday, April 16, 2014

Personal Finance Education Can’t Solve All Problems

I’m a believer in life-long learning. We’re better off when we take the time to learn what we can about personal finance. However, some people seem to believe that if we just taught personal finance well enough in schools, we’d prevent so many people from handling their money poorly. Education is valuable but will never be a complete solution.

The first reason why personal finance education isn’t enough is human nature. We know we should eat well and exercise, but many of us are fat and out of shape anyway. When I eat a donut, it’s not because I lack education; it’s because I had a lapse in willpower and the donut was available. Similarly, personal finance education will help to a point, but even those who know better will often lack the impulse control to make consistently good money decisions.

Another reason why personal finance education isn’t enough is that businesses that make money from our poor choices will adapt. Financial institutions have been remarkably successful at marketing debt to the masses. If their current marketing methods stopped working due to better education, they’d change their methods. Many successful businesses are made up of nine parts providing valuable goods and services and one part exploiting human weaknesses. Maybe their adaptation wouldn’t be fully effective, but it would work to partially undermine any widespread personal finance education.

People are not well suited to making good long-term financial decisions. Better education would help, but we’re still likely to keep buying ridiculously expensive vehicles on credit and keep giving away half our savings to mutual fund salespeople.

To improve the finances of the average person, we need a two-pronged approach. One prong is improved personal finance education. The other prong is better government policies and regulation. We need to make it easier for people to make good choices. Workers should have the option of a simple low cost retirement savings plan. A more difficult challenge is to help people avoid building foolish debt.

Financial institutions are unlikely to worry about personal finance education efforts because they can confidently count on their ability to market their products in different ways. However, any government effort to steer Canadians away from debt and poor investment choices is likely to be met with fierce resistance. But the potential rewards for the average person are enormous.

Monday, April 14, 2014

Is it OK to Pay Off Your Mortgage before Saving for Retirement?

Many financial advisors would say you shouldn’t defer saving for retirement to pay off your mortgage first. However, the truth is that paying off your mortgage first can be a perfectly sensible strategy as long as some important conditions are met.

The main condition you need to meet is that you are saving for the long term in some form. This should be at least 10% of your take home pay directed to long-term savings, preferably more. Commissioned financial advisors can make money if your savings are in the form of RRSP or TFSA contributions, but making extra payments against your mortgage can work for you as well.

Note that I said “extra” mortgage payments. It’s no good to save nothing in an RRSP or TFSA and just make your regular mortgage payments for 25 years. That’s just using your mortgage as an excuse to overspend right now.

Suppose your family take-home pay is $70,000. Then if you’re going to defer making RRSP or TFSA contributions, you should be paying at least $7000 extra each year against your mortgage. This will pay off your mortgage many years early. Then you can aggressively build RRSP and/or TFSA savings.

Another condition you have to meet for this strategy to make sense is to avoid building up other debts. If you’re paying extra on your mortgage but building debt on your lines of credit, credit cards, or with car loans, you’re not really saving. This applies to RRSP and TFSA savings as well; if you’re building debt at the same time, you’re not making any progress.

Most financial projections will show that you’re better off making RRSP and TFSA contributions early on instead of paying off your mortgage aggressively. However, the difference isn’t huge. What really matters is the amount you’re saving. If you save enough, you’ll benefit whether you save this money in an investment account or use it to reduce your mortgage.

Monday, April 7, 2014

Bad Advice on Retirement

In a recent Reuters article, Linda Stern explains that there is a big difference between an ideal retirement and the kind of retirement people end up with. She’s right about this. But she goes off the rails when she suggests that you should plan for a typical retirement.

Apparently, “Most people spend a lot in their first year or two of retirement ... But over time, retiree spending drops substantially.” It’s hardly surprising that people spend now and worry about the consequences later.

But when Stern advises that retirees plan to “start their retirements withdrawing 5 percent or more of assets in their first year of retirement” because retirees “don't inflate their spending on an annual basis to match the Consumer Price Index,” she goes off the rails.

I find this logic nuts. Other people plan poorly, overspend initially, and endure the painful reality that they’ve wasted a chunk of their savings and have to cut way back. So, I should set out to do the same thing?

Thanks, but no thanks. I’m going to try to avoid any painful cutbacks. I may not succeed, but I’m not going to throw in the towel right away.

Friday, April 4, 2014

Short Takes: Advisor Benefits of Low Fund Costs, High Frequency Trading, and more

I'm on vacation this week which leaves this week's short takes a little thinner than usual. Here are my posts for the week:

What Distinguishes Good Financial Advisors from the Poor Ones?

Feds Announce Sweeping CPP changes

More on CPP changes

Here are some short takes and some weekend reading:

Preet Banerjee shows how financial advisors could make $1 million more in their lifetimes if their clients invest in lower cost products, even if the percentage cost of advice remains constant.

James Osborne explains clearly why high frequency trading (HFT) is not a concern for buy-and-hold index investors. In short, HFT takes a small bite out of you only when you trade or the finds you own trade.

Canadian Couch Potato wrote a very good April Fools’ joke. The description of his new mutual fund had me laughing hard by the end.

The Blunt Bean Counter shares a retirement planning spreadsheet from one of his readers.

Big Cajun Man says that laptops don’t last as long as you might hope.