Tuesday, November 30, 2010

The Right Mindset for Trading Equities

For many people it’s almost impossible not to have opinions about stocks. Even those who use a low-cost indexing approach to investing like me find themselves with a strong opinion about a company’s prospects from time to time. For those who commit real money to their opinions, I have a suggested mindset for trading.

Imagine an office building with 1000 people working away on clusters of the latest powerful computers. The workers are former physicists. String theory wasn’t challenging enough for them and they went looking for greater mathematical challenges. Now they are all working together developing advanced trading strategies.

The next time you trade an equity imagine these former physicists being on the other side of the trade selling whatever you’re buying or buying whatever you’re selling. I’m not saying this just to scare readers; this is a fairly accurate depiction of the trading universe.

I’m a believer in owning equities and taking some investment risks, but trading frequently against multiple armies of former physicists is dangerous. I prefer investment strategies that require very little trading.

Monday, November 29, 2010

The Easiest Way to Invest

Readers of investing blogs tend to be those who enjoy spending time thinking and talking about investing. However, most people would rather talk about foot fungus than investing. These people see investing as a necessary evil and want to handle it in the easiest possible way.

It seems like a no-brainer that the easiest way to invest is to hand your money over to a financial advisor and just do whatever he or she says. Even if we ignore the high cost of paying the typical advisor, I’m not convinced that the answer is this obvious.

The term “DIY investor” conjures up images of a group of people boring their spouses at a party with endless talk of whether Apple or Google stock will go up or down. But it doesn’t have to be this way. An investment portfolio can be just about as simple as a bank account.

For example, an investor could just divide investment funds into thirds: one-third for a Canadian stock index, another for a U.S. stock index, and the last for a bond index. New money goes into whichever is lowest, and withdrawals come from whichever is highest. This may not be optimal, but it is dead simple, requires no paying attention to the financial media, and is likely to outperform investments recommended by the typical advisor.

I contend that the strategy I described is actually easier than having a financial advisor invest your money for you. I’d rather just do what I want to do with my money than have to talk to an advisor for all transactions. The main barrier for the “uninterested investor” is to gain enough knowledge to be able to ignore other input and just stick to a simple plan through thick and thin.

There is room for financial experts in people’s lives, but keep in mind that the typical person whom we call a financial advisor is not an expert. They just tell you which mutual funds to buy and do the buying for you. If you need complex legal, tax, or insurance advice, you need to find an expert. The same would be true whether you buy your own ETFs or let someone buy mutual funds for you.

With a modest amount of effort to gain some investing knowledge initially, investors can make their investing lives even easier with a simple DIY approach than they can by just handing their money over to someone else.

Friday, November 26, 2010

Short Takes: Geo-Arbitrage and more

Financial Highway gives the top three places to live and practice geo-arbitrage, which means living someone warm and inexpensive and making money from a western country while working remotely.

Frugal Trader at Million Dollar Journey managed to pay off his mortgage in under 3 years.

Big Cajun Man is contemplating re-gifting within the family, which means some hand-me-downs for his young son.

Thursday, November 25, 2010

Huge Pay on the Reserve

The National Post reports that a politician in Glooscap First Nation in Nova Scotia is paid $978,468 per year. This is very high, but sounds much worse when considering that the reserve has only 300 members. It gets worse, though. Apparently only 87 members actually live in the community.

With a little math these numbers lead to a suggestion that would probably help these 87 people greatly. Perhaps we could get rid of the politician and divide the pay equally among the residents. This works out to $11,246 per person per year. I’m guessing that these people would be better off with the money than whatever service the politician provides.

Wednesday, November 24, 2010

A Useful Cell Phone Feature

Many people are unhappy with the size of their cell phone bills but imagine the shock a Quebec woman got when she was charged $47,000! Her story had a happy ending, but many others whose stories don’t make the news aren’t so lucky.

From an informal poll of a few friends it seems that getting hit with an unexpectedly high cell phone bill is quite common. Maybe they’re not as high as $47,000, but they are higher than anticipated. This happens often enough that it seems to be part of the business plan of cell phone providers.

A useful feature to protect cell phone users would be a monthly cap. If I expect my usual cell phone bill to be $100, I might volunteer for a feature where my service gets shut off if my monthly bill hits say $500. The idea is that this would be an immediate cut-off so that my bill could never exceed $500. This would only happen if I were being hit with some expensive charge that I didn’t understand in advance.

Some people wouldn’t want such a feature, but I think many would like it. Cell phone providers are unlikely to offer it unless forced to, but I can dream of a world where consumers are protected from random massive bills.

Tuesday, November 23, 2010

XPF – New iShares North American Preferred Stock Index ETF

Preferred shares are tempting for fixed income investors mainly because they pay higher returns than many other fixed-income investments. These higher returns come with the inevitable higher risks. BlackRock has helped to spread the risk by coming out with a new exchange-traded fund called XPF that tracks the S&P/TSX North American Preferred Stock Index.

The downside is the cost. The management fee is 0.45%, which is fairly high for an index ETF. The HST adds a little more: 0.03%. Then there is the currency hedging. Half the fund is invested in U.S. preferred shares and the currency exposure is hedged back to Canadian dollars. Such hedging usually seems to cause tracking errors in fund returns.

Another thing to consider is that while XPF has 120 underlying holdings, they are from a relatively small number of companies. For example, I counted 18 holdings of various Royal Bank preferred shares. Presumably, if there is risk of default on one Royal Bank preferred share, then they are all at risk.

For an investor who is only interested in the Canadian part of the ETF, a potential alternative investing strategy is to choose a few preferred shares from different companies and buy them directly. The limited universe of preferred shares means that XPF has limited diversification value over holding the preferred shares directly.

On the other hand, it certainly is more convenient to just buy XPF. Investors should likely be driven by costs here. An investor who works out the costs of XPF and the do-it-yourself approach for the anticipated size of investment can decide whether the annual additional costs of XPF are worth the convenience.

Monday, November 22, 2010

Confusion over General Motors Stock

With much fanfare, the new GM Company had an initial public offering (IPO) last week. Sadly, some shareholders of the old General Motors Corporation think that their old shares will be converted into the new GM shares that closed Friday at US$34.26 per share. This will not happen.

The old GM Corporation was renamed to the Motors Liquidation Company as part of its bankruptcy process. All the old GM stock was renamed MTLQQ. These shares closed on Friday at 18.46 U.S. cents per share.

The Motors Liquidation Company sold its assets to the new GM Company. The ultimate value of the MTLQQ will be decided after the bickering among old GM’s creditors is done. This value is likely to be very low and will have nothing to do with the shares in the new GM Company.

So, in a couple of steps, General Motors Corporation has restored its name to the same initials. However, the old one was “Corporation” and the new one is “Company”. In the shuffle, the old shareholders are left with very little.

Don’t get me wrong, though. I think it’s appropriate for shareholders to lose everything when a company goes bankrupt. I just think it’s sad when naive shareholders hold out hope of getting their money back when it won’t happen.

Friday, November 19, 2010

Short Takes: Math Skills Correlate with Wealth and more

New research suggests a strong correlation between math skills and wealth. Other skills such as a good memory had far weaker correlation with wealth.

Money Smarts reviews CIBC Investor’s Edge Discount Brokerage.

Big Cajun Man runs the numbers on taking the bus versus driving to work. Despite the fact that the numbers strongly favour the bus, he explains why he continues to drive.

Thursday, November 18, 2010

No-PIN Debit Cards – No Thanks

Bill Mann reports that No-PIN debit cards will be coming to Canada this summer. You’ll be able to wave these cards in front of a reader without having to insert them or enter a PIN or sign a slip of paper. My personal take on this is that I don’t want any part of it.

I only use my debit card for accessing bank machines or to identify myself within a branch of my bank. I think of it as a bank card rather than a debit card and prefer not to give retailers access to my bank accounts. If my debit card were stolen, I certainly wouldn’t want the thief to be able to drain my bank accounts by making purchases. If I ever need to use my bank card as a debit card, I would prefer to have to enter a PIN.

I realize that others think differently on this issue and that’s fine: to each his own. However, I would want the option of having a card that cannot be used as a PINless debit card.

Some may say, “just don’t use it to buy anything,” but this doesn’t address my objection. I don’t want anyone else to be able to use my card without a PIN. If I never use it without a PIN this does nothing to prevent a thief who gets hold of my card from using it without needing to know the PIN.

Banks have plans to permit PINless transactions only if they are under $100. They also plan to occasionally require PIN entry particularly if there have been many transactions. This limits the pain somewhat, but not enough for me. A thief could easily run up thousands of dollars in charges. I have no interest in arguing with a bank over which charges are legitimate and whether I notified them quickly enough or protected my card well enough.

I understand the motivation for this “innovation”. Paying with a debit card is usually much slower than paying with cash. Retailers (and customers waiting in line) would love to speed up the payment process. The banks like it because it will increase the number of transactions people make with debit cards. Faster payments will make it more practical to use debit cards for smaller payments.

I’m just not interested in getting on this train. I don’t buy things very often and I don’t mind punching in my PIN or signing for purchases. For many people, bank statements are a blur of numbers (mostly debit purchases) to be ignored except possibly for the current account balance. However, I still check every entry on my account statements against my records and I do find errors from time to time.

Wednesday, November 17, 2010

Is There a Point to Diversification?

A friend I’ll call Jake was analyzing his investments and posed the following question (lightly edited):
I’ve got a standard mix of ETFs, including XIC, XIN, XSP, XBB, and XRB, each with a target percentage of my portfolio and a plan to rebalance when things get out of whack. I plotted the value of my portfolio against the TSX. Guess what? All three lines are almost identical. The correlation isn’t perfect, but close enough over any time period.

So what has my “diversification” and “balancing” bought me (aside from extra transaction fees)? Are markets so tightly interconnected as to make “diversification” impossible/meaningless? When was the last time you saw the S&P go one way but the DOW and/or NASDAQ go the other? Is there any advantage to carving off a chunk of cash and investing in a sector or part of the world? Logic says yes, but the results say no.

I won’t give up on my diversification just yet, but if I was giving advice to a newbie it might be “buy XIC and some bonds and diversify later (much later!).”
Jake has a point that the world’s stock markets are highly correlated. The fact that including some fixed-income investments in the mix has made little difference is a coincidence that won’t continue indefinitely. However, the interconnectedness of our world usually makes different stock markets move together.

The short answer to the value of diversification is the protection it gives from extreme events. Stock markets tend to move together when all is running smoothly, but there is always the possibility of major events that affect one part of the world more than others. I’d hate to have my investments concentrated in one sector or country and have that country experience some severe crisis.

As for the advice to a newbie, I don’t see anything wrong with starting out with just one or two ETFs while the portfolio is small. What is the value in having $2000 diversified among a half-dozen ETFs? There is nothing wrong with buying one ETF with the first $2000 and then buying some other ETF six months later with another $2000 that has been saved. Another direction for small portfolios is low-cost index mutual funds.

Tuesday, November 16, 2010

Negotiating a Line of Credit Interest Rate

Commentators frequently recommend that people negotiate the interest rate on their mortgages, lines of credit, GICs, and other loans and investments. But not much is usually said about how to go about such negotiations. I don’t have all the answers, but I did recently negotiate for a better interest rate on a line of credit. The process surprised me in a few ways.

I have an unsecured line of credit that has been mostly dormant for 17 years. A recent temporary need for money led me to use it and find out that the interest rate I’m being charged is prime+4.5%. After a quick poll of friends, it seemed that I could certainly do better. I decided to do what I could to reduce this interest rate as quickly and easily as I could.

I figured the easiest way to proceed would be to simply call the bank’s general phone number and provide an update on the 17-year old information they have about me. Surely it would be obvious that my financial circumstances warrant a lower interest rate.

Unfortunately, the call didn’t go at all as I planned. The call centre person said he couldn’t just reduce my interest rate. I’d have to apply for a new LOC which would involve a credit check. This last bit of information was conveyed with a tone implying that having your credit checked is a fate worse than death. To avoid such calamity I should go to my bank branch where they might be able to help.

The next day I called my branch, made it through the telephone menu system, and somehow ended up talking to someone at a call centre in another city. I tried my first approach again, but was assured that getting a lower interest rate was some sort of impossible goal without first talking to someone at my branch.

The call centre connected me to my branch where a bank employee assured me that we couldn’t handle this over the phone and I’d have to make an appointment to visit a specialist at the branch. After insisting that a delay of more than 2 weeks was unreasonable, I got a Saturday afternoon appointment.

My wife and I arrived on Saturday armed with every piece of paper we could think of that might be needed. In the first 30 seconds of the meeting the bank representative told us that she was prepared to use her discretion to give us a 1% interest rate reduction. My first thought was that surely this could have been handled over the phone, but I bit my tongue.

The bank representative also said that this 1% reduction was all anyone at the branch had the authority to offer. My first two attempts at asking who did have the authority to authorize a bigger reduction met with a stream of words that ended with repeating that 1% was all the branch could offer.

I can see where many people would have given up at this point. It seemed impossible to get anyone with some authority to actually look at our financial situation and make a sensible determination of an appropriate interest rate for our LOC. I decided not to be put off and insisted that the bank must employ someone with the authority to set a reasonable interest rate and that I wanted to deal with this person.

The representative went off to talk to a superior for quite a while and returned to announce that she could take our information and send it in to some sort of centre where they would take into account our “entire banking relationship” and determine an interest rate. This finally brought us to the point where she took our personal financial information.

At this point the most surprising part of this story happened: she didn’t want to know my income! She took all kinds of information about assets and liabilities, but even after I brought it up, she still didn’t want to know my income. This didn’t give me any confidence that the bank would make a sensible choice of interest rate.

When the promised date for an answer came and went, I started leaving messages. A few days later the bank representative finally told me that my LOC interest rate would be lowered to their base rate, which is prime+3%. That still doesn’t seem great, but taking off 1.5% helps. The term “base” is amusing; it clearly implies that I’m getting the very best rate possible, which seems unlikely. At least I’m not paying more than this so-called base rate.

After all this, my lesson is that the bank’s approach wasn’t so much to say no as it was to avoid answering the question. Their strategy was to put me off and hope that I would give up. In a sense they have partially succeeded because I probably won’t bother to go to one of their competitors looking for a lower interest rate.

Monday, November 15, 2010

If Stocks Go to Zero...

Too often I hear people talking about disaster scenarios where they protect their savings with gold or some other supposedly safe investment in case stocks go to zero. Do these people understand what it would take for stocks to be wiped out completely?

For a stock to go to zero, the business must be wiped out. For a broad stock index to go to zero, all the businesses making up this index must be wiped out. Just imagine it: no internet service providers, no telephone company, no cell phone network operators, no cable companies, and no grocery stores.

Without internet connectivity, telephone, cell phones, or food, exactly what would we buy with our chunks of gold? I certainly wouldn’t trade a can of beans for a bar of gold in such a desperate situation.

No doubt the remedies governments are using to deal with recent financial crises will have negative financial effects down the road, but I have a hard time seeing how the average person can protect himself from a widespread disaster.

Friday, November 12, 2010

Short Takes: Online Broker Rankings, Banks Crying Wolf, and more

Globe and Mail’s online broker rankings are out with Qtrade taking top spot again.

Tom Bradley says that the big banks are crying wolf with their customers as the banks transition into sales organizations.

Million Dollar Journey looks at whether people with defined-benefit pensions should save in TFSAs or RRSPs.

Big Cajun Man reports that Canadians now have over a trillion dollars in mortgages.

MoneyNing shows that telecommuting won’t save you quite as much money as some claim.

Thursday, November 11, 2010

Remembrance Day – Going Beyond Symbolic Gestures

Poppies and “Support Our Troops” bumper stickers are common symbolic gestures of support for our armed forces and veterans, but many veterans could benefit from more tangible support.

Recently, Canadian veterans demonstrated on Parliament Hill over the belief that their disability compensation and pension benefits aren’t adequate. In particular, they say that soldiers wounded in Afghanistan get less money than older veterans got.

I haven’t investigated these claims enough to decide if I think they are true. But anyone who feels strongly enough about supporting our troops should consider checking into these claims. If you decide they have merit, call or write your MP and tell him or her what you think. You will be doing more for veterans than any bumper sticker can do.

Wednesday, November 10, 2010

Prying Bankers Think They Know You

A Wall Street Journal article New Ways Banks Are Spying on You lists the many new types of information that banks collect about their customers to make lending decisions. Banks look at rent, utility payments, estimated house value, and other information. One of the things they do with this information is estimate people’s income to check the income they claim on credit card and loan applications.

Setting aside the privacy concerns, what if you live a lifestyle that doesn’t match the banks’ models? Maybe you have an average income, but their analysis leads them to think you have a low income. A bank that trusts their software more than they trust their customers may reject your application because they think you lied.

As more of the intelligence in the business of banking gets coded into software, the people working in banking will become less likely to understand the limitations of this software. Despite the fact that I work in high-tech, I fear the day when the best answer you’ll get for why you were rejected for a loan is “the computer said no.”

Tuesday, November 9, 2010

What Does “Pre-Approved” Mean?

House shoppers get a lot of comfort from having a pre-approved mortgage. Knowing how much a bank will lend you removes one big worry from the process of finding the right home. In this context, “pre-approved” means that the bank took your relevant personal details and determined how much they would lend you. However, when it comes to credit card offers from the very same banks, “pre-approved” seems to mean something completely different.

According to [a resource no longer available online], when it comes to credit card offers, “pre-approved” means “not yet approved” as opposed to “approved in advance”.

When yet another pre-approved credit card offer from RBC arrived in the mail, I decided to check just how pre-approved I really was. A footnote from the heading on RBC’s offer pointed me to some fine print on the back that explained what they mean by “pre-approved”:

“This pre-approved offer is based on the credit and financially related information the Royal Bank of Canada has about you.”

This certainly implies that I was approved in advance. A quick look at the application tends to support this interpretation; the only information RBC asked me to provide is

– Telephone numbers
– Birth date
– Employment Income
– Mortgage or rent payment

The application explains that my personal income must be more than $60,000 or my family income must be more than $100,000. So, I'm obviously not fully pre-approved. But the lack of any further questions implies at least a partial level of pre-approval.

To test this, I went to the RBC web site to check out the application that just anyone would have to fill in. The only additional questions on this application beyond the ones above were

– Years at current address
– Years with current employer

They don’t seem to care about assets and liabilities beyond house and mortgage. So, beyond what RBC was able to figure out from my address, it seems that my pre-approved status has little meaning. It would be nice to force banks to use the term “pre-approved” consistently between mortgages and credit cards, but this is likely too much to ask when it comes to marketing.

Monday, November 8, 2010

Bell’s Generous Offer

Bell has an offer for its customers: a $100 credit toward a new Bell TV subscription or a new cell phone. This sounds like a generous promotion until you read the body of the letter and fine print on the back.

As a long-time monopoly, Bell was regulated by the CRTC and one of the things Bell was directed to do was to set aside some of the money it collected from its customers for “future use”. CRTC has now decided that this money should be returned to customers.

Bell’s letter states that the rebate amount “could be up to $67 per home phone line”. However, “as an alternative” Bell is offering the $100 coupon. While it may not be obvious, the phrase “as an alternative” means that if you take the $100 offer you give up your right to the $67 rebate. The last line of the fine print on the back of the page is much more direct:

“By taking advantage of this offer, you will not be eligible for any other offers specific to this program, or the rebate cheque mandated by the CRTC.”

Leaving aside the question of whether customers are adequately warned that taking the coupon means they won’t get the $67, one has to question whether this is a good deal. The offer is obviously a bad deal for people who don’t want a new Bell TV subscription or a new cell phone, but what about people who do want one of these things?

The fine print states that the $100 cannot be combined with any other available offers. So, its real value is less than $100 when other offers are available, which seems to be almost all the time. Even if I wanted a new Bell service I’d be inclined to take my $67 in real money and turn down this $100 in “marketing” money.

Friday, November 5, 2010

Short Takes: Unclear Mutual Fund Statements and more

Scott Ronalds reported some results from the latest DALBAR study of the statements that mutual fund companies send to their clients. Apparently, 68% of reports don’t even include the client’s overall rate of return and few show the fees clients pay. The few “statements that do show fees present them in an unclear way.”

Canadian Tax Resource explains the differences among setting up your business as a sole proprietorship, a partnership, and a corporation.

Preet Banerjee takes a look at the conditions under which fundamental indexing will outperform capitalization-weighted indexing.

Money Smarts explains the different ways that financial advisors get paid. If you don’t know how your advisor is being paid, there is a good chance that you’re paying too much.

Big Cajun Man explains that when it comes to banking, everything is negotiable.

Million Dollar Journey explains preferred stocks. See part 2 as well.

Financial Highway has some useful information about credit card solicitations.

Thursday, November 4, 2010

Disagreeable Financial Advisors

Most times in life we seek to spend time with people we like and who agree with our views on major topics. However, this may not be a good strategy when it comes to financial advisors as Jason Zweig explains.

Here is a rough transcript of a common exchange I have with people about their financial advisors:

Me: “Are you happy with your financial advisor?”

Reply: “Yes, he’s a really great guy.”

Me: “Is he handling your money well?”

Reply: “Uh, I don’t really understand that stuff very well. But he’s really a good guy.”

A sign of a good salesperson is being likeable. Things aren’t much different with financial advisors. The advisors who are hungry for business do well by agreeing with whatever the client says, even if the client thinks he want to manage his money in a way that isn’t likely to perform well.

This brings me to a potential strategy for choosing a financial advisor. Seek out an advisor who disagrees with you. The theory is that such an advisor is more likely to be looking out for your interests even if it might cost him some business.

I don’t know if finding a disagreeable financial advisor is the best strategy, but it certainly makes sense to be wary of those who agree with you too much.

Wednesday, November 3, 2010

Gold’s Amazing Decade

Over the past decade, the price of gold has risen from about US$270 to US$1358 per ounce. This is a staggering average compound gain of 17.5% per year. Human nature compels us to imagine this trend continuing, but such high prices should make us wary, not bullish.

If we cast our view back to before the most recent decade, gold actually lost value. For the 20 years ending 10 years ago, gold lost an average of 4% per year! This isn’t an after-inflation figure. If we take into account inflation, gold lost much more value than this.

The tough thing about valuing gold is that it has almost no inherent value. Stocks correspond to businesses that have profits, losses, and dividends. We can at least measure the price of stocks relative to the earnings of these businesses. In the case of gold, how do we measure value?

Of course, currencies have a similar problem. Why do we value dollars? The short answer is that governments act in a manner designed to stabilize the value of currencies.

Between the current high price of gold and a lack of confidence in the desire of world powers to maintain the value of gold, I’m not interested in it as an investment.

Tuesday, November 2, 2010

TFSAs are another Tool for Balancing Assets between Spouses

The tax advantages of balancing assets between spouses aren’t as great as they used to be, but there is still some advantage to shifting assets (legally) from one spouse to another. For example, a couple can reduce their income taxes if taxable dividends are attributed to the lower income spouse.

To this end, my wife and I have been trying to increase her financial assets at the expense of mine. The main tool for doing this has been for all family expenses to be paid out of my income. She saves all money that comes into her hands.

Under the TFSA rules, one spouse can contribute to the other’s TFSA without the resulting income being attributed back to the contributor. This is explained clearly a few paragraphs into this CRA page on TFSAs.

So, I can fill up my wife’s TFSA from my non-registered account and she can leave her money in her non-registered account. This reduces the amount of taxable passive income I receive and increases hers.

Fortunately, new rules on income splitting with pension income and RRIFs make asset balancing between spouses less important, but there is still an advantage to balancing non-registered assets.

Monday, November 1, 2010

Lottery Fever and What to do with the Money

With the Lotto Max jackpot reaching $50 million for Friday’s draw, tongues were wagging. Most of my co-workers claim they don’t buy tickets even when the jackpot becomes huge. In a few cases the stated reason is not wanting to have to manage all that money.

It’s certainly true that most lottery winners seem to manage their money poorly. There is no shortage of rags to riches and back to rags stories. So, what would be a good way to handle the money from a $50 million win?

I may not have the best answer, but here is one answer. I would open two discount brokerage accounts and designate one of them the “tax” account. Both the tax and non-tax accounts would get $25 million. Each would hold the same mix of ETFs. One possible mix is equal dollar amounts of each of the following:

XIU, ZCN – Canadian stocks
XBB, ZAG – Canadian bonds
XSP, ZDM – U.S. and international stocks

The idea here is to have the following types of diversity in case of problems:

– 2 separate brokerages
– 2 separate ETF companies (iShares and BMO)
– stocks and bonds (the lower expected returns of bonds vs. stocks is of little concern with so much capital)

At the current dividend yields, the average yield of this portfolio is 2.68%. Every 3 months each brokerage account would get about $167,500.

My simple rule at this point is that I can spend (or waste) the cash that enters the non-tax account in any way I wish. If I feel generous, I can give chunks of it away. The cash that arrives in the tax account is for paying income taxes. At the end of the year anything left over in the tax account that wasn’t needed for paying income taxes becomes free for spending.

The only remaining rule is to avoid ever signing papers that promise future payments. If some friend begs for $250,000, the answer would be that he’ll have to wait until my account accumulates that much. If I want to buy a house, I have to “save up” for it. By never eating into capital or signing papers promising future payments, the money should last indefinitely.