I’ve had to go through a number of steps in preparation for a trip to China. There are a number of costs and I was surprised at the total. Before I even get on a plane, I’ve spent $391 and counting.
By far the biggest cost is the vaccinations. I needed several. Fortunately, the polio and tetanus boosters are covered by my provincial plan, but I had to pay a total of $313 for Hepatitis A, Hepatitis B, and Typhoid. My shoulders are like pin cushions.
I needed a new set of power plug adapters that include a Chinese adapter. This cost me $28. The remaining $50 was for a Chinese visa. As far as I can tell, this is just a formality that exists to collect $50. But, who knows. Maybe some people do get rejected.
As far as I am aware, my only remaining expense before taking off is the exchange on buying some Chinese currency. I’m expecting to enjoy the trip, but these costs could easily be overlooked by someone preparing a travel budget.
Thursday, March 31, 2011
Wednesday, March 30, 2011
Eliminating GST on Mutual Funds Unlikely to Help Investors Much
In Rob Carrick’s recent election wish list for investors, he led with a wish to eliminate GST on mutual funds. I share his desire to give mutual fund investors a break on mutual fund costs, but I don’t think this measure is likely to help investors much.
Any time there is a reduction in the cost of providing a product or service, the savings get shared by producers and consumers. This split isn’t necessarily even, though. In very efficient markets for commodity items, most of the savings are enjoyed by the consumers. In inefficient markets, producers keep most of the savings.
The mutual fund industry in Canada is competitive, but not on fees charged. Only a small slice of the industry competes on fees. The rest compete for access to customers who don’t understand fees.
The bottom line is that if we eliminated the estimated annual GST of $567 million paid by mutual fund investors, there is little reason to believe that much of the savings would be passed on to investors. Much of it would go to increased profits for mutual fund companies.
I don’t see GST on mutual funds so much as a tax on investors as it is a tax on mutual fund companies. As a result, I’m not in a huge hurry to see this tax go away.
Any time there is a reduction in the cost of providing a product or service, the savings get shared by producers and consumers. This split isn’t necessarily even, though. In very efficient markets for commodity items, most of the savings are enjoyed by the consumers. In inefficient markets, producers keep most of the savings.
The mutual fund industry in Canada is competitive, but not on fees charged. Only a small slice of the industry competes on fees. The rest compete for access to customers who don’t understand fees.
The bottom line is that if we eliminated the estimated annual GST of $567 million paid by mutual fund investors, there is little reason to believe that much of the savings would be passed on to investors. Much of it would go to increased profits for mutual fund companies.
I don’t see GST on mutual funds so much as a tax on investors as it is a tax on mutual fund companies. As a result, I’m not in a huge hurry to see this tax go away.
Tuesday, March 29, 2011
Nonsense about Worker Shortages
I listened to a piece on CBC radio yesterday about a company claiming that there is a shortage of workers qualified to perform a particular task. The company wants to work with governments and universities to fix the situation. I don’t know much about this particular purported shortage, but such claims about worker shortages are almost always nonsense.
During the tech boom we heard similar complaints from Nortel and other high-tech companies. They claimed that there just weren’t enough engineers and programmers. They called for universities to churn out more engineering and computer science graduates.
We live in a free market society. If a business tries to hire workers and can’t find the number they need, the problem is not that there is a worker shortage. The problem is that they are not offering enough money. Worker salaries are driven by supply and demand.
I am a competent programmer, if a little rusty. I haven’t worked as a programmer for many years because what I do instead pays more (and I like it more). If programmer salaries were to rise by enough, I might choose to go back to programming.
Similarly, for almost all types of jobs there are people who could fill the jobs but choose not to because they make more money doing something else. Attracting more candidates is a simple matter of raising the salary offered.
Of course, companies prefer not to do this. They would rather have a glut of highly skilled workers begging at their door. In this case they could lower the salaries they offer.
Notice how this supply and demand view casts the call for more graduates in a different light:
What they say: We need universities to produce more students with degree X to deal with the shortage of qualified candidates.
A more accurate version: We need universities to produce more students with degree X so that we don’t have to pay our workers more and might even be able to reduce salaries.
Notice how the second version generates much less sympathy.
Of course, decisions about the types of programs universities encourage students to take should be driven by supply and demand considerations. Students looking to make a living with their degrees should be looking at available salaries and forces that may increase or decrease these salaries by the time they graduate.
Ironically, if an industry is very successful at encouraging students into the programs the industry needs, it makes these programs less valuable to the students. This is because they can expect lower salaries when their large graduating classes form a glut of workers.
During the tech boom we heard similar complaints from Nortel and other high-tech companies. They claimed that there just weren’t enough engineers and programmers. They called for universities to churn out more engineering and computer science graduates.
We live in a free market society. If a business tries to hire workers and can’t find the number they need, the problem is not that there is a worker shortage. The problem is that they are not offering enough money. Worker salaries are driven by supply and demand.
I am a competent programmer, if a little rusty. I haven’t worked as a programmer for many years because what I do instead pays more (and I like it more). If programmer salaries were to rise by enough, I might choose to go back to programming.
Similarly, for almost all types of jobs there are people who could fill the jobs but choose not to because they make more money doing something else. Attracting more candidates is a simple matter of raising the salary offered.
Of course, companies prefer not to do this. They would rather have a glut of highly skilled workers begging at their door. In this case they could lower the salaries they offer.
Notice how this supply and demand view casts the call for more graduates in a different light:
What they say: We need universities to produce more students with degree X to deal with the shortage of qualified candidates.
A more accurate version: We need universities to produce more students with degree X so that we don’t have to pay our workers more and might even be able to reduce salaries.
Notice how the second version generates much less sympathy.
Of course, decisions about the types of programs universities encourage students to take should be driven by supply and demand considerations. Students looking to make a living with their degrees should be looking at available salaries and forces that may increase or decrease these salaries by the time they graduate.
Ironically, if an industry is very successful at encouraging students into the programs the industry needs, it makes these programs less valuable to the students. This is because they can expect lower salaries when their large graduating classes form a glut of workers.
Monday, March 28, 2011
Illusory Cost Savings in City Budgeting
Every year most large cities go through a painful budgeting process that usually results in property tax increases. A particular pet peeve of mine is hearing city bureaucrats or politicians describe some change as a cost savings when it is really a tax increase.
Over the years I’ve been a homeowner I’ve seen an explosion of user fees for city services. These services were once provided free of any additional charge and paid for from general property tax revenue. Now they are at least partially paid for by user fees.
Leaving aside the question of whether slapping user fees on everything is the right thing to do, it is annoying to hear some bureaucrat or politician describe the change as a cost savings rather than calling it what it really is: a tax increase.
If the change were made in a revenue-neutral way that would be one thing, but that’s not how it works. If the city collects $100 million in property taxes one year and collects $100 million in property taxes the next year plus $5 million in user fees, but provides exactly the same services for that money, this is a 5% tax increase.
What isn’t clear to me is whether those who play these semantic games are just cynically trying to make their actions seem like less of a tax increase or whether they are so caught up in the battle between city bureaucrats and property taxpayers that they really think of these tax increases as cost savings.
Over the years I’ve been a homeowner I’ve seen an explosion of user fees for city services. These services were once provided free of any additional charge and paid for from general property tax revenue. Now they are at least partially paid for by user fees.
Leaving aside the question of whether slapping user fees on everything is the right thing to do, it is annoying to hear some bureaucrat or politician describe the change as a cost savings rather than calling it what it really is: a tax increase.
If the change were made in a revenue-neutral way that would be one thing, but that’s not how it works. If the city collects $100 million in property taxes one year and collects $100 million in property taxes the next year plus $5 million in user fees, but provides exactly the same services for that money, this is a 5% tax increase.
What isn’t clear to me is whether those who play these semantic games are just cynically trying to make their actions seem like less of a tax increase or whether they are so caught up in the battle between city bureaucrats and property taxpayers that they really think of these tax increases as cost savings.
Friday, March 25, 2011
Short Takes: Identity-Theft Mortgages and more
Gail Vaz-Oxlade offers some straight-from-the-hip advice about not being suckered into taking on loans (in a post no longer online). I found the most interesting part of her advice to readers to be her assertion that you don’t need to keep a secured line of credit backed against your home to protect against identity thieves who try to take a mortgage out in your name. She says that courts side with the original owner. This is an area where it is easy to scare homeowners and I’d like to understand it better.
Rob Carrick advises us to choose an investment strategy that is as rational as we can live with. I’d extend this line of thinking to say that as we learn more about investing and the inevitable ups and downs of the markets, it becomes easier to control emotions and tolerate more financial turbulence.
Big Cajun Man has an important message about periodically changing your online banking passwords.
Million Dollar Journey explains the many tax issues of buying property in Florida. If this doesn’t scare you off buying in Florida, then nothing will.
Money Smarts has a detailed review of Interactive Brokers.
Rob Carrick advises us to choose an investment strategy that is as rational as we can live with. I’d extend this line of thinking to say that as we learn more about investing and the inevitable ups and downs of the markets, it becomes easier to control emotions and tolerate more financial turbulence.
Big Cajun Man has an important message about periodically changing your online banking passwords.
Million Dollar Journey explains the many tax issues of buying property in Florida. If this doesn’t scare you off buying in Florida, then nothing will.
Money Smarts has a detailed review of Interactive Brokers.
Thursday, March 24, 2011
Pension Millionaires
Senator Raymond Lavigne has been in the news lately after resigning to avoid getting kicked out of the senate and losing his $79,000 per year pension. The part of this that struck me was the article writer’s choice to describe the money at stake as a “$79,000 pension” rather than its full value which is clearly more than a million dollars. Similarly, generous pension plans make many government workers pension millionaires.
People tend to value spread out payments as less than their total cost. So, a couple spending a day at an amusement park spending a series of small amounts such as $30 each to get in, $25 for snacks, and $15 for parking won’t feel like they spent a total of $100. The Lavigne article would probably have drawn more ire if the pension’s present value of more than $1 million were quoted.
Moving to the subject of government workers, a Statistics Canada publication says the following:
“In fiscal year 2006/2007, the average age at retirement of the public servants studied was 58.4 and they retired on average with 29.2 years of pensionable service.”
From this information, we can estimate the value of the average public servant’s pension. (An interesting coincidence is that the average public servant retires with pensionable service of half their lives.)
According to a CBC article, life expectancy for someone who makes it to retirement age is a little under 85 years (as of 2005 to 2007). So, let’s say that the average public servant who makes it to retirement is retired for 26 years (85 minus 58.4, rounded down).
At 2% pension per year of service, the average pension is 58.4% of salary. We could just multiply this by 26 years, but this ignores cost of living increases (pension indexing to CPI) and it ignores the time value of money. If we say that the time value of money is 2% above inflation, then the present value of a 26-year pension is 20.5 times one year’s pension payments. For a pension at 58.4% of salary, the present value of an average pension is 12 times salary. Actuaries may take issue with some of the specific figures I’ve used, but my calculations are close to the mark.
So, the average public servant who retires with a salary above $83,000 has a pension worth more than a million dollars. The government employs many people who are pension millionaires, but I suspect that most of them don’t feel like millionaires.
People tend to value spread out payments as less than their total cost. So, a couple spending a day at an amusement park spending a series of small amounts such as $30 each to get in, $25 for snacks, and $15 for parking won’t feel like they spent a total of $100. The Lavigne article would probably have drawn more ire if the pension’s present value of more than $1 million were quoted.
Moving to the subject of government workers, a Statistics Canada publication says the following:
“In fiscal year 2006/2007, the average age at retirement of the public servants studied was 58.4 and they retired on average with 29.2 years of pensionable service.”
From this information, we can estimate the value of the average public servant’s pension. (An interesting coincidence is that the average public servant retires with pensionable service of half their lives.)
According to a CBC article, life expectancy for someone who makes it to retirement age is a little under 85 years (as of 2005 to 2007). So, let’s say that the average public servant who makes it to retirement is retired for 26 years (85 minus 58.4, rounded down).
At 2% pension per year of service, the average pension is 58.4% of salary. We could just multiply this by 26 years, but this ignores cost of living increases (pension indexing to CPI) and it ignores the time value of money. If we say that the time value of money is 2% above inflation, then the present value of a 26-year pension is 20.5 times one year’s pension payments. For a pension at 58.4% of salary, the present value of an average pension is 12 times salary. Actuaries may take issue with some of the specific figures I’ve used, but my calculations are close to the mark.
So, the average public servant who retires with a salary above $83,000 has a pension worth more than a million dollars. The government employs many people who are pension millionaires, but I suspect that most of them don’t feel like millionaires.
Wednesday, March 23, 2011
What’s Not in the Budget
Noticeably absent from yesterday’s unveiling of the 2011 budget are many of the measures called for by wealthy old people. I think the government made the right choice on these issues.
Many have called for big increases in RRSP and TFSA limits as well as making TFSA contribution room retroactive to age 18. None of this would do much for the average Canadian who can’t make use of all available room now, but a sudden large increase in RRSP room and particularly TFSA room would allow the wealthy to earn investment income tax-free.
One could imagine an extreme situation where a couple derives an income of $100,000 per year tax-free from a very large sum invested in TFSAs, but collect the GST rebate because their declared income is negligible.
If we keep creating tax measures to shelter more and more investment income from taxes, only income derived from actual work will be taxed. I don’t think we want a world where only working people are punished with taxes. RRSP and TFSA room should be at levels to encourage average people to save rather than allowing the wealthy to avoid taxes.
Many have called for big increases in RRSP and TFSA limits as well as making TFSA contribution room retroactive to age 18. None of this would do much for the average Canadian who can’t make use of all available room now, but a sudden large increase in RRSP room and particularly TFSA room would allow the wealthy to earn investment income tax-free.
One could imagine an extreme situation where a couple derives an income of $100,000 per year tax-free from a very large sum invested in TFSAs, but collect the GST rebate because their declared income is negligible.
If we keep creating tax measures to shelter more and more investment income from taxes, only income derived from actual work will be taxed. I don’t think we want a world where only working people are punished with taxes. RRSP and TFSA room should be at levels to encourage average people to save rather than allowing the wealthy to avoid taxes.
Tuesday, March 22, 2011
A Question about RRIF Minimum Withdrawals
In a discussion about RRIF minimum withdrawals, the following question came up: what is the exact value used for portfolio size? RRIF owners must withdraw a percentage each year, but a percentage of what value? The value of a portfolio can vary minute-by-minute. I found the answer surprisingly hard to find.
Curiously, the CRA guide for RRSPs, RRIFs, and RPPs was not helpful. This guide didn’t even contain the table of RRIF percentage withdrawals by age. I actually found the answer in a CRA guide intended for RRSP and RRIF plan administrators. Appendix D contains the table of percentages of minimum RRIF withdrawals at each age along with the following text:
“As the carrier of a RRIF, you have to pay a minimum amount to the annuitant every year after the year in which the RRIF is set up. You calculate this amount by multiplying the FMV of the property held in the RRIF at the start of the year by a prescribed factor.”
So, it’s the value of the RRIF contents at the start of the year that matters. Generally, I prefer to get answers to questions like this from the horse’s mouth (CRA in this case). Other sources might give clearer explanations and better insight, but it’s a good idea to confirm information with actual CRA documents.
Many posts on this subject reproduce the table of RRIF withdrawal percentages for each age, but I’ll avoid this just in case it changes with today’s federal budget.
Curiously, the CRA guide for RRSPs, RRIFs, and RPPs was not helpful. This guide didn’t even contain the table of RRIF percentage withdrawals by age. I actually found the answer in a CRA guide intended for RRSP and RRIF plan administrators. Appendix D contains the table of percentages of minimum RRIF withdrawals at each age along with the following text:
“As the carrier of a RRIF, you have to pay a minimum amount to the annuitant every year after the year in which the RRIF is set up. You calculate this amount by multiplying the FMV of the property held in the RRIF at the start of the year by a prescribed factor.”
So, it’s the value of the RRIF contents at the start of the year that matters. Generally, I prefer to get answers to questions like this from the horse’s mouth (CRA in this case). Other sources might give clearer explanations and better insight, but it’s a good idea to confirm information with actual CRA documents.
Many posts on this subject reproduce the table of RRIF withdrawal percentages for each age, but I’ll avoid this just in case it changes with today’s federal budget.
Monday, March 21, 2011
Looking for Reliable Interest Rate Predictions
A colleague recently asked me if I knew of a good source for reliable interest rate predictions. He was trying to decide whether to break his mortgage and pay the interest rate differential. He only wanted to do this if interest rates were headed back up and it made sense to lock in today’s low rates.
As is often the case, I knew the correct but unhelpful answer. Nobody knows for certain what will happen to interest rates. Even the U.S. Federal Reserve and the Bank of Canada can’t say what will happen to interest rates with any useful accuracy. These organizations react to world events more than they control them.
The yield curve gives the collective interest rate predictions of the financial markets, but rates could be higher or lower than predicted levels. We need to stop looking for financial prophets and make financial choices assuming a range of possible outcomes.
The curious thing about this line of reasoning is that I’ve had people agree with it and then proceed to explain what they think would happen with interest rates. Humans seem to be wired to make predictions even when we have no idea what will happen.
As is often the case, I knew the correct but unhelpful answer. Nobody knows for certain what will happen to interest rates. Even the U.S. Federal Reserve and the Bank of Canada can’t say what will happen to interest rates with any useful accuracy. These organizations react to world events more than they control them.
The yield curve gives the collective interest rate predictions of the financial markets, but rates could be higher or lower than predicted levels. We need to stop looking for financial prophets and make financial choices assuming a range of possible outcomes.
The curious thing about this line of reasoning is that I’ve had people agree with it and then proceed to explain what they think would happen with interest rates. Humans seem to be wired to make predictions even when we have no idea what will happen.
Friday, March 18, 2011
Short Takes: Long-Term Failure of Active Management and more
Canadian Couch Potato looks at a study of the dismal odds of outperforming an index with actively-managed funds over a lifetime.
The Blunt Bean Counter found a few more reasons that I missed for young people to file tax returns even when they don’t owe anything.
Big Cajun Man has some takers on his group challenge to give things up to improve your finances.
Money Smarts has some tips on setting up a simple and cheap RESP GIC account. GICs won’t make big returns, but you’re less likely to make big mistakes with them.
Million Dollar Journey gives us the benefit of personal experience buying foreclosures in Canada.
The Blunt Bean Counter found a few more reasons that I missed for young people to file tax returns even when they don’t owe anything.
Big Cajun Man has some takers on his group challenge to give things up to improve your finances.
Money Smarts has some tips on setting up a simple and cheap RESP GIC account. GICs won’t make big returns, but you’re less likely to make big mistakes with them.
Million Dollar Journey gives us the benefit of personal experience buying foreclosures in Canada.
Thursday, March 17, 2011
A Message for Mutual Fund Investors Who Pay No Fees
Based on an informal poll over the years of family and friends who invest in mutual funds, about half believe they don’t pay any fees to buy and own mutual funds. I have a message for them: you’re mistaken. There is no such thing as mutual funds without fees. The fees you pay have been hidden from you.
There are rules about disclosing mutual fund fees, but financial advisors can follow the letter of the law without their clients actually understanding what fees they pay. The fees are explained in a document called a prospectus that is supposed to be given to clients, but even a simplified prospectus is long enough and complex enough that few clients read it.
All mutual funds have expenses. Most of the ongoing expenses to run a fund are components of the Management Expense Ratio (MER). This is expressed as a percentage, such as 2%. This means that 2% of your money comes out of the fund every year to pay costs including salaries of the fund managers, payments to your financial advisor, and other costs.
A cost of 2% each year may not seem like much, but another 2% of the same money will be taken out again next year and the year after that. The math says that it will take about 35 years for half of your money to disappear.
You’d think that your mutual fund statements would have a line showing the amount of the MER being deducted from your money, but this is usually not the case. The money evaporates silently in most cases.
Another category of fees are loads. Depending on the type of mutual fund, you may pay some type of load:
Front-end load: This is where a percentage of your money is removed before the money goes into the mutual fund.
Back-end load (Also called a deferred sales charge (DSC)): This is where a percentage of your money is deducted before you get your withdrawal from a fund. This type of load is popular among advisors and many of their clients don’t understand how it works until it comes time to make a withdrawal.
There are some good financial advisors out there who properly explain these fees to their clients. It’s unrealistic to expect people to work for you for nothing. But you should understand what you are paying. If you own mutual funds and thought there were no fees, maybe your advisor isn’t the great person you thought he or she was. You thought the two of you were a professional and a client, but maybe you’re a salesperson and a mark.
There are rules about disclosing mutual fund fees, but financial advisors can follow the letter of the law without their clients actually understanding what fees they pay. The fees are explained in a document called a prospectus that is supposed to be given to clients, but even a simplified prospectus is long enough and complex enough that few clients read it.
All mutual funds have expenses. Most of the ongoing expenses to run a fund are components of the Management Expense Ratio (MER). This is expressed as a percentage, such as 2%. This means that 2% of your money comes out of the fund every year to pay costs including salaries of the fund managers, payments to your financial advisor, and other costs.
A cost of 2% each year may not seem like much, but another 2% of the same money will be taken out again next year and the year after that. The math says that it will take about 35 years for half of your money to disappear.
You’d think that your mutual fund statements would have a line showing the amount of the MER being deducted from your money, but this is usually not the case. The money evaporates silently in most cases.
Another category of fees are loads. Depending on the type of mutual fund, you may pay some type of load:
Front-end load: This is where a percentage of your money is removed before the money goes into the mutual fund.
Back-end load (Also called a deferred sales charge (DSC)): This is where a percentage of your money is deducted before you get your withdrawal from a fund. This type of load is popular among advisors and many of their clients don’t understand how it works until it comes time to make a withdrawal.
There are some good financial advisors out there who properly explain these fees to their clients. It’s unrealistic to expect people to work for you for nothing. But you should understand what you are paying. If you own mutual funds and thought there were no fees, maybe your advisor isn’t the great person you thought he or she was. You thought the two of you were a professional and a client, but maybe you’re a salesperson and a mark.
Wednesday, March 16, 2011
Taxpayers’ Ombudsman
If you’ve been having trouble with your dealings with the Canada Revenue Agency (CRA), there is a Taxpayers’ Ombudsman that may be able to help. In addition they have some good tips for how to deal with CRA.
The types of complaints they can review are
– Mistakes
– Undue delays
– Poor or misleading information
– Unfair treatment
– Staff behaviour
If you think you have a suitable case for the Taxpayers’ Ombudsman, be sure to be clear about what you want and to submit complete information. The Ombudsman recommends being calm and respectful when dealing with CRA. No matter how egregious your treatment by CRA, it is unlikely to be the fault of the CRA employee you are speaking to on the phone.
Like many service workers, CRA employees who interact with the public get paid the same whether or not they help you (within limits). Whether you like it or not, they hold the power and you don’t. Fortunately, most people like to be helpful and CRA employees are no different.
Your best bet is to be likeable. This doesn’t mean backing down from what is rightfully yours. It just means remaining respectful. Your best hope is to make the CRA employee an ally of yours in righting whatever wrong you’ve suffered.
Here’s an example of something unhelpful to say:
"MY TAXES PAY YOUR SALARY!!"
After this gem you may not get maximum cooperation from the CRA employee you blasted.
There is no guarantee that treating CRA employees well will get you what you want, but it improves your odds.
The types of complaints they can review are
– Mistakes
– Undue delays
– Poor or misleading information
– Unfair treatment
– Staff behaviour
If you think you have a suitable case for the Taxpayers’ Ombudsman, be sure to be clear about what you want and to submit complete information. The Ombudsman recommends being calm and respectful when dealing with CRA. No matter how egregious your treatment by CRA, it is unlikely to be the fault of the CRA employee you are speaking to on the phone.
Like many service workers, CRA employees who interact with the public get paid the same whether or not they help you (within limits). Whether you like it or not, they hold the power and you don’t. Fortunately, most people like to be helpful and CRA employees are no different.
Your best bet is to be likeable. This doesn’t mean backing down from what is rightfully yours. It just means remaining respectful. Your best hope is to make the CRA employee an ally of yours in righting whatever wrong you’ve suffered.
Here’s an example of something unhelpful to say:
"MY TAXES PAY YOUR SALARY!!"
After this gem you may not get maximum cooperation from the CRA employee you blasted.
There is no guarantee that treating CRA employees well will get you what you want, but it improves your odds.
Tuesday, March 15, 2011
U.S. Internet Over-Use Charges One-Tenth of Canadian Charges
AT&T has introduced a bandwidth cap on DSL usage that has sparked some outrage in the U.S. for how it will affect Netflix customers among others. However, the over-use charges are only one-tenth of what is generally charged in Canada.
AT&T charges $10 for each additional 50 GB of bandwidth used above a base allocation of 150 GB. This works out to 20 cents per GB. Canadian over-use charges are typically $2 per GB and base allocations tend to be lower than 150 GB depending on the level of service purchased.
It seems evident that Canada could use more competition in the internet access market.
AT&T charges $10 for each additional 50 GB of bandwidth used above a base allocation of 150 GB. This works out to 20 cents per GB. Canadian over-use charges are typically $2 per GB and base allocations tend to be lower than 150 GB depending on the level of service purchased.
It seems evident that Canada could use more competition in the internet access market.
Monday, March 14, 2011
Morningstar Says Canadian Mutual Funds Fail on Fees
Morningstar’s latest country-by-country fund report card gave Canadian funds a failing grade for the excessive fees they charge investors. However, it’s what the report doesn’t say that may confuse investors.
The report doesn't include an assessment of the returns earned by each country’s funds. The grading categories are 1) regulation and taxation, 2) disclosure, 3) fees and expenses, and 4) sales and media. No grades are given for earning good returns for investors.
This is likely to surprise many mutual fund investors. After all, the point of investing is to earn returns. What could possibly be more important to evaluate than whether funds did a good job of earning returns for investors?
The reason that grades aren’t given for returns is that it isn’t possible for funds to collectively give above-average returns. In the same way that not every child can be above average, not every fund can be above average. The mutual fund industry controls such a high percentage of investing dollars that the typical fund must be about average before we take into account the fees they charge investors.
This is where Canada’s failing grade becomes important. We wouldn’t be too concerned about fees if all the mutual funds were earning fantastic returns. But they aren’t. The math says that most funds must be about average before fees and expenses. This means that Canada’s high mutual fund fees drag returns from about average to dismal.
The report doesn't include an assessment of the returns earned by each country’s funds. The grading categories are 1) regulation and taxation, 2) disclosure, 3) fees and expenses, and 4) sales and media. No grades are given for earning good returns for investors.
This is likely to surprise many mutual fund investors. After all, the point of investing is to earn returns. What could possibly be more important to evaluate than whether funds did a good job of earning returns for investors?
The reason that grades aren’t given for returns is that it isn’t possible for funds to collectively give above-average returns. In the same way that not every child can be above average, not every fund can be above average. The mutual fund industry controls such a high percentage of investing dollars that the typical fund must be about average before we take into account the fees they charge investors.
This is where Canada’s failing grade becomes important. We wouldn’t be too concerned about fees if all the mutual funds were earning fantastic returns. But they aren’t. The math says that most funds must be about average before fees and expenses. This means that Canada’s high mutual fund fees drag returns from about average to dismal.
Friday, March 11, 2011
Short Takes: Patient Car Buying and more
A Loonie Saved has an interesting approach to buying a car.
Squawkfox thinks that it rarely makes sense to agree to work for free.
Money Smarts breaks down the different types of financial advisors.
Big Cajun Man invites his readers to join him in some personal financial challenges.
Million Dollar Journey looks at the economics of painting a room yourself or hiring a painter.
Thursday, March 10, 2011
Why Men Make More Money than Women
We often hear statistics about how men and women doing the same jobs aren’t paid the same. I’ve heard that women make anywhere from 60% to 90% of what men make. I don't trust these figures because the people who quote them often have axes to grind, but I do believe that a gap exists. I don’t think this gap is likely to close completely any time soon.
The reason for this gap is usually attributed to sexism. I don’t know how much of a problem this is today but it definitely was a problem in the past. See a job posting from one of my father’s job searches back in the 1964. However, I think there is another reason why women doing the same job as men get paid less, on average.
I could have been paid much more in my career if I had devoted more energy to it. If I had worked more and spent less time with my wife and sons, my income would have been higher. I consistently made choices favouring a balanced life rather than devoting myself completely to my work. More than once I turned down a promotion that I knew would require more work and travel. I don’t regret these choices, but they did cost me money.
Just to simplify the discussion, let’s divide the world into two categories of people: (1) those who are driven and consistently sacrifice their personal lives for work, and (2) those who are balanced and consistently seek a rich personal life at the expense of workplace success.
I think most people belong to the balanced category, including me. There is little doubt that driven people make more money than balanced people, on average, even when they are in the same careers. In my limited experience, most driven people are men. I have met women who are driven, but they are significantly outnumbered by driven men.
It stands to reason that men will make more money than women, on average, because of the driven men messing up the averages. Quite frankly, I think women are smarter for more often choosing a balanced life over a life devoted solely to work, but the downside of this choice is a lower income.
I have nothing against driven people. They pay a lot of taxes and create jobs for the rest of us. But I’m happy to count myself among those who make less than they could make but have a rich personal life.
The reason for this gap is usually attributed to sexism. I don’t know how much of a problem this is today but it definitely was a problem in the past. See a job posting from one of my father’s job searches back in the 1964. However, I think there is another reason why women doing the same job as men get paid less, on average.
I could have been paid much more in my career if I had devoted more energy to it. If I had worked more and spent less time with my wife and sons, my income would have been higher. I consistently made choices favouring a balanced life rather than devoting myself completely to my work. More than once I turned down a promotion that I knew would require more work and travel. I don’t regret these choices, but they did cost me money.
Just to simplify the discussion, let’s divide the world into two categories of people: (1) those who are driven and consistently sacrifice their personal lives for work, and (2) those who are balanced and consistently seek a rich personal life at the expense of workplace success.
I think most people belong to the balanced category, including me. There is little doubt that driven people make more money than balanced people, on average, even when they are in the same careers. In my limited experience, most driven people are men. I have met women who are driven, but they are significantly outnumbered by driven men.
It stands to reason that men will make more money than women, on average, because of the driven men messing up the averages. Quite frankly, I think women are smarter for more often choosing a balanced life over a life devoted solely to work, but the downside of this choice is a lower income.
I have nothing against driven people. They pay a lot of taxes and create jobs for the rest of us. But I’m happy to count myself among those who make less than they could make but have a rich personal life.
Wednesday, March 9, 2011
How We Help Advertisers Trick Us
I used to think that consumers were hapless victims of advertising techniques designed to trick us into thinking that items are cheaper than they really are. However, I now realize that to some extent we contribute to the deception.
To choose a simple example, suppose that the advertised price of some item is $17.99. We often say that the item costs 17 bucks. However, assuming that 13% HST applies, the real price is $20.33. I used to think that people were just bad at math and were being fooled. However, when we want an item, it’s easier to justify its purchase (to ourselves or a spouse) if we focus on the lower figure.
This effect is even more pronounced with the cost of airline flights. A flight might be advertised at $99, but this is a one-way fare and doesn’t include airport charges, fuel surcharges, baggage surcharges, and a host of other fees. The final price of a return flight could easily be $400 to $500 (or $800 to $1000 for two people). But it is much easier to justify taking the trip if we focus on the $99 figure.
I see this with cars as well. An ad may trumpet $19,999, but the final price with a reasonable set of options and after all the fees and taxes could be $28,000. Few people will admit the real final price they pay for a car. They often quote the price from an ad as though that is the final price they paid. I used to think that people were deliberately misleading others on the price they paid. However, if they misled themselves to justify buying the car, then it is possible that they really think in terms of the lower figure.
A modest amount of self-delusion may be a necessary component of a happy life, but it can be damaging financially.
To choose a simple example, suppose that the advertised price of some item is $17.99. We often say that the item costs 17 bucks. However, assuming that 13% HST applies, the real price is $20.33. I used to think that people were just bad at math and were being fooled. However, when we want an item, it’s easier to justify its purchase (to ourselves or a spouse) if we focus on the lower figure.
This effect is even more pronounced with the cost of airline flights. A flight might be advertised at $99, but this is a one-way fare and doesn’t include airport charges, fuel surcharges, baggage surcharges, and a host of other fees. The final price of a return flight could easily be $400 to $500 (or $800 to $1000 for two people). But it is much easier to justify taking the trip if we focus on the $99 figure.
I see this with cars as well. An ad may trumpet $19,999, but the final price with a reasonable set of options and after all the fees and taxes could be $28,000. Few people will admit the real final price they pay for a car. They often quote the price from an ad as though that is the final price they paid. I used to think that people were deliberately misleading others on the price they paid. However, if they misled themselves to justify buying the car, then it is possible that they really think in terms of the lower figure.
A modest amount of self-delusion may be a necessary component of a happy life, but it can be damaging financially.
Tuesday, March 8, 2011
Extra Charges Opening a PC Financial Secured Line of Credit
A friend I’ll call Tim had an interesting experience trying to open a secured line of credit with PC Financial. He was told that the processing fee for home appraisal and basic legal fees would be $150. However, he was later contacted by another organization looking for another $83.
It turns out that PC Financial hires other organizations to handle some aspects of checking people’s credit worthiness. In this case, there happens to be a “Writ of Execution” against another person with the same name as Tim (including first name, last name, and middle initial). This other organization wants the extra $83 to cover their cost of having Tim sign an affidavit stating that he isn’t the same person as the deadbeat in addition to the cost of having the document properly witnessed.
Tim was a little suspicious and contacted PC Financial about this extra charge. PC Financial confirmed that the charge is legitimate. (I suppose that “legitimate” is in the eye of the beholder here. At least PC Financial thinks the charge is legitimate.)
At this point the offer from PC Financial seems to be a prime+1% secured line of credit for a one-time fee of $233. I’m not sure if that includes taxes or not. This brings up some questions for knowledgeable readers:
1. Is prime+1% and a $233 opening fee reasonable for a secured line of credit for someone with a pristine credit record like Tim? Is Tim likely to get a better deal elsewhere?
2. Is it now common practice for bank customers to be surprised by organizations they’ve never heard of asking for money to open accounts?
It turns out that PC Financial hires other organizations to handle some aspects of checking people’s credit worthiness. In this case, there happens to be a “Writ of Execution” against another person with the same name as Tim (including first name, last name, and middle initial). This other organization wants the extra $83 to cover their cost of having Tim sign an affidavit stating that he isn’t the same person as the deadbeat in addition to the cost of having the document properly witnessed.
Tim was a little suspicious and contacted PC Financial about this extra charge. PC Financial confirmed that the charge is legitimate. (I suppose that “legitimate” is in the eye of the beholder here. At least PC Financial thinks the charge is legitimate.)
At this point the offer from PC Financial seems to be a prime+1% secured line of credit for a one-time fee of $233. I’m not sure if that includes taxes or not. This brings up some questions for knowledgeable readers:
1. Is prime+1% and a $233 opening fee reasonable for a secured line of credit for someone with a pristine credit record like Tim? Is Tim likely to get a better deal elsewhere?
2. Is it now common practice for bank customers to be surprised by organizations they’ve never heard of asking for money to open accounts?
Monday, March 7, 2011
Mortgages: Fixed or Variable Rate?
Much has been written about the merits of fixed- and variable-rate mortgages. These discussions usually boil down to the likelihood of saving money with a variable-rate mortgage. However, a more important consideration is whether prospective homeowners can handle higher interest rates at the end of the mortgage term.
A quick check of current mortgage rates shows that borrowers with a good credit rating can get a variable-rate mortgage at 2.3% and a 5-year fixed mortgage at 3.8%. On a $250,000 mortgage with a 25-year amortization period, this difference in rates makes a significant difference in monthly payments:
Variable (2.3%): $1095
5-year fixed (3.8%): $1288
That’s an extra $193 per month for the security of a 5-year fixed rate. But how much security do you really get from a 5-year fixed mortgage? Suppose that interest rates rise by 1% per year for each of the next 5 years. This is the scenario that we are trying to protect ourselves from when choosing a fixed mortgage. Here are the variable rate monthly payments:
Start of Year 1 (2.3%): $1095
Start of Year 2 (3.3%): $1217
Start of Year 3 (4.3%): $1342
Start of Year 4 (5.3%): $1467
Start of Year 5 (6.3%): $1593
Start of Year 6 (7.3%): $1719
Does that payment to start the sixth year look scary? The fixed 5-year term payment of $1288 certainly looks good in this scenario. However, what happens when you renew after 5 years? The new 5-year term rate will be 8.8% and the monthly payment will be $1902. This looks pretty scary as well.
Choosing a 5-year term only puts off the day of reckoning if interest rates rise. Before buying a house, you should consider whether you could afford the potentially much higher payments in 5 years. If you could afford $1902 per month in 5 years then the choice today between variable ($1095) and 5-year fixed ($1288) looks like less of a big deal.
If a 5% jump in interest rates over the next 5 years would crush you financially, then you should seriously consider renting, buying a cheaper house, or seeking a term even longer than 5 years. The choice of fixed- or variable-rate mortgages is less important than deciding whether you can afford the higher payments when your term is up.
Please note that I’m not predicting that interest rates will rise by 5% in the next 5 years. I have no idea what interest rates are likely to do beyond what the yield curve says. As a prospective homeowner, you need to accept that there are many possibilities for the future of interest rates. You need to protect yourself against reasonably probable bad outcomes.
A quick check of current mortgage rates shows that borrowers with a good credit rating can get a variable-rate mortgage at 2.3% and a 5-year fixed mortgage at 3.8%. On a $250,000 mortgage with a 25-year amortization period, this difference in rates makes a significant difference in monthly payments:
Variable (2.3%): $1095
5-year fixed (3.8%): $1288
That’s an extra $193 per month for the security of a 5-year fixed rate. But how much security do you really get from a 5-year fixed mortgage? Suppose that interest rates rise by 1% per year for each of the next 5 years. This is the scenario that we are trying to protect ourselves from when choosing a fixed mortgage. Here are the variable rate monthly payments:
Start of Year 1 (2.3%): $1095
Start of Year 2 (3.3%): $1217
Start of Year 3 (4.3%): $1342
Start of Year 4 (5.3%): $1467
Start of Year 5 (6.3%): $1593
Start of Year 6 (7.3%): $1719
Does that payment to start the sixth year look scary? The fixed 5-year term payment of $1288 certainly looks good in this scenario. However, what happens when you renew after 5 years? The new 5-year term rate will be 8.8% and the monthly payment will be $1902. This looks pretty scary as well.
Choosing a 5-year term only puts off the day of reckoning if interest rates rise. Before buying a house, you should consider whether you could afford the potentially much higher payments in 5 years. If you could afford $1902 per month in 5 years then the choice today between variable ($1095) and 5-year fixed ($1288) looks like less of a big deal.
If a 5% jump in interest rates over the next 5 years would crush you financially, then you should seriously consider renting, buying a cheaper house, or seeking a term even longer than 5 years. The choice of fixed- or variable-rate mortgages is less important than deciding whether you can afford the higher payments when your term is up.
Please note that I’m not predicting that interest rates will rise by 5% in the next 5 years. I have no idea what interest rates are likely to do beyond what the yield curve says. As a prospective homeowner, you need to accept that there are many possibilities for the future of interest rates. You need to protect yourself against reasonably probable bad outcomes.
Friday, March 4, 2011
Short Takes: Forced to Pay a Friend’s Tax Debt, Stock Market Valuation, and more
Canadian Tax Resource describes a case where a court ordered someone to pay a friend’s tax bill. This is a cautionary tale about the dangers of helping someone evade taxes.
A Loonie Saved makes the case that the stock market is overvalued based on stock market returns over the last century or so.
Preet Banerjee explains that there are many ways that an index fund manager can fail to track the index well, but that we can detect these problems by simply checking the fund’s tracking error.
Money Smarts explains the different ways that you can unlock a locked-in retirement account.
Big Cajun Man got double-billed twice – one case was his fault and the other not.
Million Dollar Journey explains the many fees that mutual funds charge investors.
A Loonie Saved makes the case that the stock market is overvalued based on stock market returns over the last century or so.
Preet Banerjee explains that there are many ways that an index fund manager can fail to track the index well, but that we can detect these problems by simply checking the fund’s tracking error.
Money Smarts explains the different ways that you can unlock a locked-in retirement account.
Big Cajun Man got double-billed twice – one case was his fault and the other not.
Million Dollar Journey explains the many fees that mutual funds charge investors.
Thursday, March 3, 2011
Benefits of Filing a Tax Return for Low-Income People
Young people who have minimal income and don’t owe any income taxes often don’t bother to file a tax return. However, this can be a mistake. There are some benefits of filing a return.
To begin with, filing a return for a simple tax situation can be extremely easy. In a recent case where I helped out, I was able to just use my own copy of tax software and the return took just a few minutes to file.
Some advantages of filing when you’ve got low income and are going to school are
1. You can accumulate some RRSP room for the future.
2. You can file T2202A information related to school costs that will give a tax reduction in a future year.
3. If you happened to have any income tax, excess CPP deductions, or excess EI deductions taken from pay cheques from a part-time job, you may get this money back.
4. The simple tax return you file is a gentle introduction to more complex tax situations in the future.
This article isn’t likely to be read by many young people in the situation I describe, but parents should consider helping their children file a return.
To begin with, filing a return for a simple tax situation can be extremely easy. In a recent case where I helped out, I was able to just use my own copy of tax software and the return took just a few minutes to file.
Some advantages of filing when you’ve got low income and are going to school are
1. You can accumulate some RRSP room for the future.
2. You can file T2202A information related to school costs that will give a tax reduction in a future year.
3. If you happened to have any income tax, excess CPP deductions, or excess EI deductions taken from pay cheques from a part-time job, you may get this money back.
4. The simple tax return you file is a gentle introduction to more complex tax situations in the future.
This article isn’t likely to be read by many young people in the situation I describe, but parents should consider helping their children file a return.
Wednesday, March 2, 2011
Side Effects of Income Tax Reassessments
A change in the way that stock options are taxed has meant that I will get money back on my 2009 income taxes. Even though the change was announced in the March federal budget, it didn’t become law until December and continued delays have forced me to continue overpaying my taxes throughout 2010 and now into 2011.
When it became obvious that this change would reduce my income tax payable in 2009, CRA didn’t demand that I take out a mortgage to pay the tax bill. Instead they estimated how much I would have to pay based on the new rules and let me pay this amount. This estimate was higher than the real figure will ultimately be, but was manageable. This is the happy part of the story.
So, the CRA automated system thinks I owe a huge sum, but there is a hold on collecting the money. A side effect of this “debt” is that I couldn’t file a T1213 form in 2010 to get permission for my employer to take off less tax on each pay. Total withholding taxes turned out to be more than double the amount that I actually owe on my 2010 taxes. But I can’t get this money back until 2009 is settled.
Back in December of 2010 I filled out an RC310 form to trigger the required reassessment of 2009. This form is only one page long, but CRA still hasn’t managed to process it. This means that I can’t file a T1213 for 2011 yet and I continue to pay a few hundred dollars too much on each pay.
I’m not starving or anything, but continuing to advance loans to CRA is becoming tiresome. I know of one other person whose RC310 form was processed in less than 5 weeks, but mine is up to 10 weeks and counting. I’m just lucky I guess.
The only moral I can think of for this story is that keeping your financial life simple has value.
When it became obvious that this change would reduce my income tax payable in 2009, CRA didn’t demand that I take out a mortgage to pay the tax bill. Instead they estimated how much I would have to pay based on the new rules and let me pay this amount. This estimate was higher than the real figure will ultimately be, but was manageable. This is the happy part of the story.
So, the CRA automated system thinks I owe a huge sum, but there is a hold on collecting the money. A side effect of this “debt” is that I couldn’t file a T1213 form in 2010 to get permission for my employer to take off less tax on each pay. Total withholding taxes turned out to be more than double the amount that I actually owe on my 2010 taxes. But I can’t get this money back until 2009 is settled.
Back in December of 2010 I filled out an RC310 form to trigger the required reassessment of 2009. This form is only one page long, but CRA still hasn’t managed to process it. This means that I can’t file a T1213 for 2011 yet and I continue to pay a few hundred dollars too much on each pay.
I’m not starving or anything, but continuing to advance loans to CRA is becoming tiresome. I know of one other person whose RC310 form was processed in less than 5 weeks, but mine is up to 10 weeks and counting. I’m just lucky I guess.
The only moral I can think of for this story is that keeping your financial life simple has value.
Tuesday, March 1, 2011
A Limitation of Carrying Forward Capital Losses
I used to think that there was nothing wrong with realizing capital losses in a year where you couldn’t use them because they can be carried forward indefinitely. However, I discovered a scenario where I wish I had held on to some loser stocks.
Suppose that in 2009 your spouse sold some stock and realized a $5000 taxable capital loss. Then in 2010 your spouse sold more stock and realized a $5000 taxable capital gain. Suppose further that your spouse’s other 2010 income is very low. You might think that you will get full value for the spousal deduction. However, this isn’t the case.
The spousal deduction is based on net income rather than taxable income. The carried forward capital loss does not affect net income. Rather it gets subtracted from net income to calculate taxable income. So, the $5000 of capital gain income reduces your spousal deduction.
If both blocks of stock had been sold in 2010, the capital gain and loss would offset each other and you’d have received the full spousal deduction. So, this is one scenario where it makes sense to hang on to a loser stock until you can actually make use of the capital loss.
Suppose that in 2009 your spouse sold some stock and realized a $5000 taxable capital loss. Then in 2010 your spouse sold more stock and realized a $5000 taxable capital gain. Suppose further that your spouse’s other 2010 income is very low. You might think that you will get full value for the spousal deduction. However, this isn’t the case.
The spousal deduction is based on net income rather than taxable income. The carried forward capital loss does not affect net income. Rather it gets subtracted from net income to calculate taxable income. So, the $5000 of capital gain income reduces your spousal deduction.
If both blocks of stock had been sold in 2010, the capital gain and loss would offset each other and you’d have received the full spousal deduction. So, this is one scenario where it makes sense to hang on to a loser stock until you can actually make use of the capital loss.
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