Tuesday, August 7, 2012

Financial Values

Mark at My Own Advisor asked whether you are living your financial values and proceeded to list his values. I decided to see how his values line up with the way I run my financial life. I’ve listed each of Mark’s values below along with my thoughts.

Continually reduce our mortgage debt by using prepayment privileges every month.

I no longer have a mortgage, but when I got my first mortgage my wife and I doubled every payment for nearly 3 years and made a 10% lump-sum payment each year. This might have been overkill, but we hate debt.

Use our line of credit only when necessary for major home renovations or emergencies.

I would say “non-optional major home renovations” like a new roof makes sense, but far too many people use lines of credit for optional things like new kitchens and bathrooms. This is usually a mistake. Save up for a new kitchen or do without. My wife and I have a line of credit, but use it rarely. Lately, we’ve used it because we didn’t want to sell some non-registered investments. However, we tend to pay it off in just a few months.

Save and invest at least 10% of our net income every year.

On average, we’ve saved much more than 10% of our incomes each year. Saving 10% will get you into better financial position than most Canadians, but you need to save more than this to have the freedom to change to a less lucrative career or take time off from work.

Hold a percentage of bonds that closely matches our age.

I’ve never followed this one. I’ve held bonds to cover planned expenditures that are within 3 years, such as tuition for my sons, but I’ve never bought bonds with savings that I designate as long-term. As I see it, the main virtue of bonds is to help investors stick with a long-term investing plan rather than sell everything when market gyrations turn their stomachs.

Have an emergency fund.

I think this is a good idea, although I’ve never had an explicit emergency fund. When I was young I had substantial cash in a savings account, and in recent years, I’ve kept modest cash balances in various trading accounts.

Always be on the lookout for ways to cut back on everyday expenses.

My wife does most of the everyday buying, so changing my day-to-day spending wouldn’t make much difference. And her home position is to be so thrifty that I shudder to think what our lives would be like if she spent even less.

Avoid carrying any credit card debt in any month.

I couldn’t agree more. Over the years, I’ve forgotten to pay my bill on time a couple of times, but apart from these mistakes, I don’t pay any credit card interest. Carrying a credit card balance is financially devastating.

Optimize our RRSPs.

Mark says “1) We make RRSP contributions automatic, sending over a bit of money every month. 2) We optimize our RRSPs in that we only contribute enough to offset paying any additional income taxes come tax time.” Maxing out our RRSP contributions has worked best for my wife and me. I can certainly understand if some people prefer to save in TFSAs and don’t have enough total savings to max out their RRSPs as well.

Keep the majority of our RRSPs indexed.

I used to actively choose stocks, but now my retirement savings are fully indexed.

Keep some U.S. dividend paying stocks in our RRSPs.

I keep all of my U.S. stock ETFs in RRSPs to save the U.S. 15% withholding tax.

Maximize our TFSAs.

So far I’ve kept my excess savings above my RRSP room in non-registered accounts. But now that the total TFSA room is becoming more substantial, I plan to max out our TFSAs at some point.

Keep some Canadian dividend-paying stocks in our TFSAs.

When I fill up our TFSAs, the plan is to use them for Canadian stock ETFs to avoid the 15% withholding tax on U.S. ETFs held in TFSAs.

Don’t invest in anything we can’t explain to a 10-year-old.

I don’t invest in things if I don’t feel like I understand them. I think this lines up fairly well with what Mark means here.

Always keep taxes and inflation top of mind when making any investment decision.

I’ve seen cases where people focus too much on taxes when making an investing decision, but far more money is lost by people who fail to take into account taxes and inflation. I definitely agree with Mark on this one.

Reinvest all dividends and distributions whenever possible.

I do this but I don’t have it set up automatically. I just let cash dividends build up in an account until there is somewhere between $3000 and $5000, and then I buy more of whichever ETF is below its allocation in my target asset allocation percentages.

Avoid investing in any “hot stocks”.

Check. I’ve done this in the past, but no more.

Never own a mutual fund again.

Check. Although I see no problem with owning mutual funds if the costs are sufficiently low.

Only own companies that pay dividends.

I don’t agree with this one. In registered investments, it makes no difference whether gains are dividends or capital gains. In non-registered accounts, I’d rather have capital gains so that I can defer taxes until I sell.

Minimize money management fees.

Check. This is a very important one.

Buy more bonds when equities are priced high.

As I explained earlier, I don’t own bonds for the long term, but I do rebalance my portfolio when its percentages are too far off target. So, I tend to sell things that are priced high and buy things that are priced low.

Buy more equities when bonds are priced high.

See above.

Put emphasis on building retirement income rather than portfolio value.

I’m not sure I see the difference. The larger the portfolio, the more income that it can generate.

Remember the stock market is unpredictable in the short-term and predictable in the long-term.

To say that the stock market is predictable in the long term may be overstating things, but it is true that stock market fluctuations tend to balance out somewhat over time.

It’s OK to splurge once in a while.

I agree, cautiously. The cost of the splurge matters. Spending an extra $100 to have some fun with your family is a great idea. Impulsively flying off to Hawaii for a $10,000 vacation when you’ve got credit card balances to pay is irresponsible.

Overall I’d say that Mark and I agree much more than we disagree.


  1. I think we are aligned.

    On the topic of mortgages, doubling your mortgage payment for 3 years is impressive. I figure at our current rate the mortgage will be killed in another 9 years.

    Sounds like your wife is rather thrifty, between the two of you, no wonder you have your financial act together.

    I can see the advantages of "buying in bulk", saving up to $3K or $5K for ETF purchases. I do this sometimes in my RRSP; especially now, I find VTI too pricy.

    Glad I could post something that could be leveraged for your site, again :)

    All the best Michael,

  2. @Mark: You post good stuff and it gets my interest. Keep it up!

  3. That's a reasonable list. I didn't read Mark's initial post, but I sometimes see people advocate dividend stocks because you can't fake a dividend. Sometimes financial statements can be misleading, or downright fraudulent, but cash is real. I guess a dividend stock could be a Ponzi scheme, so that somewhat negates this argument.

    I'm two days from being mortgage free. Very much looking forward to it!

  4. @Gene: Congratulations on the mortgage. When I paid off my mortgage I had some peope over to "burn the mortgage," which amounted to setting a few mortgage-related papers on fire in my fireplace. It definitely felt good.