Mutual Fund Salesman Fights Back

This is a funny one I got from Ken Kivenko who is a tireless advocate for the small investor up against the giant mutual fund industry. You can read his monthly newsletters at Canadian Fund Watch. Ken says he received the following message signed as the branch manager of a member firm of the Mutual Fund Dealers Association:

“Mr. Kivenko, please stop sending your Newsletter to my clients Mr. ----- and Ms. -----. Since they have been receiving your rag they constantly pester us about fund fees, returns and how our Seniors Specialists are paid. The more they read the more anxious they become. They are elderly and your stories are scaring them. It is now virtually impossible to even approach them about our new line of proprietary funds because of your rantings. The next thing I know they'll be asking about alternative investment choices. Our sales team is worried this will spread. STOP sending this material NOW! Have a good day.”

This is too funny for words, which makes me think that it didn’t really come from the branch manager of an MFDA firm, but who knows? Keep up the great work, Ken.

HST Complications

A reader I’ll call Jeremy has a question about how to handle the HST for his practice that he operates with a partner I’ll call Sandy. Here is the situation:

Sandy runs a business offering an HST exempt service out of an office she rents. The service Jeremy offers is not HST-exempt. Because Jeremy offers a different but complementary service to the public, Sandy suggested that Jeremy offer his service out of Sandy’s office space. To keep the arrangement simple, Sandy suggests that Jeremy pay her 40% of his revenues, and Sandy will provide the office space, supplies, computers, etc. without any further charges. The idea is that Jeremy will just keep 60% of his revenues.

The complication comes with how to handle the HST. Jeremy must charge his clients the HST, but how should it be split between Jeremy and Sandy?

Possibility #1

Sandy only gets 40% of Jeremy’s base rate and gives all of the collected HST money to Jeremy. Jeremy then remits the HST money to the government based on his full revenues (not just the 60% that he actually receives).

Possibility #2

Sandy gets 40% of everything including HST money. Sandy remits her share of the HST money to the government, and Jeremy remits his share. In effect, they are treating it as though Sandy is performing 40% of Jeremy’s service, and Jeremy is performing 60% of it. This feels wrong because it is really Jeremy who is performing the service; Sandy isn’t even qualified to offer Jeremy’s service.

Possibility #3

Sandy gets 40% of everything including HST money because she is effectively charging Jeremy HST on the goods and services she provides to Jeremy. Sandy will remit her share of the HST (less any HST input credits). Jeremy will remit the entire HST amount less the HST input credit from Sandy. This seems wrong because Sandy has charged HST on Jeremy’s rent and possibly other things that HST does not apply to. It also forces Jeremy to use the complex HST accounting instead of the quick method.

I could go on listing different ways to handle the HST in this scenario, but it’s time for others to chime in. What is the correct way to do the HST accounting in this case? Are there any experts out there? Maybe The Blunt Bean Counter?

Update:  In a later blog post I explained how to handle the HST for this situation.

Short Takes: Post-Christmas Sales and more

I made a change to this blog that should go unnoticed by most readers. I now have my own domain (http://www.michaeljamesonmoney.com/) instead of the blogspot address. Although I’ve set it up to automatically refer from the blogspot address to the new address, I’d be pleased if those who point to my blog from their own web sites could update the addresses. Readers of my feed should see no substantial changes. Thanks to Frugal Trader at Million Dollar Journey for the advice on how to make this change smoothly.

Now, on to this week’s short takes. It’s been a quiet week, but I found a couple of interesting articles.

Big Cajun Man has a list of things to stay away from in the post-Christmas sales.

My Own Advisor reviews the ebook The Dividend Toolkit.

Decamillionaires

The word “millionaire” is mainly used loosely to mean a person with so much money that he or she can spend far more than the average person with no fear of ever going broke. Increasingly, this loose definition does not match up with the more precise definition of a person with a net worth of at least $1 million.

Consider the hypothetical couple, Sam and Christie, both 56 years old. They met working for the same employer and have 3 children, two of whom are still attending university. Their employer is having tough times and they both got forced into early retirement. Unfortunately for them, their skills are mostly useless now that the entire industry they worked in has collapsed. Fortunately, though, they are collecting a defined-benefit pension of $5500 per month.

Using a rule of thumb that an indexed pension is worth about 15 years’ worth of payments, their pensions have an actuarial value of $990,000. Sam and Christie live in a house worth $450,000, but their mortgage is $300,000, they owe $80,000 on a line of credit, $40,000 in car loans, and $20,000 on their credit cards. This gives a net worth of exactly $1 million. Sam and Christie are millionaires.

Let’s look at Sam and Christie’s cash flow. Their monthly debt payments add up to $4700 per month. This leaves $800 per month to pay income taxes, help with their children’s tuition, heat their home, and buy food. Sam and Christie are in serious financial trouble, but they are still millionaires. Obviously, this is an extreme case. But it illustrates how being a millionaire by the precise definition can be very different from the looser definition.

Some readers might object saying that we shouldn’t count pensions. To these people I offer to buy their pensions for one-tenth of their actuarial value (if this is legal). If pensions don’t count as an asset, then these people should be happy to turn their worthless pensions into cold hard cash.

I think inflation has reached the point where we should be saying “decamillionaire” (a net worth of $10 million or more) to mean a person with enough money to be able to spend without worry. Even if $1 million is tied up in a house and $2 million in a pension, and we draw only a 2% income on the remaining $7 million, this is still $140,000 per year.

Of course, it is possible to burn through just about any amount of money as many professional athletes have demonstrated. But, I think the decamillionaire level gives about the right balance between the loose and precise definitions. Now we just have to figure out how to get the $10 million.

OK Google, You Can Keep My Ten Bucks

With apologies to the blog Give me Back My Five Bucks, I say to Google, give me back you can keep my ten bucks! That’s how much they charged me for a service that I can’t get finally got to work.

This all began with the many complaints I get from people who say that their employers block all blogspot links, so they can’t see my blog. I’ve been trying for a while to figure out how to fix this, but the only advice I ever get is that I should move to WordPress. However, I get frustrated enough fixing problems that come up with Blogger. My family would disown me if they had to endure my ranting about having to fix WordPress problems. Besides, I don’t want more features; I just want some simple blogging features to work without constant attention from me.

I poked around in Blogger settings and noticed a publishing option to “Add a custom domain”. This seemed too good to be true. Clicking on it led me to an offer to sell me my own domain for only $10 per year. So I pulled out my credit card and plunged in. Google quickly sent me a link to set up an admin account. What do I need that for? I just want all my blog pages to have a custom address instead of a blogspot address. This was my first clue that this process wouldn’t be as turnkey as I had hoped.

The link in Google’s email brought me to a page to set up an account, but all attempts to create the account ended in a server error. A few online searches gave me a suggested workaround involving requesting a password restore. This seemed to work and I now have an admin account.

Unfortunately, logging in to the admin account brought me to a set of controls that allowed me to do just about anything except connect this new domain to my blog. So, I headed back to my Blogger settings.

After going to advanced settings, I was offered a chance to type in my new domain where my blog would be redirected. This led to the error message “Another blog or Google Site is already using this address.” Handy.

Another message said “Your domain must be properly registered first” and offered a link to some “setting instructions”. These instructions began with getting into DNS settings to add some “A-records” and a “CNAME”, whatever they are. I finally located a reference to DNS settings in my admin account which then directed me to log in to some GoDaddy account, but once in there I found no reference to A-record or CNAME.

Time for another approach. The Google email ended with “At any time, if you get stuck or if you want to tell us about your experience with this service, you can find more information and get in touch through our help center (https://www.google.com/support/a).” Unfortunately, “get in touch” didn’t mean that I could direct a plea for help to an actual human. I poked around in the support area for a while but didn’t find anything useful.

It should be fairly obvious at this point that if I tried WordPress, the first time anything went wrong there is little chance I’d have the patience to fix it. I’m good with math, algorithms, and money, but not this stuff.

Update: I solved the problem.  It turns out that although I didn't need to type the "www" part when I purchased the domain, I did have to type it in the advanced settings.  Without the "www", the CNAME strings were all wrong.  I'm not proud to admit that it took me about 8 hours of work across 3 days to finally fix this.

So Google, give me back you can keep my ten bucks.

Short Takes: Interest Rate Forecasts and more

Canadian Mortgage Trends explains how wrong Amanda Lang is about the ability to forecast interest rates and how quickly they can rise or fall.

Preet Banerjee interviews Financial Advisor John DeGoey who has some very blunt words to describe the state of the financial advice industry.

Canadian Couch Potato explains how the cost of currency conversion has nothing to do with current fair exchange rates.

Million Dollar Journey gives a snapshot of where he is with his RESP, which is based on TD e-Series mutual funds. He also lays out his complete RESP strategy for shifting from stocks to safe investments as his children approach the end of high school.

Big Cajun Man says that store-fronts for the telecom companies like Bell and Rogers are no-ops in the sense that they offer little of value over visiting the company’s web site. Increasingly, low-level employees of businesses have almost no discretion to make any decisions themselves. Business strategies are created at the corporate level, coded into software for the company web site, and broken down into inflexible rules for low-level company employees.

Freakonomics discusses a better way to measure inflation than governments currently use.

Lotteries over the Long Run

People who play the lottery generally know that their odds of winning are very low. However, some ticket buyers I’ve spoken to believe (or hope!) that they’re bound to win if they keep playing long enough. I decided to do some simulations of the Lotto Max lottery to examine this belief.

I ran a million simulations of playing 2 tickets per week for 25 years. At $5 per ticket, that’s a total cost of $13,000 for each of a million lottery players. I included all the gory details about how the prize pools are determined, winning a free ticket when matching 3 numbers, and everything else.

A simplifying assumption I made was to treat all chosen number combinations as random instead of having some of them chosen by people. I also had to make assumptions about ticket sales: I chose sales of $25 million per draw when the previous jackpot was won and sales of $15 million more than the previous jackpot when it wasn’t won. This crudely models the hysteria that comes with big jackpots.

The results were dismal. The median total winnings were $1840. This means that for the $13,000 invested, half of the million lottery players had total winnings of less than $1840 and half more.

How many of the lottery players at least made back their $13,000? Only one player out of 529. So 528 out of 529 lottery players would lose money over the 25 years.

How many lottery players hit it big with enough money to retire permanently ($5 million or more)? Only one player out of 10,000. In a town of 10,000 lottery players buying tickets for 25 years, 9999 of them would never realize their lottery-based retirement dreams.

How long would you have to keep playing 2 tickets per week before the odds of winning the big jackpot reach 50/50? The answer is about 1900 centuries!

I don’t expect to make a dent in lottery sales with rational arguments, but if even one person stops buying lottery tickets after reading this, I’d be happy.

McAfee’s Persistent Trickery

I recently received what appeared to be a reminder from McAfee to renew my subscription to their antivirus software. On the surface this seems like a useful reminder service for an existing customer who wants to maintain continuous security coverage for my PC, but all is not what it seems.

A curious omission from the McAfee email was any mention of when my subscription expires. After some digging for an old password, I was able to log in to my McAfee account to discover that my subscription will last another 20 months! Why would I want to extend my subscription for another year or two now? There’s half a chance that my PC won’t even be working by then.

Another annoyance is that McAfee renewed an old subscription on a PC that I had scrapped. I thought I had been careful to check the “never automatically renew” box, but either I missed it or this box got reset somehow. Fortunately, renewal attempts by McAfee don’t work if I have an updated credit card with a new expiry date and 3-digit code, but this time they managed to renew me on a junked PC before my credit card had expired.

Getting my money back took some effort. After calling the 800-number and waiting for quite a while, the first person on the phone tried to put me off by saying they couldn’t refund my money. After I got a manager on the phone, he promised to return my money, but only after he found out that I have another McAfee subscription on my current PC. I’m not sure how cooperative he would have been if I was leaving McAfee altogether.

It bothers me that it takes such diligence to keep from overpaying. McAfee is entitled to run their business as they please, but this has left a bad taste in my mouth and makes me wonder about trying their competition.

Newspaper Paywalls

In an interesting blog post, The Blunt Bean Counter asks whether newspaper paywalls will save newspapers or if they are just a last ditch effort to save an industry that will ultimately fail. I think the answer is some of each.

Revenues for newspaper businesses will continue to decline as more people opt not to pay for a physical newspaper each day. It will take some time but people like me who like to flip through the dead-tree version of newspapers will eventually die off. Newspaper business people recognize this and hope they can replace subscription revenue from physical papers with subscription revenue from web site access.

For the most part, this won’t work; collectively, people will never pay as much for web site subscriptions as they pay for physical newspapers. The reason is simple: competition. It costs far less to run a newspaper as a web site than it does to deliver physical newspapers. Production and delivery costs are eliminated and there is far less need for administration and other jobs that traditionally existed with newspapers.

If a newspaper is able to operate with bloated administration, it will get undercut on price by a new competitor. No doubt people in the newspaper business feel that they have already cut to the bone, but the cutting will continue.

In the future we will need reporters, fact checkers, editors, and web site programmers, but we won’t need many of the overhead jobs that exist today. The music industry went through this fairly quickly and it will happen to newspapers slowly over the coming years.

Getting back to the original question of whether paywalls will save newspapers, it depends on what we mean by “save”. Paywalls will not allow the newspaper business to persist as it exists today. Overhead costs will be ruthlessly torn out of these businesses to the point where they will become radically different from today’s newspaper businesses. However, there is every reason to believe that paywalls will be used by some online news businesses in the future.

Short Takes: Financial Gurus, Taxing the Rich, and more

Daniel Solin, senior vice president of Index Funds Advisors, bluntly describes the need of fund managers and the financial media to anoint financial gurus as seers of future stock market prices.

Scott Adams comes at just about every subject from a unique angle. In discussing whether it makes sense to raise taxes on the rich, he had a great quote: “fairness is a concept invented so dumb people can participate in debates.”

The Blunt Bean Counter is giving away copies of Rob Carrick’s book How Not to Move Back in With Your Parents.

Big Cajun Man goes into rant mode when he can’t find some tax receipts and can’t seem to follow his own advice about staying organized. It always amazes me how people don’t spend 10 seconds to file away an important receipt to save an hour at tax time looking for it. Occasionally I’m guilty of this myself, but for the most part I’m pretty organized.

Where Does All My Money Go? explains how to deal with some common problems that arise in closing on the sale of a home.

Snowbird Tax Trap

So many Canadians like to spend their winters in the U.S. that we have a name for them: snowbirds. If you’re a snowbird or aspire to be one, beware of U.S. tax law. If you’re not careful, the IRS will treat you as a nonresident alien subject to U.S. income taxes. Fortunately, there are ways to avoid this fate.

Be careful of taking people’s word on these tax rules. I’ve heard so many contradictory explanations of the rules that I decided to dig through the IRS website to find the truth. The main things you need to understand are the Substantial Presence Test and the exception to this test called the Conditions for a Closer Connection to a Foreign Country. It’s also important to know that if you wish to assert a closer connection to Canada, you have to file Form 8840. On page 3 of this form it says “If you do not timely file Form 8840, you will not be eligible to claim the closer connection exception and may be treated as a U.S. resident.”

I’ll summarize the highlights of the relevant rules, but there are exceptions. For example, the rules are different if you have a green card or have applied for one. You should read and understand the information at the 3 links above.

The rules mainly hinge on how many days you spend in the U.S. each year. Some days don’t count, such as “Days you are unable to leave the United States because of a medical condition that develops while you are in the United States.” See the Substantial Presence Test for a full list of the days that don’t count.

Substantial Presence Test Highlights

To figure out whether you meet this test, you need to know how many days you spent in the U.S. this year and each of the previous 2 years.

If in the current year you spent less than 31 days in the U.S., then congratulations, you don’t meet the test. Otherwise, you have to do the following calculation:

(days this year) + (1/3 of days last year) + (1/6 of days the year before last)

If this adds up to 183 days or more, then unfortunately you meet this test. This is the part that few people seem to believe. They’re sceptical that the rules actually involve a calculation like this.

If you stay longer than 121 days (about 4 months) in the U.S. year after year, then you’re going to meet this substantial presence test.

Conditions for a Closer Connection to a Foreign Country

All is not lost if you meet the substantial presence test. You may qualify for an exception based on having a closer connection to a foreign country and still avoid having to pay U.S. income taxes. The main criteria for getting this exception are that you stayed less than 183 days in the U.S. and you really do have a closer connection to another country. However, you have to file Form 8840 or you may give up your eligibility for this exception.

Form 8840 asks many questions all aimed at determining to which country you have the strongest connection. It’s not obvious what answers the IRS considers acceptable for getting the exception.

Bottom Line

For most Canadians who spend roughly the same length of time in the U.S. each year, you can avoid paying U.S. income taxes by staying at most 121 days (about 4 months) each year, and you may be able to extend this to 182 days (about 6 months) if you file for an exception with Form 8840 each year and the IRS accepts your exception.

A Passive Investing Movie

I highly recommend having a look at a 54-minute movie called Passive Investing. The discussions are mostly non-technical and fairly easy to follow. They even cover the lifestyle advantages of switching to passive investing. For more details about this movie see Canadian Couch Potato’s description.

What prompted me to write a post about this movie is an issue that is more technical than the film itself. Canadian Couch Potato made the following remarks about the movie’s mention of the capital asset pricing model (CAPM):

“CAPM—which predicts the expected return of a security based on its beta—is still widely taught, but it doesn’t do a particularly good job of explaining returns in the real world. (The Fama-French three-factor model is a dramatic improvement.) So I’m surprised the film’s website describes CAPM as ‘the mathematical foundation of passive investing.’”

He is right that the three-factor model is better at modeling past investment returns than CAPM. However, what matters is the future and not the past. The important question is what features of past returns will persist into the future?

We can devise ever better models of past returns by adding in more factors, like momentum effects over certain durations and reversion to the mean effects over other durations. In the extreme, we can just take the entire database of past returns and call it a model. This extreme model exactly matches the past, but future returns for each stock will not exactly match past returns.

So we return to the question of what features of past returns will persist into the future. For CAPM to be useful, we need the risk premium to persist. Over the long run we hope that a diversified portfolio of volatile assets will continue to earn higher average returns than safer investments. In my opinion, it seems like a safe bet that people will continue to prefer safe investments and will be willing to pay a premium for them.

Fama and French modeled the fact that small-cap and value stocks have enjoyed higher returns than their riskiness would indicate using CAPM. Do you believe that small-cap and value premiums will persist into the future? Maybe there are good reasons why these premiums will persist based on human nature. But this seems less certain than the persistence of the risk premium. Certainly, if enough investors were to embrace the three-factor model, it would eventually erode the returns of small-cap and value stocks.

With my own portfolio, I’ve cast my bet on the risk premium and partly on small-cap and value premiums. So, in this sense I agree with Canadian Couch Potato. But I wouldn’t say an investor was wrong if he chose not to count on small-cap and value stocks to outperform in the future.

New Tools for Shafting Shareholders

When we buy shares in a company, one of the things we count on is that all shares are treated equally and get an equal slice of the company’s profits. The Financial Post reported on research into changing this equal treatment:

“A global research project launched Wednesday by Mercer, Stikeman Elliott LLP and the Generation Foundation will look at the concept of granting ‘loyalty’ dividends or warrants, or additional voting rights, that would ‘reward’ certain corporate shareholders for retaining their shares for a specified number of months or years.”

On the surface, this seems like a great idea. You get a bonus for holding your stock for a long time. However, all shareholder claims on company profits come from the same pie. If some shareholders get more, then others must get less.

But so what if some high-frequency trading jerks get a smaller slice of company profits? Who is to say that companies will only use their long-term shareholder bonus programs to shaft day traders? It could easily be abused in a number of ways.

Suppose that a family has controlled a large fraction of a business for over 50 years. If this company’s bonus program only gives bonuses for shares held 50+ years (allowing for inheritances), then they are simply awarding an ongoing yearly bonus to themselves and nobody else.

Suppose that a company grants itself the power to issue stock that is deemed to be long-term stock. Then company insiders who exercise stock options can receive shares that allow them to be treated like long-term shareholders even if they are really short-term shareholders.

It’s true that some companies have multiple classes of stock. For example, Berkshire Hathaway has A and B shares. However, the differences in share rights are fairly easy to understand. BRK B shares have 1/1500 of the economic interest of a BRK A, but only 1/10,000 of the voting rights. Investors can take this into account as they see fit in deciding on the price they’re willing to pay for shares. But a complicated web of different classes of shares based on how long they’ve been held could be made to be very difficult for investors to understand if company insiders choose to make it complex.

I’m cautiously supportive of creating incentives to encourage investor to think about the long term, but we have to be careful about giving company insiders new tools to help them divert more than their share of company profits into their own pockets.

Short Takes: Defined Benefit Pensions as Bonds, How Parents Direct Inheritances, and more

My Own Advisor explains how he considers his defined benefit pension to be like a large bond that allows him to take more equity risk with the rest of his portfolio. This makes a lot of sense, but something that many people don’t consider with defined benefit pensions is the risk that you won’t collect as much as you think. If you decide you can’t stand your job or get laid off, you may be left with only a very modest pension (or none at all if you take a commuted value when you leave). Even government jobs aren’t as safe as people used to think, particularly with all levels of government facing huge deficits. When balancing a portfolio, it makes sense to consider only the value already accumulated in the pension rather than the entire future value if you stay until retirement age.

Boomer and Echo tells a story of parents financially supporting spendthrift adult children at the expense of their responsible children. Perhaps living only for today pays off if you have wealthy parents willing to bail you out.

Canadian Dream Free at 45 makes the case that good financial habits are more important than far-away goals of huge retirement savings.

The Blunt Bean Counter takes a look at how Canadians use RRSPs and whether they raid them too soon. The answer seems to be that some leave RRSPs alone until retirement, some raid them too early, and some have well-laid out plans for using them prior to full retirement. This one generated quite a few comments.

Big Cajun Man has some fun creating some sayings in Mad Lib style. My favourite is “Hoarding is valuing the invaluable”.

Preet Banerjee wants your financial questions for The Bottom Line Panel on CBC’s The National.

Young and Thrifty explains how to reduce your payroll taxes using a T1213 form.

Retire Happy Blog says there is value in simplifying your personal finances and suggests ways to do this.

I Don’t Know My Way Home in the Dark

Having spent much of my working life around type A personalities who pour all their effort into their careers and have little in the way of personal lives, I’ve always respected those who sacrifice some career advancement to get life balance. This doesn’t include just high-powered business executives; I’ve seen it in a mechanic as well.

The way we pay for car repairs usually involves book hours instead of real hours. A book lists the number of hours each type of repair is supposed to take. Then you pay for this number of hours no matter how long the repair takes.

Mechanics vary greatly in how long they take to complete repairs. A former mechanic friend (I’ll call Dan) used to routinely take less than half the book hours to complete his work, but he says that he worked with some mechanics who would spend all day on a 2-hour job.

Dan was well-liked by his employer because he made maximum use of the space he took up in the garage (i.e., he made them lots of money). And he was well paid because he was compensated for 15-20 book hours per day, even though he was only there for 8 hours per day.

Dan’s employer routinely tried to get him to work more hours, but he always refused saying “I don’t know my way home in the dark.” This was a clever way of saying he preferred a rich life outside work over making more money.

All this came to an end when Dan’s employer tried to impose new rules that capped his pay at 125% of his actual hours worked. So now Dan is in a completely different line of work, but he still manages to get time for his family and a few rounds of golf each week. It can be difficult to turn down career advancement and higher pay, but it is worth it to me.

Do We Really Need Christmas Gift Exchanges Any More?

I get the feeling that enthusiasm for Christmas gift exchanges is mostly limited to children and shopaholics. I think this comes from the fact that most of us already have the small things we want.

There was a time when gift-selection was quite easy. When everyone one needed food and clothing it wasn’t too hard to pick a gift to make or buy. But now it’s hard to find the right gift for everyone on your list. Most people have the basic things they need and want. A gift sweater may never be worn again after the obligatory trying it on for the camera.

It’s normal for the enthusiasm for Christmas to fade with age, but the age where this begins seems to be getting younger. And it’s hard to blame teenagers of well-to-do parents for losing some interest in Christmas, unless their parents buy extravagant gifts like a new car. How excited do you really need to be about getting an eleventh gaming system?

It would be nice to see all the wasted money and energy that goes into wandering around big-box stores channeled into more useful pursuits such as volunteerism. Offering to help an elderly neighbour clear leaves or reading to children at a library are more useful than a few more plastic toys for a child who already has hundreds of them.

I’m not calling for a complete end to Christmas gift-giving. But I think it makes sense to shrink your Christmas list to mostly children and just a few adults. And maybe use some of your freed-up time to do some good in your community.

Emotions and Rational Thinking in Investing

There is an uneasy relationship between emotions and rational thinking in investing. I’m a believer in using careful rational thinking when making big life decisions like how to invest your life’s savings, but it isn’t possible to keep emotions out of the equation entirely because most of life’s core goals are fundamentally emotional.

To the extent that I have any philosophy in life it would be “sustainable happiness”. Without the sustainable part, drugs would be a good solution to produce a burst of happiness. But this is hardly sustainable. So, I try to eat well, get regular exercise, and treat others well in a bid to be happy for the long term. The pursuit of money is not an end in itself, but a means of achieving freedom, comfort, interesting experiences, and ultimately, happiness.

There are those who say that money doesn’t matter. They are partly right and partly wrong. Of course money matters, but what you give up for it matters too. I’ve consistently turned down career opportunities because they would have demanded so much time that my connection to family and friends would have suffered. In these cases, I would have said that the extra money doesn’t matter. I sometimes see people justify extravagant spending saying something like “money doesn’t matter” or “you only live once”. In these cases I think these people are usually reducing their future happiness.

So, despite the fact that success in life is best defined by emotions, I think it pays to keep emotions out of your decision-making when facing big financial decisions, such as buying cars and homes and investing your savings. You need to be aware of what makes you happy, and take this into account in making big decisions, but the decision-making itself should be rational.

Credit Card Cash-Flow Arbitrage

Years ago I noticed that my wife and I have different payment dates on our credit cards. Until recently, I never really thought about the implications of this difference, but it does present an opportunity to “optimize” cash flow.

The following calendars illustrate the differences in our credit card statements.

My next statement will cover purchases from roughly Nov. 16 to Dec. 15, and the payment will be due Jan. 5. I indicated a full week for the payment to illustrate that it is sensible to pay somewhat early to avoid interest charges.

Note that my wife’s credit card dates are shifted forward 19 days. This creates an opportunity that I hadn’t thought much about before, but I’m sure that many people use. For purchases between Dec. 16 and Jan. 3, my wife will have to pay before Jan. 24, but I won’t have to pay until before Feb. 5. Similarly, for purchases between Dec. 4 and Dec. 15, I’ll have to pay sooner.

To optimize cash flow, it’s always better to use one credit card or the other, depending on the date. For us, this is easy to handle because we don’t distinguish between my money and her money. Sometimes I pay her credit card bill and sometimes she pays mine. So, if we happen to be together when making a large purchase, we can optimize cash flow by checking the date and using the right credit card.

As I’ve argued before, the savings that come from paying bills later are modest. So, the main benefit of optimizing which credit card to use is cash flow. Sometimes the financial events going on in your life make it convenient to defer a payment by a couple of weeks.

I tend not to have cash flow issues much because I maintain a cash buffer and save a lot of my income, but I do play little mind games to create artificial scarcity to control my spending. If I’ve shifted cash into long-term savings, I could just take it out again to buy something I want, but usually I treat the money as inaccessible. In this case, credit card cash-flow arbitrage becomes a way to defer a payment until after a pay cheque or dividend payment. Mind games on top of mind games.