Friday, September 29, 2017

Short Takes: Pension Changes, the Middle Class, and more

Here are my posts for the past two weeks:

The Wealthy Renter

What We Need on Credit Card Statements

Straight Talk on Your Money

Here are some short takes and some weekend reading:

Frederick Vettese makes the case for changing federal civil servants’ pensions to a target-benefit plan to save taxpayers a lot of money. The government could save even more money by eliminating employees they don’t need.

Andrew Coyne does some clear thinking about taxes and the middle class. He shows that when there is a raging debate, it’s possible for both sides to be very wrong.

Squawkfox explains the steps necessary to open a Registered Disability Savings Plan (RDSP). It’s work, but the substantial free government money available makes it worth the effort.

Big Cajun Man was on his best behaviour for a podcast with Doug Hoyes. He even explained how he got his nickname (but left out the profanity).

Monday, September 25, 2017

Straight Talk on Your Money

There are many writers offering financial advice to the typical Canadian, but Doug Hoyes, author of the book Straight Talk on Your Money, is a licensed insolvency trustee. He’s seen enough to have good insights into the kinds of financial mistakes we make. Unlike many writers who offer black-and-white opinions, Hoyes sees the shades of gray.

The book promises to dispel 22 financial myths that are holding us back and that “Everything you know about money is wrong.” But the contents are actually more thoughtful and nuanced than advertised. Even the section titles are somewhat out of sync with the book’s contents. One section title declares “pay yourself first” to be a myth. The rest of the section then goes on to explain that paying yourself first is a good idea unless your finances are so dire that you can’t afford to start saving immediately.

The contrast between section titles and the contents gives the book somewhat of a newspaper feel where reporters write articles and the marketing department writes headlines. But don’t be put off by this contrast. Hoyes makes many great points getting to the core of why people have financial trouble.

The book begins with an explanation that rather than being rational, we rationalize. “Your gut makes a decision, for purely emotional reasons, and then you consciously find reasons to rationalize your decision.” Admitting this is true is a good starting point for making better decisions.

Unlike much “tough love” advice, Hoyes says that your financial troubles aren’t entirely your fault. Lost jobs, illness, divorce, and other bad luck plays a role. Aggressive and deceptive lenders deserve some blame, too. “But, blame doesn’t matter.” It’s better to work on solutions.

“Starting now, refer to your credit card only as a debt card.” Debt cards don’t deserve the positive connotations of the word “credit.” When it comes to credit scores (debt scores?), “focus on your goals, not your credit score.”

Hoyes recommends diversification in a different sense than the usual investing definition. Bank accounts sometimes get frozen for various reasons, so “have a second bank account, at a different bank ... where you don’t owe any money.”

“Collection agencies almost never sue anyone.” Under most circumstances “you should never pay a collection agency.” I learned quite a bit from the section on how collections agencies operate, and how you should deal with them.

The author doesn’t like the labels “good debt” and “bad debt.” “Instead of asking yourself, ‘Is this good debt or bad debt?’ ask, ‘What’s the risk that I won’t be able to repay this debt?’”

It’s not a good idea to think of your house as an investment. “By viewing your house as a consumer good, not as an investment, you can free yourself from the need to buy the most expensive house and instead focus on what’s truly important to you.” On the subject of whether a house provides stability, Hoyes says it does, but there are also ways that a house anchors you down and keeps you from following new opportunities.

In another example of the contrast between the book’s section titles and its contents, one section title is “Budgeting is a Waste of Time.” However, the proposed alternative to budgeting seems a lot like budgeting. There is an important difference, but it’s somewhat subtle. By “budgeting” the book means the process of tracking every single expenditure, analyzing them, and making necessary changes. The suggested alternative is to identify necessary spending along with big things that are important to you and to set aside money immediately from each pay cheque into bank accounts to cover these items. Whatever is left after these important things doesn’t need to be tracked. I guess the idea is that if you run out of money for the less important things that you don’t track, you can do without them for a while. Of course, this assumes that you’d actually do without instead of just running up your credit (I mean, debt) card.

On the subject of helping your kids with a house down payment, the author has a warning: “I can tell you many stories of parents who provided the money for a down payment, and as a result the kid bought a house much bigger than he or she could reasonably afford, which caused severe financial pressure for the kid, because the cost of a house is more than just the cost of the mortgage.”

Overall, I found this to be a thoughtful book with useful insights into why we get into financial trouble. It’s potentially directly useful to readers for their own finances and useful to those who try to help others with their finances.

Wednesday, September 20, 2017

What We Need on Credit Card Statements

The most prominent parts of my credit card statements are two numbers: my money-back rewards for the current month and the total rewards I’ve received since I got the card. This gave me an idea for “improving” credit card statements.

What if the most prominent part of a statement was the total interest you’ve paid since you got the card? For many of us, that would be zero or close to zero, but for too many it would be a nauseatingly big number, perhaps a 5-figure sum.

I’d be interested to see what effect this would have on people’s credit-card spending. It would likely be a slap in the face at first, and later there would be some numbness to it, but it might help some people control unnecessary spending.

Another possible effect would be for people to spend with a different card. If seeing the total interest we’ve paid over the years is painful, it makes sense that people would avoid this pain by using a different card.

Sadly, this will very likely remain just a thought experiment. I don’t think there are any credit-card issuers who’d be willing to reduce their profits this way unless the law forced them to do so.

Monday, September 18, 2017

The Wealthy Renter

It seems that everyone wants you to buy a house: your parents, real estate firms, mortgage brokers, and even the government. Alex Avery decided to make a case for renting in his book The Wealthy Renter: How to Choose Housing That Will Make You Rich. His reasonable and balanced analysis contrasts sharply with the usual cheerleading for owning a house.

We’ve all heard people say something like “renting is just throwing money away,” or “why pay your landlord’s mortgage when you can own your own house?” This advice is based on the mistake of comparing rent to a mortgage payment. Typically, renters pay for little other than their rent – maybe a few utilities. Homeowners pay property taxes, maintenance costs, utilities, insurance, and an opportunity cost on home equity. It’s the total of all these costs that we should be comparing to rents.

Avery goes through an example of an $850,000 home and concludes that the cost for an owner to occupy the home is between $4000 and $8000 a month. The high end of this range involves some double-counting and implausibly high maintenance costs,1 but a range of $4000 to $6000 per month is quite plausible. Most people would find this range shockingly high and simply wouldn’t believe it even after seeing the logic behind it. They’d be wrong.

Some might object that homeowners can look forward to gains on the value of their home. Avery gives a series of charts showing that while house prices are up quite a bit since 1991, “Canadian house prices haven’t delivered returns anywhere near those of the Canadian stock market.”

Renting and investing the difference would have made you richer than owning the average Canadian home. However, this analysis is based on low-cost methods of investing in the stock market. For investors who pay Canada’s sky-high mutual fund costs, the gap is smaller, but still favours stocks over houses. A homeowner might proudly say that his home has tripled in value, but he forgets inflation and all the money he spent on property taxes, maintenance, and other costs.

At a time when banks will lend 5 to 7 times your gross annual salary for a mortgage, the author says “if you want to build wealth, there are much better things to spend your money on than housing. Minimizing consumption of housing is crucial to building wealth.”

In addition to comparing owning to renting, Avery gives some detailed analysis of what drives housing prices. This begins with “Buildings never go up in value,” and “Only land can go up in value.” He also analyzes the 6 biggest housing markets in Canada. Toronto house prices are at 40 times annual rents, which is very high. At first I thought this was for comparable dwellings, but I’m guessing this isn’t the case.

What has really allowed homeowners to do well, Avery explains, is leverage. Investing in a house with borrowed money amplifies returns. Of course, stock investors can use leverage too. But leverage comes with risks, whether investing in stocks or a house.

“Home buying needs to be seen for what it really is: an investment in land plus consumption of the glamorous building that has been erected on that piece of land.” This makes it clear why owning a smaller house is better for your long-term finances.

“The thought of never being able to afford a house because house prices have risen so quickly you can never catch up is irrational. So is buying a house to get into the market.”

Avery includes an excellent chapter “How Housing Can Dictate Your Career in Surprising and Unexpected Ways.” This is something I’ve tried to explain to my sons. The exciting job you start with can end up being a trap if you build a lifestyle that needs your full income. Having a huge mortgage can leave you biting your tongue at work for fear of upsetting the boss and losing your job. This is something I’ve seen many times in coworkers.

One of the claimed benefits of owning a house is the forced savings. This is true to a point. If you rent and just spend all your income, you could end up worse off than a homeowner. To get the full benefit of renting, you need to save and invest some of the money you didn’t spend on home ownership. Avery explains several ways to automate your savings.

So, why is there so much cheerleading for owning a home and almost none for renting? “The primary, and often only, beneficiaries of renting are the renters themselves.” Those who benefit from all the forced spending by homeowners are the ones who promote owning. “Renting is the more logical, cheap, flexible, and low-risk way to live.”

Overall, this book gives a very thoughtful analysis of owning versus renting. Unlike most promotion of owning, the author is not a cheerleader for renting. He acknowledges advantages and disadvantages on both sides. I recommend this book to anyone struggling with a decision of whether to buy a home or rent.

1 For the high end of the range of monthly home ownership costs, Avery starts with the asking rent for a comparable house before adding other costs. But a landlord might include allowance for some of these costs in the asking rent. The maintenance cost range goes too high as well. As Avery later explains, “The rule of thumb for maintenance costs is 2 to 5 percent of the value of the house in most markets, and lower where house prices are particularly high.” Essentially, the cost of maintaining a house doesn’t go up much just because the land under it becomes more valuable. So, 5% is an unreasonably high estimate for a house sitting on expensive land, which is the case for most $850,000 houses.

Friday, September 15, 2017

Short Takes: Mortgage Delinquencies, Indexing Distortions, and more

Here are my posts for the past two weeks:

What’s Your Income


Here are some short takes and some weekend reading:

Scott Terrio, a licensed insolvency trustee explains why low mortgage delinquency rates aren’t a good sign. He says “the low delinquency rate will catch up with the reality of Canada’s overburdened households.”

Lawrence B. Siegel explains why “indexing doesn’t distort anything.”

Reporter Sara Mojtehedzadeh went undercover working in food production for a temp agency. Her story contrasts sharply with the claims made by her employer about working conditions. Strangely, she had to collect her pay from a payday lender.

Patrick McKenzie has some interesting and authoritative advice on what to do if someone creates credit accounts in your name. These things can lead to long-lasting problems if you don’t handle them correctly. Unfortunately for Canadians, some aspects of this advice are specific to Americans. I’d be interested in comparable advice for Canadians.

The Blunt Bean Counter gives his perspective on proposed new tax rules for private corporations.

Squawkfox goes through the ways that the recent interest rate hike from the Bank of Canada can affect you. The main effects are interest rates on debt. She observes that banks aren’t usually very quick to increase the rates they pay on savings accounts and GICs. I wonder how long it will take for higher interest rates to change annuity payments.

Dan Bortolotti summarizes a study of ETF investors. It turns out that they handle their ETFs poorly for a couple of reasons.

Big Cajun Man says if you try to take some form of loan from a big bank, they’ll try to get you to open a chequing account as well.

Tuesday, September 12, 2017


Employers would like to know the secret to motivating their employees to give their best effort. According to Dan Ariely, author of Payoff: The Hidden Logic That Shapes Our Motivations, the answer to what motivates us is complex, but his research has yielded some interesting results. I find just about everything Ariely writes to be fascinating, and this short book is no exception.

The book isn’t just about what motivates us at work. Ariely also tackles our attachment to our own ideas and creations, the importance of money (and sometimes lack of importance), and the urge for symbolic immortality. In short, “this book is about what we really want out of life before we die.”

One seeming contradiction Ariely points out is that happiness and meaning often don’t go together. A marathoner is strongly motivated to run hard for hours and finds deep meaning in the effort, but it’s hard to say that a person whose face is twisted in pain is happy, at least while still running.

Some of Ariely’s experiments revealed that “the more effort people expend, the more they seem to care about their creations.” This was true even when the experimenters manipulated conditions to cause subjects to work harder to produce something of lower quality.

On the subject of whether to pay someone to do certain tasks around your house or do them yourself, Ariely says that “a little sweat equity pays us back in meaning—and that is a high return.”

We search for meaning, even after our deaths. Some of us even seek to control others from the grave. “A man named Samuel Bratt, whose wife had no doubt badgered him about his smoking, bequeathed her £333,000 under the condition that she smoke 5 cigars a day.” German poet Heinrich Heine “left his estate to [his wife] on the condition that she remarry to ensure that ‘there would be at least one man to regret my death.’”

Overall, this book is entertaining, clear, concise, and gave me useful insights into motivation.

Monday, September 11, 2017

What’s Your Income?

The raging debate over the federal government’s plan to change certain tax rules for corporations has a glaring contradiction. The government insists that the changes only affect those making more than $150,000 per year. Opponents say it’s hitting middle-class business owners. Who’s right?

Consider the example of a professional whose efforts earn $250,000 per year. This professional has a personal corporation. So, it’s actually the corporation that has an income of $250,000. The professional draws a personal income of $100,000 from the corporation, leaving what’s left after taxes within the corporation. He plans to continue drawing an income from the corporation throughout his retirement. So, what is the professional’s income?

The government would say the professional’s income is $250,000, and he uses his corporation to spread his income over his lifetime to reduce his total tax bill. Many opponents of the government’s tax plans say the professional’s income is $100,000, and he’s an example of a middle-class earner getting hit hard by unfair new tax rules.

This issue isn’t as simple as it first appears. The professional’s efforts may only earn a lot of money for a modest number of years. Taking into account many years in school and several years of struggling to build a good reputation, lifetime average earnings may be well below $250,000 per year, even after adjusting for inflation and adjusting for the typical income increases salaried employees get.

I’ll leave it to readers to decide for themselves which side they think is right.

Friday, September 1, 2017

Short Takes: Too Many Advisors and more

Here are my posts for the past two weeks:

Email Replies

Small Business

Here are some short takes and some weekend reading:

Preet Banerjee interviews John de Goey who says “there are way too many advisors in the business,” and “we could easily get rid of one-third of all advisors in Canada and not make a ripple in terms of access to advice.” I agree with this. Most financial advisors are paid for their sales effort and not for their advice. The only way to lower Canada’s unreasonably high cost of investing is to lower the total amount of money that goes to advisors and fund managers. This necessarily means there will be fewer advisors.

Jason Zweig has 19 questions to ask your financial advisor along with the “correct” answers. While this is an excellent list of questions, few advisors would have the best answers, and those who do would likely only handle wealthy clients.

Canadian Couch Potato explains the upcoming change to stock-trading settlement periods.

Boomer and Echo aren’t fans of “core and explore” investing.

Preet Banerjee explains asset allocation for investing beginners in his latest video.

Big Cajun Man describes a trick for keeping your employer from taking back some or all of a direct deposit. I’d be interested in knowing whether this trick actually works or whether banks would just track down further transactions.