Thursday, July 16, 2020

A Canadian’s Guide to Money-Smart Living

Learning about personal finance makes people anxious.  Combine this with all the details to learn and the process can be overwhelming.  Kelley Keehn and Alex Fisher aim to help people get past these problems with their book, A Canadian’s Guide to Money-Smart Living.  The authors introduce the reader to basic personal finance topics without getting into too much detail.

The book begins by trying to get past emotional barriers to controlling spending and getting readers motivated to learn more about personal finance.  It then covers paying yourself first, record-keeping, planning, mortgages, debts, credit scores, and investing.

There were a number of details in the book I liked.  Many financial writers like to mock the idea that small amounts add up, but not these authors.  “The few dollars you spend on muffins, eating out, or other expenditures that you’re not tracking every day, might not seem like much at the time but mount up over the weeks and months and years.”

With so many people seemingly willing to pay any price for a house, it’s important to hear the downside: “Having too big a mortgage payment for your available cash can be absolutely crippling.”  A similar message about all debt: “More debt always equals less freedom.”

I was surprised to learn that “if you don’t use your account at least every month, your [credit] score can be negatively affected.”  I’m not sure if this applies only to credit cards, or if it’s true for lines of credit as well.  I sometimes go several months using only one of my credit cards, and I haven’t used my line of credit in years.

The book contains a good section on the problem with using a supplementary credit card on someone else’s account.  One of my aunt’s did this.  When her husband died, she had no credit record at all because she was using his credit card account, even though her card had her name on it.

A good point about mandatory minimum RRIF withdrawals: “Withdrawing the money does not mean you have to spend it; all you have to do is report it as taxable income.”

There were a number of parts of the book that could be improved.  One section on how to choose and work with a financial planner needed to start with an explanation of how much money you must have before any planner would work with you.  Another section on life insurance paints a picture of a professional life insurance agent carefully looking after your interests.  In reality, people need to know how to avoid agents who try to sell them whatever product generates the biggest commission.

On the subject of breaking a mortgage, the authors say that a penalty of “three month’s [sic] interest is common,” when mortgage penalties are often in the 5-figure range.  On the subject of mortgage life insurance, the authors fail to mention that typical policies use “post-claims underwriting,” which means they don’t check if you qualify for coverage until after you’re dead.

In an example of a couple getting a mortgage, the authors say that “By paying about $456 weekly [instead of $1982 monthly], for example, they save in interest costs and pay off their mortgage faster.”  This isn’t true for these numbers.  Paying biweekly or weekly shortens a mortgage when the payments are simply divided by two or four, effectively increasing the total amount paid each year.  In this example, the weekly amount is calculated to give the same amortization period as the monthly amount.

In a discussion of whether to pay down your mortgage or contribute more to an RRSP, the authors list 4 factors to consider.  However, they miss the most important factor which is how much financial risk you want to carry forward (in the form of leverage) as you age.

In the “Get to Know Your Banker” section, the authors offer mostly obsolete advice about a personal relationship with your banker.  Curiously, they end the section with the modern reality: “Loans are approved by a computer program these days – it’s rarely a human or personal process.”

The book gives a table showing the letter grading system Transunion uses for credit scores, but goes on to say that Transunion rated a particular creditor as “fair” instead of “B” as shown in the table.  I couldn’t figure out the point the authors were trying to make here.

Among the things to consider when deciding whether to buy GICs is “where are interest rates going?”  This is bad advice.  Trying to predict future interest rates is a waste of time.  Currency experts trade trillions of dollars based on interest rate expectations.  An average person trying to outsmart them is just gambling.

“While funds with high MERs may be worth it because of the professional managers they use, it means that those managers need to work that much harder to earn you a decent rate of return.”  All the evidence says that trying to find managers who can overcome high MERs over the long run is futile.

For RESPs, you can open multiple plans, “but, as with the other tax shelters, each plan must follow the maximum contribution rules.”  A reader could easily be confused by this.  The authors mean that the total contribution to all RESPs can’t exceed the maximum per beneficiary.

The last quarter of the book contains several typos that show a lack of attention to detail.

Overall, this book might be helpful to personal finance novices.  The best parts are the early sections designed to motivate people to improve their finances and give them tools for changing bad habits.

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