Another great question David Chilton, The Wealthy Barber, asked me on his podcast is what big financial mistakes I see people making.  I’ll discuss two mistakes I see mainly among working-age people and two more specific to retirees. Buying expensive cars and trucks Paying $1000+ per month on car loans for the rest of your life isn’t a sensible financial move for most people.  You might need a car, but you don’t necessarily need such an expensive car.  In a moment of weakness and excitement, you sign the papers on that great car.  That sets up a cycle that’s hard to break.  You’ll be rolling one car loan into another.  The debt will keep growing and last for decades. I used to tell people to pay cash for cars.  I still think this is good advice, but people just blink now when I say it.  At the very least, think about the life burden your car payments will create and choose a car that fits your budget. Buying a house that is too expensive This is ...

A reverse mortgage is a loan against your home where you don’t have to make mortgage payments.  The lender gives you a lump sum or regular payments that are limited to a percentage of your home’s value, typically 20-60% depending on your age, and you get to stay in your home.  The mortgage balance grows until you die, leave your home for some other reason, or choose to pay it off. In a typical case, you or your estate pays back the lender from the proceeds of selling your home.  For most reverse mortgages, you get to stay in your home even if the debt grows to more than the home’s value.  The best information I could find is that this happens less than 1% of the time, which is hardly surprising given the extended real estate boom in Canada. House prices have been appreciating fast enough to keep ahead of the debt. The number of reverse mortgages held by Canadians is still just a tiny fraction of all mortgages, and even fewer reverse mortgages have run to completion....

One of the contentious questions David Chilton, The Wealthy Barber, asked me on his podcast is whether people should invest in real estate.  This is an emotional subject for many, and all of us come to the discussion with different experiences and skills. We are really asking three different questions here: 1. Should you own your home or rent? 2. Should you own rental properties? 3. Should you invest in REITs (real estate investment trusts)? Should you own your home or rent? There are many factors to consider.  Let’s focus on money first.  Are you better off from a purely financial point of view to own your home or rent a comparable home?  If you’re an emotionless robot when it comes to investing and saving, and you understand low-cost index investing, then the answer is usually that renting is better financially.  In rare markets, this can flip, but renting wins most of the time. But people aren’t emotionless robots.  They often invest their savings terri...

The subject of FIRE (Financial Independence Retire Early) has captured the imaginations of many.  Some love it and some hate it, because it’s a good strategy for some and not others.  Many variants of FIRE have evolved over time to suit people’s different needs and desires.  This makes it hard to speak generally about FIRE, but there are principles that we can use to judge a particular FIRE plan. Here is a general personal finance principle: Don’t cheat your future self by indulging your present self. The fact that we tend to discount the future too much makes this principle difficult to follow for some.  Roughly speaking, this principle means you should plan for your future consumption to match your current consumption.  In some cases, a carefully thought out plan can have some higher consumption in the present than in the future.  The key here is having a sensible plan rather than just living for today and ignoring the future. FIRE enthusiasts don’t have ...

Another great question David Chilton, The Wealthy Barber, asked me on his podcast is should young people invest 100% in equities?  Opinions on this point change with the times.  In the late 1970s, popular opinion was that it was crazy to put any money at all in the stock market.  By the late 1990s dot-com bubble, people believed that stocks were the path to great wealth. Stock markets have been performing very well for a long time, so it’s not surprising that popular opinion favours stock investing today.  Ironically, investing 100% in stocks is best when popular opinion is against stocks.  At today’s elevated stock prices, the case for 100% stock ownership is weaker than it has been in most of the past. But this doesn’t mean that investing in stocks today is a bad idea.  It just means that expected future returns are lower than usual, and the odds of a stock crash are higher than usual.  But if you can hold for the long term, you can ride out the sho...

We’ve heard that melting down an RRSP early can be valuable when it lowers your future tax rate on RRSP withdrawals later in retirement.  But we’ve also heard that delaying RRSP withdrawals so the RRSP can continue growing tax-free is valuable.  But not everyone agrees that longer tax-free compounding is valuable.  Who’s right?  Let’s dig in. We can make mistakes when we try to measure the value of some portfolio choice in isolation.  We have to consider all of its effects to draw a correct conclusion.  Here’s an example: Scenario 1 (RRSP meltdown) : You withdraw an amount M from your RRSP today.  If your average tax rate on the withdrawal is T, you get to keep M(1-T). Scenario 2 (no RRSP meltdown) : In a second scenario, you delay RRSP withdrawals for a decade.  Your RRSP grows by a factor of R in that decade, and you withdraw MR then.  If your future average tax rate on that withdrawal is U, you get to keep MR(1-U). It’s important to note t...

When Canadians have some money available, a big decision they face is whether to invest it in an RRSP or TFSA or to focus on paying down debt.  Dave Chilton, The Wealthy Barber, asked me how I thought about this choice on his podcast .  Here I give a fuller answer to his question. This is really two separate questions.  The first is whether to invest savings or pay down debt.  The second is whether to put savings you’ve decided to invest into an RRSP or a TFSA. It never makes sense to invest ahead of paying down high-interest debt.  We could make a case for starting to invest a little, just to start the habit, but paying down high-interest debt should be the initial priority.  This leaves the question of whether to invest or pay down your mortgage. Invest or pay down your mortgage A popular answer to this question is that you expect to make about 7% per year on your investments, but your mortgage is only 4%, so you should always invest.  This is right ...

One of the talking points of financial advisors is that even if right now you’re able to handle your own investments, tax planning, and other aspects of personal finance, you may face cognitive decline later in life.  The implication is that maybe you should get a financial advisor now before it’s too late. The challenge here is that many people who hold themselves out as financial advisors are little more than sellers of expensive mutual funds.  Some might even be inclined to take advantage of your cognitive decline to churn your account and generate excess fees. What you may need is a good financial advisor.  Some financial advisors are excellent.  They range from those who charge by the hour for advice only to those who manage your investments directly for you.  However, if you’re in cognitive decline, it won’t help to just get the occasional portfolio checkup.  The advisor would have to directly manage your investments.  But it’s hard to get this ...

The best way to respond to stock market news is usually to ignore it.  This is (almost) what I do.  The exception is that I make small adjustments when stock prices are very high.  David Chilton asked me about these adjustments when he interviewed me for his podcast .  Here I give a fuller answer to his question. I hesitate to talk too much about this part of my portfolio plan, because it is a small step toward market timing, and investors get themselves into a lot of trouble with market timing.  I once described how I handle high stock prices to a friend, and he responded by selling all of his stocks.  The change in my own stock allocation percentage was barely noticeable, but he had gone to zero, mainly because I caused him to think about high stock valuations.  This was definitely not the outcome I wanted. Most sensible people avoid market timing.  I used to be one of them.  But I realized that I was against market timing unless something ...

People who have savings when they retire are faced with tough choices for how to spend their money to get the most out of retirement.  Their instincts to try to preserve their savings often leads them to mistakes such as living too small, overpaying their taxes, and not getting the most they can out of CPP and OAS. The common investment accounts retirees have are RRSPs, LIRAs, TFSAs, and taxable (non-registered) accounts.  Trying to figure out which accounts to draw from is already a complex problem.  To add more complexity, retirees might have a workplace pension, a possible inheritance, income from part-time work, and face decisions on when to start drawing CPP and OAS.  Fortunately, it’s not important to come up with a perfect plan.  What you need is a good plan that isn’t too far from the best possible. It’s not possible to go through all combinations of retirement scenarios in a single article.  Instead, I’ll discuss how some good savers go wrong in re...

Suppose you’re in the happy position that Grandma has offered to fully fund your child’s RESP with $50,000.  The big question is whether you should put the entire $50,000 into the RESP right away or spread it out over time to maximize the government grants.  David Chilton asked for my thoughts on this question when he interviewed me for his podcast . To begin with, let’s make sure this really is a math problem.  If you choose to spread the RESP contributions out over time, how will Grandma react?  Will she say “If you’re not going to put it all in the RESP, I’m not giving it to you.”?  If so, then your choice is made for you.  We’ll assume here that Grandma doesn’t mind if you spread out the RESP contributions.  We’ll also assume that your child is young enough that there is time to spread out contributions before post-secondary education starts. Overview of RESP rules The lifetime limit of total RESP contributions for one child is $50,000.  Each ...

Over a lifetime, investment costs take a huge bite out of people’s savings, but many investors don’t understand how they work.  It’s not that they’re complicated, it’s that the final answer seems unbelievable.  How could it be that these fees nearly cut my retirement nest egg in half? Let’s go through some of the misunderstandings. I don’t pay investment fees Some people think that because they never swiped a credit card or wrote a cheque to pay investment fees, they didn’t have to pay them.  This isn’t true.  If you own mutual funds or exchange traded-funds (ETFs), then fees are quietly deducted from your savings.  The total of these fees for the year is called the Management Expense Ratio (MER). The investment returns you see on your statements are net of fees in most cases.  An exception is that some group RRSPs report before-fee returns.  The fact that you see net returns is good in the sense that you see represent what you actually got.  On t...

David Chilton, The Wealthy Barber, has a great podcast with amazing guests, and I was thrilled to be invited to chat with Dave.  He’s done so much to help Canadians with their finances, most recently with his updated book The Wealthy Barber . Years ago I wrote a positive review of his book The Wealthy Barber Returns , and Dave left a message asking for a phone call.   At the time, I didn’t know Dave was a good guy who just wanted to thank me.  At first I thought I might have said something to upset him.  So, I spent the first minute of the conversation giving two-word answers.  As it became clear Dave wasn’t upset, I relaxed a little, but Dave must have come away with the impression that I can’t talk to people.  Fortunately, we got past that first impression years later, and I was human enough for Dave to invite me on his podcast. Over the coming weeks, I intend to write blog posts or point to existing blog posts giving fuller answers to Dave’s excelle...

I liked Charles Ellis’ book Winning the Loser’s Game so much that I had to read his latest: Rethinking Investing .  It is very short at just over 100 small pages, but is packed with good advice.  Some of it is specific to U.S. tax laws, but most of it useful for Canadians. Ellis takes on three huge areas of personal finance.  The first is your portfolio allocation, or what you should invest in.  The second is your savings plan, and the third is your “spending rule,” or how to spend your assets during retirement.  A detailed treatment of these areas could easily run to thousands of pages, so this book is necessarily at a high level.  Ellis wants you to get the broad ideas right, so that you won’t make big mistakes as you fill in the details. Ellis calls compounding investment returns “your power curve.”  He explains that most of your investment growth comes at the end, which provides motivation to begin early.  Saving is “your first priority.”...

When it comes to big questions about saving and investing, author Nick Maggiulli is critical of the answers given by the financial industry.  In his book, Just Keep Buying , Maggiulli brings data and evidence to answer these questions in interesting new ways.  I find myself agreeing with most of his conclusions, but not always with how he arrives at them or expresses them.  Whether you agree or disagree with his conclusions, Maggiulli adds to the discussion with thoughtful points of view. This book is organized around 21 questions that many people ask, including “How much should you save?”, “Should you ever go into debt?”, "Should you rent or should you buy?”, “What should you invest in?”, and “How soon should you invest?”  The discussion and answer to each question is its own chapter. In the rest of this review, I’ll examine some of these answers. Save what you can How much money should you save?  Maggiulli says to “save what you can.”  On its own, this is...

An organization called Generation Squeeze is calling for big cuts to Old Age Security (OAS) .  For some reason, these cuts are aimed exclusively at senior couples.  Digging into the numbers, the proposal makes no sense. The stated goal of the proposed OAS changes is to free up government money for other priorities.  Whether or not OAS is the right target for reducing government spending is a different discussion.  The puzzling part of this proposal is having all the cuts apply to senior couples. Currently, OAS will get clawed back from any senior whose 2025 net income (Line 23400 of the tax return) is over $93,454.  For each dollar over this income threshold, OAS payments are reduced by 15 cents.  The current rules make no distinction between singles and couples.  The calculation is based on each person’s own income without regard to whether they have a spouse. Generation Squeeze wants to change the threshold to $100,000 for total household income....

Whether you agree or disagree with his arguments, Morgan Housel tells entertaining stories, and his latest book, The Art of Spending Money: Simple Choices for a Richer Life is no exception.  What I liked most about this book is it caused me to think.  Mostly, I agreed.  Occasionally I disagreed.  Sometimes I recognized my own ideas, and sometimes I had something new to ponder.  The book flew by. Most people I know will find that the way they think about spending aligns well with Housel’s recommendations.  The readers who will likely benefit the most are those who give up too much of what matters in their lives to amass wealth.  Such wealth builders are the type of person the financial industry seeks out, and it’s not surprising that writers from the financial industry tend to write for this type of person.  These writers often exaggerate how common it is for the general population to have their type of money obsession.  We all tend to speak ...