Sometimes my grandmother surprises me. She is always up to date on the latest news, but I didn’t expect her to analyze the latest Canadian federal budget as carefully as she has. Here are her thoughts on what the tax-free savings accounts (TFSAs) mean to her. Unlike RRSPs that cannot be used past the age of 71, she is allowed use a TFSA. (I won’t give away her age, but her eldest daughter is on the verge of not being able to contribute to an RRSP either.) For my grandmother, investing means GICs at a bank, which is sensible at her age. I used to wonder if the bank took advantage of her by offering poor interest rates, but at the latest update, she left one bank to move to another where she negotiated a better rate than the best I was able to find with my discount broker. In one way the TFSA is good for her because it lets her shelter interest income that is usually highly taxed. However, the $5000 limit is a problem for her. The great interest rates she gets are partly due...

The Big Cajun Man over at Canadian Personal Finance has been calling for tax relief for single-income families for some time now. One way the government could do this would be to permit income splitting. Consider a hypothetical couple, Carol and Dan. Carol earns $80,000 per year as a software developer, and Dan stays home with the kids earning no income. Most people publicly praise Dan for taking on a non-traditional nurturing role while privately wondering what’s wrong with him. It takes a long time for attitudes to change, but that’s another story. Carol gets some tax breaks for supporting a spouse, but she still pays a lot in income taxes. If the Canadian government permitted income splitting, she and Dan could each declare $40,000 per year in income, and their overall tax bill would be quite a bit lower. We’ve heard that the Canadian government’s new tax-free savings accounts (TFSAs) provide income splitting opportunities. However, you will not get the same immediate benef...

The Canadian Federal Government introduced the tax-free savings account (TFSA) in yesterday’s budget. This is roughly the Canadian equivalent of the Roth IRA in the U.S. Canadians will be able to put up to $5000 per year into a TFSA. Any gains on investments inside a TFSA are tax-free. The TFSA is similar to an RRSP in that the income from investments within the account are tax-sheltered. The main differences are as follows. 1. TFSA contributions do not give you a tax deduction. RRSP contributions are deducted from your income to reduce taxes. 2. TFSA withdrawals are not taxed. With RRSPs, any withdrawal is treated as regular income and is taxed. A natural question is should you contribute to an RRSP or a TFSA? The answer depends on your tax rates. If your tax rate when you contribute money is higher than it will be when you withdraw money, then an RRSP is better. If your tax rate when you contribute money is lower than it will be when you withdraw money, then the TFSA is bette...

When people get into trouble with their debts, they usually have several different debts including credit cards, car loans, line of credit, and possibly student loans. The debts usually have different interest rates and different required monthly payments. Some debts are scheduled to be paid off quickly and others over a long period of time. The idea of a consolidation loan is to borrow one large amount to pay off all of the other debts. For this to make sense, this loan would have to be at a low interest rate and amortised over many years to make the payments low enough for the debtor to handle. To qualify for this type of loan at a low interest rate, the debtor might have to put up some collateral, and this collateral is usually a house. The consolidation loan then turns into a home equity line of credit (HELOC). On the surface, this seems like a good strategy. A lower interest rate means that you pay less interest. What other considerations could there be? I can’t say that I e...

It turns out that banks consider students to be great customers for their credit cards. I learnt this from James D. Scurlock’s book “Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders,” which gives a fascinating look into the world of lenders and their hapless customers. The part of the book about students hit home with me. I have one son in university, and another will hopefully be going in a couple of years. So why are students good customers? When you think of the old style bank that only lends to people with steady income to pay off a loan, lending to students makes no sense. Students usually have little income, and many of them will run up bills on their cards that they can’t pay off. It turns out that students have something else that makes them great customers: parents. According to Scurlock, parents will almost always bail their children out of debt problems. And the attitude of banks has changed dramatically over the years. Students run up debts and pay intere...

Not to be too philosophical, but my experience has taught me that I’m best off to conduct myself as though there exists a single objective reality that applies to all of us rather than each of us having our own separate realities. What does this mean for the investing world? If several people all buy 100 shares of ABC stock at the same time for the same price, then they will all get the same return over a given period of time. Some of these people bought ABC stock for very smart reasons, and some might have bought it because they have the initials ABC. Some of the investors are smart, some dumb, some nice, and some mean, but they will all get the same return. This all seems obvious enough, but you have to keep it in mind when you read the come-ons for businesses that want to set you up with an account to trade stock options. Stock options are side bets between two parties on whether a stock will go up or down. A bet that the stock will go up is called a call option, and a bet tha...

ABC stock has been rising steadily lately – is this a good time to buy? XYZ stock has fallen steadily lately – is this a good time to buy? Sadly, the answer in both cases is maybe. It turns out that you just can’t tell what is going to happen to a stock by just looking at what has happened in its price history. ABC might go up and it might go down. The same is true of XYZ. To understand this better, let’s look at an example that is much easier to understand: bananas. Suppose that bananas have been selling for a dollar per pound. Sometimes you buy a few and sometimes you don’t. Suddenly, banana prices jump to $1.50 per pound – should you buy them now? If the bananas seem the same as usual then probably not. But what if the bananas look unusually good, and you ate one and found it to be much better than the usual bananas? Then you’d probably buy them at the higher price. The next month, banana prices drop to 50 cents per pound – should you buy them now? If the bananas seem to be ...