Year: 2009

Categories
Investing

Beginning Investment Strategies to Consider

I’ve commented before about how dangerous it is to give investment advice to friends and family.  I keep running into people who are very bright individuals in other areas of their life, but just throw up their hands in frustration and give up when it comes to managing their money.  Never one to learn from my experiences, my goal is to put together a couple of posts, one on easy to understand and set up investment strategies and the other on investing strategies to avoid unless you REALLY know what you’re doing.

Short Investing Horizon

If you had a chunk of money sitting around that will be used for something within the next 5 years, your priority should be capital preservation (not losing it!).  A post a while back on Canadian Money Forums asked about investing $15k for 2 or 3 years, and the consensus seemed to be that for this short a time frame GICs or high interest savings account are the best place to put it.  I agree wholeheartedly.

If a person with a lump sum of money to invest for 2 or 3 years has any debt (even a mortgage), I think an even better use would be to pay down the debt.  It should PROBABLY be possible to borrow it again (assuming a decent credit rating) if the money is needed after a couple of years, plus you’ll have avoided all the interest that you would have paid in that time period (which  I can guarantee will be higher than the return on a GIC or savings account).

10 Year Investing Horizon

If you won’t need the money for at least 10 years (usually this is for retirement funds) things get interesting.  Equities (stock) are more volatile (meaning they can move up and down unpredictably).  Obviously people prefer a guaranteed return, not an uncertain one (and prefer to make money, not lose it), and therefore equities offer a greater LONG TERM *AVERAGE* return than GICs or a savings account.  To capture this higher return you need to stay in the market for longer lengths of time, to catch the periods when the market does really well (to make up for the times it does very poorly).  The longer you stay invested, the closer you should be able to get to the long term expected return (which should be around 7% by some measures).

Rather than picking specific companies, these strategies focus on asset allocation.  Read over these short descriptions, pick the one that sounds most interesting.  Spend an hour or two reading the links in its description and you should be good to go!

Couch Potato Portfolio

MoneySense magazine has what they call the couch potato portfolio (based on a US version by Scott Burns).  The idea is an intensely simple portfolio that takes minimal time or thought to maintain (they estimate 15 minutes per year and no investing knowledge required).  The core idea of this is a portfolio that has very broad diversification.  It is broken into four components, and each year these are “re-balanced” so that they will be worth the same amount.

e.g. say you put $100 in A, B, C and D .  At the end of the year A is worth $120, B and D are worth $110 and C is worth $80, you would buy and sell until you had $105 in each of the components and they’re “balanced” again.

There are SLIGHT differences in what you choose for your four components, but it’s not worth getting too hung up on.  If you want to get started with retirement savings but keep putting off “figuring out investing” and never get around to it, picking a couch potato portfolio and getting started would probably be very worthwhile.

In addition to the information at the MoneySense site, the Canadian Capitalist has summarized the portfolios.

Sleepy Portfolio

The Canadian Capitalist took his inspiration from other lazy portfolios and created the sleepy portfolio (a “fire and forget” portfolio for large sums of money, if you get a surprise inheritance this might be a reasonable place to dump it) and the sleepy mini portfolio (for small sums of money on an ongoing basis).

The sleepy portfolio is targeted for young, aggressive investors (so if you only have 10 years until retirement it might not be the allocation for you).

Others

Larry MacDonald proposed the One Minute RRSP Portfolio for those who want the barest of bare bone portfolios (it consists of 2 ETFs with an optional third cash component).  Scott Burns, Ted Aronson and the Coffeehouse Portfolio each have their own version of a “lazy” portfolio that’s worth looking at if you have the time and inclination.

If you prefer to get your investing advice from a book and not from yahoos on the internet (why are you reading this blog then? 🙂 ) Unconventional Success by David Swensen, The Smartest Investment Book You’ll Ever Read by Daniel Solin (allocation overview here) and The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein each contain easy to assemble / maintain portfolios as well as the rationale behind their construction.

How to do it

Once you’ve picked one of the above strategies and read about it, summaries of the the actual asset allocations can be found here (for all except Solin’s and MacDonald’s).  Sign up for a discount brokerage account (I like iTRADE / E*TRADE, Mike uses Questrade) and buy the ETFs that make up them up.  Wait a year and rebalance.  Repeat.

If you’re working with a small amount of money (maybe under $25k), follow Canadian Capitalist’s sleepy mini portfolio (or save in a high interest savings account / GIC) until you’ve got $25K, then move to one of the others.

Keep learning.  If you develop a deeper understanding of investing and want to follow a more complicated approach (and manage to convince yourself that it will provide higher returns than passive investing in one of these flavours), then switch.

Categories
Personal Finance

10 Tips – Back to School Savings For College Students

CollegeMacNCheese
It’s back to school time and most university and college students are probably looking forward to a long winter of tough studies, late night Ramen noodles and figuring out how to cut costs in order to get by on not very much money.

Here are some suggestions from a current student who has done some research in the field and came up with the following tips.

1) Laptop

Are you looking a new laptop? There are a lot of sales going, but you can save by asking for another $50 to $100 off. If you are interested in Macs, be sure to get the free iPod Touch through Apple’s back to school promotion. By the way, do not get the extended warranty plans. Most credit cards give you a free year of extended warranty.

Potential Savings: $50 to $200 for laptop purchase, $80 to $100 for using credit card extended warranty.

2) Beer

Molson non-alcoholic beer costs about $5.99 a dozen. Regular beer costs $24 a dozen. By going non-alcoholic, there is about a 75% savings. There is less calories as well. A suitable solution for many people

Potential Savings: $1.50 for every can of beer.

Potential Annual Savings based on 60 cans of beer: $80.

3) Cell Phone

Retention, retention, retention. Do you have a retention plan? If not, call in to get one. Why pay $50 a month when you can pay $30? Since you get more with a retention plan, there are fewer worries about overage as well. If you do not need to talk a lot, check out 7-Eleven SpeakOut Wireless.

Potential Monthly Savings: $15 to $40.

Potential Annual Savings: $180 to $480.

4) Internet and TV

Big players are giving great promotions to new student customers for internet services and TV services. Be sure to call in and ask to be put on the promotions if you are already a long time customer. TV isn’t always necessary nowadays. You do save quite a bit by not getting the TV channels

Potential Monthly Savings: $10 to $50.

Potential Annual Savings: $120 to $600.

5) Home Phone

If you have a cell phone with a retention plan, it is most likely that you do not need a home phone. Skype can be a good option if you need to call a lot. If you really need a phone, make sure you bundle and call in for the best plan.

Potential Monthly Savings: $10 to $30.

Potential Annual Savings: $120 to $360.

6) Credit Card

Some student credit cards do not have rewards. You should definitely have a credit card with cash back or a good reward program. Looking for the best cash back credit card with no annual fees? Check here for information on best canadian rewards credit cards.

Potential Monthly Cashback: $5 to $10 based on $250 to $500 spending a month.

Potential Annual Cashback: $60 to $120 based on $250 to $500 spending a month.

7) School Supplies

There are some crazy back to school sales right now. 18 cents for a 80 page notebook!!! A fraction of the regular price!!! Stock up. Stock up.

Potential Savings: $1 per notebook and lined paper, Various for other items.

Potential Annual Savings: $20 to $100.

8) Textbooks

Brand new textbooks from the bookstore are very, very expensive. Many courses do not need textbooks to prepare for exams and many textbooks are available in the library. My rule of thumb is that if I need to use a textbook for more than one course, I will get the textbook. Getting the textbooks for courses that are harder and more important is a good idea too. There are so called “international versions” of textbooks that are bought and shipped from outside of North America. These usually cost $30 to $40 each, a far cry from regular textbook price of $90 to $150 each. Buying international versions from Ebay or other resellers would work.

Potential Savings per Textbook: $60 to $120.

Potential Annual Savings based on 10 courses: $600 to $1200.

9) Personal Hygiene Items

There are a lot of personal hygiene back to school packages at various supermarkets and drug marts. I buy a few and stock up on them for the whole year. Some of the best deals out there.

Potential Savings: $10 to $30 per package.

10) Travel Costs

My experience is that aircanada.com and westjet.com offers the best prices for airplane tickets within Canada, but you need to try to catch the various sales. However, international flights tend to be cheaper when booked through a broker rather through the internet in Canada. I usually ask two to three brokers for the same route before making a final decision, because different brokers have access to different systems and different tickets. From past experience, I have saved around $400 per trip. By the way, do not buy various form of travel insurance due to the high mark up and basic common carrier travel accident insurance is free through many credit cards.

Potential Savings: $200 to $600 per international trip.

More information on how to travel cheap.

Conclusions

By trying to save here and there, it is possible to save at least a thousand dollars a year by getting some of the best deals out there and being flexible about things. Most students have a tight budget and any savings is a good idea.  For more savings ideas check out 397 Ways to Save Money book review.

Also check out get your back to school educational finances in order.

Photo Credit: monkeycat

Categories
Personal Finance

Are Canadian Cell Phone Wireless Costs Too High?

high1

It is a common perception that Canada has one of the highest wireless fees in the world. As a result, wireless penetration rate in Canada is only 62%, which is one of lowest in developed countries. Contrary to this common perception, Canadians enjoy one of the lowest wireless fees in the world through wireless retention plans from the Big Three (Bell, Rogers and Telus). I am going to discuss this using an OECD report on developed countries’ cell phone fees.

Methodology for OECP Report

OECD divides cell phone users into three groups: low, medium, and high usage. Voice minutes, text messages (SMS), and multimedia messages (MMS) are considered. The number of services is arbitrarily defined on annual usage. Important usage information is listed in Table 1 and is taken from here.

[table id=12 /]

Low Usage Comparison

Prepaid is fairly expensive in Canada. I will use SpeakOut Wireless in my analysis, since I determined it offers one of the best prepaid cell phone services in Canada.

Costs of SpeakOut Wireless using OECD low usage definitions:

  • Local Voice Minutes: 529 * $.20 = $105.80
  • National Voice Minutes (7% of calls are assumed national): 527 * .07 * $.16 = $5.90
  • SMS (SpeakOut Wireless charges $.04 for incoming and outgoing messages. To simplify things, I assume that for every outgoing text message, there is one incoming text message): 396 * ($.04 + $.04) = $31.68
  • MMS: Not available on SpeakOut Wireless to the best of my knowledge.
  • Fixed Charges (911 fee of $.79 a month): 12 * $.79 = $9.48
  • Total Cost: ($105.80 + $5.90 + $31.68 + $9.48)* 1.13 = 172.73 (5% GST, 8% PST)

OECD is estimation for low usage in Canada is $195.68 and Canada ranks 20th in terms of lowest cost in the 30 countries low usage comparison. My own calculation by using SpeakOut Wireless suggests that OECD’s calculation is representative for Canada. If my calculation is used instead OECD’s calculation, Canada would rank 19th in the low usage comparison. I conclude that Canada needs to have better prepaid options for people with low usage.

Medium Usage and High Usage

Here is where I would disagree with OECD methodology of calculating Canadian wireless fees. OECD used retail wireless plans in Canada, but in reality, most Canadians are able to get wireless retention plans from the Big 3 after a year of contract with any one of them or through retail promotions that occur once or twice a year.

[table id=13 /]

As seen from Table 2, a standard retention plan covers OECD medium usage and high usage definition. Annual total cost of this standard retention plan is $372.22.

Medium Usage Analysis

According to OECD’s medium usage analysis, Canada ranks 27th out of 29 countries in this section. If my calculation is used, Canada would rank 21th out of 29 countries. There is a big difference depending on the methodology used and it could be argued that there need to be better medium usage plans.

High Usage Analysis

According to OECD’s high usage analysis, Canada ranks 19th out of 30 countries in this section. If my calculation is used, Canada would rank 10th out of 30 countries. I believe this is the evidence that Canadian wireless fees are one of lowest in developed countries rather than the highest. Canadian retention plans have more features and are cheaper than US retail and retention plans. I believe that the high usage analysis is the most important and this is the category that most Canadian wireless users fall into.

Conclusions

If OECD introduces an ultra high usage comparison, I assume Canadian wireless cost based on retention plans would be among the top 5 in developed countries.

Canadian long distance can be very expensive, but retention plans usually come with either 100 or 1000 Canadian long distance minutes. In fact, there are Canadian long distance and North American long distance unlimited calling packages from retention departments. Canadian long distance should not be an issue on retentions, but Canadian long distance can be a real issue on regular retail plans.

Retention plans are really great and I use about 1000 to 2000 minutes and 100 text messages a month without any overages. It is possible to use even more minutes and text messages, but it needs to be used within the provisions of the retention plan like 6pm unlimited early evenings, unlimited network calling, unlimited incoming, or unlimited calling to 5 numbers. If you do not have a retention plan right now, do call in and ask for the retention department. It is very likely that you will be given a retention plan by just asking nicely.

Photo Credit: nutmeg15

Categories
Frugal

How To Hitchhike

HitchhikeI touched on hitchhiking in a previous post, but felt that it deserved a deeper treatment than I gave it at the time.

For those not familiar with the term, hitchhiking refers to getting rides, for free, from generous motorists who have a free seat and are willing to take you to (or at least closer to) your destination.

To give a bit of personal background, I’ve hitchhiked in Canada and across Europe (throughout the UK, Holland, Germany, Italy, Scandinavia, etc).  I based my philosophy initially on Europe on 84¢ a Day, then developed my own approach after getting bit of experience under my belt.  I haven’t hitchhiked in years myself, but I do pick up hitchhikers (and keep thinking I should try hitchhiking up to my hometown at some point).

Why Hitchhike?

First and foremost hitchhiking is a way to minimize travel costs (and save money for more important things, like beer).  Whether to allow a trip that couldn’t be afforded, travel further on a set budget, or just to save money, hitchhiking lets you go further on less (in 1996 I traveled Europe for 4 months on $5000, including airfare).

Often when traveling you end up in a bubble that protects you from the locals.  You’ll spend time with other travelers, which is great for learning about the world, but somewhat sad that you’re finding out about India when you’re staying at an Amsterdam hostel.  Often the locals that you do interact with, such as hostel staff, don’t have much interest in you as a person (they’re just doing their job) and aren’t particularly keen on a cultural exchange. Hitchhiking makes it FAR more likely you’ll be talking to a typical member of the culture you’re traveling in, and it will probably be someone very interested in talking to you (as often that’s why they picked you up).

Social Contract

There’s a number of unspoken rules when hitchhiking.  Both parties are interested in safely and enjoyably spending time with one another.  The hitchhiker does this to get closer to her destination, the driver does this to have company on the road (or to feel good about himself for helping someone out).

When someone picks you up your have an obligation to be a pleasant traveling companion.  Talking to the driver and keeping the conversation friendly and enjoyable are necessary – this isn’t the time to debate religion or politics.  I still feel badly about one time I got picked up with a woman I was traveling with at the time.  We’d tried to camp out the night before, and slept VERY badly, so shortly after being picked up we both fell asleep for the next 4 hours of the drive.  The driver didn’t pick us up to listen to us snore, and was very gracious when I apologized profusely after waking up at our destination.

Small exchanges are certainly appropriate (if you’ve packed a small lunch and want to eat, certainly offer to share – standard etiquette applies).  SOME hitchhikers will offer payment (in cash or gas), but to me this kind of defeats the whole point: if I’m going to pay for transportation, why not just take a bus?  I took a small bag with Canadian pins, coins and other small gifts that I gave to drivers (especially if they picked me up with children, the kids were delighted with small trinkets).

Since drivers have been good enough to pick me up in the past, I feel obligated to pick up hitchhikers when I’m driving.

Appearances Matter

Sadly, as in many areas in life, first impressions matter.  Particularly when drivers are speeding past at 80 km / hour, often they’ll be too far down the road by the time they decide to pick you up if its a tough decision.  Everyone should be clean and decently dressed when hitchhiking.  For men, having short hair and no facial hair is probably a good idea.  For women I’d probably err on the side of modest dress (the last things you want drivers to think is that you’re offering physical affection).  Standing on the side of the road puffing a cigarette is probably not the best idea (I’ve never smoke cigarettes, so this wasn’t an issue for me, but I recently hesitated to pick a guy up because he was smoking).

If you can do something to get attention, look harmless, and look like fun it’s probably worth doing.  While traveling Europe, if I had to wait more than 5 or 10 minutes I’d pull out a Canadian flag I was traveling with and start dancing with it on the side of the road.  One time a bus full of Asian tourists slowed down, they all took pictures of me, then it sped up and disappeared (I felt so used 😉 ).  I giggled at the time thinking about the starring role I was going to have when they went home and showed their friends the European vacation pics.

Two guys will have a tough time getting picked up (most drivers would find it intimidating to be in a car with two young guys).  Traveling on your own, or with a woman, is probably the best approach.  Two women traveling together have an easier time getting rides than two men.

Location, Location, Location

Where you hitchhike is probably the biggest factor to determine how long you’ll wait for a ride.  Sometimes the country itself is a problem:  when I was in Sweden, I couldn’t get picked up to save my life.  I was told that all students in the country can take buses for free, so motorists had the feeling that no one should have to hitchhike and wouldn’t pick you up.  After spending a morning on the side of the road, I sprang for a bus ticket to Stockholm and got out of the country.

The best places to hitchhike are where drivers are traveling slowly or stopped (giving them more time to decide they want to pick you up).  A gas station is therefore a MUCH better place to find a ride than a highway on-ramp, which in turn is better than along the shoulder of the highway.  Often drivers will be happy to drop you off at a restaurant or gas station if you ask.

In some countries (and in certain areas within them) it is illegal to hitchhike.  The Dutch police pulled over and told me that they’d be back in 10 minutes and would arrest me if I was still there.  Usually I think the police will understand that you aren’t a local and hopefully give you a warning if you’re somewhere you shouldn’t be.

Safety

Hitchhiking has a higher chance of getting into a dangerous situation than many other forms of travel.  The first comment on my review of 84¢ a day was a fear of ending up in a Hostel horror movie.  If you’re worried about this to the point that it makes you uncomfortable (or worse, decide to carry a weapon to protect yourself), you’re better off just paying for travel and avoiding the hitchhiking experience entirely.  I had two bad experiences over four months (a German guy tried to talk me into letting him fondle me, and two stinking drunk Fins offered me a ride) and in both cases I just stayed polite, alert and got out of the situation as soon as I could.

I’ve met a woman was raped while hitchhiking, so bad experiences happen (although I’ve met men and women who have hitchhiked extensively and had overwhelmingly positive experiences).  Weigh your feelings of the pros and cons and decide for yourself if it’s worth hitchhiking as a form of travel.

Have you ever hitchhiked?  Have you ever picked up a hitchhiker?  What was the experience like?

Categories
Real Estate

Refinancing Your Home Mortgage. Is It Worth It?

Expensive house

Because of dropping interest rates – mortgage brokers have been falling over themselves this year to try to get clients to refinance their home mortgage and get a lower rate.  Brokers of course, make money from refinancing, so this is a good deal for them.  The idea of having a lower interest rate and being able to lock it in for a while, can be quite appealing for the home owner.

We were contacted a while ago by our mortgage broker about refinancing our mortgage.  I was skeptical that there would be any benefit, but of course I wanted to look at the numbers.

Refinancing fees

This is the greater of three months interest or the interest rate differential (IRD), which is the interest differential payable on the two different rates.  Ie if your current mortgage rate means you will pay $10,000 in interest over the next 2 years and you get a new rate which only involves $6,000 in interest, the breakage fee will include that $4,000 of lost interest which the mortgage company won’t be collecting.  This breakage fee may seem like a lot if you have a several years left on your mortgage, but it makes sense.  Why would a company forgo $X of interest (and profit) by letting you lower your interest rate without charging a fee to cover it?

In our case, we have a five year mortgage.  First off –  please don’t tell me about how shorter term mortgages are theoretically cheaper over the long time.  I’m well aware of that – however in our case it made sense to lock in because at the time we couldn’t handle a large interest rate increase.  There are three years left in the mortgage at 5.19%.  According to our mortgage company FirstLine – the breakage fee is $4834 + $100 or $300.  The $100 fee applies if we stay with FirstLine and the $300 fee is if we don’t.  Since we would probably stay with FirstLine, our fee would be $4934.

One interesting strategy is you are planning to break your mortgage is to maximize any amount you can prepay without penalty by borrowing the money and then paying it back with the new mortgage.  You can read more about how to save money when breaking a mortgage.

Do we save on interest?

One scenario I looked at was:

  1. Keep our existing mortgage for 3 years at 5.19% or
  2. Break the mortgage and get a 3 year fixed mortgage at 3.59% (taken from ING site).  The idea is to directly compare the benefit over 3 years with known rates.  I calculated that the interest savings would be $4675.  In other words the breakage fee will exceed the interest saved by $259.  As previously mentioned – this makes sense since the mortgage company is not going to voluntarily give up profit that is already under contract and if they can make some extra money they will do it.  I didn’t get a quote from FirstLine or anywhere else for a better rate so it’s quite possible that the interest saved might be slightly more than my example.

Conclusion – Not worth doing in this situation.  The breakage penalty is roughly equal to the interest saved.

[edit]  I forgot to include the amount of the breakage fee which gets added to the mortgage.  This amount will accrue interest and will lower the profitability of refinancing.

Refinancing can lower your interest rate risk

Another scenario is:

  1. Keep existing mortgage for 3 years at 5.19% and then getting a 2 year mortgage at ?% or
  2. Break the mortage and get a 5 year fixed at 4.15% (from ING).

One other benefit of breaking your mortgage is to lock in a great rate for a longer time period.  This made a lot of sense a few months ago because the long term rates were so low.  If we did that strategy then we would break even or lose a bit in the first 3 years.  However if interest rates were to go up over the next few years then we would make a profit because the last 2 years would be locked in at 4.15%.  Had we kept our original 5 year deal in that case the interest rate paid on renewal would be much higher than 4.15%.

The problem is that to do this calculation you would need to know what the 2 year fixed mortage rate is, 3 years from now.  Is it lower, the same, higher, a lot higher???  You can create all the spreadsheets in the world, but it’s still a guess which is why I didn’t do an actual calculation for this scenario.

We are aggressively paying down our mortgage and will hopefully be done with it in about five years.  What this means is that in three years, our outstanding balance won’t be all that large, so the risk at that time from higher interest rates is not that meaningful since our payments would still be quite manageable, even if rates were 10% or higher.

Jump to shorter terms and lower rates

Another strategy for refinancing is to go from a fixed long term mortage to a shorter term or even variable term mortgages which have lower rates at the moment.  This is another strategy where you are basically trying to predict the direction and timing of interest rates.  If you are successful, you might save a lot of money – if not…well that’s too bad.

Historically low rates

What if you don’t have a lot of time remaining on your existing (large) mortgage and would like to lock in for several years?  Given the low rates available it might make a lot of sense to break the existing mortgage and lock  in the low rates.  Locking in for 5 years, gives you time to pay down the mortage without worrying about a big interest rate reset during that time.

Don’t get sucked in by lower monthly payments

One tempting aspect to getting a lower interest rate on your mortgage is the possibility of lower monthly payments.  This could occur for two reasons:

  1. Interest rate is lower, less interest = smaller payments.
  2. You can reamortize the mortgage and start your amortization period from zero again.  Ie if you are 5 years into a 25 year mortgage and you refinance, you can restart your 25 years amortization which will result in lower monthly payments.

The problem with #1 is that you end up paying the extra interest anyway in the form of the termination fee, so you don’t really save anything.  #2 is just bad – you are just turning your original 25 years mortgage into a 30 year (or longer) mortgage.

I think it would be easy for someone to renegotiate their mortgage, pay the termination fee, end up with lower monthly payments and be congratulating themselves several months later (having forgotten about the termination fee) on their clever financial engineering (“Hey neighbour, I refinanced and saved $200 per month”).

If you get pitched by a bank or mortgage to refinance in order to lower your monthly payments, run the other way.  They might also be suggesting switching to a shorter term to get a lower interest rate.  Yes, you will save in interest, but a 1 year term or variable mortgage won’t stay cheap forever and if rates go up, your payments will rise accordingly.

Conclusion

From what I can tell, there are no direct savings from breaking a mortgage and it might even cost you a bit.  The mortgage company will charge a fee to make sure that for the time remaining on your original mortage – their profit will stay the same, which means you don’t save anything.  The only way you can benefit from breaking your mortgage is to make an accurate call on future interest rates. One such situation is if you are getting near the end of your fixed mortgage and there are historically low rates available.  It would be hard to go wrong in that situation to refinance your mortgage assuming you want to stay locked in.

You should also consider negotiating to get a better breakage fee.  I don’t know if mortgage companies will bend on this, but you never know.

Photo Credit nutmeg15

Categories
Real Estate

Foreign Buyers

In real estate there is a euphemism “this property would be ideal for a foreign buyer” which means that it’s overpriced and they need a buyer who is ignorant of local market value to pay that much for it. In smaller communities in Ontario a variant on this is “I’m going to try to find a Toronto buyer” which means the same thing.

A friend of one of my relatives played the part of the ignorant Toronto buyer. His father-in-law passed away and left his wife about $1 million. They started looking at property outside of the GTA (greater Toronto area), got excited about how cheap everything was, and started buying real estate like it was going out of style.  I’ve lost touch with them but the last I heard they had gotten themselves in over their head (they hadn’t been able to rent out or resell what they’d bought).

Apparently in the 80’s Japanese developers played the role of ignorant buyers in New York. After coming to town and finding everything cheap compared to Tokyo, they started overpaying for properties. They’ve since learned their lesson and are paying market rate.

Some times it isn’t just regional variations. A while back I saw a saw a 5 bedroom property being offered for $140k in my home town, which looked like a killer deal. I’ve been watching it for the last 6 months, and it’s still available. Finally I mentioned it to my brother and said it didn’t make sense that it was sitting on the market unsold for so long. My brother had heard through the grapevine that the condo complex it is in had gotten tired of all the rentals and had gotten new rental restrictions put in place. There was a good reason why it’s selling cheap:  it’s ideally suited to a student style of rental, which is no longer allowed.   Someone who didn’t do their due diligence and jumped on the deal might be sitting on a property that is difficult to rent out (and couldn’t be easily resold for the purchase price).

One of my brother’s friends was involved in the sale of a fly-in fish camp.  Apparently the lake that the lodge was on was dead (no fish), but the buyers didn’t know to check this.  They were babes-in-the-woods moving into a new industry they didn’t understand, thought they’d found a good deal and got taken.  I was surprised my brother’s friend talked about this, as I’d find it VERY questionable to be involved in such a transaction, and I find it shocking that he’d brag about being involved in taking advantage of people (it said a lot to me about what kind of guy he is).

Market rate is market rate. Very few people will foolishly give away a property for a fraction of its value, so if a property seems to have an abnormally low price, the first question we need to ask ourselves is why? Many “get rich quick” schemes sell the idea that you have to move fast and seize opportunities. If we don’t have a compelling reason *WHY* something is cheap (and a way to inexpensively remove this roadblock and make it worth far more), then chances are we don’t understand something about the property. It’s probably not a killer deal we need to jump on.

Nancy Zimmerman (check out her blog if you haven’t read it yet, it’s good stuff) was recently considering buying a place she found at a good price (especially compared to the Vancouver market she was used to).  Myself, and a number of other commenters were concerned about jumping on a “great deal that needs to be finalized quickly”.  I think she made the right decision not buying, and look forward to hearing if she gets any more information about if it was as good a deal as she thought (or if there was some problem lurking in the background).

Categories
Announcements

Labour Day Beaches and Air Show – LinkStuff – Sept 6

AwesomeHappy Labour Day everyone – we’ve had a fantastic weekend in Toronto – in fact the weather has been perfect for the past week.  Saturday we went up to a beach near Wasaga and it was quite impressive.  I was expecting a fairly small beach but it was huge.  Sunday we braved the crowds to head out to Centre Island to enjoy the beach there and watch the air show.  We didn’t have a great view of the show but were able to see quite a bit.  One time we were watching and a plane went right over us from behind.  It sounded like it was about 10 feet over our heads.  🙂

AwesomeDayAtChelseaBeach

These pictures were taken with our new Canon 200sx.  Some of the pictures and videos ended up being pretty good but those planes are hard to take pictures of.  They are either too far away or moving too fast when close.  The other problem is that the view finder on the Canon is not as good as the actual camera – there were a number of times where I couldn’t see the planes on the view finder but the picture showed them clearly.

AwesomeDayAtChelseaBeach1

The links

Good Financial Cents had a pretty cool story about a friend who just returned from service in Afghanistan.  Nothing to do with personal finance but a good read.

Finance Freelance Life had a very useful post on How to save and store critical financial information for your family.  If you get hit by a bus one day you don’t want your family to have to scramble to figure out the finances (not that you’ll really care at that point).  🙂

Million Dollar Journey had another great post from Kathryn called Money and dating – finding someone with similar financial goals.

Canadian Capitalist tells us his top five investment deals.

Preet talks about a hedge fund that returned 80% last year.  And it wasn’t run by Bernie Madoff.

Financial Blogger asks Is my pension dead?  6 Killer questions to ask your HR about your pension plan.

The Dividend Guy explains why ETF marketing is hurting investors.

The Oblivious Investor has some thoughts about paying down debt vs investing.

Cash Money Life gives us a guide for estimated taxes. These are American rules.

Moolanomy also wrote about how to calculate IRS estimated tax payments.

Personal Finance by the Book thinks that a rising national debt makes the Roth IRA a good choice.  The Roth IRA is the American equivalent to the Canadian TFSA so he’s basically predicting that taxes will go up so paying your taxes now might be a better choice.

The Intelligent Speculator says it’s time to dump eBay.

ABCs of Investing explains what REITs are – real estate investment trusts.

Carnivals

Festival of Frugality

Carnival of Money Hacks

Carnival of Financial Planning

Carnival of Everything About Personal Finance

Categories
Money

Contribute Unused Vacation And Sick Leave Pay To My 401(k) Or Other Retirement Accounts

Employers already have the ability to let workers contribute the value of their unused vacation time to their 401(k) plans but it is pretty rare for en employer to do so.  A recent proposal by President Obama will make it easier for employers to convert unused vacation and sick leave pay into a retirement account such as a 401(k) plan.  The purpose of the plan is to try to encourage Americans to save more – while the American saving rate has increased from the dismal 0% rate in the last year or so – the low amount of savings that middle-aged Americans have is going to be a big problem when they try to retire.

What kind of retirement accounts will it apply for?

This program will apply to any qualified retirement plan.  401(k) plans, Roth IRA, tradition Roth etc.  It hasn’t been announced if you will have the option of splitting up your unused vacation time into different accounts or have to designate one account to be the receiver of any contributions resulting from unused sick days or vacation time.

Will these contributions be on top of existing contribution limits?

No, the contribution limits won’t be changing for any retirement accounts.  If you have already reached the contribution limit for your Roth IRA for example then you won’t be able to use that account for this purpose.

What if my current vacation/sick leave is “use it or lose it”?  Can I still contribute?

Probably not.  These changes are voluntary for employers and employees and there are no actual rules changes.  If you lose your unused holiday at the end of the year then it would be up to the employer to “volunteer” to allow these unused days to be contributed to a retirement account.  I wouldn’t hold your breath waiting for this to happen.

Will these changes encourage workers to save more?

I doubt it – workers who can already “bank” their vacation days and unused sick leave pay will just continue to do so.  Workers who don’t have the ability to carry over these days are very unlikely to have an employer who suddenly decides to allow employees to keep their vacation days.

Where there any other changes announced?

Yes.

Ability to buy US government savings bonds with your IRS tax refund.

Starting in 2010 you will be able to select “buy savings bonds” selection when filing your taxes.  Your tax refund will be used to buy US government bonds which will be mailed to you.  I’m not sure how useful this is since these bonds don’t pay very much interest and are probably a more appropriate investment in a tax-sheltered account such as the Roth IRA.

Auto-enrollment for retirement plans

Another feature of the latest proposals is to make it easier for small and medium sized employers to automatically enroll employers into their company retirement plans.  Currently there is a fair bit of bureaucratic paperwork to set this up and this process will be streamlined.

More Information

Roth IRA Contribution Limits For 2010