Author: Mike Holman

Categories
Personal Finance

Cash Flow Measurement

One of the financial activities that my wife and I decided to start doing this year was to measure our cash flow on a monthly basis in order to determine if we were spending more or less than our income. I believe the ideal way to monitor your finances is to keep track of every single financial transaction you make during the month. At month end you should be able to reconcile all your money coming in with money going out and then you can analyze where all your money has gone.

The only problem with that method is that it’s a lot of work to keep track of every single dollar you spend and we decided not to bother with that kind of detail.

What we decided to do instead is just do a much simpler calculation to figure out our net cash flow for the month. From this we can calculate the total amount we spent during the month and how much we saved.

The calculation is as follows:

1. Cash saved during the month = Cash Position at beginning of month minus cash position at beginning of last month.

2. Total money spent = total income during the month minus cash saved (from calc 1)

Note that the Cash Position is the net total of all your bank accounts, credit cards, and line-of-credits. It’s not important to do this at the beginning of the month but you should pick a time in the month that is consistent month to month. The first of the month works for me because I get paid at the end of the month and no withdrawals are made before the first of the month. It’s important to try to do this type of analysis over at least three months because of the normal variation in monthly spending.

This calculation tells you how much you saved and spent but no details on what the money was spent on. To try to fill in the gaps a bit, the next step I do is to look at our bill payments in our checking account as well as all charges on the visa statement and enter those entries into a spreadsheet which allows us to quickly see where about 80%+ of our money is spent.

I like this modified calculation because it’s fairly easy to do and gives us a lot of important information about our finances. We can always keep track of every detail if we feel the need to cut back a bit and need to know what can be cut, but until that time, this method will do.

An example calculation:

On April 1, Sue has $1000.00 in her bank account and owes visa $80.00.

On Mayl 1, Sue has $1250.00 in her bank account and owes visa $160.00.

Sue has a net income of $3500.00 per month.

We’ll calculate for the month of April.

1. Cash saved during April = ($1250 – $160) – ($1000 – $80) = $170

2. Total spending during April
= $3500 – $170 = $3330.00

Now this method is only a measurement of your cash flow and the resulting information needs to be further analyzed to determine if you are on track for your financial plans.

If you are looking for another budgeting program then check out my You Need A Budget Review.

Categories
Opinion

SuperBlog?

On Canadian Dream’s post today he talks about the possibility of forming a new shared personal finance blog with multiple writers. This got me thinking a bit about the concept and I thought I would share some of my thoughts.First of all I think a group blog is a great idea. There are lots of bloggers who only want to post infrequently and sharing a blog would help keep the traffic up so that there would be people still reading your posts even if you only posted once or twice a week. I personally haven’t “hit the wall” yet but if I ever get to a point where I just can’t or won’t post several times a week then sharing a blog with a couple of other bloggers would be ideal.

I’m guessing there could be other motives for forming a group blog and they would be financial. A lot of blogs have advertising but as successful as some blogs are in terms of hits, it’s difficult for a single person to expand that blog without quitting their day job to write content for the site. The answer of course is the shared blog. However if the shared blog is to be run like a company then I’m not sure how well it would work if there a lot of bloggers involved. Who has the final say on things? Who controls the money? Who decides the layout?

My suggestion would be that a better idea is to have one person who is keen on creating a profitable site and has access to financing, to be the owner of the new site. They would get other bloggers to write posts by paying them. It could be small amounts at first and then maybe more money if the site takes off. I wouldn’t be surprised if you could get a lot of quality posts for $10/post. The idea would be to create a “must visit” blog which will drive traffic to the point where the advertising revenue can create a profit.I didn’t think of this idea of course, one example that I’m thinking of is hockeybuzz.com which is a hockey blog run by a guy named Eklund who supposedly has a lot of nhl connections. If I’m not mistaken, he started the blog himself and then later added posts from other writers. I would assume at this point that he pays those writers but I don’t know that for a fact. Who can do this? Someone with a lot of drive, access to money, good webmaster skills would help. You could start a site from scratch but nothing breeds success like success so I would suggest that you follow the Eklund model and expand on an already popular site. Canadian Capitalist comes to mind as well as Million Dollar Journey. CC has built up his traffic over the last several years while MDJ worked some kind of magic to quickly create a very popular site.I don’t think either of those guys wants to start writing more posts per day but if they could get other people to write the extra posts then that would be a way of expanding their sites.Why don’t I want to do something like this? For one thing I don’t believe the Canadian personal finance world is big enough to support a blog like hockeybuzz.com. The hockey blog world much, much bigger than the Canadian personal finance blogworld. Plus I rather like having my own little blog.

Categories
Investing

Why I Suck At Trading

I’ve come to the realization that I would not make a very good stock trader. The evidence leading to this conclusion became glaringly apparent when I made my first ever stock purchases over the last couple of months. Both trades were Bank of Montreal purchased for my leveraged stock plan.

After doing a bit of research on the mechanics of buying stocks along with practicing on the trading simulator at Questrade, I was able to get comfortable with getting the real time quotes and placing an order with a limit. The limit probably wasn’t necessary since I was buying board lots of a heavily traded company, but better safe than sorry.

The other part of being on the “buy side” was waiting for a dip. I had read in many books and blogs that the best way to accumulate dividend stocks was to “buy on dips”. It seemed pretty obvious that all one had to do was wait until said dip appeared and then let the trading begin! The only problem was an an extreme lack of patience on my part. Once I got it into my head that I was going to be buying some stocks then I kept a close eye on the price in order to identify a dip at which point I would pull the trigger. However due to the feverish excitement I was in, I ended up spending way too much time at work checking the price of the stock. I’m sure my co-workers were suspicious since I was spending a lot more time glued to my computer than I normally do. After a while I decided that dip or no dip it was probably better to pay a couple of bucks too much for the stock rather than lose my job because I was checking real time quotes all day long. The other problem I had was a constant irrational fear that the price would skyrocket and if I didn’t buy right away I would never get it for that price again.

I ended up buying the first 100 shares of BMO at $71 which was after the shares had been hanging around $68 for a while because of the trading scandal. The reason I couldn’t buy when the stock was lower was because I didn’t have the account set up yet and it took a while for that to happen. For the next trade I told myself that I would wait patiently until the stock hit the very bottom (wherever that is). But history repeated itself and I ended up buying 200 shares at $68.60 which felt a lot better than $71 but of course, better deals could have been had with a little patience.

Since my plan is to hold these shares for a long time, the initial purchase price isn’t all that important but the competitive spirit in me demands that I get the best price possible. I didn’t accomplish that goal with my purchases this time but I’m hoping that next time I’ll be able to stay cool long enough to get a good deal. If not, the dividend cheques will help make up for it.

Categories
Investing

Bubbles

No this is not about the Trailer Park Boys, but about a new article that William Bernstein of Four Pillars of Investing fame has written here on his website.

He talks about the possibility that we are in a bubble based on a number of factors including over valuation of worldwide stocks and the realization of Hyman Minsky’s criteria for a bubble – liquidity and displacement. By displacement he’s referring to a transformative technology (ie the web) or new financial ideas. Bernstein says that this displacement is occurring with the onslaught of new ETFs on which Larry McDonald wrote about. Personally I would have to respectfully disagree with Bernstein for the simple reason that ETFs have been around since 1990 so they really aren’t a new invention. Index funds which are pretty closely related to ETFs have been around since the mid-seventies. Admittedly there are some exotic flavours of ETFs coming out which leads one to believe that maybe we are in a bubble because apparently any type of investment will sell these days as Canadian Capitalist covers here.

In the end he concludes that the odds are not more 50/50 that we are in a bubble. One of his ideas in his book is that a major bubble only occurs once every generation or about every 30 years because everyone forgets about the last big bubble. In this case it has been too soon since the dot bomb for another bubble to occur.

On the other hand he also mentions in the article “the better you are at tuning out the opinions of others and making judgments for yourself, the wealthier you will be.” So perhaps we just have to make up our own minds on whether there might be a bubble occurring.

Categories
Frugal

Cheapest Grocery Store Comparison

I’ve heard from many people that certain grocery stores are much cheaper than other ones. Loblaws in particular is usually named as one of the more expensive ones whereas No Frills is considered one of the cheapest. I’ve always been doubtful that there is a huge difference between stores but since I’ve never compared prices before I didn’t really know. Our average grocery bill for this year is $591 per month so it’s worth seeing if we can save a bit. We shop exclusively at Loblaws because it’s the most convenient store from my house although there is a Price Choppers which is almost as convenient. Food Basics and No Frills are not too far but much less convenient.

Which grocery store is the cheapest?

After reading about various other bloggers reducing their food bill,I decided to carry out some research of my own. I planned to do a price comparison of the four nearby grocery stores using a basket of goods made of up items which our family buys regularly. What I want to see is if there really is a big difference between Loblaws and the other stores and also to see where the best prices are for various items since the cheapest goods probably won’t all be at the same store.

Cheapest grocery store experiment

To perform the experiment I found an old notebook which I could use to write down the data and then set off to the various grocery stores with wife & son in tow. First stop was Price Choppers – since I didn’t have a list of items yet I wandered around and just wrote down items and prices of goods that I know we buy frequently since I figured they should make up a significant part of the food bill. I only wanted to make a sample list, it would be too much work to compare every item we buy over the course of several months. I ended up with a list of 24 items including all the normal staples. Next stop was Loblaws, followed by Food Basics and then No Frills.

You’ll notice in the spreadsheet below that I’ve used a multiplier on all the items to try to estimate how many of that particular item we use in a month. This was done to try to create a proportional basket of goods, based on market capitalization if you will.

Cheapest groceries result

The results were quite interesting. Loblaws was indeed the most expensive but not by a whole lot. Food Basics was 5% cheaper than Loblaws and Price Choppers was 10% cheaper than Loblaws, No Frills was the cheapest at 16% less. Some of the items had huge discrepancies in price while other items were priced similarly at all the stores.

The other basket of goods I created was to add up all the cheapest prices for each item. This basket which would require a lot more effort since it would involve shopping at all four stores, priced in at 20% cheaper than Loblaws which is a significant savings.

Now that we’ve seen the results from this experiment we will definitely make the effort to buy items where they are the cheapest. It’s unlikely that we’ll be able to save the full 20% saving that we could achieve by only buying the cheapest item at all four stores, but I’m hoping that we can save somewhere between 5-10% off our bill without having to go through a lot of extra effort. The spreadsheet with all the data is linked below.

Other ways to save money on groceries are:

  1. Cut down on wastage. This is hard to do but by keeping the fridge clean and looking around in it once in a while you should be able to keep wastage to a minimum.
  2. Buy cheese blocks instead of slices. I love cheese slices but I compared the prices of some recent purchases and it was $1.29 per 100g of block cheese vs $2.09/100g of sliced – 62% more! I think if we can buy a block then slice it up and store in tupperware in the fridge it will still be pretty convenient to use.
  3. Watch the packaging – those squeeze bottles of ketchup, mustard and mayo are apparently more expensive than the regular containers.

If you have any other suggestions for me then I’d love to hear them!

Shopping Experiment Spreadsheet

Categories
Book Review

Winning the Loser’s Game – Book Review

Winning the Loser’s Game is written by Charles D. Ellis and is based on a ground breaking 1975 article he wrote for the Financial Analyst’s Journal on passive investing.

This book is similar to Bernstein’s Four Pillars of Investing and Malkiel’s Random Walk Down Wall Street in that the main theme is active investing can’t beat the market so investors are better off using low cost index funds. Ellis doesn’t go into the detail that Bernstein and Malkiel do and he also tends to stick to his main message and doesn’t get into portfolio advice such as asset allocation. I found the book well written and quite entertaining. Although the indexing message has been written about in many other books, he finds interesting ways to explain why indexing is the best investment method.

The title of the book comes from his explanation of how amateur tennis is an analogy for the investment game. According to Ellis, professional tennis is a winner’s game because the ultimate outcome is determined by the action of the winner. Amateur tennis is very different because the outcome if determined by the loser. In amateur tennis, the skill levels are so low that neither player is capable of a “winning” play very often. In fact the the winner of this game gets a higher score because his opponent is losing even more points.

Ellis says that the investment field used to be a winner’s game because prior to the 1970’s, 90% of the trades on the NYSE were by individual investors so the professionals could realistically beat the “amateurs” if they were good enough. By the 1970’s however most of the trades on the NYSE were by institutions so investment professionals were now competing against themselves (other professionals). They couldn’t beat the market anymore because they were the market.

Part of the book is about investment policy which I found quite interesting. Ellis suggests that investors should write down their investment policy and by referring to it periodically it will help determine if the policy is being followed. For example if you want a conservative portfolio and it goes up 30% in one year then your portfolio doesn’t match your policy.

I did get a laugh at his comment on leveraged investing since I just started doing some leveraging myself.

“The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed. Leverage is all too often the instrument of self-destruction.”

Categories
Investing

There’s a fine line between good and evil…

This is the last post in the “Leveraged Investments” series. Check out the previous post entitled “Exit Strategies”.

There’s been a lot of posts on leverage lately in the blogworld so I didn’t think it would hurt to have one more…

Also – I’m in no way advocating anyone use leverage for investments unless they are comfortable with the extra risks.

As Financial Blogger and Tom Bradley pointed out, leverage is an instrument that almost everyone uses when they buy their house. Although most people buy a house to live in, not as an investment, it’s an example of where people are using leverage and they might not even realize it.

If you ask people on the street about how they feel about borrowing to invest they might give you a lot of negative feedback. I suspect this is a holdover from times when margin accounts were the only way to borrow for investing. The problem with margin accounts is that if your investments drop in value enough then you have to come up with cash to pay the difference which is why certain investors were running out of windows in 1929.

My opinion is that leveraged investing can be a useful tool but definitely entails extra risk. However it occurs to me that sometimes the idea of leveraged investments can be a question of semantics.

Consider the following:
Person A gets a $200k mortgage on his house with a 25 year amortization. After five years, his mortgage is $185k and he also has $10k in cash that he has saved. This person decides to invest the $10k into a dividend stock, let’s say…BMO. So now he has a $185k in mortgage and $10k of stock.

Person B also gets a $200k mortgage on his house with a 25 year amortization. After five years, his mortgage is $175k but he has no extra cash to invest because he has been making extra mortgage payments. This person decides to borrow $10k from his secured line of credit and buys $10k of BMO as well and gets the tax rebate on the interest paid.

According to popular wisdom, person A is the epitomy of responsible investing using good old cash to buy his stock. Person B on the other hand has made a deal with the devil and plunged into leveraged investing.

So what’s the difference between the two? The only difference I can see is that Person B can write off his interest on his investments and Person A can’t. Obviously there are interest rate differences but I’m ignoring those since they shouldn’t be too significant.

Moral is – if you don’t make extra payments on debt and use cash to do investments then you would be better off to put that cash into the mortgage and then borrow it out again for those investments and get the tax rebate.

And yes, I realize that this logic was the genesis of the Smith Maneuvre but rest assured that I don’t recommend that particular strategy.

Categories
Opinion

EI and CPP Contributions Complaint

As you all know, anyone who works for a company has to pay EI – employment insurance premiums and CPP – Canada Pension Plan premiums on every paycheck. The maximum amount you can pay for CPP in 2007 is $1989.90 which is based on a salary of $42,100. The maximum EI contribution is $720 which is based on a salary of $40,000

[edit – Here are the 2011 Employment Insurance premium amounts and the 2011 CPP contribution amounts]

The problem is that the deduction rates are calculated so that the premiums are all deducted during the portion of your salary within the annual maximum. For example EI is calculated at $1.80 per $100 of earning up to $40k in earnings. That’s fine if you earn $40k per year and the deductions will be constant throughout the year. But what if you make say $65k per year? Then the EI contributions will only be deducted for the first 7.5 months or until the middle of August, when you’ll see a significant raise. In that case the CPP will be deducted until the end of August. The more you make, the higher the deductions are per paycheque and the earlier in the year you get your “raise”.

This drives me nuts because as much as I like to get a raise during the year, I find it difficult in January to go back to the “old” paycheque at a time when heating bills are higher. Why can’t the government mandate that the annual maximum contributions be prorated over the entire year so that there is no “raise” and “pay cut” because of this dumb policy?