Personal Finance

Best Financial Tip – Take a Long Term View Of Your Finances

Today’s post is going to be short and sweet.  When making financial decisions, take a look at the long term view first.

Most people go through a life path where they start their careers, progress with their careers, buy a house, maybe have kids, pay off all debts, save for retirement and eventually retire.

The biggest expense areas can be grouped into the following:

  • Housing costs
  • Retirement savings
  • Living (basically any other spending).

One of the problems that I see with some people is that they spend too much money on living and not enough on retirement savings and paying down debt.

If you are a person who makes the minimum payment on your debts (including mortgage), doesn’t save much for retirement and only saves for things like vacations – you are headed for a bit of a crash at retirement time.

One of the biggest problems with an “I’m not saving for retirement” strategy is that the strategy will work exceedingly well for a long time.  You’ll have a great life and won’t have any money worries assuming you can balance your budget.  The problem is that once you retire, you’ll have to adjust from living the high life to living in near poverty.

If you are middle class or higher, you need to save for retirement in order keep some sort of decent living standard in retirement.

Cut expenses, save for retirement

If you are young (less than 30), then I wouldn’t be concerned with retirement savings.  If you are over 30, you need to start thinking about saving for retirement.  Even if it’s not possible now – think about how to make it happen in the near future.  The retirement savings money has to come out of your living budget category.  Yes, that means you will have to cut back on your living expenses.  You can decide which ones to cut.

Housing is a funny category.  It’s common for people to buy an expensive house, but then only make the minimum mortgage payments for 30 years or even longer.  It shouldn’t take 30 years to pay off a house, in fact it shouldn’t take more than 20 years in my opinion.

Make a plan to pay off your house in a reasonable amount of time.  This extra money will come from your living category. 


If you spend too much money on ‘living’ and aren’t putting enough money into future expenses like retirement – try to think ahead and how you would like your life to be.  Do you want to be debt free someday?  Do you want to retire early or work part time in your 50’s?  Those things won’t happen by accident – you need to do some planning and some saving.

 This post was part of the Blog for Financial Literacy effort organized by Glenn Cooke from

Personal Finance

How To Save $100,000 For An MBA Or Other Higher Education

A reader asked me how he can save $100,000 in order to do his MBA. My first thought was “with great difficulty”.  $100 grand is a lot of cash to save even if you make a high salary.

Obviously, to save money you must spend less than you earn and save the difference. Cutting your spending and increasing your income are the two options you have.

I’m not going to get into money saving tips – there are a million…no, perhaps even a billion blogs out there dedicated to that sort of thing already. I will say however, that saving money is 99% motivation. If you are keen to save money for a desired goal and have the financial capacity to do so, then you will do it.

If you need someone to explain obvious money saving strategies like cooking and eating at home is cheaper than eating out, then trust me – that MBA won’t do you a bit of  good. Just keep eating out and enjoy your life.

Increasing your income by working extra hours or from a part-time job is another possibility, but it might not be practical for everyone.

Save or borrow for an MBA?

I think the reader should consider borrowing money to do the MBA.

Most people complete an MBA in order to increase their earning potential. They might spout some other nonsense about their intentions, but they are lying. It’s all about the money!

Assuming an MBA increases your future earnings, waiting to save up for an MBA means that there will be fewer post-MBA higher-earning years.  If you borrow money and complete an MBA now, you can start earning the big MBA salary earlier and there will be more years with the extra income.

For example if the reader is 30 years old and takes 10 years to save up $100,000 to get the MBA, he will be 40 before he starts making big MBA money. Assuming he retires at 65, that gives him 25 years of post-MBA higher salary earnings.

But what if he borrows the money at age 30 and goes the MBA now? If he starts the post-MBA salary bump at age 31, that gives him 34 years where he is earning a higher MBA salary.

That extra nine years of increased earnings adds up – even if the post-MBA salary bump isn’t that large.

If your salary increases after the MBA, that will make the $100,000 loan easier to pay back.

And yes, this argument can also be applied to any post-secondary education which is why it can make a lot of sense for students to borrow in order to complete a degree or other training if it increases their future earning potential.

What if my post-MBA salary doesn’t increase?

If you spend a $100,000 on an MBA and end up going back to your old job – needless, to say you probably wasted your money. Not everyone benefits from an MBA.

It’s important to be able to pay back your MBA student loan, even if your salary doesn’t increase. To do this, you have to look at your current pre-MBA income and determine if that is possible. If not, you might want to consider saving up part of the MBA cost first and then borrow the remainder in order to reduce your risk.


$100,000 is a lot of money to save and it would take most people a long time.

If you want to invest in post-secondary education (ie MBA) to increase your future earnings, consider borrowing the money you need unless you can come up with the cash in a reasonable amount of time.

Make sure that whatever education you choose has a reasonable chance at a payoff. Even MBAs don’t pay off for everyone.


LinkStuff – Sandy Edition

I hope everyone survived the recent bad weather resulting from Hurricane Sandy.  Luckily in the Toronto area, we were spared most of the effects and just had a bit of extra rain.

The New York stock exchange was closed for two days this week because of the weather and my friend Alexandra Macqueen who wrote the excellent Pensionize Your Nest Egg book, commented that it was closed because of too much liquidity.

Stock exchange liquidity refers to the ability to easily sell securities on the exchange and since there were lots of liquids involved in the shutdown….ok, maybe you had to be there.

On with the links

Here is a story about a mom who is considering spending $1,500 on a double stroller.  And I’m sure her RRSP & RESP are maxed out…

Here is a funny article about why statisticians make lousy investment clients.  Some good lessons about “safe” retirement withdrawal rates. 

Congrats to Tim at Canadian Dream who just paid off his mortgage at age 34.  If you are only going to do one good thing financially – paying off the mortgage would be my #1 choice.  And don’t go to any open houses either…

Robb from Boomer & Echo discusses why he made a major career change.

Mike Piper discusses retirement planning with no kids.

Michael James explains why he is too lazy to fill out the MPAC house assessment reconsideration form.  😉


The True Cost Of Owning An ETF – The MER Is The Main Thing

I read an article recently about a formula to calculate the true cost of owning an ETF.  The idea behind this formula was to capture all the costs of an ETF, not just the annual expense ratio or MER.

Related: What are ETFs? – Exchange Traded Funds

If you are trying to add up your costs for something, it makes sense to try to include every single cost involved.  However, from a practical point of view, it might also make sense to just include the significant costs and ignore the insignificant ones if it is too much work and the final result will be similar.

This second approach definitely applies to the cost of ETFs.  For most investors, the MER or expense ration of an ETF is the dominant cost and the main one they have to worry about.

Bid-ask spread costs [explained below] and to a lesser extent, trading fees are mainly relevant for frequent traders.

Related: How to buy an ETF or Stock at a discount brokerage – Step by step directions

The reason this article caught my eye was mainly because of the example given – the “true” annual cost for an ETF that had an expense ratio of 0.10% ended up being 0.76%, which is almost 8 times higher than the original expense ratio or MER.  That seems pretty suspicious to me, so I took a closer look.

In the example, the investor has $10,000 which they use to buy an ETF.  After six months they sell the ETF and the author calculates the “expense ratio” which includes the trading fee and the bid-ask spread.  While their math isn’t wrong, I’m not sure how common that scenario is.

Do most people buy ETFs if they only have $10,000?  I would think that low-cost index funds would be a far better choice.  The author is American and they have access to a lot of very low cost index funds, so in most cases – someone with a smaller portfolio wouldn’t likely be investing in ETFs.

Related:   ETFs or Index funds – the best strategies

The other problem is that someone who changes their entire portfolio every six months is a reasonably active trader in my opinion.  Yes, I realize that investors make changes, but do they sell everything every six months?  Not likely.

Most investors are somewhat passive with a good part of their portfolio.  Even active traders often have a good portion of their money in static investments and just “play” with a smaller amount of money.

The trading fee and bid-ask costs are only relevant for buys and sells, so the annual cost for ETFs that are invested long term will be very close to the MER of the ETF.  If an investor does more frequent trades on a portion of their portfolio, that will increase their expenses, but not by much since the extra costs are spread over the entire portfolio – not just the actively traded portion.

Related: How to sell an ETF or Stock at a discount brokerage – Step by step directions

Trading fees

ETFs are securities traded on public stock exchanges and require a commission to be paid to a broker in order to be bought or sold.  There are some commission-free ETFs, but they are in the minority. 

Common sense is important when it comes to trading fees.  If you are paying $25+ for your fees, then you need to find a cheaper broker – see the Canadian Discount Brokerage comparison for more information.

If you are paying $10 or less per trade, you still need to make sure that it makes sense to be buying ETFs.  If you are buying $100 of an ETF each month and paying a $10 fee, that is not a good idea since your fee is 10% of the transaction.  Way too high!

One rule of thumb which I like, is to not do any stock/ETF transactions where your trading fees are higher than 1% of the trade amount.  So if you are paying $10 per trade, your minimum trade amount should be $1,000.

Here are some other suggestions on how to lower your trading costs when buying ETFs or stocks.

Bid-ask spread

The bid-ask spread is an investment cost which is difficult to understand (for me at least).  The easiest way to think about it is pretend you buy some ETF shares right now for $15 per share. If you are a day trader, you might want to sell those shares in one hour.  Let’s say the share price doesn’t change in that hour.

When you buy, you are paying the ‘ask’ price and when you sell, you receive the “bid” price (in theory at least). Therefore, if you buy and sell an ETF (or any individual stock) and the share price doesn’t change, you won’t get the same price you paid.

This may seem odd – if you buy a stock at $15.00 and sell at $14.97, didn’t the price go down and you lost three cents per share as a result.  In reality, that’s possible, but in my example where the price didn’t change – your loss was a result of the bid-ask spread. 

XIU.TO (my favourite Canadian ETF), for example has a bid of $17.57 and ask of $17.58.  If you put in a market order, it will get filled at the ask price of $17.58. 

The ‘ask’ price is the lowest price that sellers are offering their shares for on orders that are unfilled.

If at that same moment of time, sold the shares at market – you would likely get $17.57 per share for a loss of one cent per share.  This loss is due to the  difference or “spread” between the bid and ask offers for outstanding shares.

In our example, a one cent “commission’ represents 0.057% of our trade.

Related: Stock Purchase – Bid/Ask Prices

Let’s look at another ETF.  VTI (all American stock ETF from Vanguard) which happens to be my favourite American ETF, right now also has a spread of one cent.  The difference with VTI is that the price of each share is $72.53, so a one cent commission is only 0.014% which is about one quarter of the spread ‘commission’ we paid on the XIU share.

Obviously the spread commission as a percentage is not only a function of the difference between the bid and ask price, it’s also a function of the share price.  The higher the share price is, the lower the commission as a percentage.  One cent is a smaller fraction of a $75 stock vs a $18 stock.

The “ETF cost” author’s bid/spread example could be an ETF that has a three cent spread and a sub-$20 share price.  While this isn’t unreasonable, if you stick to the larger ETFs, this shouldn’t happen. 

I decided to check the bid/ask for all the ETFs I have in my portfolio and most of them were one penny:

  • XIU – one cent
  • VTI – one cent
  • VEA – one cent
  • XRB – two cents
  • XSB – one cent
  • BSV – two cents

This isn’t to say that these ETFs never have larger spreads.  It can and does happen, but it’s not likely to get more than a couple of cents.

Both XRB and BSV are not heavily traded compared to the other ETFs which helps explain the larger spread.  Even my most ‘expensive’ spread which occurs on XRB still only results in 0.07% commission which is half of the example in the article.

Let’s do a fun example

Since the author did a fairly arbitrary example which increased the ETF costs dramatically, I will do the same thing to show that the trading fees/spreads are insignificant – at least in my example.


  • Portfolio is $100,000 at the beginning of the year. 
  • Portfolio is made up of one ETF.
  • ETF share price is $28 and never changes or pays out dividends.
  • ETF annual expense is 0.17%.
  • Investor purchases $1500 of one ETF at the end of each quarter with a trading cost of $10 and a two cent spread which is 0.07% of the share price.  The trading fee comes out of the account.
  • They can buy fractional shares (this makes the example cleaner).
  • The time period is five years.

My theory is that the annual expense of 0.17% is the only one that matters. 

After five years, the investor has $129,400 in their account and has paid:

  • $954.61 in MER
  • $200 in trading fees
  • $5.36 due to the spread commission

The total cost over the five years is $1,160.

Now I will admit that in this case, trading fees are more significant than I originally thought, however the spread commission is not.

So depending on what kind of investor you are, the annual MER and to a lesser extent your trading fees will determine your total costs.

Moral of the story

Bottom line is that as long as your transaction fees are low and you don’t trade a lot, the annual ETF expense ratio or MER will be the largest part of your ETF cost.  If you want to be a cost-conscious passive investor, buy broad-based, commonly traded ETFs with low annual expense ratios (or MERs as we like to say in Canada) and make sure you aren’t paying too much for trading fees.

Even if the combination of bid-ask spread and trading fees is high, assuming your transaction amounts are small portion of your portfolio – the MER is the main cost.  Work on minimizing the MER before worrying about the other stuff.

If you don’t have a large portfolio ($100,000+), then I would take a good look to see if ETFs or low cost index funds are more appropriate.


LinkStuff – Dividend e-Book Edition

My friend Mike Hereux from the Dividend Guy blog has written a book about dividend stocks called Dividend Growth: Freedom Through Passive Income.

It’s a pretty good guide on dividend investing and includes everything from stock selection to diversification to taxes. If you want to learn more about dividend investing, this book is a good value.

So far it is only available on Kindle, but Mike has promised that a print version is forthcoming. Remember that you don’t need a Kindle to read Kindle books – they can read on any computer or smart phone.

One of the neat features of this book is that there is both a Canadian and American edition.

Here are the links to the books in the Kindle bookstore:

On with the links

 Boomer & Echo wrote a really good post illustrating the need for disability insurance with a real life example.  I’ve had conversations with people who thought that only people with manual jobs need disability.  This isn’t the case at all.

This article shows some proper financial planning strategies for low income seniors.  If you are in this group or know someone who is, send this info to them.

 Michael James does some research to show that a bond & stock portfolio isn’t likely to outperform an all-stock portfolio over the long haul.  You should add bonds or other fixed income products to reduce volatility, not to increase returns.


Avoiding Cell Phone Data Roaming Charges While Traveling In The United States – Success!

I’ve written a number of articles about my experiences with attempting to reducing my iPhone data charges while traveling in the United States and I”m happy to say that this year, I didn’t have any data “surprises”.

Last year, I got some unexpected charges because I wasn’t monitoring the data usage correctly and I also didn’t realize the excessive amounts of data used in Skype phone calls.

Read about last year’s experience:  How to avoid cell phone data roaming charges when traveling to the United States

How I saved on roaming charges this year

Roger’s has changed their roaming data plans signicantly from last year.  I decided to purchase a 20 MB one month data pack for $30.  Not exactly cheap, but a lot better than the roaming charges.

20 MB isn’t that much data for four days, but this time I had wifi available at the conference as well as in my hotel room.  One of the best things you can do to save on data charges is to use wifi, even if you have to pay for it.

One of my concerns from last year was a lack of data monitoring and no alerts from Rogers.  To fix this I bought an app for my iPhone called Data Usage Pro ($1.99), which measures your data use and categorizes usage by cell or wifi.  The cellular data usage is the number you have to monitor, since wifi data doesn’t cost you anything.

By monitoring my data usage and limiting my non-wifi data use, I was able to make the 20 MB last until I got to the airport in Denver on the way home.  At that point, I realized that a good friend of mine from Calgary was also in Denver so I gave him a call using Skype.  This ended up using a lot of data and my 20 MB data pack ran out. 

Roger’s sent alerts telling me this and made it easy to purchase another 10 MB for $10 day pass.  The other problem I had is that I got to the airport way too early and ended up doing quite a bit of surfing there which is why I bought more MBs.  All was not lost as it was a Sunday afternoon, so I spent a couple of hours drinking beer, watching football and surfing.

Better confirmation of data package purchase needed

My only complaint about this whole process was that the 20 MB data package doesn’t get activated until you cross the boarder.  The problem is that you don’t know if your purchase went through or not.  Why can’t Rogers acknowledge your purchase with an email, so you don’t have to worry?

I ended up buying two packages because I thought the first purchase didn’t work and had to phone to get one of them refunded later on.

Next year will be different

This will be my last year with a locked iPhone.  My plan in early 2013 is to buy a new iPhone once my current contract runs out and unlock the old iPhone and use that for foreign travel.  Once the phone is unlocked, I’ll be able to buy a local sim card and pay very low American data rates.

Summary – Ways to save on roaming charges

  • Make sure you understand exactly what data usage is and how to monitor it on your phone.
  • Buy a data package from your wireless provider.
  • Consider an app to monitor data usage.
  • Use wifi as much as possible. 
  • Avoid Skype or other Voip calls unless you are using wifi.
  • Leave phone at home or put it in airplane mode and just use it for calls.  Make sure you have a long distance calls package for this.

LinkStuff – Arrowhead Provincial Park Edition

I recently wrote about our visit to Pinery Provincial park which is a great park.  I think our favourite park from this summer was Arrowhead Provincial park which is near Huntsville, Ontario.

It’s located about three hours north of Toronto and is just outside Huntsville.

What we liked about Arrowhead

  • Campsites were large and private. Couldn’t ask for anything better. We rented a cabin again and it was just lovely.
  • Nice beach.  Ok, it wasn’t Pinery, but the beach area is very nice, although the water wasn’t very warm.  Good enough however.  There is a good rental place on the beach for various watercraft.
  • Nice river.  There is a quiet river leading off from the swimming area which is great for canoeing.
  • Stubb’s waterfall.  There was a small waterfall about 10 minutes walk from our site.  The kids had a great time climbing around the various shaped rocks near the falls.  We did a short hike down a very scenic trail beside the river.
  • Trails – Lots of good walking trails.  There are also mountain bike trails and rentals on the beach.
  • Close to Huntsville.  If you have to make a quick run for food/beer, it’s nice to have stores nearby.
  • Near Algonquin Park.  An Arrowhead pass is good for Algonquin as well.  While there is lots to do at Arrowhead, if you have a rainy day – heading to the Algonquin visitor centre is an option.

We liked it so much, we’re planning a longer trip next year.  Probably five nights.

Anyone else ever been to Arrowhead?  Any other parks you want to extol the virtues of?

On with the links

How to save money wrote a primer about how to use Priceline to get cheaper hotel rooms.  For detailed bidding instructions, you can check out my post on how to use Priceline.

Michael James had an interesting look at market efficiencies or inefficiencies depending on your perspective.

Jim Yih shares why he switched to a cashback credit card.

Mike Piper answers the question – Is rebalancing, market timing?

Boomer and Echo asks – Can you trust advice from your bank?  I say no.

Ellen Roseman has some good advice and resources if you are in the market for a new car.



Withdrawal Of RESP Over-Contributions – Tread Lightly

Reader Bryan sent in the following question:

I opened an RESP the month after my son was born, and I have been diligently contributing such that my contributions will nearly reach the maximum amount that the government will match by 20%, and the extra room has been filled with money my son has received as birthday/Christmas gifts (he’s almost 5 now).

I haven’t kept careful tabs on the actual amounts contributed, so I recently went into the bank to get a statement printed about contribution information. I discovered that I have “over contributed” in the sense that I have contributed money that the government has not matched because annual totals exceeded $2500. The over contribution has added up to ~$300 over the years.

I have read that amounts that the subscriber contributes can be withdrawn at any time with no tax penalty, I was wondering if I could withdraw that $300, then re-contribute it (in the next calendar year that is, on target to max again this year) to get a 20% match of that amount? Are there any penalties or gotchas I need to be worried about?

To summarize – Bryan made some extra contributions to his son’s RESP that didn’t get any grant because the maximum grant was already paid that year.  He wants to know if he can withdraw the contribution amount that didn’t get any grant without any penalty and then re-contribute it to the RESP.

The answer is no

Unfortunately, this plan won’t work.  Bryan should just leave the “over-contribution” in the account and keep closer track of his contributions in the future.

Before explaining why, a bit of terminology:

  • Assisted contribution:  A contribution to an RESP account that receives a grant.
  • Unassisted contribution:  A contribution to an RESP that doesn’t get any grant.

Bryan suggested that RESP contributions can be withdrawn at any time without any kind of penalties.  In fact, this is only true if the child is attending post-secondary education and is eligible for RESP payments.  If the child is not eligible for RESP payments (ie not going to school), withdrawing RESP contributions will likely result in losing some of the RESP grant money that is in the account.

Now you might be thinking that you should be allowed to withdraw unassisted contributions without penalty, but that’s not how the withdrawal rules work.  When a financial institution completes a contribution withdrawal request, they are required by the government to withdraw from the assisted contribution bucket before withdrawing from the unassisted contribution bucket.

The result is that if Bryan tries to withdraw the $300 of unassisted contribution money, he will end up withdrawing from the assisted contribution bucket and the government will claw back the amount of grant attributed to the original $300 contribution which will be $60 worth of grants.

There are rules which allow over-contribution withdrawals without clawbacks.  These only apply to contributions over the lifetime contribution limit of $50,000.  So for example if you end up contributing $51,000 to an RESP beneficiary ($1,000 more than the lifetime limit), you can withdraw the extra $1,000 and no grant clawback will occur.  In Bryan’s case however, there was no over-contribution, so those rules don’t apply to his situation.

Contributing money to an RESP that doesn’t get a grant is not an over-contribution.

How to avoid making contributions that don’t receive a grant

You have to keep track of contributions yourself.  The only limit on RESP contributions is the $50,000 lifetime limit.  Other than that – you are allowed to contribute whatever you want, whenever you want and nobody will ever tell you that some or all of your contribution is not eligible for a grant.

If you aren’t sure where you are in terms of contributions, call your financial advisor or financial institution and ask.  You can also call the HRSDC at 1 888 276 3624. They can provide the amount of contributions and grants made for your child.

Also make sure you understand the rules about how much you can contribute to an RESP in any given year, how the retroactive contributions work and also the RESP contribution rules for 15, 16 and 17 year olds.