Author: Mike Holman

Categories
Money

$250 Stimulus Check For 2010 – Is It Enough?

President Obama has proposed another $250 stimulus check for all recipients of Social Security as well as a $250 check for people on SSI.  This stimulus check was given out in 2009 and he has suggested that since SS and SSI payments are not increasing in 2010 because of low inflation, this check will help people pay their bills.

Is a $250 stimulus check enough?

The problem is that $250 doesn’t go as far as it used to!  Obviously everyone can use more money but the question to be answered is – is a $250 stimulus check enough to help people?  Given the costs of administrating this program and sending checks out – another good question is whether the program is worthwhile doing at all for a relatively small amount of money.

Here are some possible options for the government to consider:

Increase the amount of the stimulus check

Making the stimulus check larger to $500 would make it a lot more worthwhile considering the admin costs.  More money would be available to help stimulute the economy.  The downside of a larger check is of course the extra costs.  Giving out twice as much money will increase the government deficit and debt levels and clearly that is not a good thing.

Lower the amount of the stimulus check

Another option is to lower the check to a level around $100.  This would save the government and taxpayers money but doesn’t make a lot of sense since now the amount is way too low and it would be very pointless to handle giving out checks for only $100.

Don’t do any stimulus check in 2010

This last option is unfortunately a definite possibility since the bill hasn’t passed the house yet which means it could still die.  Not giving out a stimulus check would be the best thing for the government since it wouldn’t cost anything but what about the people on SS and SSI who need the money?  They would probably not like this option.

Keep it at $250

If there is any stimulus check then this is by far and away the most likely option.  The amount isn’t great but on the other hand, the cost is somewhat affordable to the government.  Plus, this is the same amount that was given last year so it makes sense in that context.

Categories
Announcements

Tiger Woods LinkStuff For Dec 10

Tiger Woods…”links”…linkstuff?  Haha – get it?  Ok, I have to admit I’ve been following the Woods sordid saga pretty closely.  My only question is why did he bother get married?  I had to wonder at the comments of one of his “friends” who was annoyed that he was seeing other girls as well.

On with the links (the other kind)

Larry MacDonald of was kind enough to mention this blog in another Globe and Mail article.  I gave some advice about RESPs.

Canadian Capitalist lists some 2009 year-end financial deadlines.

Million Dollar Journey talks about selling hope via lottery tickets.

The Financial Blogger explains how to make 6 figures a year.  I checked out his post and unfortunately, his method involves a heck of a lot of work.

Thicken My Wallet wonders when his dividends will go up.

Studenomics wrote a lengthy post comparing buying vs renting a house.

Where Does All My Money Go had an interesting post on the modified Dietz return calculation which is used to calculate portfolio performance.

ABCs of Investing explains what private equity is.

Categories
Money

Cash For Caulkers – Make Your House Energy Efficient

A new government program was announced today which would provide “cash for caulkers” or more appropriately “cash for remodeling”.  The idea behind this program is to help improve the economy by encouraging home owners to spend money improving their homes by remodeling.

The improvements would have to fall under the “efficiency” category.  Things like insulation, windows and caulking would be eligible for the cash.  Improvements like new kitchen countertops would not be eligible.

This program might overlap with the cash for appliances program which gives money for buying more energy efficient appliances such as fridges, dryers etc.  Click here for the cash for appliances list of eligible appliances.

How much cash will be paid to the home owner?

According to Steve Nadel who is part of the initiative – the program might pay up to $12,000 in cash to each home owner.  This amount would be calculated according to how much work you have done to make your home more energy efficient.  To qualify for the maximum amount you would probably need a fairly energy-inefficient home in order to improve it a lot.

How will the cash grants be calculated?

The details of this program are not finalized but it is likely that there will be companies who will do an energy audit on your home before any work is done.  They will measure the energy efficiency of the home.  Then the home owner will add insulation, do some caulking etc and get another energy audit which will determine how much the remodeling has improved the energy efficiency of the home.  The grants would likely correspond to the increase in efficiency of the home.

One of the more specific details is that home owners might be eligible for a 50% rebate on both the price of the equipment and the installation, up to $12,000.   At this time there are no income restriction on who is eligible to receive grants from this program.

Categories
Real Estate

Buying Co-Ops


I recently came across an article I’d read and enjoyed before on anoisette. Basically it’s a horror story of what can happen if you buy into the wrong co-op in Toronto.

When I first started hunting for my first condo, I kept coming across dirt cheap properties (they’d be in great areas, look wonderful and have a low price). I’d ask my agent why she wasn’t showing me these, and she kept saying “they’re co-ops, I never recommend clients buy in co-ops”. I was suspicious about this, and the main rationale she gave me against them is that it’s hard to get a mortgage, so you need to put down 35% (it is considered a different kind of non-mortgage loan).

The reason for this, as was explained to me, is that with a condo you own a deed to that space in that building. Because of this, you can borrow against the deed and get a mortgage, much as you would with a single family home. In the case of a co-op, you own a SHARE of the corporation, which entitles you to exclusive access to one of the units. When you borrow money to buy the place, you’re using this share as equity (much as you could use a stock share to borrow money or pawn your guitar).

I’m not totally sure why banks like condos but hate co-ops, but apparently there are more legal requirements about how a condo is run, and they have more options to foreclose. My agent kept telling me that I’d need lots of money for a down payment, and becuase any buyers would have the same problem, I’d have a tough time selling it down the road.

Since I was (and am) planning to hold the properties I buy for the long-term, the selling argument didn’t bother me. The massive down payment sucked, but I reasoned that if it’s tough for me to purchase, this is a “barrier to entry” that would make it tough for other people to purchase as well (and help me get a good deal).

One strategy I also considered was to offer a vendor-take-back mortgage if I ever wanted to sell, then I’d be able to get a higher price for the property by making it easier for people to buy (I’m happy to get paid over an extended period instead of upfront as long as the interest rate is reasonable for the risk I’m assuming).

In the end, this article helped convince me that a building could go to the dogs and I could be stuck with a massive problem. Part of me still feels that this risk is reflected in the price (why co-ops are so cheap), and that by doing your due dilligence you could determine if a building was well run or not (and perhaps be willing to step in and protect your investment if you saw that the building was going down hill).

Has anyone had experience living or investing in a co-op in Canada?  How did it work out for you?

Categories
Investing

Why I Quit The Smith Maneuver

Almost 3 years ago I started up a Smith Maneuver leveraged investing plan which involved borrowing money using an investment loan (home equity line of credit) to invest in dividend stocks.  I wrote extensively about this process (see list at the bottom of page).  Over time I have seen this account go through some unbelievable volatility, have almost no dividend increases and watched interest rates plummet which meant that the account was quite profitable on a net cash flow basis.

Last week I decided to sell all the stocks in the leveraged investment account and pay off the line of credit loan.  I had been debating for a while if I should continue the leveraged plan and since it was at a point where there was a small capital gain, it made the decision very easy from a psychological point of view.

Why did I end the Smith Maneuver plan?

A lot of things had changed for me in the 3 years since I started the plan.  My opinion of leveraged investing hasn’t really changed but I didn’t feel that it was a good fit for my situation anymore.

Extra risk. When I started the plan I wanted some extra risk.  The problem is that as time went on and it became apparent that we were going to be a single income family and my company had several rounds of layoffs in the past year – my appetite for that extra risk diminished.

Another issue concerning risk is that when I started the plan, my portfolio was 80% equities and 20% bonds.  It didn’t occur to me until much later that adding leverage to a portfolio that isn’t 100% equities doensn’t make any sense.  All I had to do to increase risk was to decrease the percentage of bonds in my portfolio.  If your portfolio is 100% equities and you still want to add some risk then using leverage is a good tool for that.

Hassle – Having a leveraged investment account means doing a bit of work.  You have to open the account, buy stocks, transfer money, keep track of purchases for ACB values.  Transfer dividends out of the account to help pay the interest.  You also have to account for the earned dividends and interest payments when you file your taxes.  This isn’t a huge amount of work but again, my life has changed in the last few years – one more child plus a home business which takes time means that I’m a lot less inclined to want to do extra financial activities unless there is a clear benefit.

Motivation – Another thing that changed was my motivation – at this point in time we have a decent standard of living.  It’s likely that I’ll be able to retire at a reasonable age with an adequate income so the question is – why bother with extra risk?  Extra money is nice but if there is a downside then it’s not worth it for me.

Would I recommend doing or not doing leveraged investing?

My opinion on borrowing to invest hasn’t changed much – I think it is a valid tool to increase your portfolio risk as well as make extra purchases when the market is down.  Just be prepared for a bit of extra work.  Handling volatility is something that I have no problem with but if you have a hard time watching your unleveraged portfolio go down in value then be prepared for the fact that watching a leveraged portfolio go down is much more difficult.

The original leveraged investing plan

This post lays out the grand plan for leveraged investing.  I had a chuckle seeing Frugal Trader’s comment about my projected borrowing costs of 6% – he suggested increasing that estimate a bit.  As it turned out the borrowing costs were much lower than both of us anticipated.

The risks of leveraged investing were discussed in great detail.
Here is one risk which I found amusing

Future growth rate of dividends: If this doesn’t happen then the plan will fail. Not much I can do here other than to try to pick good companies with proven histories of both paying dividends and increasing them. Based on the last 10 years this looks like a slam dunk. But as William Bernstein wrote in Four Pillars of Investing “Ignore the last ten years” when looking at trends. I’ll have to ignore William on this one.

Lesson learned – Don’t ever ignore William Bernstein!

Interest rate exposure.  This is the risk I was most worried about and ironically it was a non-factor since interest went down and stayed down.  This is still a risk factor for the future however.

Conclusion

I’m glad I did the leveraged investing plan, it was quite interesting and I learned a lot.  My advice to anyone thinking about it is to start small and make sure you are comfortable with all the different aspects of leveraged investing before you go in deeper.

Categories
RESP

RESP Grants In a Foreign Country – Reader Question

Randy had some questions about RESPs:

Hi, I was wondering what is meant exactly by ‘approved post-secondary school’. I might go back to EU in the next 10 years, so I wasn’t sure what’s needed as proof of education to be able to withdraw including the grant money. I talked to a childrens education fund sales person and he mentioned that it could be any post-secondary school/university, even outside of Canada, all that’s needed is a note from the institution that proves that the kid is enrolled.
Is this true?

He also wanted to know if grants accrued while in Canada would be taken away if the child leaves the country:

Will the government will take back the grants (matched contributions made by the gov) if the kid studies outside of Canada?

He also asked about the specific resp account:

Also, I’m looking into setting up a TD mutual fund RESP account that i’ll then convert into a TD e-series funds account as is described in another blog entry in this series (https://moneysmartsblog.com/resp-how-to-get-started/). Hopefully there’ll be no annual fee. this sounds a bit complicated though, is it to avoid the annual fees?
Most banks have a 50$ annual fee for RESP accounts. For example the TD Waterhouse RESP account (their other RESP product) has a 50$ annual fee if you have below $25K in the account.

RESP grants can only be earned by kids who are living in Canada

While the child is living in Canada, they are eligible to receive grants on any money contributed to the RESP.   If the child moves away from Canada – they can continue to make contributions but can’t get any more grants.  They can keep any grants that they earned while residents of Canada.

RESP grants can be used for post-secondary education in a different country

If the child ends up going to post-secondary school in a different country then they can still use the RESP (including grants) for this purpose.  They don’t need to attend school in Canada.  You need to call the CRA to verify the exact school you want the child to attend.  You just need to show proof of enrolment at the school.

From this document  http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-08e.pdf

A post-secondary educational institution includes:

  • Aa university, college, or other designated educational
    institution in Canada;
  • An educational institution in Canada certified by HRSDC as offering non-credit courses that develop or improve skills in an occupation; and
  • An university, college, or other educational institution
    outside Canada that has courses at the post-secondary
    school level, as long as the student is enrolled in a course
    that lasts at least 13 consecutive weeks.

One thing to keep in mind is that the RESP is completely tax sheltered while you are in Canada.  This may not be true if you live in a different country.
Example.

Little Johnny lives in Canada from age 0 to 8.  His parents contribute $2500/year for 9 years – total contributions will be $22,500.  Total grants received from government will be $4500.

Johnny and family moves to Germany in the year he turns 8.  At that point they can’t get any more RESP grants.  The RESP + grants will continue to exist in Canada – if Johnny goes to post-secondary school In Germany then he can use the RESP money (including grants) for that purpose.

It’s important to note that the government approves the RESP grants – not your financial institution.  So don’t get the idea that if you “forget” to tell your financial institution you don’t live in Canada any more they will continue to pay the RESP grants.  They won’t.

Why convert your TD mutual fund account to eFund account?

The main benefit to converting the TD mutual fund account to the eFund account is to be able to buy the TD efund index funds.  They are the cheapest index funds around and are the best deal if you are willing to manage the RESP account by yourself without any financial advice.  According to the Canadian Capitalist – there are no annual fees on a TD efund RESP so that would be a huge benefit as well.

Annual account fees are a bad thing – especially for a smaller account (such as a new RESP).  Try to avoid them if possible.

Categories
Money

California Unemployment Benefit Extension – Another 20 Weeks

California currently has an unemployment rate of 12.5% which is one of the highest in the country. Given that it is the most populous state it also stands to reason that California has the highest number of unemployed people living there.

Like every other state, Californians have benefitted from the numerous unemployment benefit extensions that have been created by the federal government. The latest extension provided by bill H3548 will give long-term unemployed Californians an extra 20 weeks of unemployment benefits.

Because of this recent extension the maximum number of benefit weeks available for someone in California is now 99 weeks.

California unemployment benefits are as follows:

  • EUC Tier 1 – 20 weeks  (7 weeks plus 13 weeks)
  • EUC tier 2 – 14 weeks (used to be 13)
  • EB  – 20 weeks
  • EUC tier 3 (new with bill H3548) 13 weeks or 19 weeks (if unemployment rate is greater than 8.5%)

However the extra 20 weeks is divided into 3 parts. 1 week is added to Tier II EUC. 13 weeks are Tier 3 and 6 weeks are Tier 4. Since the latest extensions are set to expire on Dec 31, 2009 it will be virtually impossible for anybody to receive the last 6 weeks.

“How many of those 20 additional weeks you get depends on when you started your claim and the upcoming eligibility deadlines,” says Loree Levy, a spokesman for the California Employment Development Department. Under the deadlines as they now stand, it’s unlikely that anyone in California would get the final six weeks, she says.

It is very possible that Congress will revisit this issue before the end of the year and extend the expiry date so that the full extensions can be utilized.

There are currently thousands of people who have run out of benefits or will run out in the coming months:

Loree Levy, spokesperson for California’s Employment Development Department, said Monday that an estimated 92,000 residents had exhausted all of their available unemployment by the end of October, and roughly 285,000 will be eligible for the newly enacted benefits by the end of the year. Whether they can get 20 weeks or only 14, though, depends on whether Congress extends the filing deadline.


Categories
Money

Michigan Unemployment Benefits Extension – Bill H3548 – 20 More Weeks

Michigan has the dubious honor of highest unemployment rate in all of America.  At 15.1% as of October, it leads the pack by a full 2 percentage points.  Nevada (13.0%) and Rhode Island (12.9%) are the next highest state and California is the next large state at 12.5% unemployment rate.

The reason the unemployment rate is so high in Michigan is because of the concentration of auto and parts plants in that state.  This industry was part of a high-profile government bailout and GM ended up going bankrupt anyway.  Needless to say this provides for a spike in unemployment as the auto sector will probably take a while to stabilize.

Fortunately the federal government has authorized and funded several unemployment benefit extensions this year and the recent bill H3548 extension is the latest (and probably not the last).  These extensions are part of the national stimulus package for 2009.

Michigan unemployment benefits are as follows:

  • EUC Tier 1 – 20 weeks  (7 weeks plus 13 weeks)
  • EUC tier 2 – 14 weeks (used to be 13)
  • EB  – 20 weeks
  • EUC tier 3 (new with bill H3548) 13 weeks or 19 weeks (if unemployment rate is greater than 8.5%)

This adds up to a total of 99 weeks.

The new benefits were originally planned to start in mid-December:

“We still anticipate that payments will begin on this new extension by mid-December,” Isotalo said. “Letters should be going out with information and instructions about the new extension and what people need to do to report for these new benefit payments” by Nov. 25.

In actual fact payments have already started for Michigan residents and many will get their checks starting just after Thanksgiving Day weekend.

The way things are set up now – these latest extensions will expire at the end of the year which means that not many people will get the full 20 weeks.  You need to use the tier 3 up before Dember 31, 2009 in order to get tier 4 which at this point is difficult to do.  There have been reports in the press that congress will be looking to extend the expiry date before the end of the year.

“Now that we have acted on the extension, we must quickly take up legislation to continue the Emergency Unemployment Compensation program itself, otherwise millions will be left without this important insurance come January,” concluded Rep. Levin.

“The action today responds to the needs of 100,000 in Michigan and one million people nationwide who have exhausted their benefits or will have exhausted them by the end of the year,” said Rep. Levin.  “With six people competing for every available job, unemployed workers need insurance to feed their families and pay their bills.”

In Michigan there are 99,000 people who would have run out of benefits by the end of the year without the latest extension.