Author: Mr. Cheap

Categories
Investing

Design an American’s Retirement Account

I have a good friend who lives in the states who is looking to get serious about her retirement saving. She wants to put about $250 / month into a 403K (tax sheltered retirement savings at a non-profit, like a 401K or an RRSP). She’s read some investing books, but isn’t really interested in the subject and often finds them confusing.

She’s been looking for a vehicle she can set up, pay into every month and ignore (with as little monthly / annual maintenance as possible). She’ll be looking to start cashing it in when she retires in 3 decades or so.

Originally I was advocating buying “dividend aristocrats” that have a high yield, but obviously this takes research and more of an ongoing awareness (how are the businesses you own doing these days?). Also, there’s definitely a risk in having your retirement savings concentrated on a handful of companies (even if they’re great long-term companies).

Instead, I’ve recommended Vanguard’s Balanced Fund (60% equities in broad US market index, 40% bond funds – 0.2% MER, 9.34% average return over the last 5 year) as a way to put money away, not worry about it, and expect to have a nice nest egg to retire from. She would buy this on auto-pilot, and ignore it.

Given that the bulk of this blog’s readers are clearly smarter then I am, would you agree with this recommendation? Any alternatives you’d encourage her to consider? For Canadians, what would your retirement savings look like if you lived in America?

Categories
Opinion

Cult of the Expert

Our society loves experts.

We love investing experts, real estate gurus, all-knowing professors, benevolent leaders and kung-fu masters. We like to think there are people out there, such as the Professor on Gilligan’s island, who can take our problem and devise a masterful solution. Almost every story in our culture glorifies this concept.

Jack Baur on 24 is pretty well super-human. Why he isn’t running the world from a mountain lair is beyond me. Maybe because everyone else on the show is super-human too. Each crew member on each of the starship enterprises routinely performs miracles. It seems to be part of the recruiting requirements at starfleet academy. All the way back to Odysseus we like to read / hear about people who are pretty darn remarkable.

In reality, there isn’t a single soldier in the world who is anywhere near Jack’s level. No engineer is anywhere near as good as Scotty or La Forge and most sailors would have a hard time dealing with a single cyclops (let along a bunch of them).

Certain professions tap into this desire to believe in heroes. Lawyers, doctors and real estate agents continually try to convince society that they have abilities and knowledge that are unattainable (and incomprehensible) to us and we need to just turn our lives (and our money) over to them.

Robert Heinlein wrote:

A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.

As Heinlein encourages us, we can defend ourselves in a court of law, help someone who is sick or sell a property ourselves. Of course there would be extreme situations where it would be worth seeking help (performing brain surgery on your wife might not be the best idea, although it might give you a chance to defend yourself in court), but anyone with a brain in their head can (and should) handle routine matters in these areas on their own.

Clearly the reason why these professions want to scare us into putting them up on a pedestal is to ensure their own economic well being. Its bloody hard to create a monopoly on a profession, but a few of them have managed it. As I, and others, have wrote before, no one will care more about your well-being than you, so you owe it to yourself to put the best person on the job (and usually that’ll be you).

Some time ago I pulled some of my thoughts together about real estate agents. An agent showed up and offered to “explain how a buyers agreement benefits the buyer”. It is insulting that someone would have the gall to pretend that an legal agreement that binds us to them as an exclusive supplier benefits *US*. Any agent who would try to feed you that bull clearly thinks you’re an idiot (and why do business with someone who has such a low perception of you?).

If you’ve read this far, you’re clearly in the group of people with brains in their head. If you’re already doing things for yourself, I commend you on your courage and intelligence. If you’re not, I encourage you to learn and try more. You have the capability to do it. I believe in you!

Categories
Frugal

Frugal vs Cheap

While digging through the I Will Teach You To Be Rich archives, I came across an interesting post about Cheap versus Frugal.

Although I am *MISTER* cheap, I’m actually quite hurt when someone I care about says something that implies I’m cheap. Amusingly, I actually don’t mind if they CALL me cheap. An insight about me that a friend once had was that I’m “generous to other people but not to myself”, which I think has a good deal of truth to it. I’m certainly not Mr. Stingy.

I agree with Ramit that frugal people focus on value, while cheap people focus on price. I *NEVER* expect anyone to foot the bill for me (and err on the side of giving more myself to be sure that this never happens).

Overall I think being frugal is one of the greatest virtues. It involves soul-searching and an understanding of yourself and your environment in an effort to ensure that your resources are distributed in line with your values.

Who could complain about that?

Categories
Personal Finance

An Open Letter to ING Direct Canada

Please note!

To get a $25 bonus with a new ING account then use the referral code 33089336S1.  This is also called the  orange key code.

To the guy with the accent and his two curvy henchmen:

To begin with I’d like to thank you for entering, and shaking up, the Canadian banking industry. When I first heard about you, in 1997, I thought “what a great idea” and was happy to open an account with you. I was delighted to refer friends and family to you, and the referral bonuses you offered were a cherry on top of the sundae.

People were reluctant to bank with an entirely Internet based bank. I understood that concern, and did my best to reassure them that you wouldn’t run away with their money in the middle of the night (and you haven’t). Showing them that you are FDIC insured, just like the big banks went a long way to reassuring them. The fact that you offered higher interest rates on your SAVINGS ACCOUNT then the big banks offered for GICs went a long way to getting them to switch.

I was working down in the US in 2000 and evangelized you south of the border too.

As a banking revolutionary, I salute you. Unfortunately you seem to have recently lost the fire in your belly.

When PC Financial opened its doors, I was suspicious at first. I assumed that their higher rates would be mere teasers and expected within a couple of months for them to drop below yours. I was perplexed when months went by and they stayed higher than ING Direct. Your commercials kept playing, telling us to keep our money and get paid top interest, but they started to ring false in the face of the ongoing interest rate disparity.

In December of 2006 I applied to you for an un-mortgage. Being self-employed, I expected that it might be a little tougher to arrange, but we’d been together for so long, I expected it would happen one way or another. In the end your representative turned me away completely (not even offering a mortgage with a high down-payment or higher interest rates, just a refusal to do business with me). That same week both PC Financial and Scotiabank offered me mortgages.

You’ve changed man. You used to be about turning the bank industry on it heads and connecting with the littler guy. You streamlined your operations and passed the savings on to us. Now you’re turning your back on us, at exactly the time PC Financial is welcoming us with open arms.

My last GIC at ING direct came due in May, and after moving the money from it, there’s a sad 56 cents sitting in my ING Direct account. I hope the winter that has fallen on the orange giant thaws, and on that day I’ll happily return (although sadly you’ll have to outdo PC Financial now, when before all you had to do was match them to keep me).

Please let all the drained accounts sitting with pennies in them be the sparks that re-ignites your belly fire. Become what you were in 1997 again: charge into battle again. For your shareholders, yes, but for us little guys too!

Categories
Book Review

Rich Dad, Poor Dad by Robert T. Kiyosaki

I think I heard about and read “Rich Dad, Poor Dad” right when it hit the tipping point and everyone was talking about it (I’d guess around 2004 maybe?). My aunt and uncle had read it, and I wanted to borrow another book from them and they forced this one on me. They told me it was about this guy and his two fathers (they couldn’t remember exactly how he had two fathers, but they assured me they explained it at the beginning), one of whom was a business guy, and the other was an academic. My uncle is very anti-education, so I was immediately suspicious and asked if it glorified the “business father” and denounced the “academic father”. They assured me this wasn’t the case and I foolishly read it.

From a very early age my parents taught me that its better to save then spend, and ideally you put money into things where it grows (how do you think I became Mr. Cheap?). Unfortunately they also made me ultra-conservative, and I wasted my investing youth on GICs and CSBs, but that’s a story for another day. With this background, when Mr. Kiyosaki advocated buying assets (which he defined as things that increase in value) instead of liabilities (which he defines as things that decrease in value) my reaction was “well, duh?!?!”.

I was excited when he kept promising to tell you how to find investments that would yield 13 or 17% (that range seems to be his “conservative estimated returns throughout the book”, but I got to the last page and hadn’t found anything.

John T. Reed thoroughly debunks Rich Dad, Poor Dad and if you’re at all thinking about reading this book or are enthusiastic after reading it, I’d recommend reading through his entire analysis before you gamble money on any of his ideas.

A couple of the things that Mr. Reed points out that bothered me too were that Bob seems quite unethical (I was bothered by him creating a library out of “discarded” comics that had been reported destroyed to the publisher and making money off of them the same way Mr. Reed was). I also didn’t like his re-defining the terms assets and liabilities. His “definition” of an asset is simply an appreciating asset, while his definition of a liability is a depreciating liability. Depreciating assets (like cars) aren’t liabilities and appreciating liabilities (like mortgages) aren’t assets. A car that you need to earn a living is still a depreciating asset, even though its a required expense for a business that earns money.

If you’ve read it, well at least its a fast, easy read. If you haven’t: don’t bother.

Categories
Opinion

Congratulations to Me!

Two years ago today I was reading Kevin Smith’s “Silent Bob Speaks” and in one passage he wrote about always feeling like his weight was something “he’d deal with later when it got really serious”. This startled me a little, as I felt exactly the same way (although I didn’t see myself as being quite as big as Mr. Smith).

I decided it might be time to get an objective measure, so I weighed myself, looked up the weight categories for my height and age, and found out I had passed through the “overweight” category and was now considered “obese”.

Being obese shocked me enough that I figured it was time to stop fooling around and to start dealing with my weight. I was visiting a friend at the time, and she was quite knowledgable about nutrition and weight loss, and was very helpful in figuring out the changes I had to make to start living a healthier life (thanks quietrose, you rock!!!). I read John Walker’s “The Hacker’s Diet“, followed his advice of weighing myself daily (and using a 10 day moving average to remove the jitter), then constantly made adjustments whenever my weight loss started to plateau.

Initially I cut out fast-food and non-diet soft drinks and that was enough to lose 2.5 pounds / week. As this rate of loss slowed down, I started measuring the caloric content of what I was eating and making healthier choices. I kept cutting things out until what I was eating was all quite healthy. At this point when my weight started plateauing again I started forcing myself to drink more water and eat smaller portions.

Over 7 months, I slimmed down to the point where I’m at the lower end of my recommended weight, and I basically bouncing around withing a 5 lbs range (when I start getting towards the upper end of the range I eat less, when I get close to the lower end I eat more). 1.5 years later (2 years since I started losing weight) I’m still maintaining my new weight. Its gotten so easy (especially since I’ve moved in with my girlfriend and am eating healthier food) that I don’t even really think about it anymore (or I think about it every time I eat, but its such a habit it doesn’t take any work).

Weight loss may not seem like it has a lot to do with personal finance, but I think there’s actually similarities here that people don’t notice: Things like the value to knowing as much as possible about your weight (or networth) and the true quality of the food you’re eating (or your investments). There are different ways to make changes, such as exercise (or earning more income) and diet (spending less money). If you only make one type of change, its very easy to sabotage yourself by the other (e.g. exercising and eating more or getting a raise and increasing your lifestyle spending). Both processes benefit from measuring your on-going process and making improvements as you see the opportunity to do so. Both are also hardest when you first start them (the first 3 days of a diet or a budget are going to be the hardest, they both get easier as you go).

I hope to post further about the value of measurement, which I really feel is key to enacting changes. But for today, give me a virtual pat on the back – I’ve earned it! 🙂

Categories
Opinion

Mad Money

I’ve been tracking my expenses, which is  a great way to get a grip on how much I’m spending, what I’m spending it on, and what my savings rate is. Part of me is thinking that I might have gone overboard, as I’m saving 83% of my pre-tax income, which is higher than the 75% upper end recommended

I haven’t tallied my spending from New York yet (which should drive my averages up), but before I left I had gotten my variable spending down to almost $1200 (shaving another $100 off of what many people seem to think is an already low cost-of-living).

What I’m thinking is that I might start taking anything above 75% that I save and earmark it as “mad money”. If I want to travel with this, blow it at the mall, buy some big tech toy or whatever, that’s what its for, to be spent foolishly. I’ll try to avoid anything with a monthly commitment, but if I end up with something that does have a monthly commitment, I’ll just take it out of the mad money fund (and cancel it when/if it runs dry).

I’m torn about whether this makes sense or not, because with my current spending, I could be retired in 3 years or less. Capping my saving at 75% would definitely push this back (and lead to a potential retirement in 5 years or so, unless I could up my income a bit). My lifestyle would definitely improve though…

Definitely food for thought…

Categories
Investing

Canadian Peer-to-Peer Lending

I love it when a good idea comes to fruition. I thought about starting up Craigslist in Canada before they came here (I’d used it in San Francisco and loved it – I even registered a domain for it!). I was going to build a dating site based on collaborative filtering, and I wanted to start a Canadian P2P Lending site like Lending Club and Zopa, and someone has finally done it!

In case you haven’t read about P2P lending, its basically eBay for banking. Instead of borrowing (or saving) money through a bank, the borrowers and lenders communicate directly and cut out the middle man. In theory, the massive profits that the big banks make should go into giving both sides better rates and leading to a more efficient capital market.

We’re still in the infancy, so I wouldn’t say we’re quite at that point yet, but its still a very exciting new place to borrow and invest. Through an American friend I managed to set up a Prosper account and have been scraping by with around a 5.5% return on our investment there (we’ve had MASSIVE defaults).

One of the best things about these types of sites (from an operator perspective), is that lending laws are different in every country (and often from province-to-province or state-to-state). This gives the chance to set up a “local” version in your country, and not have to compete with the current site dominating the market (as would be the case if you tried to start a local auction site or a local classifieds site).

I have my fingers crossed that CommunityLend will improve on the business models of Lending Club, Prosper and Zopa. Even if they don’t, I’m happy that at least we’ll have a Canadian version available to us.

In case you’re reading this and wondering why I’m happy people made money on “my” ideas, my feeling is that ideas are cheap. With a company, creation and operation is the hard part (and deserve the bulk of the returns). Frank Herbert (the author of Dune) once had a guy come up to him and say “I have a great idea for a book, I’ll tell you, you write it, and we’ll split the profits 50/50”. Mr. Herbert said “no way, coming up with ideas is the fun and easy part, writing the book is hard work!”.

People have made similar observations about video games. If there’s any market for ideas, I certainly haven’t found it (please tell me where it is so I can cash in and retire!). The only way you can “sell” an idea is to find someone naive enough to give value to ideas on their own merit, convince them to do all the work and give you equity for your initial idea (“you build it and we’ll split the profits 50/50), hope that they are naive but very bright and productive (I haven’t met many people who would fit this bill), then sell the results and cash in.

An idea that I had (that no one has actually done yet) was to build a website, say “ideasarecheap.com”. On it people could write up their ideas for businesses, post a business plan if they have it, and list what resources they bring to the table (what portion of the start-up capital they have, skills they possess, contacts, etc.) and what resources they don’t have but would need. People with those resources (or people just wanting to offer advice), could connect with the budding entrepreneurs. Money could be made off of advertising (I know, I know, this business model is *SO* 1999).

Anyone have $1000 / month to front me while I build it? 😉

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