I filled out my networth at NetworthIQ for the past half-year (right back to before I purchased my condo). The shoot-up in value then drop resulted from me using my estimated after-renovation value of the condo I bought. If I wanted to be exactly correct, I should have valued it based on work COMPLETED month-to-month through the renos (but I’m happy with the drop as I understand its not really a drop).
People used to say that you should always have 3 months living expenses in your “emergency savings”. When reading “The Intelligent Investor” they claim that you can increase you position to 100% stocks (risky) if you meet a number of criteria, one of which is liquid assets to pay for living expenses for 1 year.
I’m the last person on earth to say “live for today, don’t bother saving”, but the idea of an emergency money pool of cash strikes me as a fallacy. Obviously you need to be able to weather the storm of not earning income for a reasonable period of time (I’m working towards getting this period of time to be the rest of my life, and that’s a big project), but like anything there’s more then one way to accomplish this.
Given my estimated monthly costs of $2,140 in order to survive without earning money for 3 months someone might suggest I keep $6420 ($2,140 x 3) in my checking account.
Since I wouldn’t need the entire amount immediately (just one month’s expenses per month), a slight improvement would be to have this money in a safe, liquid investment (perhaps a cashable GIC, money market account or high-yield savings account). While I’m waiting for the emergency to strike, I would be earning a small yield on this money (say 3% after tax, maybe 1% after taxes and inflations). If the emergency never hits and I keep this fund around for the next 35 years until I retire, I’ve paid a HUGE price to have this “insurance” (considering some use 5.5% as returns after tax and inflation on conservative dividend paying blue chips).
$6,420 compounded at 1% annually over 35 years would be $9,094.59, whereas $6,420 compounded at 5.5% annually over 35 years would be $41,818.76.
So what’s the alternative you ask? Simple. Go into your local bank, and set up an unsecured line-of-credit (LOC). If you have a decent credit rating and income, they should happily give you a pretty large balance at a few percent over prime (I got an offer out of the blue from TD for $10,000 at Prime + 2.75%, they recently offered to increase this to $20,000). Obviously at this rate you wouldn’t want to borrow from this account unless it was a VERY good investment, but it is well suited to use as an emergency source of funds. If I have 3 months without income, I simply withdraw what I need to survive from the LOC every month. A LOC works just like a cash advance on a credit card (you get the money immediately, and immediately start paying interest on it until its re-paid), except that its a FAR more reasonable interest rate.
Then once money starts coming in again, I pay off the LOC before anything else (paying it down will likely be the best investment available to me). With a $20,000 limit, and spending $2,140 / month I can go 9 months without earning income, even with interest factored in. For full disclosure, there’s usually a small monthly minimum payment (3% or $50 whichever is more), but you can juggle money between accounts, or pay this from passive investments or whatever.
This allows me to put all my cash into long term savings, get it working as hard as possible for me, and at the same time have a cushion to deal with unexpected emergencies. If I can see a period of unemployment coming up (currently my contract is over at the end of September, so I can expect to not get paid for a while if I don’t renew it and don’t look for another job), I can keep money available to pay my living expenses (and avoid the LOC interest charges), but this is different then saving money for UNEXPECTED periods without income.
If I ever encountered a longer period of not earning money (say I became disabled or suffered major depression), I’m in trouble regardless of however I’ve structured my finances (unless maybe if I’d bought disability insurance), so a pot of “emergency funds” isn’t going to help all that much (it just puts off things getting bad for a couple of months longer than it would have otherwise). I’d probably just start liquidating long term assets as needed (sell my condo, sell my stocks) and when everything ran out, throw myself on the mercy/charity of friends/family/government (not a fun idea).
This would work the same way for other unexpected costs (such as needing a new appliance, roof repairs, vet bills or a new car).
Any other ideas for the best way to deal with short term financial emergencies?
Say I get paid a dividend (perhaps from my ROC that’s due mid-month) and its paid into my E*Trade account. That account has a negative balance (since I’ve been trading on margin). That interest paid on that negative balance is tax-deductible.
How is that affected if I withdraw the dividend payment and use it for something else? Say I withdrew it and applied it to a principle residence mortgage (non-deductible debt). From Revenue Canada’s perspective, would I have paid back part of my margin loan, then re-borrowed the money for non-deductible purchases (and thereby “contaminated” the margin loan), or would their view be that as long as I withdrew EXACTLY what was deposited, then I didn’t really repay any of the loan (it just traveled briefly through my account)?
If the mingling is bad, can/should I get E*Trade to make dividend payments directly to me?
Thanks if anyone knows! A pointer to a sites dealing with this issue would be greatly appreciated!
On June 6th I lost most of the gains on BMO and ROC that I’d previously made (about $400). The market seemed to turn against them (no specific bad news), and both stocks dipped back to where they were when I bought them.
Its a little bit nerve wracking, but I just doubled my position in both. I bought $5K of each originally because that’s how much I had to spend. I now had some more free cash, so its seems like if they were worth buying at that price before, they should still be and the rational thing is to grab another helping.
Ideally I would have preferred to buy similar companies in different sectors (expand beyond banking and tobacco), but of the stocks I’m currently looking at, these two still stand out (National Bank is closing in though). I’m comfortable focusing so intently on such a small position because I’m still in the early days of building my portfolio, I’m young enough to be a bit more aggressive, and I really see bank stocks as forming the core of my portfolio anyway (and I don’t have a problem with having a tobacco position if the price is right).
I’m glad the drop has happened to test my nerves a little bit. I’m looking forward to a huge drop (25% after I’ve bought something perhaps) and am hoping that I’ll have the courage buy when that happens.
For anyone who regularly buys stock on a value basis, how do you decide how much more to buy when it drops below a previous purchase price?
EDIT: I got “lucky” and had a big drop after writing this (but before it went live on the site). Currently (June 7th), my portfolio was down $400 at one point in the day. Considering that I was up $400 at one point, that’s a lose of $800 (8% of my portfolio).
Of course, there is no way, except in hindsight, that I could have known what the high and low points would be (I still don’t). I continue to be happy to own these companies, and look forward to future dividend payments!
(now I just need to figure out a better way to decide when to buy more of a stock I own after a drop).
EDIT 2: There seemed to be a bit of a rally (as of mid-afternoon on June 8th), I’m currently down $200.
To start at the beginning – please see part 1 of this series.
I talked to various friends and family and scoured the web looking for the best way to find contractors. I found so many horror stories about contractors gone out of control, that I was almost as stressed out about hiring contractors as I was about trying the work on my own (and actually wasted a week and a half flip flopping between the two ideas). I had intentionally avoided taking on any work during this period (the theory was originally so that I could do the work myself, but in the end it turned out just to be so I could supervise the work myself).
Since I figured getting the walls painted before getting the new floors put in made sense, I decided to start with that. I got a recommendation from a friend and my girlfriends father recommended getting a painter through Sears. In the end the prices were the same, except that the recommended guy was going to take 3 weeks (and the painter was going to come in with a crew and do it in 3 days) and the Sears job came with a 1 year guarantee. Easy decision, I hired the Sears guy.
The Sears guy actually recommend a flooring man to me, and I got the guy in to do my floors after the painting was finished. Initially the paint was peeling, and I was freaking out that the whole $1800 job was going to come down in strips, but the painter assured me that that was normal and that they’d come in to do touch-up (which they did) and that it’d be good after it had dried for a month (which is was – live and learn).
For the flooring I went with Ikea laminate (TUNDRA, maple effect). The costs seemed to keep jumping up on me (I was quoted $1 / sq. ft. for installation, but then it turned out quarter round and baseboards were extra. Picking up the wood ended up being another extra ($50 for 2 of his friends and a truck) and another $50 to get their help to bring it up to my condo. He offered to redo the tiling instead of laminate in the kitchen, and for some reason I had to pay twice for this area (I’d already paid to have the laminate installed there, then when were were doing tiles instead, I had to pay $1 / sq. ft. AGAIN, so the tiles cost me $2 / sq ft.).
In the end I got about 800 sq. ft. of flooring done (700 sq. ft. of laminate, and 100 sq. ft. of ceramic tiles) for $4000 ($2000 labour, $2000 materials) which I was quite happy with. I called one place that quoted me $2.50 / sq. ft. for the work (which may have included quarter round and baseboards, I’m not sure) and I got Empire Today to come in and give me a quote (which the guy told me it would be a minimum of $10K for their cheapest laminate – no thanks!).
It’s quite funny, as before I did this job I couldn’t care less about “home improvements” and the general state of my living environment. Since I’ve done this, I’ve actually developed an eye for things that are roughly done around peoples houses or in restaurants and certainly appreciate a nicely done living space in good repair. I also enjoy watching the reno shows on HGTV (although I still prefer the Real Estate hunting / haggling shows).
I’m putting in an offer on another “fixer-upper” condo, and the work I had done on this unit definitely has improved my ability to estimate costs of renovations (I hope, otherwise I might be in trouble! 🙂 ). Its amazing the wide array of skills you develop just buying and fixing up a small 1000 sq. ft. living space.
My girlfriends father, an electrician, was good enough to help me replace a few of the light fixtures (they were pretty awful) and all of the electrical outlets (the painters messed them up by getting paint in them – I guess they couldn’t be bothered to cover them).
With the space glowing and fresh (and nicely smelling of fresh paint) I showed the place off to my local friends and sent pictures to my family and distance friends. Now I just needed to find someone to pay me rent every month!
(continue to part 6).
I’m not very passionate about asset allocation yet (although I know its an important area I need to educate myself about). The one aspect I have considered is the impact of inflation on savings. Back when interests rates were running at 10-12% (in the early 80’s), people were happy, but what they were foolishly ignoring was that they were being heavily taxed on this (treated as full income) and inflation was knocking it down further.
The funny thing is, and I realized this shortly after buying my condo, is that when you’re in debt inflation is a great thing. My mortgage is currently in the low $90K, and if 90K is worth less then it was in the past, that makes my mortgage easier to pay off. Inflation will drive up what I’m able to collect for rent, while making the mortgage easier to pay (increasing the cash flow).
If your salary was going to double, but the cost of everything would also double, is this a good thing or a bad thing? Ignoring taxes and whatnot, it obviously wouldn’t make a difference if you had no savings or debt. If you have savings, it would effectively cut them in half (since the price of everything has doubled). If you have debts, it would also cut them in half (since you’d be making double the salary). In a nutshell, this is the effect of inflation.
High interest apparently can hammer the stock market, and as it leads to inflation, it would also make dividend payments less valuable. Apparently inflation hurts most businesses, as people have less money and they buy less from them (which prevents them from increasing their dividend).
In “The Intelligent Investor” (which I’m reading right now), they recommend REIT’s as an inflation hedge, clearly owning real property works in pretty much the same manner (you’re just accepting increased volatility since your personal holdings will clearly be less diversified than even the smallest REIT. The one thing I don’t like about REIT’s is that they’re so easy to abuse – the people running it can easily get kick-backs from people doing work on the properties and steal from shareholders). Gold is also popular as an inflation hedge (basically any time you put money into stuff), but its apparently far more speculative then real estate (sometimes goes up a huge amount, and sometimes doesn’t move much for years). I’d also be afraid with gold that a cheap way to produce it will appear (similar to artificial diamonds) and that would wipe out their value (this seems less likely to happen to land and living spaces).
On June 1st (actually May 31st, I got excited and couldn’t wait until the next day 😉 ) I chugged through my financial figures to have a look at what my current networth is. The variables that I’m considering are:
Mortgage: $93,174.21
E-Trade: $10,058.30
Cash: $11,145.49
Condo: $143,500.00
Loan: $5,000
Networth: $76,529.58
The condo value is debatable (until I sell it, the value is somewhat unknown), but $143,500 is quite a conservative figure (similar units in the same building are selling in the $160’s). The loan is basically $5,000 that I lent to a friend (I know, I know, bad idea) that I’m hoping to get back in September. The stock portion is very volatile, so I’m not sure what the best way to include it is (I commented on this on “A Canadian and her money” and I think it annoyed her :-), but that’s the shares’ value as of June 1st.
This is a 9.29% gain ($7,096) over May, which is good but primarily comes from a lucrative contract I’m working right now (and suffering every day for, so I don’t think these gain rates are sustainable). This contract is paying around $6400 / month, and the rest came from getting my tax refund, a GIC coming due, some gains on the stocks I bought, etc (e.g. lucky circumstances, nothing I can repeat month-to-month). Additionally, there’ll be taxes to be paid on this next year (no withholding at source), so this is a before-taxes number (I’m expecting to be at around a 33% marginal tax rate next year).
Last months gain was around 7.82% ($5,539) which is probably closer to what I should expect.
My current estimate of my monthly expenses are around $2,140.00, which I’m trying to bring down, so my gross in May was somewhere around $9K).
I’m earning about $250 / month from my condo (I’ll post details on this later, but its around a 7.5% ROI), and an estimated $67 / month from the stocks and cash (assuming 4% return / year, I’m hopeful that the stocks will do significantly better then this). Therefore passive investments (before taxes) cover 14.8% of my monthly expenses. Given that my passive income was around $150 in December, this is an excellent gain (more than double the passive income in less than half a year).
I don’t really care too much about my assets vs. liabilities, so I won’t bother with that.
I really love bank stocks, and have been quite happy with my BMO so far (given, we’re still on our honeymoon as I only bought it 2 weeks ago). CIBC would be nice with a slightly higher yield (its at 3% right now) as its payout ratio is the lowest of all the banks (at 34%) so in theory it has the most cash to pour money into dividends. I like their products (PC Financial is backed by CIBC) and the fact that they’re trying to develop internationally (they own a massive chunk of FirstCaribbean).
HOWEVER, 3% is just 3%. With BMO still up at 3.8% its pretty tough to consider other Canadian banks. When I start looking in other sectors (other than tobacco) things get even worse. Manulife Financial (MFC) looks quite a bit better then their competitor, however they have a relatively pitiful 5-year average dividend of 1.7% (its currently at 2.2%, so a good buy if you like the company). You’d think there’d be massive growth to compensate for such a low dividend, however their average 3 year dividend increase is comparable to BMO’s (26% vs. 23%). The stock increase in price hasn’t been that impressive compared to BMO (MFC grew at 12% vs BMO growing at 15%). One very nice thing about MFC in relation to BMO is that MFC’s current payout of 28% is much smaller then BMO’s massive 45%. I wish the insurance companies would pass more cash along to shareholders, but perhaps there is legislation that requires them to keep a certain amount of money on hand.
Maybe its just a case of different industries and the price of diversification, but banking definitely seems more lucrative than insurance.