Author: Mr. Cheap

Categories
Personal Finance

Post Dated Checks

What should happen if you put a post-dated check into an bank’s ATM before the check’s date?

In my naive view of the world, the bank should put a hold on all funds deposited in the ATM. When they are verified by a human, cash should immediately be credited, and check funds should be released when the check clears (or if you have a good relationship with your bank released immediately and the funds pulled back if there’s a problem with the check). If the date hasn’t occurred yet, the check should be held until that date, then processed.

Tellers do this if you try to deposit a post-dated check. They’ll accept it (at least at my bank), but warn you that it won’t be processed until the date on the check.

I did this with a check that was dated June 1st. I deposited it on May 28th (while I was thinking of it) to one of TD Canada Trust’s ATMs, and expected the funds to be released on the 1st. Instead, they processed the check, and tried to pull the funds out of a Bank of Montreal account. The person who wrote me the check hadn’t transferred funds in to cover it yet (why should he, its a post dated check?) and the check bounced out of his account (and charged him $5). We both called our banks, and the only thing they could offer was that I shouldn’t deposit post-dated checks in the ATMs.

His bank wouldn’t even refund the $5, which from my perspective is totally outrageous (and I’m a Bank of Montreal shareholder!!!). They said they’d look at the check, and if it was cashed before the date on it they’d refund his $5, but they charge $5 to look at the check, so he wouldn’t get any money back (how offensive is that?).

AND, he’s going to have to write me a new check (which I told him to take $5 off of since he definitely shouldn’t be paying for it – he didn’t do anything wrong). Apparently TD Canada Trust won’t charge me anything when the check is returned (which is good), but they’ll pull the funds back out of my account (which would have caused me problems, but since I’m forewarned I canceled a transfer so it should be all good on my end).

All they’d have to do to fix this flaw in their process is have the person who opens the deposit envelope check the check and make sure the date isn’t in the future. If it is, then put it in a file for processing on the proper day (and if its far in the future, maybe put a hold of the depositor’s account). Simple, but not something they’re willing to do.

Morals of the story: Take post-dated checks to be deposited to the tellers, don’t put them in machines and its far better to be a bank owner then a bank customer.

Categories
Opinion

The High Price of Living Cheap

While I like to consider myself frugal, my friend and family tends to view me as cheap. I like to get a bargain, which, as failings go, doesn’t seem too bad to me.

HOWEVER, even though I’m cheap, I like to consider myself quite generous. One of the most insightful things I’ve had a friend say about me is that I’m generous to others, but not to myself. I’ll leave the analysis for my time on the couch (yeah right, as if I’d pay for therapy!!!). Instead I’d like to write today about how it can often cost you money being too cheap.

I tend to wear clothes and use “stuff” as long as I can get away with. I have socks with holes, and just recently was persuaded to give up the winter jacket I’ve been wearing since high school (I’m now in my early 30’s). I don’t put a high value on what other’s think of my appearance, and certainly don’t place any value on displays of wealth, so if it keeps me warm and doesn’t offend people around me, I’ll keep wearing clothes.

For the most part, I think this works to my advantage with clothing. With other items though, sometimes this backfires. I finally bought a high-quality travel mug (Thermos Brand) from Wal-mart for $10 (yes, I’m a big spender). Previous to buy this one, I was using two el-cheap dollar store travel mugs (bought for $2 a piece). The first cheap one started leaking, so I replaced it with a similar make that start leaking almost immediately (it was like a trick dribble glass, when you’re drinking from it, it’d spill liquid down your front). Surprisingly I put up with it from the first mug for a few weeks (gotta get my $2 worth) and finally broke down and fixed the situation when I saw co-workers eying the wet marks on my shirts.

To be fair, it was usually tea, and I buy stain resistant shirts, so once it had dried there wasn’t a mark, but…

Another example of being “penny wise, pound foolish” was I was visiting a friend in the Bay area and decided I wanted a portable dvd player to use on trips. I’d debated the purchase for a few months and finally decided it would be worth it when traveling to be able to bring along a few movies and watch them. I wanted a cheap one, and wanted an external battery (since the built-in play time is quite miserable on most of them). After running around between all the major stores that would sell them (Target, Wal-Mart, Best-Buy, Good Guys, etc, etc, etc) buying one, realizing that the external battery was incompatible, returning it and finally selecting another, we spent an entire day shopping (out of a time limited visit) and I saved $30 (not including gas and wear-and-tear on my friends vehicle) off of the player and battery I saw at the first store we visited. Not my finest hour.

I think a fallacy many people fall into is not valuing their own time. I viewed my friend’s and my day as worthless, when in actual fact it was worth far MORE than $30. In real-estate people often brag about their profit on a property, but don’t include their own time and labour on the project (magic fairies did the paint job and other renovations I suppose). Again, they’re not valuing their time, if they factor it in the project might not compare that favourably to getting a second job and investing in stocks.

The other fallacy I often fall into is “Sunk Cost“. When money is spent and there’s no way to get it back, often the best way to make a decision is to ignore anything that’s already been spent, make the best decision from your PRESENT perspective (and try to use any new information on future decisions).

I think there’s real value in looking at where you spend your money and trying to make sure you’re spending wisely on the things you value most. However, cheap for cheap’s sake can often be an expensive way to live your life.

Categories
Investing

“Personal” Yield With Dividends

I love dividends.

Growing up I started investing with GICs and Canada Savings Bonds as a child when interest rates were around 10% (I turned down a 12% GIC at a credit union because I didn’t like the idea of having to buy a share of the union for $40). Naive me, I thought this was a standard ROI and dreamed of future wealth. Fast forward 20 years and the reality of GICs out pacing inflation by 1 or 2% sinks in they start to look a lot more like a wealth protection device than a wealth creation device.

I dabbled in stocks and lost 75% of my money during the tech boom.

That’s why I was so excited when I came across the ideas of dividend-paying (regular money payouts from the company to you the shareholder) blue chips (established companies). It seems to have ALMOST the long term stability of GICs, with the growth potential of the stock market. Pretty sweet.

One of the most fundamental ideas for good dividend stocks is the “Dividend Yield” which is how much you should expect to make on your investment in the next year (a dividend yield of 4% on $100 of stock means you should earn $4 in the next year through dividend payments). For Canadian companies, this dividend is taxed more favourably than interest income (the higher your tax bracket the bigger difference this makes).

Even more exciting is the idea that good companies should regularly increase their dividends. This is like a low-taxed GIC that will randomly increase its payout! There’s a small chance that the company will cut its dividend (which in addition to the lower payments would also cause the stock price to plummet), but that risk is the price for the more attractive gains.

Some people like to talk about “personal yields” which is the dividend-yield of a stock, based on the price you purchased it at. So going back to the above example, if the company increased their dividend payments by 25% to $5 and the stock price increased so that your shares were now worth $125, the dividend-yield is still 4%, but your PERSONAL YIELD is 5% (since you bought the stock for $100).

The fallacy with this outlook is that your shares are now worth $125. You’re ROI is $29 (29% in one year, not too shabby! Of course capital gains taxes would kick in when you sold, but still…), but if you decide to keep the stock and keep collecting dividends, there’s nothing magical about this “pile” of your money and the dividend-yield is still the same (if you like the looks of another stock that is paying 5%, the $125 might be better off there).

By bragging that your new dividend is 5%, you’re lumping the capital gains in with the dividend payments, which isn’t really rational.

Say I bought a GIC for $1000, invested it for a year at 4%, then reinvested the $1040 for 4% for another year. Am I earning 4% or 4.16% in the second year? Clearly I’m making 4%, I’m just confusing things if I want to lump in the $40 gains from the previous year. The only way to decide between buying another GIC or putting the money elsewhere is to ignore the past, look at the current value, and pick what looks like the best investment.

Landlords make a similar mistake when they buy a house and start patting themselves on the back about the financials after a decade. Rents should increase, and you need to compare them to the CURRENT value of the property to see how the property is doing as an investment, not the original purchase price.

Compounding is good, but don’t use it to fool yourself.

There’s probably an economic term for this fallacy, does anyone know it? I think the basic idea is when you segment your money and start looking at the “pools” as separate, you’re in self-delusion territory. If you want to evaluate an investment, factor in the CURRENT value of the vehicle, not the original price to determine the ROI going forward.

Categories
Real Estate

Getting Started With Investment Real Estate – Part 4

To start at the beginning – please see part 1 of this series.

When we last left off, I’d identified an area of town I wanted to buy in, and had toured all the 2 bedroom units in 3 buildings. I’d put in a lowball offer on each of them (12 units I think) and was turned down by each of them. I was upfront to my agent that I was going to keep raising the amount and re-offering on each unit in tern (according to my ranking of their “desirability”).

I actually started getting the feeling that my agent wasn’t presenting the offers. She told me that the listing agents were getting angry at the offers, but when I asked her for more details about the conversations, she got vague in a hurry and couldn’t provide any specifics. Finally, in an effort to get her to present the offers, I offered to fax them to the listing agents myself to save her the effort (since I was making A LOT of offers), which she declined, saying this was part of her job.

What got her going again was I told her that I thought after the current round of offers maybe I’d target another, more affordable, area of town. I think she decided that presenting offers was easier then showing me more units and got to work. Again, this is my speculation, I *HOPE* she was presenting offers and doing her best to get me a good price, but you never know for sure.

It actually got to the point where she was suggesting I talk to the listing agents directly. She diplomatically presented this as wanting to help me get the best possible price, even if it meant her losing out on her commission. I think the reality may have been that she was thinking I was too much work for the expected commission (which I can totally understand, I’d drop clients if they weren’t profitable from a payment-per-hour-of-work perspective too). Amusingly, right when we were having this conversation, one of my offers was accepted (outright) and I got a 2-bedroom condo in rough shape for $126,000.

My original plan was to do the renovation work myself. I had approached buying the condo (which are known to be one of the least profitable forms of rental housing) as a learning exercise, and even if I just broke even I was reviewing it as more then an investment. Doing the reno work was supposed to be a chance to learn about painting and laying down flooring.

My father had offered to come help me do the work, and I’d refused (I don’t like the idea of dragging in friends and family as free labour on money-making ventures). Faced with a fairly daunting job ahead of me, I reconsidered and asked him if he was still willing to help teach me how to do it. In the interim, he’d reconsidered as well ( we’re an indecisive bunch), but he suggested I get the unit professionally worked on in order to get it in rentable shape ASAP, and generously offered $5K towards the renos.

I debated about trying to do it myself, and got to the point where I was losing sleep worrying about doing the work. At that point, I decided to bite-the-bullet, get advice and hire contractors to do the painting and flooring for me.

(Continue to part 5).

Categories
Book Review

The 4-Hour Workweek by Tim Ferriss

I had been coming across references to Tim Ferriss’ “The 4-hour Workweek” when a friend was good enough to send me a copy. Its a very quick read, and I tore through it over the last week’s commute.

There were parts of this book I really liked, parts I didn’t buy, and parts I found rather distasteful.

The Good: One of Tim’s central idea is to focus on your “competitive advantage” (he doesn’t put it this way). Hire people to do anything that you can get them to do cheaper then it would be to do it yourself, then focus on the higher paying elements of your life. He presents this as the 80/20 rule (20% of what you do provides 80% of the benefit). I definitely agree with this idea. I had a relative in England who was an insurance executive and he HATED to do yard work. I told him to hire a neighborhood kid for 5 quid a week to do the yard work then work a bit more on the job to pay for it (he was paid far more then what the yard work would cost). He agreed with the principle, but wasn’t willing to do it.

Tim suggests doing this to your ENTIRE life constantly. He suggests things like virtual assistants from India to deal with all the little irritant in your day so that you’re free to concentrate on what you do to make money. I’ve spent 45 minutes some days trying to sort out billing problems with my phone or internet, and its a great idea to outsource this very frustrating experience. How funny it’ll be if we hire people to argue with the people business have hired to talk to us.

Tim also talks about the fears of not working 9-5 and the spiritual angst of doing the same. I’ve worked on starting a business, and taken time to “smell the roses” in my life, and he’s dead-on that the puritan work-ethic kicks you hard for not being a good corporate drone like everyone else (plus friends and family don’t like it too much that you aren’t a wage slave the same as them).

The Bad:

Tim suggests financing all this with “financial muses” which are basically small products or services that you test market until you find one that you can sell for a big markup. You then automate the entire process of manufacturing, advertising and distributing the product/service and just let the money trickle in and fund your lifestyle. Nice idea, but I have the feeling its not quite so easy.

He suggests costing out “adventures” as motivators for setting up these muses (e.g. figure out how much it’ll cost to study Spanish in Buenos Aires for 6 months, then keep trying different ideas until you find one that can fund it). Again, not so sure its as easy as all that (or wouldn’t everyone be doing it?).

The Ugly:

Quite a few of the choices Tim makes in his life seem quite unethical to me. He brags about winning a marital arts competition by dehydrating himself down 2 weight categories (then re-hydrating back up to his proper weight before competing) and using a rule-technicality (basically shoving his much smaller opponent off of the mat) to win. Doable, and he apparently has the trophy, but has he actually accomplished anything?

He also seems to have made most of his money from selling “BrainQUICKEN” and “BodyQUICKEN” which are “supplements” (in my opinion snake oil).

I’d have trouble selling stuff that didn’t work (in my opinion – hopefully dropping that in will save me from being sued :-)) even if it made me a lot of money.

Interesting ideas and a quick read, but not quite the radical life-changing book its being billed as.

Categories
Frugal

Cutting Food Costs

I’m trying to “put my money where my mouth is” (or maybe change the money going into my mouth) and pull back on my food spending a bit. I packed my lunch for the first time yesterday and brought two tuna and mustard sandwiches (mustard as a healthier alternative to mayo), a bag of carrots, an apple, chickpea salad and coucous. It took about 5-10 minutes to make the night before and cost around $3.50.

If I could cut *ALL* my food spending in half, that’d be an extra $4000 per year (after taxes). In addition to being extra money to save/invest, that’d reduct my annual spending to $24,228.85, which (assuming the 4% retirement figure) would allow me to retire on $605,721.25 (instead of $705,721.25). Very significant savings from packing a lunch and eating out a little less often.

It’d be interesting to prepare an Excel chart looking at my savings rate and retirement target and calculating how much “time to retirement” cutting back on certain expenses would provide (the double-whammy of lower expenses and increased savings would be powerful I think). Might definitely help “cut-to-the-bone” if you saw that cutting something out would let you retire 3 years earlier.

I still don’t quite get how Derek Foster is able to support a family of 4 on $400k, but I’ll keep thinking about it. I suspect that once you factor in CPP and whatnot it can reduce how much you need for retirement.

Categories
Business Ideas

Another New Financial Product I’d Like to See

Continueing in the same vein as yesterdays new financial products post, another product I’d like to see is “segmented” loans. Basically these would be exactly the same as regular loans, except that you would be able ot “tag” part of them for specific uses, and those tagged parts would each be individually tracked.

e.g. say you qualified for a 80% (under new CMHC rules to avoid mortgage insurance) loan on a principle residence. But say you’d been saving for a while, and actually had a 25% down-payment. You take out the 80% loan, and tag 5% of it as “borrowed for investment purposed” and buy some dividend stocks with it. You also specify that all payments are to go towards the “non-investment” 75%. At the end of each year, they report your mortgage information, and give you a breakdown on the different “tagged” amounts. Each year you’d get a deduction for the investment portion of the mortgage, which would increase as time went on (since it would be accumulating interest as you paid down the other portion).

HOWEVER, from both your perspective and the banks, the mortgage is being paid EXACTLY the same as if it was all one amount (same payments, same amortization, same rate, etc), its just some automated book-keeping to help your with your taxes.

Eventually you’d pay off the “non-investment” part (especially if you kept refinancing, and borrowing more for investment purchases against your primary residence) and then would start paying off the tax-deductible portion.

I realize this is quite similar to a readvanceable mortgage, but the big difference is that this would ONLY require bookkeeping, in terms of movement of money, nothing would be different from a traditional mortgage (I could write a simple on-line application that would take any mortgage and break it up to provide this information). Therefore, anyone who offers mortgages could add this as a free additional service.

Categories
Personal Finance

A New Financial Product I’d Like to See

I’ve often thought that a really great financial product would be a combination high-interest savings, checking, mortgage and line-of-credit (LOC) account.

Basically you’d set it up, and could have your paycheck deposted in it or whatever. You’d get Prime-2% interest on your savings (4% currently, comparable to PC Financial or ING Direct). You could write checks out of it and pay bills and whatnot.

If you had been authorized for an UNSECURED, if your accont ever dropped below zero, instead of being charged overdraft or whatever, you’d suddenly go from being paid Prime-2% to PAYING Prime+1%. Just like a regular LOC, they’d expect $50 or 3% to be paid on it per month (or whatever) and you could keep paying bills and writing checks.

If you bought property, and borrowed money for it, you’d then have a SECURED LOC that would come before the unsecured. You’d get credit up to your equity (75% of the properties value) and the borrowed amount applied against this and pay Prime-1% (like a variable rate mortgage). If you ever exceeded the 75%, you’d switch into the unsecured and pay a premium on the “overflow”.

This would obviously be dangerous to people who can’t manage their finances, but the world shouldn’t be designed for the lowest common denominator. Banks profit on each of these products individually, so I imagine they’d do ok with them all combined (and have ALL of that customers business). It would be much easier for the customer to manage their finances with 1 account instead of three.

Any ideas on how I can set up my own bank and offer this? 🙂