Category: Personal Finance

One of the new economic and social buzzwords is “frugal” – there are frugal blogs, frugal people, frugal lifestyles.  Everyone is frugal these days ranging from people who have always been frugal their whole lives to people who have no idea what frugal means but just want to be part of the crowd.

One of the things that I wonder about is what is the definition of frugal?  I don’t consider myself to be frugal – I like the term “financially responsible”.  The problem with a term like “frugal” is that it is fairly general and can be interpreted in so many different ways.

Here are a few possibilities that I suspect some people use and my thoughts:

I spend less than I used to (ie I’ve cut back)

I don’t see how this qualifies anyone as frugal – someone who was very spendthrift and has reduced their spending could very well still be a spendthrift.  On the other hand someone who is extremely frugal (like my Mother-in-law) could increase their spending and still be very frugal.

I spend as little as possible

I would think this sounds like a good criteria for frugality – although not the only one.  The problem of course is the application – for some “spend as little as possible” is taken literally and there is nothing in their lives that doesn’t get evaluated for value.  That person might do thing like try to live without a car or with only one car (for a family).  For others – “spend as little as possible” is applied to the lifestyle that they choose without regard to cost.    That family might chose to have 2 cars for convenience – the reduced spending might apply to the options included with the car or even the type of car – but the 2 car variable is not up for grabs.

I expend effort and time to be frugal

This one sounds pretty good – it’s always hard to ignore a good effort.  One of the problems with this approach is that ‘frugal effort’ can be applied to fairly small budget items and savings on larger items might not be maximized which is not very frugal in my opinion.

Here are some examples of ‘frugal effort’ that I’ve come up with just to clarify what I’m talking about:

• Preparing your own meals.  Most people do this, but the test is how often do you eat out?
• Creating basic goods from scratch.   Making your own laundry detergent is only frugal if you have a lot more time than money.
• Comparison shopping/coupons.   This one may be obvious but it takes time.  This has to applied intelligently – saving 25 cents on soup is irrelevant compared to the money you can save on a car.

I save a lot

Frugal or not – a high savings rate is rarely a bad thing.  Like some of the other examples – this one is relative – someone who makes $10 per hour and can save is almost undoubtedly frugal.  Of course if that person is a student living with their parents, then maybe not so frugal.  If that person make $250k per year after tax and saves $50k per year – are they still frugal?  I’m thinking not since they spent $200k in one year!

What is your definition of frugal?

Enough of my thoughts – do you have any “definitions” or criteria for frugality that people should meet before they can wear the frugal badge of honour?

One of my favourite investment topics is asset allocation – trying to figure out what your division between stocks and bonds should be in your portfolio.   I read a comment on this idea recently written by the excellent blogger Michael James who writes an excellent financial blog.

Normally when you are trying to figure out your desired asset allocation you consider your existing portfolio.  If you have $100k then you might decide to go with 70% stocks and 30% bonds.  Within those major asset classes you would probably have more detailed asset classes such as Canadian equities, US equities etc.

This approach works quite well for investors who have a fairly significant portfolio assembled.  But what about someone who is just getting started?  They might be in the situation where their portfolio is quite small but they are making large contributions to it.  An example could be someone who has just paid off their mortgage and now has quite a bit of extra cash to contribute to their retirement savings.

Does asset allocation matter if your contributions are a significant percentage of the portfolio?

I would say no.  If an investor has a portfolio value of $5,000 on Jan 1 and is planning to contribute $1,000 per month then it’s not worth worrying about keeping his portfolio at the perfect allocation.  One of the main reasons for asset allocation is risk management – either you want to protect your assets or are willing to risk them for a greater future reward (or something in between).

If you are in this situation then I would still consider coming up with some sort of asset allocation model (ie 75% stocks, 25% bonds etc) although it’s not really necessary in the early stages.  If you are buying securities with transaction fees such as stocks or exchange traded funds then it might be cheaper to just buy a lot of one investment at a time.   Even if you are buying index funds or managed mutual funds which don’t have transaction costs then don’t worry too much about the allocation until you have enough money to assemble a proper portfolio.

At what point should the asset allocation matter?

Tough to say – I would suggest that rather than think of a dollar figure – a ratio of yearly contributions to portfolio size might be more meaningful.  From a risk point of view – someone with an investment portfolio of $10k and annual contributions of $20k probably isn’t that worried about the original $10k from either a safety standpoint or a performance standpoint.  It just doesn’t really matter much in the beginning.

On the other hand if an investor has $20,000 and is contributing $1500 per year then they should concern themselves with designing a proper portfolio since they are at a point where the contributions are a small percentage of the portfolio.

Another factor might be the normal variances of the portfolio – if you assume a possible range of -15% to +15% (in most years) for a mostly equity portfolio then if the 15% estimate is larger than your contributions then that might be another point where your asset allocation plays a bigger part of the risk management rather than your contributions.

I recently saw Adam Sandler’s “Bedtime Stories”.  To get the obvious first question out of the way, yes, Mr. Cheap watches children’s movies.  And, no, I don’t have any kids.  I get a tear in my eye at the “When She Loved Me” sequence in Toy Story 2.  I watch “chick flicks” in addition to the manly genres of Science Fiction and Westerns.  Heck, I can’t think of a genre of movie I *won’t* watch.

Mr. Cheap is more complicated than you think, thank you very much!

On almost every level, Bedtime Stories was truly terrible.  That’s par for the course for Mr. Sandler, but in this outing he had Xena, Uncle Dursley and the delicious Keri Russell to work with, and he STILL made mess of it!

Setting aside that it’s a bad movie (and it is), the reason I thought it was worthwhile to post about is that it makes some strong assertions in topic areas we blog about.  Given that these are being made to children, and shaping their views on careers, money and economic issues, I think it’s worthwhile to consider.

At the beginning of the movie, Adam Sandler’s father sells his hotel to a British scoundrel because the father is running it into the ground.  We’re lead to believe that the father is virtuous for “caring about guests”, while the brit is scum for running profitable businesses.  The father wrangles a very half-hearted promise from the buyer that Adam Sandler will be considered to run the hotel when he gets older.

Fast forward a few decades and Adam Sandler is the virtuous custodian who pays for elderly drunks’ mini-bar tab  from the evil bureaucrat that insists customers pay for booze they’ve consumed.  The next hour and a half is Adam Sandler’s character whining that he’s worked hard as the custodian, so should now be made the boss of the entire massively-renovated far-larger hotel.  He demonstrates none of the skills to actually DO this job, and doesn’t seem to have any interest in gaining those skills (or working and taking a risk by starting his own hotel).  He just whines and whines, until he figures out his niece and nephew’s bedtime stories can alter reality, so he starts trying to use MAGIC to get what he wants.  I suspect he’d take right away to “Rich Dad, Poor Dad” or “The Secret” if he ever read either.

After using magic extensively (and finding it doesn’t work), at the end of the movie (sorry to spoil it for you), he’s suddenly magically running his OWN hotel!  So whine enough about how much you deserve something, trust in some kooky magic, and you’ll get what you want, or something awfully similar.

In the early part of the movie, he’s the custodian and is treated badly by the “higher ups” at the hotel.  At the end of the movie, he’s the higher up, and for some reason the former higher-ups are now working as his custodial staff while HE treats THEM badly.  Much as the ending of “Night at the Museum” teaches our children, the perfect punishment for villains is to make them janitors.  Of course, there’s no chance that it’s a necessary job, deserving its own dignity and respect.  Nope, let’s teach the kids that janitors are bad people, who deserve their “continuous suffering” because of past misdeeds (and it’s important that they’re treated poorly by those around them:  as long as the custodian isn’t Adam Sandler).

Don’t waste your time watching this, but more importantly, please don’t poison young minds by exposing them to it.  Unless, of course, you want to teach those young minds that all businesses are run by greedy, evil people, that you get what you want in life by wishing for it (instead of through planning, discipline or working hard), and it’s important to reach a status level in society that lets you feel better about yourself by treating other people badly.

My wife got a marketing letter from TD Visa recently which has the headline

“Share the value and convenience of your TD Visa Account with family and friends…

No approval required”

The idea is that you can apply for extra credit cards which you can give to friends/family/neighbours/shifty guy at bus stop etc.  We got a bit of a laugh from the letter since the idea of getting a credit card for your friends seems a bit silly.   I can see maybe lending your card in an emergency but actually getting a card for them?

Obviously they are just trying to expand their business and getting their existing customers to use more products is a pretty good way to do this.  I did this for my wife (got her a second Visa card) but I feel at this point in time that she is fairly trustworthy.  🙂

Other than for a spouse or child (maybe) I just can’t see ever, ever doing this – can you?

We’re looking to buy a bicycle for my wife – touring type (ie mountain bike with smooth tires).  Does anyone have any advice or suggestions?

Open to buying new or used – not sure what price to think about.  Something lighter would be nice.  In our area (Riverdale/Beaches) in Toronto there is a Canadian tire as well as a bunch of smaller bike places.  Has anyone bought a bike in that area?  How about Kijiji – can you get a used bike that isn’t stolen off it?

Ideally less than $500 would be good.

Maude: Neddy doesn’t believe in insurance. He considers it a form of gambling.

(on Ned Flanders from “The Simpsons”)

Ellen Roseman recently wrote a blog post “Don’t buy insurance from banks.”  In it (and in the accompanying column) she details a couple who approached her with a problem.  They had purchased critical illness and life insurance on their mortgage in 1999, and been upfront with the bank about their health at the time and during renewals.  When the man had developed cancer and they tried to collect on the policy, TD Canada Trust denied their claim, saying it was a mistake that the policy had ever been sold to them.  Getting the situation written up in the Toronto Star shamed TD into honouring the policy, but unfortunately I’ve long had the feeling this is a common occurrence with insurance companies.

When you’re deciding who to buy insurance from, they happily promise you the world.  Benefits are pointed out and you’re lead to believe that you’re fully protected.  Even when you try to get the full details of the policy, agents try to steer you away from that and just assure you “it’s full coverage”.  When something bad occurs, suddenly the situation becomes far less certain and there are a great deal of exceptions and special cases.  Often the insurance company needs to be forced to honour the policy, either in court or by going to the press.

Post-claims underwriting, where the validity of a policy isn’t confirmed until a claim is made, is an AWFUL idea, that clearly exists to collect payments from “customers”, while keeping an escape hatch to avoid payment of any actual claims.  I’ve written before about self insuring, and behaviour like this on the part of the insurance companies is a big part of the reason that I only carry insurance protecting against CATASTROPHIC lose.  Since I currently don’t have any dependants, this is mostly protection against  liability and extreme damage in my rental condo (with the highest deductible they would allow).

The movie “Sicko”, by Michael Moore, details the failings of the American medical system.  It’s obviously a very “structured” perspective on this issue (I love Michael Moore and his movies, but you can’t take this style of work at face value).  My feeling was that the worst failings presented weren’t the fault of the government, but insurance companies being allowed to violate agreements with their customers in disgustingly immoral ways (such as the woman who was denied treatment for ovarian cancer because the insurance company claimed she was “too young” to have developed it).

In investments there is the legal principle that sophisticated parties can not make ridiculously one-side (or overly-complex) agreements  to take advantage of unsophisticated people.  Unfortunately I think this is rampant in insurance sales, where the contracts being sold are VERY complex (and intentionally so), that are being misrepresented to buyers.  Until insurance companies begin to behave (or are forced to behave) with more integrity, I’ll avoid purchasing insurance except when there’s absolutely no other choice.

Have you ever had to make a large claim on an insurance policy?  Was it easy or hard?  Did you have to fight to have the claim honoured, and if so, how?

I was happy to get a copy from a friend of John T. Reed’s “How to Write, Publish, & Sell Your Own How-To Book” which I’ve been wanting to read for a while.  In articles, and in other books, Mr. Reed has discussed that he got started on writing “How-To” books when a friend suggested them to him, he was surprised at how profitable they were, and he’s been doing them ever since.

John Reed takes titles seriously, and typically they tell you EXACTLY what the book is about (writing, publishing and selling a how-to book in this case).  He goes through the process in depth, for example explaining what type of paper or cover design he recommends and why.

I’ve had a goal to write a book at some point, and was surprised at his approach to the actual writing.  He recommends writing about something you know, writing the way you speak, makes some suggestions about length and that’s about it.  He suggests that past English teachers, and their negative feedback, can safely be ignored (like Stephen King, he never got any encouragement from his teachers to write professionally), but that if you have writing talent, your friends will probably have noticed and complimented you on it.  Failing that, he suggests to just barrel through and, in the worst case, dictate what you want to say to a recording device then transcribe it.

To a degree this reassured me that there’s no “black art” to it, or “literary police” I need to get permission from before I start writing.  He basically suggests typesetting as you go (work on it in the form you’ll eventually publish it in) and just get going.

A large part of the book is a diatribe against the publishing industry (and why you should avoid them).  He’s used to being looked down on as a self-publisher, and strongly feels that being published by a typical publisher is such a bad deal that people only do it for the vanity of seeing themselves in a book store (and convincing their friends that they’re a “real” writer).   I’m not sure if I feel as strongly about it (and would love to be offered a publishing deal like Squawkfox – yes, I *AM* green with envy).  But, I also like to make more money, so I’d be tempted to get into self publishing if it was more lucrative.  He has done both and is a strong advocate for self-publishing (and distributing).

He recommends printing the book and binding it yourself at home to start, and once you’ve gotten enough orders to justify it, do a print run with a publisher for a year or two’s supply of books (and print more as needed) to sell through your own website.  I was surprised that he didn’t mention “on demand” Internet publishers (like Lulu.com), either to recommend or criticize them.  I’ve read on-line reviews of some of his “early edition bound-at-home” books, and customers seem pretty under-whelmed by them.  I think on-line, on-demand publishing might be the way to start, then switch to larger-scale when and if the volume supports it.

That’s probably the one big criticism that can be made of John T. Reed, he’s very forceful and direct about what he believes and why, and its great 99% of the time, but occasionally he has blind spots (and refuses to acknowledge them), or gets misinformed and can’t shake the incorrect information (I’ve read repeatedly some funny ideas he has about XML).

While how much money you make depends entirely on how popular the book is, Reed’s experience has been that his books do well over a long time (they keep selling year after year).  He suggests that they’ll be the type of coveted “passive income” vehicles that take a large amount of upfront labour, then pay out year-after-year into the far future.

I don’t like linking to books we review.  Since we never set up an affiliate system, it doesn’t make any money for “the Mike” (watch out Trump!), and some readers will think we’re getting a commission which will bias the review.  Since you can ONLY buy this book at John T. Reed’s website (he discusses the rationale for this in the book), I’ll include the link here (but we don’t make a dime if you click on it and / or purchase the book).

I finish course work this term, and am thinking about a few possible side-projects once I switch into full-time research mode.  Writing a book is definitely one of the contenders.  Ideas I might write about include:

• A romance novel about a frugal man (and the women who love him)
• A super-basic, introductory personal-finance book
• An introduction (and how-to guide) for Canadian dividend reinvestment plans (DRiPs)
• A travel-log about my cheap backpacking trip across Europe (there’d be a bit of romance in this one too, although sadly no where near as much as I’d hoped there would be when I started the trip).
• A travel-log about my experiences living in Taiwan (and teaching English there)
• A layman’s guide to the Ontario Residential Tenancies Act, written for landlords and tenants, translating the legalese into English (with examples). I’ve been meaning to fully digest the act at some point, and doing so to write a book might be a good way to combine two projects.
• A guide to graduate school, suggestions how to: get in, decide where (and whether) to go, outline the differences from being an undergrad, how to get up to speed in your research area, basic research and teaching skills, how to relate to your supervisor and fellow grad students, etc, etc.
• A introduction to computer programming, using building a simple game (think Tetris or Space Invaders) with a real programming language as the core “project” and explaining proper software development techniques (and their rationale) throughout.

Which of my books would you buy or do you think would be the most popular?  What would you write a book about?

Some big events this week when both Chrysler and GM were denied any long term bailout money unless they come up with better restructuring plans.  The US and Canadian governments have not given up on them however since both companies were given short term cash to continue operations.  I thought it was pretty interesting that the governments didn’t just rubberstamp the recent deals that GM and Chrysler came up with to improve their operations.

I agree with Obama that the threat of bankruptcy is necessary to get a proper restructuring deal.  The problem with the government just giving these companies more money is that when any tough negotiations have to take place, such as between the CAW and GM – the government ends up being the third party in the negotiations and the union and car company are more inclined to bargain just hard enough to get the bailout money.  This was evidenced by the recent sweetheart deal reached with GM and the CAW.

Bankruptcy will be a tough road but when an industry is so far over capacity and has different parties (companies, unions, pensions) then it might be the best way to get the fairest deal for everyone.  It’s kind of like locking 12 people in a room for a day and a half and demanding that they come up with an agreement on something.  That happened to me several years ago on jury duty and I can tell you that although nobody was happy with the final outcome – an agreement was reached.  Ok, it wasn’t really a day and a half – we were allowed out for dinner at a very expensive restaurant (courtesy of the taxpayer) and for sleeping overnight at a hotel.

Homer: Well, Marge, it was horrible. Everyone was against me in that
jury room. But I stood by the courage of my convictions and I
prevailed. And that’s why we had chinese food for lunch.

Should Wagoner have been fired?

I originally thought that the Wagoner – the head of GM was rightfully fired as CEO because the company had gone pretty far downhill under his lead.  However, after a brief discussion with Jim from Bargaineering.com on Twitter – I realized that maybe replacing him wouldn’t be that easy since he does know the company.  I also read that under his leadership the company went from 177,000 employees to 92,000 today which is an impressive feat.  Now, I think that he should have been kept on – it appears to me that he had the company on the right track but given the conditions of the last couple of years (high gas prices, recession) the goalposts kept moving on him which made it impossible to get the company to the right size quick enough to prevent it’s current situation.  Don’t forget that the pressures to downsize that exist today were not present in their current form before a couple of years ago.  Given that GM needs fixing asap – I’m not sure that he wasn’t the best person.

What’s up with Lewenza?

I wrote about Ken Lewenza – head of the CAW a while ago after he got a pretty sweet deal with GM.  This guy does a lot of negotiation through the media and I’m really starting to think that he sounds a bit like the Iraqi Information Minister who reached some fame during the Iraqi invasion.  It doesn’t seem to matter how bad things get for the car companies he still says things like

The message from the Saturday meetings was “almost unanimous that the pattern agreement struck at General Motors must be the objective of the union,” Mr. Lewenza said in a phone interview Saturday.

when talking about ongoing negotiations with Chrysler.

After the government said that GM must come up with a better deal with the union, Lewenza said the union will not reopen talks with GM.   Ok, Ken – good luck with that.