Category: Personal Finance

Thicken My Wallet recently wrote an interesting post about “Leaving free money on the table“. The gist of the post is that there are a number of scholarships and government grants which go unclaimed each year, and that just by applying you can get free money.

This is true for what it is.  My favourite example was a Kitchener/Waterloo region housing lottery for first time home owners. They could apply to a lottery to help with up to $11.3K to assist with their down-payment. No lottery was held, because fewer applications were received than the number of awards they had to give (so everyone who applied got it). I’ve never been as disappointed to own property as when I read about this.

There is another side to the issue (with respect to TMW).

Years ago I started a business that was intended to use some of this “free money”. The short version was that I’d sell something of value to families that they’d be able to purchase with grant money (which I’d help them apply for). The business itself actually fell under a number of categories which would have qualified for grants.

In total, I sold to ONE family who used grant money for the purchase (and they bought out of a grant they already had set up – they were actually the ones who initially suggested the business venture to me). They were very happy with the purchase, and continued to buy (even when the grant was pulled back and they had to pay 1/2 the amount out of pocket).

There’s a version of the advance-fee scam that works by contacting individuals or businesses and telling them that they qualify for a grant, and they just need to pay the small application fee to receive a much larger sum of money. Everyone likes free money, and people certainly get taken in by this.

Even TMW’s $500 scholarship came about because someone on the inside met him and told him about it (they came to him). There are no guarantees that you’ll find grants as easily as he did (and certainly no guarantees of your success or the ease of applying). There are businesses (in Canada many “film” companies) that exist solely by applying for government grants. They work darn hard to get the money, but sadly their hard work is focused on navigating the bureaucracy rather than creating value (I suspect they work harder to get the grant money than they do on the funded projects).

I once suggested to a friend that a good business to start would be a service to help people get grants. I looked into it, and found it already exists. PLEASE NOTE: I’m not endorsing the linked-to companies! They require upfront payment to become a member or to hire a “consultant”, rather than collecting a fee if the grant application is successful. This made me suspicious to do business with them. They clearly have an incentive to build membership numbers rather than get grants awarded.

Much like the coupon queens, my experience is you often hear about this juicy, unclaimed, free money, but once you actually go looking for it, you’ll find it to be labour intensive enough that applying turns into a relatively low-paying job.

Other than one-time “lucky strikes” has anyone been able to consistently apply and receive grants or scholarships?

This post is part of a group project on will writing and estate planning. Other blogs participating are: Thicken My Wallet, Million Dollar Journey, Where Does All My Money Go, The Financial Blogger and Canadian Capitalist.

…was finally completed recently – the “will” at least, not sure about the “testament” thingy. 🙂 We had started this effort a year and a half ago but when the lawyer had one final question for us to answer, we put it on the back burner and didn’t get around to it until now. Kudos to my wife for putting in the final push to get this done!

Why do you need a will?

The main motivation for us was our kids. We wanted to ensure that if something happened to both of us, that the kids would be looked after by someone that we could choose rather than someone a court would appoint. Another reason was that if one of us passed away, then we wanted to make it easier for the survivor to carry on and not have to pay extra legal fees to get things settled.

How much does a will cost?

We paid $350 to get a will done with our lawyer (who is in Toronto, Canada) – he said he normally charges $400 but we have done a lot of business with him so he gave us a discount (or so he says).

How much work is involved?

I would suggest there are a few hours involved because you have to decide a lot of things like:

• Who will look after your kids (and a backup).
• Who will be the executor of the will (and backup).
• Who will have power of attorney and decision-making ability in the case where one or both spouses becomes incapacitated (ie decide to pull the plug) (and a backup).
• Who inherits your possessions in the case of one or more deaths in the family (this could include everyone dying).

There are other situations to be covered which I won’t list since I don’t want this post to be the reference point for a home-made will.

It is also important to let other people know of your intentions – especially if you are designating them to look after your kids. Not everyone will be interested!

How do I decide who will look after my kids?

Good question! I think the best way to approach this is to figure out which friends or relatives are most likely to raise them in a way that you approve (which doesn’t have to be the same way as you).

Things we thought about:

• Family unit – both couples we chose have kids about the same age as our kids. We felt that it would be less of a burden for someone to add a couple more kids rather than to add kids to a family that either doesn’t have kids or the kids are a lot older.
• Values – you can’t rule from the grave so don’t try. Don’t give the potential guardians four million rules and instructions, just pick someone you trust and respect – they will do the right thing.

Make a list of financial accounts

It’s important to make a list of all your financial accounts and assets so that the survivor or executor doesn’t miss anything and doesn’t have to spend hours and hours going through all your old paperwork to find various accounts. We made a list of all our financial accounts like credit cards, bank accounts, investment accounts etc and will give a copy to the executor. We have a copy here at our house for the survivor in case one of us passes away. Ok we haven’t quite finished this last step but it will happen!

What about just writing my own will or use a “do it home” kit?

I asked my lawyer this very question and he said that although it’s not the worst strategy – the problem is that if there are any errors or omissions or if things change after the will was written then it won’t stand up in court as well as a proper will. I think that if you don’t have kids and maybe don’t have a ton of money then doing it yourself is probably a good option but keep in mind that you are not saving a lot of money so hiring a lawyer shouldn’t be a last resort.

Check out the other posts in this series:

Thicken My Wallet wrote about “Top 5 myths about wills“.

Million Dollar Journey details “Why you need a will and the basics of estate planning“.

The Financial Blogger has “Common mistakes on a will“.

Canadian Capitalist came up with “A guide to getting your will done through a lawyer“.

Where Does All My Money Go provides some “Benefits of a professional executor“.

This is part three of my three part series comparing various Canadian and American investment accounts.

I had a request recently from a blogger friend of mine – Paid Twice, who thought it would be a good idea to do a post on some of the more common U.S. and Canadian investment accounts. This post deals with the Canadian TFSA and the American Roth IRA. In part one I looked at retirement accounts – the Canadian RRSP and the American 401(k) . Part 2 compared educational savings plans – the Canadian RESP vs American 529 plan.

Please note that this is just a general comparison – it’s not intended to be reference material for any of the accounts listed.

A big thanks to Madison from My Dollar Plan for helping out with this series.

Canadian savings account

TFSA – Tax-Free Savings Account

American equivalent

Roth IRA

Similarities

• All contributions to these accounts are after-tax money. No tax benefit is generated from the contribution – however a contribution to the Roth IRA can qualify for the retirement savings credit.
• All earnings of any type within the TFSA and Roth IRA are not taxed.
• Most common security types (stocks, mutual funds etc) are allowed to be purchased in account.
• Annual limits are similar – $5,000 for the TFSA in 2009 and $5,000 for the Roth ($6,000 if you are age 50 or older).
• Relatively new account types. The Roth IRA was established in 1998 and the TFSA doesn’t start until January 1, 2009.

Differences

• Withdrawals from the TFSA are not taxable. Withdrawals of contributions from a Roth IRA are not taxable but withdrawal of earnings are only not taxable if the participant is 59.5 years of age or older and the account has been opened for at least 5 years.
• Contributions limits for the TFSA are not income dependent. Limits for the Roth IRA are phased out with higher incomes.
• TFSA contribution room can be carried forward (accumulated) which is not the case for the Roth IRA.

Conclusion

The general idea of these accounts is quite similar in that you can contribute after-tax money and allow it to grow tax-free. The TFSA withdrawal rules are much more lenient than that of the Roth IRA but as discussed earlier in the series, this might not be such a good thing if it encourages investors to withdraw money without good reason.

Read more for a detailed look at the 2009 Roth IRA contribution limits.  That post also covers phase out and traditional IRA.

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

Tax Free Savings Account refresher for Canada

ING offers TFSA refresher for Canadians

Is the RRSP still worthwhile because of TFSA accounts?

Using the Tax Free Savings Account (TFSA) for Canadians as an emergency fund

More Information

Roth IRA Contribution Limits For 2010

As a result of a recent trip, I have a number of euros that I wanted to convert to Canadian dollars. I thought it would be interesting to take a look at different options to convert the money and determine what the different conversion rates are and if it is worthwhile to try to get a lower rate. In my case I only have 460 euros which is about $736 Canadian dollars so this exercise might end up being somewhat academic since I’m not going to put a lot of effort just to save 1%. It might however be beneficial to know how to get better rates in case I want to convert larger amounts in the future.

I’ve decided to investigate two alternatives:

1. Go to a bank branch and get the money converted.
2. Go to a proper currency exchange company ie Thomas Cook – this is much less convenient since I’ll probably have to go downtown to accomplish this one.

I phoned my bank and got the spot rates for Euros to Canadian dollars. They will give me 1.5234 Canadian dollars for each euro for a total of $700.76. Interestingly the conversion rate to buy is 1.6602 which implies a 4% fee for this conversion – seems like quite a bit.

Then I called Thomas Cook and got a sell rate of 1.509 which only nets me $694.14 which is $6.62 less than CIBC. This difference isn’t enough to be significant but for larger amounts it could be relevant.

Of course these results are also dependent on all being executed at the same time – the realities of the currency exchange markets could mean that a big currency swing from one day to the next could outweigh the different rates charged.  I ended up going to my local CIBC branch and after waiting in line for 5-10 minutes, I got my $700 loonies!

Does anyone have any other ideas about how to convert money at a good rate?  Is it worth even discussing for smaller (ie less than $5k) amounts?

A while back I made reference to $30 / month of passive income and one of my off-line friends was quite interested in more details. Along the same lines as my previous “Everyman’s Guide” posts the rules are that that we’re thinking about ultra-low-risk, very reliable ideas (“get rich quick” schemes aren’t allowed). In previous posts we assumed our “everyman” is poor and unskilled. Unfortunately, passive income usually requires at least one of the two.

Poor and No Skills

• Sell some junk from around your house each month. Arguably this isn’t passive, but with all the stuff most of us have gathering dust around our place, you could make $30 pretty easily slapping an ad on Craigslist or Kijiji and having someone come by your house to pick it up. I could probably make $30 / month for the next couple years if I started selling off my DVD collection.

Poor and Some Skills

• Start blogging. I was actually surprised when Mike start monetizing the site. My expectation was that we’d get enough money each month to mail a letter or two, but its been better than that. Its debatable whether this is passive or not, but if you’d blog even without getting paid, then monetizing it can be viewed as passive income (its especially passive for me since Mike does all the work).
• A generalization of the first point, but sell something that you’re currently creating for fun. Do you knit, sell what you make! Paint? Sell them! Make pottery? Ditto. You probably won’t get anything near minimum wage for your efforts, but if you keep enjoying it for its own sake, getting a bit of cash from it might be ok.
• Create some product that can sell on its own. Think T-shirts at Cafe Press, a how-to or recipe book at Lulu or create a casual game and sell it through Reflexive Arcade.
• Buy other people’s junk cheap and re-sell it on Craigslist or Kijiji.
• Get other people’s broken junk for free, fix it, then re-sell it on Craigslist or Kijiji. Think computers, cars, or bicycles.
• Property manage OTHER people’s real estate. If real estate is passive, than managing other people’s property should be passive as well. If you found someone who had a condo or small unit they’d probably be willin to pay you 5-10% of the gross rent to show it to potential tenants and be a “first line contact” in case of problems. 5% of $600 is $30 / month.

Not Poor and No Skills

• Pay off $1,242 on a 29% credit card (saving $30 / month is as good as earning it in my book)
• Buy $8000 of General Electric stock (currently yielding 4.5%) or $8372 of Royal Bank stock (currently yielding 4.3%)
• Put $11,804 in 3.05% PC Financial’s Interest Plus Savings Account.
• Buy real estate that will have cash flow after paying all expenses (including a monthly vacancy and maintenance budget).

Not Poor and Some Skills

• The world is your oyster, seize it!

Some of these are a stretch as “passive” I’ll admit, but passive income always seems a bit ambiguous.

What ideas do you have (or better yet, things you’ve done) for getting $30 / month in passive income?

This article was originally posted on Bible Money Matters.

One of the most common financial complaints that I hear is that the price of gasoline is too high. I agree that it’s tough to see higher fill-up costs at the pump, but I sometimes wonder if some consumers doth protest way too much? Most people have bigger expenses than gasoline to worry about and gas costs are one of easiest expenses to reduce.

Gas prices are visible and frequent

If you own a car and use it regularly, then you will probably be familiar with market gas prices since you probably buy gas at least once or twice a month (or a lot more frequently). Because gas is a commodity and is sold in standard unit prices, it’s very easy to compare the price with other gas stations and with the price you paid last week. For most other consumer goods, the unit costs are not as quite as transparent and there are different brands to consider.

How much of your budget goes towards gasoline costs?

This will vary widely for different people but in my case we spend about 2% of our net pay on gasoline. This is probably on the low side since we don’t use our car everyday. Groceries, on the other hand, take up about 16% of our budget. Keep in mind that our grocery budget includes a lot of common household items such as diapers, kitty litter etc.

My point is that if I want to cut back on our expenses or even just complain about them, I should focus on what’s important. Our gasoline bill could double and it wouldn’t make a big impact to our budget. If our grocery bill doubled then we would be hurting. I suspect the average consumer has many other expenses which are much bigger than gasoline costs.

How to lower your gas costs

Here are a couple simple ideas on how to lower your gas costs. There are many other lists on the internet which are a lot more comprehensive but I’ve tried to stick with a few solid ideas that if applicable, will make a significant difference.

Drive less – If you can reduce your driving then you will reduce your gas consumption by a proportional amount. This can accomplished by planning your trips better – if you drive to the grocery store seven times a week then do some planning and cut the trips down to twice a week. If you can carpool, walk, ride or take transit to work instead of driving then you will save money.

Drive slower – the faster and more aggressively you drive, the more gas you burn. No more racing!

If you can’t beat ’em, join ’em

Consider investing in oil related companies. The stock prices won’t be perfectly correlated to your gasoline costs but over the long run if the price of oil keeps rising then your stocks (I would look into buying an exchange traded fund) should perform well.

Other posts on gasoline prices and driving tips

Frugal Dad says gas prices are still relatively cheap.

My Two Dollars says to stop complaining about gas prices.

Debt Free Revolution delivers pizza so she knows all about gasoline saving driving tips. Check out the funny photo on this post!

Cash Money Life explains hypermiling which is extreme gas savings.

Being Frugal says she doesn’t drive as much to save gas.

I personally have no problem with it, but many people in the personal finance blogosphere seem to have objections to networth as a measure of wealth (and especially whether to include your principal residence in the calculation, Mike and I even disagree on this one).

While re-reading “The Millionaire Next Door”, one idea they mention in passing is that one view of “your wealth” is the length of time you could go without working (i.e. without receiving a paycheck). I thought this was an intriguing idea, as it factors in your spending and lifestyle as well as your assets.

The calculation would simply be: (assets – liabilities) / monthly spending.

As an example, my assets (after subtracting liabilities), including cash, stocks and my investment condo were worth about $87,318 as of June 1st (I’d also consider this my networth). Since I’m living on about $1300 / month, I could go for about 67 months ($87,318 / $1300), or 5.5 years without working (BIG IF: my living expenses didn’t increase and my assets didn’t decrease in value).

Alternatively, you could use assets / monthly spending (including debt servicing) if your liabilities are greater than your assets (and having a negative number would bum you out).

I especially like this calculation as it favours my approach to life :-). I’d be significantly higher on the networth ranking of PF Bloggers if we factored in lifestyle costs.

Factoring in the principal residence is still a tough issue, as selling it would probably INCREASE your monthly expenses (since you’d have to rent something comparable). *sigh*

How long could you go without receiving a paycheck? What do you think of this measure of wealth compared to networth? Any ideas for what we should call it?

I wrote this post quite a while ago but when Mr. Cheap published a post on a similar idea (Labour versus Investment Income) yesterday, I figured it was a good time to post it. His post focussed more increasing income rather than investment strategy whereas this post has more to do with savings.

I was talking with my sister a while back about investing and she was asking about some of the types of investments that I own. I am a passive investor and own mostly exchange traded funds. Since she is moving to Asia later this year, she doesn’t have access to the same exchange traded funds that I do and was worried about missing out or not having the best investments. My answer for her was – don’t worry about the exact investments you own – the main thing is your savings. If you spend less than you earn, hopefully a lot less than you earn, then you will be fine. You don’t need to have the absolute best investment plan to secure your financial future.

What are savings?

I define savings as using your earnings to increase your net worth. If you earn $1000 and pay off some debt then you have saved that money and your net worth has increased. Normal savings of course, is when you have the actual cash and can keep it in the bank or invest it. Ultimately your financial security depends on how much money you have – how you got there doesn’t really matter. Whether you invested in bonds, stocks, expensive mutual funds – whatever – that is not as important as how much money you saved in the first place.

Some proof

I set up a little financial model to show the effects of investment return compared to rate of savings. Basically I want to compare one person who save a lot of money but gets a low rate of return with another person who is a much better investor and consequently gets a higher rate of return – but they don’t save as much. The question is who ends up with the most money?

Scenario

Saver Bob saves $10,000 per year and invests in a tax-free account. Saver Bob is very conservative and can’t stand the thought of his investments declining in value so he invests in government bonds which pay 4% per year.

Trader Tim saves $5000 per year and also invests in a tax-free account. Trader Tim is very aggressive with his money and invests only in equities which have a higher expected rate of return compared to bonds, but are also a lot riskier since he can lose money. Trader Tim is a pretty successful and get 8% per year which is double that of Saver Bob’s 4% return.

After 20 years, who has the most money? The saver with the low rate of return or the not-so-good saver with a much better rate of return? The answer is that Saver Bob wins the race by quite a bit. Saver Bob ends up with $320,000 which is 27% more than Trader Tim’s total of $252,000.

Summary

We saw from our example that the investor who saved twice as much but got only half the return, ended up with a lot more money. The point is that you should put more effort into saving money rather than how to invest it. I’m not suggesting that it doesn’t matter how you invest – just that it shouldn’t get the same priority as the saving. Once you have your costs under control and feel like you have maximized your savings, then worry more about things like asset allocation, investments etc.