Category: Personal Finance

Mike and I often post about how to manage your finances to get a little bit of extra return from it (whether it be through leveraged investing, real estate, dividends or asset allocation). That’s the stage of “financial life” we’re at. Some people comment on personal finance blogs and say “that’s all well and good for you, but what about those of us who don’t have any money to invest?”.

With that in mind, I thought it might be useful to do a post about how to make extra money if you’re poor and unskilled. I’ll apologize in advance, but most of these boil down to “get a second job”. When you don’t have any money to invest, unfortunately your labour is what you have to earn money with. I’ve done most of these myself (and am happy I don’t have to do them any more).

I’m not going to post any “get rich quick” ideas like setting up a vending machine route or doing “no money down” real estate deals. These are all ultra-low-risk, very reliable ideas to get some extra cash in your pocket. As well, some things people suggest like blogging for ad revenue clearly have a spectrum of returns they offer. Probably most blogs pay the people who start them FAR less than minimum wage. These all should be fairly close to “sure things” (which is why they don’t pay all that great).

1. Get a second job. Yes, I’m sure that you work hard and I can understand at the end of the day the last thing you want to do is head off and work somewhere else. Jobs like delivering newspapers, product samples, phone books, working retail, working fast food, or telemarketing are usually available (I’ve done each of these except for telemarketing). Like everyone, you have to decide which you want more: money or free time.
2. Work overtime at your current job. If you’re not on salary, see if there’s the opportunity to work longer shifts or extra shifts. Many companies have trouble getting staff these days, so your manager might be very happy to give you extra work. If you get any sort of over-time pay all the better!
3. Start a cleaning business. Most people like to live in a clean house but hate to clean. You can earn $10-15 / hour pretty easily by just putting up some fliers around your neighborhood with your phone number and rates. Eventually you can bring your own cleaning supplies and charge more (probably $20 / hour). Any healthy adult can wipe dusty surfaces, scour tubs and vacuum. Clean freak customers will be delighted to give you pointers to make you a better cleaner.
4. Do semi-skilled work. Can you surf the Internet, write e-mails and use Word? Post a flier offering to teach elderly people basic computer skills. Have you passed many high school subjects? Offer in-home tutoring on any subjects you did well in. Can you do minor repairs, cut grass or paint? Post a flier offering to be a “rent-a-husband”. Do you have a car? Get a job that requires one (like delivering pizzas) or offer things like getting groceries for shut-ins.
5. Help people clean out basements / garages. Post a flier saying you’ll help people clean out their garage or basement if they let you take anything that they’re going to throw away. It amazes me what perfectly good things people will toss. Take their garbage and sell it on EBay or Craigslist. A digital camera may eventually be useful (maybe one of your clean up jobs will give you an old one). A truck would be useful as well (then you could take furniture / appliances as well). Eventually you’ll learn what will sell and what really is garbage.
6. House sit / Baby sit / Pet sit. Check in on people’s houses while they’re on vacation or walk their dog while they’re at work. Requires you to be trustworthy and responsible (they’re trusting you to take care of their beloved homes, children and animals), but once you’ve proven yourself there’s a good chance of repeat business and referrals. An added benefit is that you can walk multiple dogs at once, or check on many houses on the same day – you get paid multiple times for the same time commitment!
7. Do some small scale farming. If you live in a rural area, grow plants you can sell or raise small animals (such as rabbits or chickens). Get a book from the library or find someone already doing something along these lines and learn from them. You can even offer the plants / meat as “organic” (since you’re not going to use pesticides or anything, right?). Rabbits can thrive on day-old bread (bakeries will sell you a ton of it cheap) and weeds and greens you can pull from anywhere. Chicken feed is dirt cheap. A fun article about raising chickens was posted on kuro5hin. Don’t bother trying to breed dogs or anything like that – the market is saturated with people doing it for fun and you won’t be able to make any money. If you end up not being able to sell what you’ve raised – eat it yourself and cut your grocery bill!

Pretty much any of these can be expanded to something that pays significantly more if you like it and are good at it. Do you like doing minor repairs or painting? Start a flooring or painting side-business. Got more cleaning customers than you can handle? Raise your prices and hire someone to help part-time. An aunt of a friend of mine house-sits full time. When people go on extended vacations, she moves in and lives in their place – no need to pay rent! As you get more skilled or expand your operations, the pay will increase as well. When I was doing contract programming, I was basically doing the computer skills idea at a much higher level (and was able to charge $50 / hour to do so).

More information

104 ways to save extra money – Great list of ideas to save money.

A while ago I read a post about only spending re-earned money. Its not a new concept, and in fact in George Samuel Clason’s classic “The Richest Man in Babylon” he talks about something similar. In it, a money lender is teaching an ambitious young boy how to become rich. He has convinced him to live below his means and invest the excess. The money lender asks him what he does with the income from the money he saves. The boy talks about the delicious foods and the fancy clothes he purchases. To which the money lender chastise him and says that he’s “eating his children” and he has to allow his wealth to compound and keep making more for him (the re-re-earnings in the originally linked to post).

Another blog post I read was about the blogger getting his first $30 / month in passive income. He was excited, but also had the feeling “its just $30 / month”. Similarly I was talking to some friends one time about my investment condo and talked about how I make around $250 / month from it and one of them apologetically said “$250 per month isn’t very much money”.

Its true, but one of the commenters on the $30 / month post said to think about it like some bill he’d never have to pay for again. Imagine he got a cell phone with free usage for the rest of his life. You’d be pretty excited about that, right? If I view my condo as paying for all my groceries for the rest of my life, $250 / month becomes pretty sweet!

Most of my long term financial plans revolve around re-earned income (as the original poster called it). Being able to have passive, reliable income that covers the various expenses in life seems to me to be the best way to get to the point where you can be confident that you’ll never be forced to work somewhere you hate for the rest of your life.

With the Canadian tax deadline looming (Apr 30th), what should a tax payer do if they’ve encountered a situation with their taxes that they don’t know how to handle? Every accountant worth their salt will be working overtime now so who to turn to for advice?

How about Revenue Canada? I haven’t often come across the idea of calling them when you have problems, but I’ve done it a few times over the years and its very easy. The contact numbers are available here, they work extended hours leading up to tax time, and I’ve found them to be helpful and polite (although less so after you’ve called them “money grubbing soul suckers” as I had to learn by experience). A couple of years ago when I asked whether an external hard-drive should be treated as a expense or a capital cost allowance (CCA) they were able to promptly answer (CCA), and when I asked them what class number of CCA, they put me on hold and got back to me within a couple of minutes (class number 10).

The benefits are that they’re readily available (I’ve never had a long wait when I’ve called) and free.

The drawbacks are that if anyone is going to be a stickler for tax laws, its Revenue Canada. They’re CERTAINLY not going to give you any tax planning advice or suggest better ways to structure your finances. Additionally, they’ll interpret any ambiguities in their own favour. The flip side of this is that you never know what will be the outcome if your accountant gets too creative, so playing by the rules is a good idea (Mr. Cheap doesn’t fear much but he does fear Revenue Canada!).

This being said, I’ve found that accountants I’ve worked with in previous years weren’t particularly helpful either (which is why I’ve gone back to doing my taxes myself). Apparently tax preparation and tax planning are very different activities (accountants charge FAR more for tax planning: if you hire them for preparation that’s all you’re going to get).

The other drawback might be if you’re doing something illegal, you might draw attention to yourself. I’m not, so that wasn’t a consideration for me (if you have numerous accounts in the Cayman Islands perhaps calling them isn’t a good idea 🙂 ). Asking them what expenses are valid for a grow-op might be a bad idea too. They’ve never asked me for identifying information (SIN or tax id or anything) – so I *THINK* its anonymous information (maybe they trace telephone numbers – who knows?).

What has your experience been dealing with Revenue Canada? Are their benefits / drawbacks I’ve missed?

In my last post about emergency funds, I covered a number of good reasons why I prefer to use a line of credit for my emergency fund instead of having cash.

Some reasons I listed were:

• Tax inefficiency – interest payments on the cash are taxed at the marginal rate.
• Better uses for the money – either paying off debt or investing at higher expected returns.

Since I published that post a couple of months ago, the Canadian government has introduced a new tax-free savings account (TFSA) which basically allows Canadians to save money in an account where none of the earnings (interest, dividend, capital gains) are taxed.

This is a big development because one of the main reasons I don’t like keeping too much cash around is the high taxes that I have to pay on the interest. With the introduction of this new tax-free account, my reasons for not having a cash emergency fund have been greatly reduced.

The other great benefit of the tax free account is that you can save up for large purchases, such as cars, vacations etc and you don’t have to worry about the tax issues from earnings.

New emergency fund strategy

We’ve decided that once the new tax-free accounts become available (in 2009), we will start up an emergency fund which will also double as a savings account for our next car. Since we still have a large mortgage that we want to dispose of as soon as possible, this emergency fund won’t be very large. I’m thinking of maybe starting it at $5,000 and accumulating it up to about $10,000. At that point it will be around three months expenses.  The new strategy will be a combination of cash emergency fund and line of credits.

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

Comparison between Canadian TFSA and American Roth IRA

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

With scams the best defense is often to discuss them and let people who haven’t run into them know how they work. Unfortunately, talking about scams can seem like a “how to” for scam artists, which IS NOT my intention here. I always love reading about scams and cons, in part to protect myself, and in part out of amazement at how devious people can be when they’re trying to part us from our cash.

Growing up I was good friends with one of those “super smart” girls we all knew. She’d have her compositions read in English class and everyone would make a fuss over her. You know the type (actually, if you do know the type and they’re over 18 tell them Mr. Cheap is single!).

One day my parents showed me a picture of her in the local newspaper. She’d had a poem accepted and was published in a collection. The next time I was at her house I congratulated her. She mentioned that she had got two copies of the publication and one was on their mantelpiece. I asked her if they’d sent her the two copies as author’s copies and she admitted that no, she’d bought them. I congratulated her again and let it drop as I knew she’d just been the victim of a vanity scam.

The person putting out the publication puts out a call for submissions far and wide. Everyone who submitted was accepted, then he offers the publication for sale at a hefty mark-up over his printing costs. He then sold a couple copies to each of the authors (not to anyone else – if some authors didn’t buy who cares? Most did) and started soliciting submissions to his next edition. The “authors” would have been just as “published” if they’d headed down to the local print shop and self published (although that might have been less likely to get their picture in the local paper). More info about this type of scam is available here.

Vanity scams work on our pride in ourselves or our loved ones (usually a spouse or a child). Most of us are predisposed to think that we’re pretty darn wonderful, and when someone comes along agreeing with us its tough to ignore whatever they’re selling.

“Modelling agencies” will do something similar when they tell you how beautiful your daughter is and how they can get her modelling and TV work. Who doesn’t think their daughter is beautiful, so the parents buy it hook-line-and-sinker. Then comes the pitch that a $800 photo shoot is necessary for them to accept your princess as their client. The parents pay, poor quality photos are taken, and they never hear from the agency again. If asked the agency can just say they haven’t found anything yet.

An uncle of mine years ago had an idea for a business selling fake pot plants. People could buy it to try and look cool to their friends without risking trouble from the police (I’m not sure what you’d do if one of your cool friends wanted to actually smoke it). At one point he got invited in for a meeting with a bunch of guys dressed in suits who claimed to be venture capitalists and wanted to invest in his business. The catch was that they wanted a couple of thousand dollars to do “market research” on his idea. Needless to say, if he’d had this money to give them it would have been gone.

A few weeks after her purchase, the book disappeared from my friend’s mantelpiece. I didn’t bring up the subject, but I hoped that she had got some wisdom as a “gift with purchase” of her book.

Be VERY careful when someone tells you that you have a wonderful opportunity (because you’re so special) if you just can come up with a bit of cash. They may be selling you a dream and nothing else. If you really have so much raw talent, they should cover the costs of giving you author’s copies, taking pictures or market research.

“O that men’s ears should be To counsel deaf but not to flattery!” – W.S.

I was surprised, when I first tried renting the condo I bought, at how savvy potential renters were. My initial rental price was *way* too high, and people would come, look around, then politely decline to fill out an application. I dropped the price and kept getting the same behaviour. Finally I dropped it again and suddenly half the people who saw the place wanted to fill out the application (and some of them wanted to rush through the application process – they were afraid of losing the place to someone else).

A friend of mine with quite a bit more experience commented on how this was very typical. He always knows that he’s overpriced a unit if less than half of the people who see it fill out the application (if they don’t fill out the application on the spot, they aren’t going to rent it – even if they promise to think about it and call later).

This is VERY different from how people often throw money around without a second thought. I’m usually amazed at how little thought and consideration people put into purchases, even major ones. People walk onto a car lot to have a look around and walk off owning a car they didn’t intend to buy. People hook up with a real estate agent who talks them into a buying a property that costs FAR more then the original “high end” they’d agreed to consider.

John T. Reed explained this behaviour in one of his books. People shop for an apartment differently than how they shop for most things. Typically people decide what price range they can afford for rent. They look at a bunch of apartments in that price range, and they rent the nicest one (or once they’ve got a feel for nice and bad apartments in that range, they start filling out applications for all the nicer ones). If you’ve got an apartment that SHOULD rent for $1200 / month, and the people coming to see it are looking for something in the $1500 / month range the $1200 apartment is going to look poor compared to the other places they’ve seen.

They aren’t really any more sophisticated than that (they just want to live in the nicer places they’ve seen), but an excellent buying strategy emerges from this. The end result is they become very savvy consumers for apartments in the price range they’re shopping in – just by picking a price, looking at a number of items in that range, and taking the nicest one. The wouldn’t be able to appraise other units or say what price they SHOULD be renting at, they just can find the nicer apartments at a specific price point.

Landlords rationally respond to this by either dropping their rent price until a unit is priced correctly, or they add things in (like free cable or more appliances) until the unit they’re rent is competitive for the rent “band” it’s competing in. This is a surprisingly efficient marketplace!

When people shop for a place to BUY, they look at places, fall in love with one, then try to get the best deal they can on it. When people shop for cars, they pick out the make and model they want then try to haggle with the dealer. If someone is buying a guitar, they try strumming them and pick out the one that has the look or sound that is appealing to them. These are all buying strategies almost guaranteed to get you a BAD deal.

So, an easy short cut to becoming a savvy consumer for something is to pick a price, view multiple items available for that price, then take the nicest one you see. E.g. decide you’re going to spend $14,000 on a car, go to dealerships and tell them that’s the EXACT price you’re willing to spend (after taxes and add-ons and everything) then tell them to let you test drive something they’d have available for that price (and have them tell you what extras you’d get). Do this at 5 dealerships, then buy the one that you liked the best – chances are you’ll get a good car for your money. Explain to each salesman what you’re doing, and if he has half a brain (big if) he should offer you a package that’s a good deal to increase the odds that you buy from him. If the dealership you choose tries to increase the price at the last minute, just go buy the car you liked second best.

Corporations perhaps approach the problem the wrong way when they put a project up for bids and then award the contract to the lowest bidder (who then does his best to provide the minimum amount of work while still fulfilling the contract and getting paid). Perhaps they should instead give a general outline of their problem, set the price they want to pay, then have companies’ bid by offering the services they could provide for that price.

One of the big benefits of RRSPs is that when you withdraw the money, you don’t necessarily pay the marginal tax on the withdrawals but rather the average tax on the amount you withdraw.

For example if you withdraw $40k from your RRSP and you don’t have any other income source then you will pay only the tax payable on $40k which works out to a lot less than your marginal tax rate. If you have any income such as CPP and OAS – let’s say you get $12k per year from those, then the tax on the rrsp withdrawal will be the taxes payable on your income from $12k to $52k which will be more than the first example but still a lot less than your marginal rate.

What if you make a lot of money from your other income sources? In that case, the taxes due on the rrsp withdrawal might just end up being your marginal rate. If you are withdrawing your rrsp money and it’s all being taxed at or close to your marginal rate, is it still worth it?

You need to look at your own scenario and try to decide if it’s worth while or not.

Two main benefits of RRSPs:

1) The possibility of paying less tax on the withdrawal amount than the tax that was deferred on contribution.
2) No tax drag because of taxes on dividends, capital gains and interest.

Some common situations where RRSPs will probably have lesser value:

Defined benefit pension – if you work for the government or a company that has a good DB pension then the pension will probably put you into a moderately high tax bracket. If that is the case then you aren’t getting as much benefit from the RRSP since the tax you pay on the withdrawal might be the same or even higher than the tax you deferred when you contributed. You will still get some benefit from the fact that there is no tax drag in the rrsp. Another consideration is potential government clawbacks on your OAS (Canadian government benefit). This is one of those situations where you will probably be better off using the new TFSA account.

Low income – This is worth a post of it’s own but if you don’t make much money and can still save then the TFSA is a better choice than the RRSP.

Alternative income – If you have an alternative income planned for retirement such as dividend stocks (Derek Foster method or Smith Maneuver) and/or rental properties or any other income sources then they have to be considered as well. This is similar to a defined benefit pension in that if this money puts you at a reasonably high tax rate then any RRSP withdrawals will be taxed at a high rate and you lose part of the benefits of the RRSP.

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

Comparison between Canadian TFSA and American Roth IRA

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