Category: Personal Finance

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Personal Finance

Energy Sales Scams

Energy market de-regulation

In Ontario the energy market (natural gas, electricity) was de-regulated a few years ago to introduce competition in the energy marketplace. This has created a lot of problems because the energy resellers use door-to-door salespeople to sell the contracts and many of them seem to be crooks.

The problem

The biggest danger from door-to-door salespersons of any kind is that if they knock on enough doors they will find people who are vulnerable to making a hasty decision – old people, mothers with a young child or two, someone who is sick. All these groups are people who might normally be able to see through the lies of an energy market reseller but sometimes fall prey and sign a contract that they either don’t want or don’t understand.

My experience

Two summers ago I was relaxing on our back deck when someone knocked on our door. It was quite a loud knock and I originally thought it was one of the neighbours who was making some noise. I ignored the noise and kept enjoying the fact that my new little baby was asleep. Then I heard the knock again – this time even louder. Still I didn’t move – until the third set of knocks and I heard my wife who had been sleeping in the front room with our two week old baby, talking to someone at the door. It was only then that I realized someone had been knocking on our door – immediately I was quite annoyed that someone would keep knocking even though we weren’t answering the door.

The trap

Since I knew my wife was in even more of a sleep-deprived zombie state than I was, I quickly went into the house and talked to the person at the door. The man seemed normal enough and had his two kids with him – probably around 10 years old. He asked me if I had received my “discount” on my natural gas bill yet? I said no since I had not heard of any sort of discount. He then asked me to go and get an old gas bill and he would make sure I would get the discount. Now at this point, anybody who has any sort of intelligence would probably start to smell a rat – but given the fact that I was extremely tired and overwhelmed by the new baby – didn’t suspect a thing. While the “suspicious” part of my brain was taking a rare nap, the “greed” brain portion was wide awake and prompted me to listen to the guy and go an find an old gas bill. When I couldn’t find one I returned to the door and asked the guy if I could still get the discount without an old bill. I asked him if he could look up the account number at his office since I thought he worked for my natural gas provider. He said it shouldn’t be a problem and asked me to sign a document he had on a clipboard. On top of the clipboard I noticed quite a few gas bills that he had obtained from my neighbours for their “discount”.

The awakening

I took a look at the paper (I wasn’t completely brain dead) and noticed right away that it was a contract where if I signed I would be agreeing to a fixed rate natural gas delivery for three years. At that point I knew exactly who and what he was and and that he was trying to rip me off. I told him that this was not a discount but a contract for gas delivery. He said no – it’s for a discount on your gas bill and then showed me a table that indicated that his company’s gas charges had been lower (supposedly) then my provider. I even asked him what company he worked for and he wouldn’t say.

The punishment

Had he not had his two kids with him, I think I would have been quite tempted to literally throw him off my porch since I was quite annoyed by then. I was angry at him for waking up my sleeping family and trying to rip me off. I was also a bit angry at myself for almost letting him get away with it. I did tell him what I thought of him and his lies and told him to get lost.

The lesson

I learned that even if you are as sharp as a tack (or like to think you are), it’s important to remember that sometimes your guard is down whether you realize it or not and people like door-to-door salespersons can take advantage of that. It’s also a good idea to keep in mind that older friends and relatives might have more of those moments where they let down their guard so you should talk to them about not signing anything at the door.  This can also apply to people who are looking for charitable donations at the door.  Many of them are professionals who’s job it is to solicit donations so make sure that you be careful with them too.

See another post on this problem.

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Personal Finance

Corporate Borrowing

When my friend and I bought a building, we set up a corporation to purchase it. Our thinking was to have the limited liability that the corporation would provide, as well as get the preferred corporate taxation.

We’ve recently run into some cash flow issues (perhaps that’ll be a future post) and my partner set up a loan with one of the major banks. The bank wants us to fill out a form with our personal financial data.

My response, when I saw this, was that since the CORPORATION is borrowing the money, the lending decision should be made based on the CORPORATION as an individual, not us. To my mind, if we provide our personal details, we’re clearly going to be guaranteeing the debt (which seems to undermine a lot of the value a corporation is supposed to provide).

My partner insists that this is how things work for small corporations and that no lender will loan us any amount based on the corporate assets (which I believe comfortable exceed our current debt level). I think that the corporation should be able to borrow money itself (although obviously a smaller amount then it could borrow if we were acting as guarantors).

Do any of our hyper-intelligent readers know which of us is right (ideally with a link to “official information” so the victor can rub the loser’s nose in it)?

Secondly, if banks are perhaps more conservative lenders, who should we be talking to in order to arrange corporate financing without the personal guarantee? All the corporate lending websites that turn up on Google look pretty dodgy. I don’t think a mortgage broker would be the person to talk to, but I can’t really think of who else to contact…

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Personal Finance

Analysis Paralysis

I’ve been reading the book “The Paradox of Choice” by Barry Schwartz which is an essay looking at the problems of having too much choice. It’s not a bad book although how he stretches his central idea into an entire book is beyond me.

Some of the ideas he talks about are similar to some decision making ideas that I’ve thought about so I thought I would share them with you in the contexts that I came across them.

Buying a house

Most people have a hard time deciding on a house to buy because there are a lot of different choices to make and there are so many differences between even the most similar of houses, it can be really hard to evaluate if you are getting good value for your money or if any particular house is what you really want.

I think one of the best strategies to deal with this is to forget about buying the “best” house and instead focus on avoiding the worst houses.

When I bought my first house I had no idea what I was looking for and what I wanted – and the fact is, it took me several years of living in that house before I had a clear idea of things that I like and don’t like in a house. This was further complicated by the fact that sometimes things change after you buy a house. Ie in my case I bought a house with a small yard and then developed a passion for gardening.

The fact is that of all the houses I looked at, almost all of them would have been suitable choices for me and I would have been equally happy in all of them. Out of ten houses, if you choose the fifth best house – you will never know what it would have been like to live in any of the four “better” houses so they don’t really matter once you make the decision to buy. The poor decision houses would have involved a lot of renovation work which I wouldn’t have handled very well and a higher price tag which also would have been a mistake.

Bottom line is when choosing a house (or car or vacation etc) – focus on spending a reasonable amount of time on a good choice and avoid the bad choices. Endless dithering to try to get the “best” choice will result in paralysis or a rationalization to spend more than you can afford on the basis that something that is more expensive must be better.

Asset Allocation

Regular readers of this blog will know that I have a big interest in asset allocation with respect to investments. I like reading books about it, reading blogs, talking about it, dreaming about it (at work) with the end result that I ended up spending too much time analyzing something that doesn’t necessarily need a lot of analyzing. In fact the more I read, the more indecisive I got because every new piece of information seemed to contradict and be better than the old information. So what did I do? Simplify!!!

Instead of worrying about whether I should have 5%, 10% or 20% REIT allocation I decided to not buy any at all. I should say that the main reason I did this is because REITs have done so well over the last few years that I didn’t want to buy at an all-time high. Emerging market is another one – it’s been going crazy for the last few years and again, instead of worrying about if it would crash if I bought it – I didn’t buy any. You could argue that this strategy is more of a “head in the sand” avoidance strategy and there is nothing smart about it and I wouldn’t disagree with you. The reason that it worked for me is that I was able to put a simple asset allocation together that I was happy with and I can add in more parts (REITs, emerging markets) later on.

There are plenty of other examples of where too much choice can impair our investment decisions – ever count how many mutual funds and stocks there are? Pension choices are another black hole for a lot of workers where instead of having to choose between one or two black holes..err.. pension choices, they get a slew of black holes to choose from which can result in a lot of them choosing by default to leave their investments in money market funds or the default pension plan which is usually the most conservative.

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Personal Finance

Ponzi Schemes

Ponzi schemes are a broad category of scams that can be presented as virtually any investment (e.g. real estate, currency trading, or stock trading). They work simply by paying off early investors with their own money or with the money of other people who join later. It looks like the investment is doing fabulously well, and the person running the scheme enjoys all the accolades from “investors”. At some point the number of people joining will start to slow down, at which point the person running the program just leaves with all the cash.

Say I had developed a super lucrative currency trading system such that I offered you a return of 1% per day on your investment (an astounding 365% per year return). You give me $1000. I start paying you back $10 / day. As long as you don’t ask for your money back, I can pay you back with your initial investment for 100 days. This is unlikely to happen. Eventually you’ll:

  1. Want your investment back
  2. Will invest more
  3. Will tell your friends and family about this great investment

If you try 1, I happily return your money (and I’m out a bit of cash for the days I paid you). This reassures you that it isn’t a scam and will probably get you into position 2 or 3. At the very least you’ll hopefully reassure other investors that you were able to get your money back, “so it seems to be on the up-and-up”.
If I can sell you on the value of compounding, I may not even have to pay you out the cash each day (and can just show you a nice virtual account that keeps going up faster and faster until I leave town).

A woman was looking for a loan on Prosper and was talking about how she had their high pay off investment opportunity she was going to buy then pay back the loan with. It was a HYIP, which are basically all Ponzi schemes. I was really torn, because part of me wanted to warn her that she was in very dangerous waters, but another part of me was tired of having other people get angry at me when I tried to warn them in the past.

Since a Ponzi scheme can look like anything, you might think they’d be hard to spot. Thankfully, in order to get as many people involved as quickly as possible (to maximize the take when the con men leave town or the website) they tend to offer ridiculously good deals (like a 365% return). With any investment, there is a correlation between risk and return. There’s no way to get a safe, high return. If someone is offering you a safe, high return, you might be looking at a Ponzi scheme.

As the old saying goes “if something seems too good to be true, it probably is”.
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Personal Finance

Safe Withdrawal Rule for Retirement Funds

Yesterday I posted part one of this topic Why Retirees Should Have Equities In Their Portfolio.

One of the biggest concerns for retirees is the fear of running out of money. If you are retired and living off a pension which is indexed for inflation then you don’t have much to worry about since the pension should keep going until you expire. What happens if you have no pension or only a little bit of pension income from a source like a government pension plan? Then you need to live off income from your investments.

How much can I safely withdraw from my retirement funds?

Simple – use the 4% rule. This will give you a great chance of not running out of your money and it’s valid for 25+ year periods. If you are at an advanced life stage where 25 years is a dream then the 4% can be adjusted upwards.

The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year – this includes dividends, interest, withdrawals. The next year you take out the same figure you took out the first year plus inflation. So if you start by taking $40,000 out and then inflation is 3% then the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate.

Keep in mind that this amount only covers the withdrawals from your investments. Any other income you have, such as pensions, will be in addition to the withdrawals. If you find the 4% rule doesn’t give you enough income then you can either cut back your spending or increase the withdrawal amount (which will increase the chance you will run out of money later on).

The 4% rule is really a guideline rather than a hard and fast rule – If your equities perform better than expected then you can spend a bit more than the 4% rule amount however the opposite is also true, if you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.

 

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Personal Finance

Fed Cuts To Prop Up Markets?

Today’s surprise Fed cut of 0.75% to the federal funds rate was a bit of a shocker considering that it was a very large cut. Normal changes to the this rate are usually 0.25% or 0.5%. While there is certainly a risk of recession in the US, it doesn’t seem so inevitable that a large cut is all that necessary. Given the timing of the reduction and the dropping markets overseas while the US markets were closed yesterday, it’s hard not to think that maybe the Fed was managing the markets rather than the economy. To a lesser extent, the same argument applies to the Bank of Canada which lowered its rate by 0.25%.

And now a related reader question! (no pun intended)

I got an email today from a faithful reader (my wife no less) asking what the relationship between the government lending rate and the markets. Not being an economist or having much economic training of any type I thought this would be an interesting one to tackle.

My answer

The government lending rates are used to try to control the economy and inflation (not the stock market).

The idea is that if lending rates go higher, that will put a damper on economic activity ie business spending, expansion etc. So if the economy was going “too well” and inflation was creeping up then the government will raise lending rates to slow the economy down and keep inflation in check.

The opposite is also true – if the economy is slowing down and a recession looks like it might occur then the government will lower rates to try to stimulate the economy by encouraging businesses to spend more.

How this affects the stock market is sometimes not all that clear, but generally speaking if lending rates get lowered then that provides an upward push on the markets because the risk of a recession is less (in theory). An increase in the lending rate should create a downward pressure on the market for the opposite reason.

The stock market is supposed to be valued according to the future earnings of the companies in said market, so if there is a recession then future earnings will be lower and the market will go down. If the economy is ‘hot’ then future earnings should be good so the market will go up.

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Personal Finance

The “Myth” of Weekly Mortgage Payments

When I bought my first house way back in the beginning of 2000, I set up the mortgage payments to be withdrawn from my account every week. I had heard and read that making payments more frequently would reduce the time necessary to pay off the mortgage significantly. Instead of keeping the money in my account and paying a monthly payment at the end of the month, you would save on interest by paying the weekly amounts ahead of time.

So what happened? Well, I hated the weekly payment because at the time I was being paid twice a month so every few months there would be three mortgage payments in one pay period which would mess up my budget. I decided to switch the payments to semi-monthly to match my pay cheques.

Does this mean I’m paying thousand$ more in interest costs? Not a chance! I had a conversation with a good friend of mine around the time I switched from weekly to semi-monthly payments and he explained to to me that the reason that “weekly” payments (as promoted by the banks) pay the mortgage down quicker is because you are paying more to the principal, not because you are making more frequent payments.

For example if your monthly mortgage payment is $1200 then if you want to do weekly payments, the bank divides the monthly payment by four which means your weekly payment is $300. The problem is that there are more than four weeks per month so by paying one quarter of the monthly payment each week, you are in effect paying more money into your mortgage.

Over the course of one year, $1200 per month total $14,400. $300 per week totals $15,600 over the year which is $1300 per month which is a $100 more than our original monthly payment. This is why the “weekly” payment method pays down the mortgage faster.

What does all this mean?

Don’t worry about the frequency of your mortgage payment, just set it up so it fits your budget and pay schedule.

Increasing your total payments along with occasional extra payments will result in a mortgage that is paid down quicker. Whether you pay daily, weekly, bi-weekly, fortnightly, semi-monthly, thrice monthly or once a month (as I do) you should consider the total amount you pay each month and try to keep that as high as possible.

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Personal Finance

January Networth

Now that the last of the paychecks have come in, the reality of not working has hit. Holiday excess added up as well (I was “off the wagon” with food and money over the holidays). I was up to 172 lbs, and am now back on a more controlled diet (pistachios and gingerbread men got the better of me). I also dropped a fair bit networth wise (although the market is as much to blame as I am 🙂 ).

Mortgage: $91,951.09
E-Trade: $20,232.88
Cash: $5,015.93
Condo: $143,500.00
Building: $12,553.50

Networth: $89,351.22

This is a cash drop of a little over $1K, and a networth drop of a little over $5K. As Kurt Vonnegut would say “so it goes”.

All the applications are in for PhD work, so now it’s just a waiting game. I’m cautiously optimistic, and expect to be starting in either May or September.

If I had cash to spare right now, I’d still be looking at US and Canadian banks (probably BAC in the US, any of the big 5 here in Canada). Real estate wise, I’m always impressed when I look at what Windsor multiplexes are selling for (an 18% vacancy rates leads to good deals on property).

My passive income is up a bit at $319.96. This isn’t even close to enough to live off of, but it should “cushion the blow” in the coming months when there won’t be a lot of cash coming in. This will drop once Washington Mutual “officially” cuts their dividend (those dirty rats).