Categories
Baby Expenses

Maternity and Parental Leave – Baby Expenses I

The post is part of the Baby Expenses Series. See the entire series here.

In Canada, new mothers are allowed by law to take 52 weeks off from their jobs. This time off is called maternity leave. During that period they are eligible for employment insurance (EI) benefits which are calculated as 55% of their normal earnings up to a maximum salary of $40,000. Some companies also offer a “top up” which usually involves paying the difference between what the mother gets from EI and some percentage of their normal salary. The top up amount and duration will vary from company to company – I’d be interested to hear what your company offers?

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New fathers are allowed to take up to 37 weeks off which is called parental leave however the EI benefits that are paid out have to be shared between the mother and father so they can’t both collect EI benefits at the same time. In my case my wife didn’t qualify for EI since she wasn’t working so I was able to collect EI benefits when I took my parental leave. The “top up” feature available to new mothers at some companies is also available to new fathers in some cases. At my company, most dads don’t get any EI since their wife gets all the EI benefits so their top up is calculated as though they were getting EI.

One misconception which I’ve heard from a number of my friends is that the time off has to be shared between the two parents and can’t total more than a year – this is not true, only the EI benefits have to be shared.

The EI benefits is calculated as 55% of the mother’s salary up to a salary of $40,000. The first two weeks of the maternity leave are unpaid so the EI benefits actually start on the the third week. My salary is more than $40k so I received the maximum benefit which is $413 per week. The actual payment after tax ($48) was $778 which I received every two weeks. In my case the withholding tax wasn’t enough but I think my company adjusted for it because I didn’t owe anything at tax time. You should keep in mind that you might end up owing some money at tax time because of this. You can get the withholding tax increased if desired.

The way to apply for EI is to go online at here. This contains all the steps you need. It also contains a link to the Quebec parental insurance plan which is different than for the other provinces. Basically you go online and fill out the required information and they will send you a pin number which will allow you to go here and see your online information. One of the items you will need from your employer is a form called “Record of Employment” which basically lists your financial employment for the past year. I went into my local Service Canada Centre when I got this form in order to complete my application. Applying for EI is not something you can do in advance, you have to wait until you have finished work before applying.

Something to keep in mind is that it will take about four to six weeks to get your first EI benefit deposited into your bank account, so don’t count on getting any money right away. Usually once you start getting them, you’ll get two or even three payments right away and then every two weeks after that.

When I was receiving EI benefits, I used the reporting feature of the online account to fill out my report every two weeks. This report basically says that you aren’t looking for work, are still not working etc. However in researching this post I realized that you can sign a declaration of exemption when applying which means you don’t have to fill out the reports every two weeks.

Tomorrow, I’ll be starting a series of posts where I take a look at the essential items that new parents should have.

Next Baby Expense post.

Categories
Announcements

Baby Theme Week

Thanks to a comment from Money Gardener who is one of my regular readers and commenters and will also become a dad in January, I decided to do a post on baby related expenses. I’ve had this topic on my list for a while but I’m glad to be doing this now because the older your children get, the more you forget about their younger days. My little guy turned one recently so hopefully I’ve been able to remember most of the pertinent financial information.

See the first post here.

The baby post ended up turning into several posts and I found I was really interested in this series so in the spirit of things I decided to temporarily change the name of the blog along with the header until the series is over. I can’t believe how many baby related expenses there are!

I realize that most of my regular readers probably couldn’t care less about baby expenses but hopefully they can add something in the comments that I’ve left out or correct errors.

On another note – I want to point out that I somehow managed to get a listing in the exclusive Carnival of Personal Finance hosted by Frugal Law Student so check it out.

A couple of other blogs I follow also have posting on the Carnival – Brip Brap and The Financial Blogger who ironically became a new dad on the weekend – congrats!.

Categories
Real Estate

Another Perspective on Real Estate Investing

I’m a big fan of listening to different people on a subject, considering what they have to say, then making up your own mind. Violent Acres (a really funny, evil blog!) recently posted an article “Formula For Calculating the Profitability of a Rental Property“. Its definitely worth reading over for anyone who’s interested in real estate investing.

I think her approach of working out market rent then working backwards from there in order to determine a “fair price” for a property is great. My gut reaction would be the $50 / month / unit profit is on the low side (it wouldn’t take much to get $50 in unexpected costs or miscalculations), but she seems to acknowledge that there’s actually a potential for profit in some of her other factors (such as assuming 1 month per year vacancy, increasing equity, tax write-offs and increasing rents). Also the $50 profit seems to be “cash in your pocket”, whereas I prefer to consider it “equity + cash in your pocket” (paying down a liability is as good as saving in my book).

Great post, great ideas and definitely something worth reading (and re-reading if any part doesn’t make sense) if you’re thinking about getting into real estate investing.

Canadian Dream originally posted a link to this and helped me re-discover Violent Acres (thanks!).

Categories
Book Review

The Trouble With Prosperity – Book Review

This is another book in the Bernstein recommended list and the second book I’ve read and reviewed by James Grant. The other review was Money of the Mind.

Along with being an author, Grant is also the founder of Grant’s Interest Rate Observer, an investment newsletter based in New York City. As one might expect, books written by a guy who sits around and observes interest rates all day long, might not be that exciting. I’ve concluded that although he is a good writer and his books contain tons of research – he’s no Clive Cussler. Ironically I was reading a Cussler novel at the same time I was trying to read this book.

For the record, I managed to get through two thirds of this book and just skimmed the remainder, so needless to say I don’t recommend it unless you are absolutely desperate for an insomnia cure.

The premise of the book (not that it really matters at this point) is that Grant is of the opinion that there are natural business cycles which shouldn’t necessarily be interfered with as much as governments and central banks tend to do. In particular he says that when there excesses created as a result of good times (his theme in Money of the Mind), it’s important that when the inevitable recession or depression occurs that it be severe enough to “clean up” all the inefficient investments, companies etc. If the central bank works too hard to soften the blow then it only prolongs the inefficiencies. He uses Japan as a prime example of a country where the banking system was sorely in need of a major overhaul after that country’s great economic success in the 80’s but as we’ve seen, Japan never had the major downturn that might have let them fix their problems and then grow normally.

Although I don’t disagree with his logic I’m not sure I completely buy the fact that you have to make every business a lean machine before heading into the next upswing. If you only have a mild recession after a long up cycle then there will be companies that are not all that efficient staying in business, but the way I look at it, if the market values them accurately then someone will come along and buy them and make them more efficient.

Categories
Real Estate

5 Ways to Make (or lose) Money With Investment Properties – Part 3 – Inflation

Go the first post in the 5 ways to make money with investment properties series.

Inflation

In most investments inflation causes you problems. With real estate investing its your friend in a major way.

Inflation is measured by taking an imaginary basket of goods, and figuring out what they’d cost at different points in time. If the purchases would cost more then they would have in the past, the difference is the inflation rate (if it costs less, the difference would be the deflation rate). How much inflation affects you depends on what you typically buy and in what amount. If you don’t drive, clearly the gasoline component of the “basket” wouldn’t affect you as much as it would affect drivers (it will still affect you as increased gasoline costs will get passed along to consumers in the price of any items that requires gasoline for production or distribution – e.g. anything you buy that’s made in China or if you buy a bus tickets to go to Calgary).

House prices (or at least housing costs generally) make up a large part of the inflation measurement. Therefore, house prices and inflation are strongly correlated (some could argue that increasing property values is one of the driving forces of inflation and that house appreciation and inflation are basically the same thing).

Say we buy a house for $100K, get an interest-only mortgage and inflation is 3% over the next year. How much do we expect our house to be worth? In “real” terms (inflation adjusted) we’d expect it to still be worth $100K in todays dollars. In terms of future dollars though, it will actually be worth $103K.

So we now see that without doing any work, our real return on the property purchase is roughly the inflation rate (3%, or a real return of 0%). Since GICs give a real return of 1%, this isn’t too shabby!

It gets better though.

Since we have an interest-only mortgage and have been paying the interest (part of our cost of living, for simplicity’s sake lets say the interest, utilities, maintenance and taxes are equivalent to what we’d pay for rent and ignore them). After a year the mortgage is still $100K (since we’re paying interest only), however, after that’s adjusted for inflation, the $100K mortgage is only actually worth $97K to the bank (money in the future is worth less then money today).

Once we remove the speculation element from real estate pricing, we can clearly see that part of our return from the property is:

rate of inflation * (property value + outstanding mortgage).

Or, in the case of a 100% interest-only mortgage, double the inflation rate times the property value.

Not too shabby at all!

Most of our methods to make money with real estate can backfire and cost you money. Clearly the speculative element of price appreciation is totally beyond your control (or ability to predict), however this is one of the nicest returns, because as long as we have inflation (I don’t think its going anywhere soon), you can pretty well count on this portion of your return Extended deflation would be the negative risk of this portion of the returns – however, again, I can’t imagine a situation where that would happen here in Canada. If it did we’d have worse problems then poor real estate investment returns.

See the next post Taxation.

Categories
Personal Finance

Reduce Finance Tracking

In a previous post I talked about my method of tracking our household cash flow in order to determine if we are spending more or less than we earn. I also keep track of our spending that occurs on our visa as well as automated debits from our chequing account.

As worthwhile as I think those exercises were, I stopped doing them for the simple reason that I’ve been stressing out too much over our finances as a result of following them too closely. In particular, when following the individual expenditures I tended to get upset if we had unplanned expenses which affected our cash flow. Now I don’t want anyone to think that we are just going ignore our finances – far from it! We aren’t going to change our spending habits and the plan is to look at our bank account at the end of the month, figure out how much “extra” money we have and hopefully put that money into the mortgage. This “extra” money at the end of the month should be an indirect proxy for the cash flow calculation and will tell us how much we’re saving each month.

It was very educational to keep track of the expenses and cash flow for the last six months and hopefully we’ll do it again sometime in the future.

Categories
Real Estate

5 Ways to Make (or lose) Money With Investment Properties – Part 2 – Leverage

Go the first post in the 5 ways to make money with investment properties series.

Benefits and dangers of leverage with investment properties.

Whenever people get talking too much about O.P.M. (other people’s money) keep your hand on your wallet and start moving towards the door because they’re about to pitch a get rich-quick-scheme to you. On the other hand, leverage is a valid and powerful way to magnify you returns (good or bad) on an investment.

Say you’re opening a store, and you have the money to afford a small 800 sq. ft. shop. In such a space you feel you could earn a 20% annual return on your initial investment, working there full time. If you considered borrowing money at 7%, getting a larger shops (say 2000 sq ft), selling a wider range of merchandise, etc, etc and earn a projected return of 14% on your money invested and the money borrowed. All other things being equal, it would probably be well worth considering borrowing the money. Your time investment (1 year) is the same either way, but a 14% return on your investment, plus a 7% return (14%-7%) on the borrowed capital would give you a higher return if they were equal amounts (21%), and increasingly large returns the more money you borrowed after that.

The obvious downside is the larger venture will have a high risk (volatility). If you start a business with your own money and it goes bust, you lose that money. If you start a business with borrowed money and it goes bust, your creditors will do whatever they can to make your life unpleasant.

With real estate, a commonly used example is buying a house for $100K. If you buy the house outright (with your own money) and it appreciates 3% (so its now worth $103K), you’ve earned a 3% return on investment (ROI). If you buy the house for $100K, with 10% down ($10K), and it appreciates 3% you’ve earned a 30% ROI!

Clearly in such a situation the interest, maintenance and closing costs to buy and sell the property would be far more then 3%. However if you rented the house out to cover all these costs, clearly its nicer to earn $3000 from a $10K investment instead of $100K investment. Even then its not a totally fair comparison, as your costs would have been lower if you hadn’t borrowed the money, so therefore your return would have been higher (more then 3% – probably more like 10% if you had avoided a 7% mortgage). We’ll ignore this for now, although I do acknowledge the omission.

My consideration with leverage is to look at the ROI of the investment, add a margin of error and make sure that I expect to be earning more then I’m paying for using OPM. At 5.05% (what I got on my last mortgage), it isn’t too hard to get better returns then this. I would be very reluctant to borrow money at 20-30% (like you sometimes hear about people doing to pursue “sweet deals”).

One of my favourite lines about leverage is that its a power tool. It lets a craftsman do a much better and faster job, but you can injure yourself more easily and much worse.

In part 3 I’ll talk about inflation.

Categories
Personal Finance

RRSP Contributions

After getting some interesting comments yesterday in my post about what to do with my year end bonus I decided to do a post about rrsp contributions and the best way to do them.  Please check this page out for up to date rrsp deadline information.

One of the suggestions was to put the bonus into the rrsp and use the tax refund to pay down the mortgage. I’m not a big fan of this rule of thumb because it doesn’t necessarily fit everyone’s situation. Some people should put all their extra money into their mortgage and forget about their rrsp. Others should do the opposite and put it all into their rrsp. Most people should probably do some combination of rrsp contribution and extra mortgage payments.

Most people make rrsp contributions by setting up an automatic withdrawal plan from their bank account. Then they will recieve a tax rebate the following spring which is not a good thing because it means that you have made an interest free loan to the government. Another problem is that if you are trying to maximize your rrsp contribution, it is difficult to do with after-tax money. If you can make the contributions with your pre-tax then it will be a lot easier.

A better way to contribute is to get your company to reduce your income tax deductions at the source (your employer) by an appropriate amount so that you pay less tax on each paycheque and will not get a refund at tax filing time.

How do you do this? Most companies that have group rrsp plans will be able to accomodate this if you are contributing to the group rrsp plan. It’s best to talk to your payroll department to see what they can do.

Another option is to fill out a government form T1213 – you send it in and they will send a letter (hopefully) allowing your employer to reduce your deducted income taxes. This can be done on salary or a lump sum amount. This form has to be filled out once a year.
Obviously if you get a reduction in your income tax then you have to make sure you actually make the contribution otherwise you’ll owe quite a bit of tax the following spring.

An example:

If Sue is in the 40% tax bracket and decides to contribute $500/month then her employer will reduce the tax deducted by $500 * 40% = $200 per month. By doing this she is contributing the $500 from her gross salary, not her after tax salary and will avoid giving the government an interest free loan.