Categories
Personal Finance

Personal Inflation Rate vs. CPI

One of the efforts I had thought about doing for retirement planning was to measure my personal inflation rate in order to have a more accurate value to use than the CPI value. Realistically it’s not going to work – there are too many variables and potential changes in lifestyle. For example over time, our interests may change from cheap hobbies to expensive hobbies, our young son will probably eat more as he gets bigger and will require more money for activities. It will be difficult to separate the basic “retirement spending” from normal spending. The other problem is that there is a fine line between personal inflation rate and plain old overspending. At some point if you are going to retire you have to be able to live within your means even if that entails reducing or eliminating expenditures on activities that you enjoy.

Fabrice Taylor writes in the Globe & Mail about the fact that the CPI doesn’t necessarily match up to the inflation rate that you or I might experience within our lives. This figure is very important for retirement planning since the real rate of return of your investment portfolio is the actual return minus the inflation rate. Taylor refers to a study done in the US which says that the real inflation rate is twice as much as the official rate.

Another good example is financial planning for education costs. I’ve read that post-secondary tuition has gone up about 5% per year over the last decade. If you are doing projections for your education fund then using the CPI will understate the actual inflation since tuition is a big part of the school costs.

Since I’m still a few years away from retirement I don’t worry too much about my assumptions for rate of return and inflation. Personally I use 3% inflation in my calculations which is probably a good enough estimate for my purposes.

Categories
Book Review

Rich Dad, Poor Dad by Robert T. Kiyosaki

I think I heard about and read “Rich Dad, Poor Dad” right when it hit the tipping point and everyone was talking about it (I’d guess around 2004 maybe?). My aunt and uncle had read it, and I wanted to borrow another book from them and they forced this one on me. They told me it was about this guy and his two fathers (they couldn’t remember exactly how he had two fathers, but they assured me they explained it at the beginning), one of whom was a business guy, and the other was an academic. My uncle is very anti-education, so I was immediately suspicious and asked if it glorified the “business father” and denounced the “academic father”. They assured me this wasn’t the case and I foolishly read it.

From a very early age my parents taught me that its better to save then spend, and ideally you put money into things where it grows (how do you think I became Mr. Cheap?). Unfortunately they also made me ultra-conservative, and I wasted my investing youth on GICs and CSBs, but that’s a story for another day. With this background, when Mr. Kiyosaki advocated buying assets (which he defined as things that increase in value) instead of liabilities (which he defines as things that decrease in value) my reaction was “well, duh?!?!”.

I was excited when he kept promising to tell you how to find investments that would yield 13 or 17% (that range seems to be his “conservative estimated returns throughout the book”, but I got to the last page and hadn’t found anything.

John T. Reed thoroughly debunks Rich Dad, Poor Dad and if you’re at all thinking about reading this book or are enthusiastic after reading it, I’d recommend reading through his entire analysis before you gamble money on any of his ideas.

A couple of the things that Mr. Reed points out that bothered me too were that Bob seems quite unethical (I was bothered by him creating a library out of “discarded” comics that had been reported destroyed to the publisher and making money off of them the same way Mr. Reed was). I also didn’t like his re-defining the terms assets and liabilities. His “definition” of an asset is simply an appreciating asset, while his definition of a liability is a depreciating liability. Depreciating assets (like cars) aren’t liabilities and appreciating liabilities (like mortgages) aren’t assets. A car that you need to earn a living is still a depreciating asset, even though its a required expense for a business that earns money.

If you’ve read it, well at least its a fast, easy read. If you haven’t: don’t bother.

Categories
Investing

BCE and Capital Gains

I’ve been reading quite a bit recently about how owners of BCE (outside their rrsp) will be getting nailed with capital gains taxes once the takeover is complete. Jonathan Chevreau wrote a post about this in his blog, the Wealthy Boomer. In his comments, I noted that given the recent increase in price of the stock due to the impending takeover, the capital gains shouldn’t be a factor since the $12 price increase will cover any capital gains tax bill. This is true, assuming of course that the stock would have stayed in the $30 range for the next little while.

My worst case capital gains estimate is as follows:

If an investor has one share with an ACB of zero (worst case scenario) they will receive $42.75 for that share. Because of the capital gains tax they have to declare $21.37 as income. Let’s assume 50% income tax to keep it simple. They would then pay $10.68 in tax which means they would net $32.07 for a share that was only trading at about $30 up until a few months ago. I would argue that the final outcome of this transaction is a tax-free switch from BCE to say BMO (Bank of Montreal) with a $2 bonus tossed in (to pay the accountant?).

Chevreau made a great point about how there should be different rules for involuntary taxable events (sells) which prompted me to propose the following:

The government should change the taxable event rules to exclude involuntary switches from one Canadian company to another. Ie if you own a Canadian public company like BCE and it gets taken over and you buy another Canadian company with the proceeds then there should be no taxable event incurred and the adjusted cost base from your original shares will be transferred to the new Canadian company shares.

Any thoughts? Is this a reasonable policy for the government or is a forced sale and resulting capital gains a normal and foreseeable risk of owning equities?

Categories
Opinion

Pennies

First off, a big thanks to Mr. Cheap at Financial Security Quest for helping me get the Canadian flag into the header, as well as Canadian Capitalist for providing the .gif file.

On with the post!

This article from the Globe & Mail talks about a recently released Bank of Canada study recommends getting rid of the lowly penny which I couldn’t agree with more. The study determined that the penny isn’t necessary when the average day’s net pay reached $100 which is in accordance with a model created in Britain based on the relationship between the average day’s net pay and a currency’s denomination structure.

Interestingly enough the Department of Finance said there is still significant demand for pennies but an internal memo indicates that this “demand” is really the effect of people hoarding the pennies and fewer are recirculated.

Personally I can’t stand using pennies because they are so useless and time consuming. I always end up with jars and jars of them and have to spend all kinds of time rolling them. Does anybody really care if milk cost $4.99 vs $5.00? Also a report by Desjardins Group says that pennies are costing Canada at least $130 million per year.

Australia, New Zealand, France, Norway and Britain have all eliminated their lowest denomination coins so it can be done. I’m sure there are people who want to keep the penny around for sentimental reasons or possibly because they like holding up the grocery store line while they search around their giant purse for that last penny, but I think it should go. And while we’re cleaning house, maybe the nickel can be tossed out as well.

Categories
Opinion

Congratulations to Me!

Two years ago today I was reading Kevin Smith’s “Silent Bob Speaks” and in one passage he wrote about always feeling like his weight was something “he’d deal with later when it got really serious”. This startled me a little, as I felt exactly the same way (although I didn’t see myself as being quite as big as Mr. Smith).

I decided it might be time to get an objective measure, so I weighed myself, looked up the weight categories for my height and age, and found out I had passed through the “overweight” category and was now considered “obese”.

Being obese shocked me enough that I figured it was time to stop fooling around and to start dealing with my weight. I was visiting a friend at the time, and she was quite knowledgable about nutrition and weight loss, and was very helpful in figuring out the changes I had to make to start living a healthier life (thanks quietrose, you rock!!!). I read John Walker’s “The Hacker’s Diet“, followed his advice of weighing myself daily (and using a 10 day moving average to remove the jitter), then constantly made adjustments whenever my weight loss started to plateau.

Initially I cut out fast-food and non-diet soft drinks and that was enough to lose 2.5 pounds / week. As this rate of loss slowed down, I started measuring the caloric content of what I was eating and making healthier choices. I kept cutting things out until what I was eating was all quite healthy. At this point when my weight started plateauing again I started forcing myself to drink more water and eat smaller portions.

Over 7 months, I slimmed down to the point where I’m at the lower end of my recommended weight, and I basically bouncing around withing a 5 lbs range (when I start getting towards the upper end of the range I eat less, when I get close to the lower end I eat more). 1.5 years later (2 years since I started losing weight) I’m still maintaining my new weight. Its gotten so easy (especially since I’ve moved in with my girlfriend and am eating healthier food) that I don’t even really think about it anymore (or I think about it every time I eat, but its such a habit it doesn’t take any work).

Weight loss may not seem like it has a lot to do with personal finance, but I think there’s actually similarities here that people don’t notice: Things like the value to knowing as much as possible about your weight (or networth) and the true quality of the food you’re eating (or your investments). There are different ways to make changes, such as exercise (or earning more income) and diet (spending less money). If you only make one type of change, its very easy to sabotage yourself by the other (e.g. exercising and eating more or getting a raise and increasing your lifestyle spending). Both processes benefit from measuring your on-going process and making improvements as you see the opportunity to do so. Both are also hardest when you first start them (the first 3 days of a diet or a budget are going to be the hardest, they both get easier as you go).

I hope to post further about the value of measurement, which I really feel is key to enacting changes. But for today, give me a virtual pat on the back – I’ve earned it! 🙂

Categories
Investing

Chasing China

One of the things I’ve read in many investment books and articles is that you should create an investment plan, write it down if necessary and stick with it regardless of what happens in the markets. At this point I don’t have a finalized investment plan set in stone, but one of the negative investment behaviours that I’ve identified in my investment past is chasing returns.

Chasing returns usually refers to the activity of switching from a poorly performing (or average performing) investment into one that has an extraodinary recent return. This kind of investment philosophy is probably the quickest way into the poorhouse. It’s been proven in many studies that funds that perform very well in the short term rarely continue that success.

Last fall I purchased some units of a China mutual fund. At this point in time I was already on my way to becoming a low cost diy passive investor but for some reason I thought I should catch a short ride on the China express. As it turns out the fund actually went up about 20% over two months after I bought it which is a pretty incredible return. Towards the end of January this year I made the decision to sell the fund because I decided that the fund was too risky and was not the type of investment I wanted to own plus the reason I bought it was because I was chasing returns which I didn’t want to do anymore.

I figure that if I do the passive investing method properly then I could set myself up for a good retirement and I didn’t need to try for any home runs along the way. This new Canadian blog explains this baseball analogy much better than I ever could.

Since I sold the fund, it has bounced around quite a bit and currently stands at about 10% above where I sold it. In the past I would have been steamed that I had “lost out” on that 10% gains but now I honestly don’t care.

Categories
Opinion

Mad Money

I’ve been tracking my expenses, which is  a great way to get a grip on how much I’m spending, what I’m spending it on, and what my savings rate is. Part of me is thinking that I might have gone overboard, as I’m saving 83% of my pre-tax income, which is higher than the 75% upper end recommended

I haven’t tallied my spending from New York yet (which should drive my averages up), but before I left I had gotten my variable spending down to almost $1200 (shaving another $100 off of what many people seem to think is an already low cost-of-living).

What I’m thinking is that I might start taking anything above 75% that I save and earmark it as “mad money”. If I want to travel with this, blow it at the mall, buy some big tech toy or whatever, that’s what its for, to be spent foolishly. I’ll try to avoid anything with a monthly commitment, but if I end up with something that does have a monthly commitment, I’ll just take it out of the mad money fund (and cancel it when/if it runs dry).

I’m torn about whether this makes sense or not, because with my current spending, I could be retired in 3 years or less. Capping my saving at 75% would definitely push this back (and lead to a potential retirement in 5 years or so, unless I could up my income a bit). My lifestyle would definitely improve though…

Definitely food for thought…

Categories
Personal Finance

Cash Flow Measurement

One of the financial activities that my wife and I decided to start doing this year was to measure our cash flow on a monthly basis in order to determine if we were spending more or less than our income. I believe the ideal way to monitor your finances is to keep track of every single financial transaction you make during the month. At month end you should be able to reconcile all your money coming in with money going out and then you can analyze where all your money has gone.

The only problem with that method is that it’s a lot of work to keep track of every single dollar you spend and we decided not to bother with that kind of detail.

What we decided to do instead is just do a much simpler calculation to figure out our net cash flow for the month. From this we can calculate the total amount we spent during the month and how much we saved.

The calculation is as follows:

1. Cash saved during the month = Cash Position at beginning of month minus cash position at beginning of last month.

2. Total money spent = total income during the month minus cash saved (from calc 1)

Note that the Cash Position is the net total of all your bank accounts, credit cards, and line-of-credits. It’s not important to do this at the beginning of the month but you should pick a time in the month that is consistent month to month. The first of the month works for me because I get paid at the end of the month and no withdrawals are made before the first of the month. It’s important to try to do this type of analysis over at least three months because of the normal variation in monthly spending.

This calculation tells you how much you saved and spent but no details on what the money was spent on. To try to fill in the gaps a bit, the next step I do is to look at our bill payments in our checking account as well as all charges on the visa statement and enter those entries into a spreadsheet which allows us to quickly see where about 80%+ of our money is spent.

I like this modified calculation because it’s fairly easy to do and gives us a lot of important information about our finances. We can always keep track of every detail if we feel the need to cut back a bit and need to know what can be cut, but until that time, this method will do.

An example calculation:

On April 1, Sue has $1000.00 in her bank account and owes visa $80.00.

On Mayl 1, Sue has $1250.00 in her bank account and owes visa $160.00.

Sue has a net income of $3500.00 per month.

We’ll calculate for the month of April.

1. Cash saved during April = ($1250 – $160) – ($1000 – $80) = $170

2. Total spending during April
= $3500 – $170 = $3330.00

Now this method is only a measurement of your cash flow and the resulting information needs to be further analyzed to determine if you are on track for your financial plans.

If you are looking for another budgeting program then check out my You Need A Budget Review.