Screwed on Bank Charges

We just got our first bank statement since attempting to stop using our credit cards completely. My plan to reduce our total spending by not using a credit card may have back-fired slightly, as there was a whopping $17 in extra charges charged to our bank account, in addition to the $11 we are already charged for our monthly plan “Everyday Banking Plan.” We were pushed over our transaction limit because we are such heavy Interac/Debit users, and we have many automatic deposits and withdrawals coming in and out of our account every month. To combat the problem, we will carry around more hard cash in our wallets in December and I hope this will help us stay under the transaction limit.

I am seriously considering using our BMO bank account for all our bill payments and direct-deposits, and using a separate ING Direct account (they allow you to create 4) for Interac charges, since as far as I know there is no limit to the number of Interac transactions you can make with ING Direct accounts, just as there is no limits or charges associated with transferring money from an ING Direct account and a big-bank account (except charges incurred from the big-bank). It will be nice when ING Direct one day provides bill payment and direct deposit service.

Doom and Gloom

There is an interesting chart here, “Asset Class Performance” (got the link from here) showing the performance of various asset classes since 2000 and giving several predictions. One comment said: “I believe all will fall, while bonds will soar. special thanks to debt deflation depression.” The poster leaves no website to track him down unfortunately.

While digging around in Google for the term “debt deflation depression,” I found found this article: “Will the Latest Oil Price Shock Lead to a U.S. and Global Recession?

Interesting article with some interesting comments as well. The comment that Google picked up was this prediction:

I don’t understand how you can face two decades of real wages lagging productivity world wide, and still not be 100% convinced that a major depression is guaranteed in the coming years. The only way for consumers to absorb higher oil prices would be to take on more debt. As long as debt can be piled on, growth can go on, but there is no doubt that debt growth is the one and only fuel of the present growth.

Take away the US and european overindebted consumers, meaning, take away housing boom asset wealth induced spending… And the world falls into 30’s like debt deflation depression.

And if there’s one way out, I’d like to see it. Apart from aggressive monetising of public deficit, and aggressive policies in favor of higher wages (and I see none of them coming in the coming years), I can’t think of any.

So ?
So is there a question ?
Of course higher oil prices and lower house prices, will force the world into depression. Higher oil prices may indeed speed up the top of the debt-housing boom.

Talk about doom & gloom. Also no website provided for that comment either. No one really knows exactly what will happen in the next few years, but I have certainly seen a lot of doom & gloom predictions popping up lately regarding the stock market, real estate, and the US economy. I try not to let any predictions I read dictate my behaviour. I am invested for the long term and realize that market fluctuations are a fact of life. I am prepared to stay invested no matter happens and to invest consistently in my RRSPs year after year (especially when markets are down).

Life without credit cards – 2 week update

I did not announce it on this blog, but the week of November 6th, my wife and I stopped using our 2 credit cards, AMEX Gold and BMO Mosaik Mastercard, altogether. We basically told ourselves to stop using them, and to start using cash or debit for everything. I had thought for a long time that we were overspending because we were buying on credit, much like a university student will spend more money if they have a student loan then if they didn’t. As long as we paid of our cards promptly, I thought, they were a pretty good deal. One month interest-free plus the convenience. Wrong, according to The Wealthy Barber:

For most people, they’re not a good deal. The convenience that you view as positive can combine with human nature to form a destructive force, especially in the hands of someone who loves to shop. How many times have you bought something with your credit card that you wouldn’t have bought if you’d had to pay cash? And isn’t it usually something that you know you could live without? Then how many times have you opened your credit-card bill, clutched your throat, and shrieked, ‘Five hundred dollars! What the heck did I spend it on?’ So the fact is that many people who pay off their balance each month are still hurt by their use of credit cards.”

This described us pretty much exactly, so it was after reading this that I decided to work towards not using credit cards EVER. I realize that I will have to use them for many online purchases. However, those will be few, and it will be easy to transfer some money from chequing to the credit card immediately after making the online purchase.

We have made good progress so far. The last charge on our AMEX was on November 6th. The last charge on our BMO Mastercard was on November 11th. There was one other $4.25 parking fee charged to our BMO which was then paid down immediately that day and I also charged almost $200 to our Mastercard for dental work but I expect to get reimbursed for that from my employer well before it comes due (unfortunately we have to pay our dental claims up front before getting reimbursed from my company). I find that I have spent far less in the past few weeks than I have in a long time. I almost made a $300 purchase on a new computer case and hard drive two weeks ago, but after looking at the balance in our chequing account, I hesitated. That is a typical expenditure that I would have treated as a need before, charging it to my credit card without thinking. Now I realize that it is a want, and that I can live without it. We have a savings account for these wants and I will reconsider that purchase once there is more saved up. I was also wooed in the past by the Air Miles scam (both our credit cards are Air Miles credit cards). After 8 years of collecting, and enough points for just one flight, I am completely turned off by them. Nothing more than a scam intended to get me to spend more on my credit cards.

Here’s more thoughts on cash vs. credit cards from “Free Money Finance: Eight Unusual Ways to Create Cash“:

It seems impossible to exclusively use cash in today’s credit-oriented world, but those who do “create” significant cash. How? By spending dramatically less. Ron Blue, author of Master Your Money, notes that the mere use of credit cards causes a family to spend 34 percent more even if the statement is paid off monthly. Author Nancy Dunnan agrees in Never Call Your Broker on Monday by noting, “People like your parents or grandparents actually went through life using checks or cash. It worked then and it works now. Do the same and you’ll wind up spending 20% to 45% less.”

Check out the first comment on that post, and also the comments on this post. Unbelivable how attached people can be to their credit cards and those “cash-back rewards.” I am still firmly of the opinion that the best credit card out there is no credit card.

Money NUT

Just read a great article about being a Money NUT. Since I am a money nut myself, I agreed with a lot of what he said, including the part about financial blogs which I am have recently become more a part of:

I read financial related blogs. Over the past year, by both posting on my blog, and by continually reading all the other personal finance blogs, I’ve found that I am always reinforcing my values. Being a part of the PF blog community has given me the motivation to always make our net worth number go up and to follow the principles that most of us share. It’s like a support group without the circle of chairs.

He asks “Do you get the jokes about being ‘cheap’, or a ‘tightwad’?” I have definitely been called cheap before, but I don’t mind any more. Actually my dad and my dad’s dad are probably called “cheap” more than me so maybe it’s going to get worse with age. But they’ve also done better than anyone else I know at saving their money and building significantly large nest eggs without having ultra high-paying jobs and without sacrificing quality of life.

Time for Change

Recently, my wife and I have been severely punished for not carrying around change:

  • In October when we arrived in Maui, I lost my wallet (don’t ask). We made 4 calls from a payphone to 2 of my relatives in Canada to see if I had left the wallet at their house, or our house, the previous night. When we saw our credit card statement a couple weeks ago, we saw that we owed about $15.58 CAD for each call, $46.74 in total. Had we had plenty of US quarters on hand, I am sure our calls would not cost this much. Another idea would have been to buy a pre-paid phone card.
  • Recently my wife got a $50 parking ticket because she only had enough change in her wallet for half the time she needed to park for. The machine unfortunately did not take credit card and there was no teller who could take cash. A backup stash of loonies in the glove compartment would have come in handy.
  • I checked my accounts in gnucash for the keywords “bell” and “telus” and found a slew of payphone credit card charges. If I go back a year, it’s quite a bit. I’ve gotten so used to the convenience of swiping my credit card in payphones. I’m so hooked (and I never have any change on me), so I always look for the machine with the swiper.

I think I need to get one of those keychains that can hold two quarters, although the fact that we both have cell phones now should prevent these silly charges (too bad we didn’t bring them to Maui). If I get around to it, I think I’ll stick a roll of quarters and loonies in the glove compartment for “emergencies” such as meter parking. I park at meters so many times without paying it’s a wonder I haven’t been ticketed more.

Ottawa announces new policy on income trusts

The CBC reports that Ottawa has announced new policy on popular income trusts:

On the eve of an anticipated federal election, the governing Liberals announced new tax guidelines Wednesday that make dividends more attractive for investors but leave tax policy on income trusts unchanged. . . . The federal changes . . . would reduce personal income taxes on dividends, which the Finance Department says will help level the playing field between corporations and income trusts.

Note that it says they are only reducing personal income taxes on dividends, which was made more clear later in the article where Monte Solberg, Conservative finance critic is quoted as saying “pension plans will not benefit by this tax break that will go to individual investors.” The article continues:

The tax reduction will take the form of an enhanced dividend “gross-up” and tax credit to make the total tax on dividends received from large Canadian corporations more comparable to the tax paid on distributions of income trusts, and to eliminate the “double taxation” of dividends at the federal level.

The article also provides some important warnings about income trust that should be heeded:

A study released Wednesday says that despite the recent bloodbath in income trusts, the sector may still be overvalued by 28 per cent, or $20 billion. ‘Much of the overvaluation stems from abuses in the financial reporting, valuation and marketing of business trusts,’ concludes Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants. . . . The study says the tax advantage of the trust structure has been overstated as the motivation for the mass conversion into trusts of corporations outside the energy and real estate sectors. ‘Rather, it has been the opportunity for selling owners to receive inflated prices well above what strategic industry buyers and professional investors alone would be willing to pay. Investment bankers have been motivated by the $1.4 billion of inflated underwriting fees that they have received since Jan. 1, 2001. Many have taken advantage of ill-informed investors seeking higher cash-yielding investments.’

This came as no surprise to me, as it was something my advisor told me about a while back. And one further blow to the non-energy, non-real-estate trusts:

Accountability Research said its examination of the 50 biggest income trusts outside the energy and real estate industries found that less than two-thirds of their cash distributions are actual income. The rest is a return of investors’ own capital.

The Three Worst Reasons to Buy a House

I just came across an excellent article, “The Three Worst Reasons to Buy a Home.” It is actually a summary of “this MSN Money article.”

(1) Real estate is better than the stock market. While the real estate market has been red hot in the past few years, with a national average increase of 50% over the past five years, and prices in some markets doubling during that same timeframe, it’s important to keep in mind that past performance is no guarantee of future results. Major real estate recessions are a very real possibility, and it can often take a long time to recover. Moreover, real estate appreciation over the past 40 years has only topped inflation by 1%, as compared to 7% for the stock market. Over the long run, the law of averages has a funny habit of evening things out, so look before you leap.

The MSN article provides further information about past market declines:

Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California — all of which suffered major real estate recessions in the past 20 years. After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems.

Two articles at the van-housing blog: here and here show that Vancouver has had drops as well. This should all be no surprise to most people. Yet 3 weeks ago one of my in-laws claimed that “real estate is the best investment ever.” Just last week someone (a recent condo buyer) said to me “you think it’s going to go down?” with complete disbelief. And this week someone else told me they didn’t think prices were going to fall but that they might “level-off.”

The final nail-in-the-coffin for the “real estate is better than the stock market” argument comes from the MSN article: “In the past 40 years, the average appreciation for homes has exceeded the inflation rate by only a percentage point or so. Compare that to stocks, which have bested inflation by 7 percentage points in the same period.”

(2) Rent is the equivalent of throwing your money away. Renting is often cheaper than owning, especially in overpriced markets. Also, you’re not really throwing your money away when you write a check to your landlord — you’re exchanging cash for a place to live, and you’re buying flexibility, freedom, and a lack of homeowner headaches.

The Wealthy Barber provides some excellent commentary against the “rent is throwing your money away” argument:

Paying rent is no more throwing your money away than is buying food or clothing. You need shelter. It’s one of the three basic necessities of life. Renting is one way to acquire that shelter, and in some cases, it’s a very intelligent way.

The last reason to not buy a house, is one that applies to those in the US:

(3) The tax deduction makes it all worthwhile. While it’s true that your mortgage will get you a tax break, it’s not like you’re going to end up profiting. Deductions such as this are like giving someone a dollar for the privilege of receiving 35 cents (or less) in return. While this helps to offset the cost of ownership, it’s by no means a justification for buying a house. Moreover, the other costs associated with home ownership (e.g., insurance, repairs, maintenance, etc.) aren’t typically tax deductible. On top of all this, recent legislation seeks to place a cap on the mortgage tax deduction, meaning that the tax benefits of buying a home may shrink substantially.

Canadians have no mortgage-interest deduction. So this is irrelevant. Not without doing something crazy like The Smith Manoeuvre. One less reason to buy a house for the wrong reasons!

Paying Down Student Loans vs. Contributing to an RRSP

There are many people, me being one of them, who ask themselves “should I put money into my RRSP or pay down my debts?” For very high interest debt, such as credit cards and bank overdraft, this type of debt should always be paid down before anything else. For other debt such as student loans, bank loans, and mortgages, the answer is less obvious.

I have come up with a good, simple example, to answer the above question. Imagine you had at least $1000 room in your RRSP and you owed $10,000 at 7% as of January 2006. In January 2006, you have a choice of either putting your next paycheque (of $1000) towards an RRSP invested in a balanced portfolio of bonds and equities, or towards the $10000 loan. You can do nothing else with your loan or your RRSP until January of the following year.

  • Case 1: If, in January 2006, you put $1000 towards the $10,000 loan, you would be left with $9,000. Over the next year, you would be charged $630 in interest, a savings of $70 over what you would have paid had the loan principal still been $10,000. Your net worth based on the RRSP and the loan would be -$9,000 – $630 = -$9,630 at the end of the year.
  • Case 2: If, in January 2006, you put $1000 into the RRSP invested in a balanced portfolio of bonds and equities. To be conservative, we will assume that it will appreciate by 7%, however, it doesn’t really matter so much as we will not be realizing any value on this portfolio for years to come (until we retire, presumably). After one year, the RRSP portfolio will have appreciated by $70. In April 2005, you will receive a tax refund. Assuming a marginal tax rate of a modest 18%, you will receive $180 in refunded taxes in April. You can then apply this to your loan in April or put it in your RRSP. Let’s keep the calculation simple and just hold it as cash until the end of the year (not a smart thing to do in practice, as technically you owe that $180, more or less, to the government later on). During the year, our loan accumulates $700 in interest. At the end of the year our net worth will be -$10,000 – $700 + $1000 + $70 + $180 = -$9,450.

In Case 2, we are $180 richer than in Case 1. This came directly from the RRSP tax credit as the amount that the RRSP holdings grew by was exactly compensated by the extra amount we owed on the loan. This demonstrates the power of RRSPs. The $1000 + $180 is now pre-tax dollars. The government has refunded us the $180 in taxes on that $1000. The $180 is not free money, as we now owe the government some taxes when we take our money out of the RRSP when we retire. It is our hope, however, the when we retire we will be in a lower tax bracket and the $180 in taxes will actually be less (let’s say $150). So really we are $30 ahead, not $180, but still, thanks to tax deferral (deferring taxes on income until we retire), we are ahead.

One strategy is to contribute monthly to your maximum allowable limit, then to apply the tax credit in April to your loans. The tax deducted from your paychecks acts as a forced savings device for an annual loan principal payment.