Apr 252015
 

I recently read a study suggesting that there is a correlation between the cost of engagement rings and the duration of marriages. Researchers looked at 3,000 U.S. adults who had been married at some point in their lives, and found that subjects were more likely to end up divorced if they had spent large sums of money on engagement rings and weddings.

For example, male participants who spent $2,000 To $4,000 on engagement rings were 30% more likely to end up divorced than guys who only spent between $500 to $2,000.

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Similarly, people who spent $20,000 or more on their weddings were 3.5 times more likely to end up divorced than people who spent $5,000 to $10,000.

The authors of the study believe the correlation between high wedding and engagement ring costs and high divorce rates is probably due to the financial stress placed on couples who are overly determined to have the “perfect day,” regardless of their actually ability to afford it. 😕

The diamond and wedding industry has done an excellent job promoting their businesses over time. Before the second world war, only 10% of engagement rings contained a diamond. But by the year 2000, about 80% of rings did. In 2012 alone, Americans collectively spent roughly $7 billion on diamond rings. 😯

Here’s my analysis on all this. People who want expensive rings and fancy weddings are generally more materialistically demanding in the first place. Later on in the marriage they’re more likely to live in expensive neighbourhoods, drive fancier cars than their friends, and shop at high end stores. These kinds of behaviours usually lead to debt and other money problems, and we all know how financial stress is often the primary contributor for divorce.

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Apr 222015
 

Finance Minister, Joe Oliver introduced the government’s 2015 Federal Budget yesterday. The big takeaway is that there will be tax breaks for everyone. Yay! 😀 The proposed budget is expected to get passed as the Tories hold a majority government.

It’s nice to finally see some welcomed changes in fiscal policy to address the economy rather than rely on monetary policy alone. :) Federal budgets are important because it shapes the way we plan our personal finances.

Increased TFSA Contribution Room

The annual contribution limit for the Tax Free Savings Account rises to $10,000 effective immediately. This means Canadians who have already maxed out their TFSA for 2015 will now have another $4,500 of contribution room to use. The TFSA is a holding account where we can buy investments and not pay taxes on the gains.

Some people believe this change will only benefit the upper class who are already wealthy. Here’s my poor attempt at humour on Twitter from yesterday.

However, Ottawa says that individuals with annual incomes of less than $80,000 accounted for more than 80% of all TFSA holders at the end of 2013. And about half of TFSA holders had annual incomes less than $42,000, meaning the TFSA is mostly being used by the middle class. Personally I think the new TFSA policy benefits serious savers, not necessarily the wealthy.

RRSP delays taxation to a future date when we’ll likely be in a lower income tax bracket than today. Gains in a TFSA are made from after tax contributions and are not taxed, for the most part. So between the RRSP and TFSA average Canadians now have a lot more freedom and room to save and invest with preferential tax treatments.

Here’s a table showing how much someone would need to save to max out both accounts. The maximum RRSP contribution limit assumes the person earned the same income in the previous year.

Combined Tax Sheltered Savings Table 2015

Annual Gross Income Max TFSA Room Max RRSP Room Combined TFSA/RRSP Limit % of Income
$20,000 $10,000 $3,600 $13,600 68%
$30,000 $10,000 $5,400 $15,400 51%
$40,000 $10,000 $7,200 $17,200 43%
$50,000 $10,000 $9,000 $19,000 38%
$60,000 $10,000 $10,800 $20,800 35%
$70,000 $10,000 $12,600 $22,600 32%
$80,000 $10,000 $14,400 $24,400 31%
$90,000 $10,000 $16,200 $26,200 29%
$100,000 $10,000 $18,000 $28,000 28%

 

As we can see people who make $50,000 a year will have to save more than 38% of their incomes before running out of space in tax advantaged accounts. There is no point in buying GICs, bonds, stocks, mutual funds, and other investments in a regular cash account anymore, unless you’re like me and trade derivatives or buy securities on margin. 😉

Decreased Minimum RIF Withdrawal Rate

The new federal budget also gives seniors more options. When an RRSP is converted into a Registered Retirement Income Fund (RRIF) retirees will be able to leave more money in their tax sheltered account each year to help their savings last longer and can also lower their overall tax burden. The proposed new RIF minimum withdrawal rate will decrease from the current 7.38% at the age of 71, to 5.28% starting at the age of 71, and gradually increase to 20% by age 95. 😄

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In general lower income, and younger folks should prioritize saving in a TFSA before considering RRSP, and vice-versa for high income earners. I like to put bonds in my RRSP, and the more volatile, higher potential investments in my TFSA. For most Canadians I believe the TFSA has a more important role in our financial lives than the RRSP. However, both are important as the RRSP can save us money today by delaying the tax liability to future years, while the TFSA can save us money in the future. Holding the right amount of each can minimize the overall taxes we pay over time.

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Apr 192015
 

If money didn’t exist, we’d all be rich. However the reality is that society needs a simple and effective medium of exchange so the economy can run efficiently. Since money is so ubiquitous, yet also finite, we should try to maximize its utility by controlling and spreading our spending over time. Sometimes this means delaying a purchase until a future date or just not buy it altogether.

Chronic shoppers often have to overcome a sense of deprivation when they pass up an opportunity to spend. But changing the way we think about delayed gratification can help. :) Instead of dwelling on what we will potentially miss out on we can think in terms of what we will gain instead. 😉

Next time we decide to not buy something, we can tell ourselves that since we’re not spending $X on that, we can add this $X to our emergency fund, or build up a larger down payment for a future home to raise a family in. Or we can use this $X to pay down our debts. Once our debts are completely gone we can work less, travel more, and take up new hobbies like pottery making. 😀

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Everyone’s reasons will be different. But the basic idea is use our goals, aspirations, and dreams to convince our brains to not feel deprived because of our decision, by replacing the temptation for an immediate reward with a larger, or more enduring reward. Rather than wallow in self pity we should feel proud and anticipative of a better life tomorrow.

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Apr 162015
 

Canadian Farmland Values Up Again

Okay, it’s that time of year again when the national agency, Farm Credit Canada, release its farmland value report about the previous year’s farming landscape. As it turns out in 2014 the average Canadian farmland price increased 14.3%. 😀

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Meanwhile residential real estate prices increased only 5.2%, according to the Canadian Real Estate Association. Of course the most strategic way to invest in a portfolio of properties is to be exposed to both residential, and agricultural real estate. Farmland prices are assessed using recent comparable sales. These sales must be arm’s-length transactions. The highest price increase was an incredible 18.7% in Saskatchewan, the land of living skies. The full report is on FCC’s site.

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As luck would have it I decided to buy some Sask farmland a few years ago. 😉 Back then I had blogged about why land in Saskatchewan was the bee’s knees because of how undervalued it was compared to other provinces and neighboring States.

 

The Greatest Advantage of Real Estate Over Stocks: LEVERAGE

I leveraged 8:1 to secure my position as a farm owner. This meant I borrowed $7 of the bank’s money for every $1 of my own money to invest. So an increase in Saskatchewan’s farmland value of 18.7% last year actually means a redonkulous 150% rate of return on my capital. Not too shabby. 😉

My farmland was worth about $1210/acre last year, so after this year’s adjustment it should be worth $226/acre more now. Awesome sauce! 😉 $226 doesn’t sound like a lot of money to get excited about, but since I own 310 acres it all adds up pretty quick. :)

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Investing in farmland isn’t for everyone but hay, maybe I have it in my jeans. 😀

As much as I like to feel wealthy on paper, when one particular asset class consistently outperforms all the other ones I’m faced with an asset allocation problem. Farmland now represents about two-thirds of my financial investments (all assets except primary residence.) This means I am not very diversified anymore. :( Although I realize this must be the ultimate first world problem, lol. 😛

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Apr 132015
 

15-04-expensive-internet-memeNorth Americans pay a lot of money for high speed internet access. One way to get around this costly expense is to own the means that produce the service. This means buying shares of the internet service providers that we use. Telecommunication companies are usually very generous to their shareholders as many pay out up to 40% of annual profits to their owners. Over time this gives one the opportunity to have a reoccurring internet bill pay for itself.

Step 1: Figure out your current internet service fee.
Step 2: Save an equal amount of money earmarked to buy shares of your internet provider.
Step 3: Continue buying shares every year for 20 years.
Step 4: Now use the dividend income you receive from your ISP to pay your internet bill. :)

Example: If we currently pay $50 a month for one of Bell’s internet plans, we can simply set aside another $50 a month to buy Bell stocks (BCE) on the TSX. This gives us $600 a year to invest in BCE. To save on trading fees we can buy the shares once a year, not every month.

The average price of BCE last year was around $50 so every year our $600 savings can buy us 12 shares of BCE. After 20 years we’ll have 240 shares total. Bell currently pays its shareholders $2.6 per share every year. With 240 shares, we would get $624, or about $600 after tax, with the dividend tax credit, for most people.

At that point we can essentially use Bell’s dividends ($600/year) to pay for the cost of our internet usage ($600/year.) :)

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