Dec 172014
 

Flawed and Unreliable

I want to know who’s daft idea it was to make the debt to disposable income (DTI) ratio the most widely used and talked about metric to determine our financial risk. :-x  “Debt” is a balance sheet item (net worth,) but “income” deals with budgeting or income statements. Debt is simply a static number. But income requires the element of time in order to exist. One has a set monetary value while the other is a reoccurring event. Comparing the ratio of debt to income is like comparing net worth to spending. Or, for the engineers out there, like comparing a scaler against a vector. The two parts that make up the ratio are loosely correlated at best, but it’s not a very relevant measurement for any practical purpose. :| And why is the income represented as an annual rate? Why not monthly?

The other problem with this ratio is it’s heavily influenced by monetary policy. 30 years ago a typical mortgage rate was 18%. The cost of carrying a mortgage was extremely expensive, almost prohibitive. Thus the debt to income ratio was under 80%, quite low. But today, the cost of servicing a mortgage is only around 3%, so more Canadians can easily afford to take on larger mortgages. This increases our overall debt levels which skews the debt to income ratio. Of course consumers tend to increase their borrowing if the cost credit becomes cheaper. But that doesn’t necessarily mean they’re at more risk of insolvency.

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This is why the debt to income ratio isn’t a very reliable metric to use over long periods of time. It’s impractical to compare debt/income to begin with. The added effects of changing interest rates only makes the wonky ratio even less valid. :(

Alternatives to the Debt to Income Ratio

I believe a much better metric to measure consumers’ financial situation is the debt to net worth ratio. Debt to net worth (or equity) ratio is what businesses use to determine if they are borrowing too much. They use this ratio to determine debt related goals for themselves. Total-debt-service (TDS) ratio is another helpful way to gauge our debt default risk because it measures how much we pay each month towards debt against how much money we make over the same period. Actually, the Americans often use the TDS ratio, but they refer to it as their “debt to income ratio.” If you’re confused this comment should help clear things up.

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Dec 142014
 

What you can buy for a Canadian dollar these days is absolute noncents. :D The loonie has sunken to a multi year low, valued at only $0.86 U.S. The lower Canadian dollar rate today means it’s more difficulty for Vancouverites to pick up milk and cheese for half the price across the border.

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This Canadian dollar trend going lower will probably continue into next year due to lower commodity prices and a stronger U.S. economy. This is excellent news. :D When the price of oil and other goods fall it’s known as deflation. Many economists and central bankers would tell people that deflation is bad. But don’t let them fool you. Deflationary pressures can create an excellent environment for saving money and finding undervalued investments for those who know where to look. ;)

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Dec 112014
 

Grumpy Cat Is A Wealthy Cat

The internet is the best thing to have happened to cats since the ancient Egyptians. The most popular cat in the world right meow is none other than Tardar Sauce. Her first picture was uploaded to the social news site Reddit in 2012. Denizens of the web quickly fell in love with her distinctive expression. She was given the label Grumpy Cat and variations of her pictures, often with sarcastic captions, spread all across the web and turned her into a popular internet meme.

Two years since her internet debut, Tardar Sauce has now made over $114,000,000, according to the CBC. That is more money than most “A” list Hollywood actors including Brad Pitt, and top athletes including Christiano Ronaldo. There is even a Grumpy Cat Christmas themed movie, Grumpy Cat’s Worst Christmas Ever, in which she’s voiced by Aubrey Plaza, who is best known for playing April from NBC’s comedy, Parks and Recreation.

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Dec 082014
 

The Divorce Capital of the World

To most girls, the word “wedding” will have a nice ring to it. :D But marriage can be difficult and it doesn’t always last a lifetime. Divorce can often go off without a hitch for some. But for others, it can get quite messy, especially if there’s a lot of money involved. London, England appears to be the top destination for married couples looking to go their separate ways. It is known as the “divorce capital” of the world due to its court system’s “generosity to estranged wives.”

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Sir Chris Hohn is a hedge fund manager in London. Recently his wife, Jamie, decided to leave him and she wanted to take half of their household assets with her because she believed their wealth was created due to their “partnership.” It was a bitter dispute, but in the end she was awarded £337 million ($525,000,000 USD). This enormous amount, granted by High Court judge Jennifer Roberts, was the largest ever seen in London’s courts. This settlement dwarfs the previous £220 million record, paid in 2011 by a rich Russian oligarch to his ex-wife, and further cements London’s reputation as the best place to get a divorce for non-working spouses. :)

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Dec 052014
 

Americans VS Canadians on Household Debt

Consumers love to spend money. And around this time of the year big spenders tend to have a whole lot of purse-onality. :D A report from the newyorkfed.org shows that Americans have a total of $11.7 trillion of household debt. Roughly 74% of that is mortgage debt. That’s aboot $37,000 of total debt for every man, woman, and child in the U.S.

Meanwhile, a recent report from the Equifax credit bureau reveals that Canadians now carry a total of $1.5 trillion of debt. This is 7.4% more than a year ago. And it works out to be roughly $43,200 per capita. But not to worry because if we remove the mortgage portion, then the total amount of debt has only increased 2.7% from 2013. This is actually quite sustainable, because if the inflation rate is around 2.7% and our debt increases by the same amount then the real value of our debt wouldn’t have gone up at all. ;)

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It looks like Canadians are 17% more indebted than Americans. Sorry :| But stable growth of household debt isn’t necessarily a bad thing. In fact, it’s what’s keeping the Canadian economy competitive. Canadians have to stimulate the economy by consumer borrowing and spending. Low interest rates have encouraged people to do just that. Auto loans showed the most significant increase, at 6.8% year-over-year. This is great news for everyone! Drivers can own new cars with affordable financing. Dealers are making more money from selling more cars. The manufacturing sector is firing on all cylinders. And total economic activity increases across the country. ;) I don’t see any problems with this picture.

A devil’s advocate may suggest that borrowing money to buy expensive cars and speculate in the hot real estate market may not be such a smart idea. But let’s not forget that personal finance is relative. Despite the increase in debt, the delinquency rate — (bills more than 90 days past due) — remains on a downward trend and now stands at just 1.1% of all loans in Canada, Equifax said. In other words people are better off with their debts today than when they had less debt in previous years. That’s because the cost of debt is what determine’s our ability to pay it back. For example I would much rather owe a bank $100 with a 2% interest rate, than owe $80 with a 10% interest rate. Assuming these loans are amortized over many years, the latter loan, despite being a lesser amount, will end up costing me more money. :?

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