Sep 182017
 

What is a Blockchain?

A blockchain is basically a digital and decentralized ledger that can record virtually any type of transaction between 2 parties in an efficient, verifiable, permanent, and secure way. The first blockchain was conceptualised by Satoshi Nakamoto in 2008 and implemented in 2009 as a core component of the digital currency Bitcoin, where it serves as the public ledger for all transactions. 🙂 Since the creation of Bitcoin, the tech community has found other potential uses for blockchain technology. It can also assign title rights by providing a record that compels offer and acceptance.

The Rise of Blockchain Technology

Each of the Big Four accounting firms is testing blockchain technologies in various formats. Ernst & Young has provided cryptocurrency wallets to all (Swiss) employees, installed a Bitcoin ATM in their Switzerland office, and accepts Bitcoin as payment for all its consulting services. The CEO of Ernst & Young Switzerland stated, “We don’t only want to talk about digitalization, but also actively drive this process together with our employees and our clients. It is important to us that everybody gets on board and prepares themselves for the revolution set to take place in the business world through blockchains, [to] smart contracts and digital currencies.” PricewaterhouseCoopers (PwC), Deloitte, and KPMG are all currently testing private blockchains.

Buying Cryptocurrency

One way to ride the blockchain train is to invest in cryptocurrencies that use this technology. There are many to choose from, but the most popular ones are Bitcoin, Bitcoin Cash, Ethereum, Ripple, Litecoin, and Dash. They are all a little different. Bitcoin, for instance, is mostly used as a payment platform and may not be particularly scalable beyond being used for payments. However, Ethereum may have considerably larger aspirations because it’s an entire platform that enables savvy developers to build and deploy decentralized applications and smart contracts. With no central point of failure and secured using cryptography, applications are well protected against hacking attacks and fraudulent activities. The digital token used to buy for services on the Ethereum network is called Ether. There’s a saying that Ether is to Bitcoin as silver is to gold.

So last week I decided to buy 4 Ether. 🙂 I think the Ethereum platform has a lot of potential, but speculating in the nascent cryptocurrency market is akin to gambling due to its high risk nature. This is why I didn’t buy much.

Continue reading »

Sep 152017
 

Median Income Grows to $70,336

The results from last year’s national census about family incomes have been released. Below is a table showing how much we all made in 2015. Overall the median national income was $70,336. This means half of Canadian households made more than this number, and the other half made less.

Atlantic provinces and Quebec saw the lowest median incomes for some reason. There seems to be a trend for younger people to leave Newfoundland and Labrador in search of better job opportunities in other provinces. I often hear people complain that jobs pay less in B.C. than in other provinces. According to the data above, it appears B.C. is right in the middle with a rank of 7 out of 13 for household incomes. Not too bad. 🙂

 

Comparing 2015 Incomes to 2005

Keep in mind that inflation (as measured by CPI) has eroded about 19% of our money during the 10 year span between 2005 and 2015. But the data is inflation adjusted to 2015 constant dollars as a commentator pointed out below.

However income is just one aspect of personal finance and doesn’t necessary determine how well off households are. For example just about anyone who held real estate in Canada between 2005 and 2015 would have experienced tremendous growth to their home equity. This wealth could be used to either create passive income or lower their housing costs through gradually reducing the cost of their mortgage over time.

  • To be in the top 10% of all income earners in Canada you would have to make over $93,390.
  • To be in the top 5%, you’d have to earn at least $120,219
  • To be in the top 1%, you’d require an income of $234,129 or higher.

If you want to know exactly how you compare to other people of your demographic, you can plot your income on this fun interactive chart released by Statscan. 🙂 This is for individual incomes. For example, I learned that for my ripe-old-age of 30, my earnings are in the top 10% of my cohort. Not too shabby.

 

Additional key findings from the Census

  • Ontario had the slowest growth in median income since 2005.
  • Fewer children living in low income. But there are more low income seniors.
  • The incomes of 32.0% of couples were fairly equal (both earning from 40% to 60% of the couple’s total income).
  • Same-sex couples have higher incomes. For example, over 12% of male same-sex couples had household incomes over $200,000, compared with 8.4% of opposite-sex couples. (Time to find me a boyfriend, lol. Just kidding.)
  • 67% of the population aged 15 and over reported income taxes. This means about 1/3rd of Canadians didn’t pay income tax in 2015.
  • Of 14 million households, 65% are saving for retirement.

Overall this was a pretty cool look at recent Canadian household incomes. 🙂

 

Sources:
https://www.statcan.gc.ca/daily-quotidien/170913/t001a-eng.htm
http://www.cbc.ca/news2/interactives/census/2016/income/
http://www.cbc.ca/news/politics/statistics-canada-census-2016-income-hightlights-1.4287179

——————————————————————–
Random Useless Fact

Sep 052017
 

After the FED raised interest rates in the U.S., the Bank of Canada did the same. In July the central bank increased rates by 0.25%. This means the Prime lending rate at banks is now 0.25% more expensive for borrowers. What does this mean for Canadians in debt? It means we should reduce our debt balances to normalize our interest expenses and keep our debt load under control. 🙂

How to Adjust Debt Levels Based on Interest Rates

So if the interest rate is higher by 0.25% how much debt should we try to pay down? We can use the following formula to find out. 🙂

Debt amount to pay down = (Interest rate increase amount) x (total debt balance) ÷ (new interest rate on loan)

For example, let’s say I have a variable loan with $100,000 outstanding and my interest rate was 5% before the interest rate hike. So this loan was costing me $5,000 a year in interest payment. But the central bank raised rates by 0.25% so now the loan is costing me 5.25% or an extra $250 per year more than before. I want to know how I can lower my cost of borrowing back down to $5,000/year.

Debt amount to pay down = (0.25%) x ($100,000) / (5.25%)
Debt amount to pay down = $4,761

This means in order for my borrowing cost to stay at $5,000 per year, I will need to pay down $4,761 of my $100,000 debt balance. So at this point I have a decision to make. I can either pay down my debt quickly to bridge the $4,761 gap so I can go back to my initial budget. Or I can accept paying more interest (0.25% or $250 more) every year and work that extra cost into my budget.

Personally I like to adopt a combination of both. 🙂 Earlier this year I used half of my monthly savings to pay down debt, and the other half to invest. But after July’s rate hike I’m putting roughly 75% of savings into debt repayment, and 25% into new investments. Anyway, below are the results of my August finances.

 

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $1100
  • Freelance = $800
  • Dividends = $600
  • Interest = $300
*Discretionary Spending:
  • Fun = $300
  • Debt Interest = $1200

*Net Worth: (ΔMoM)

  • Assets: = $1,112,600 total (+900)
  • Cash = $3,000 (+500)
  • Canadian stocks = $148,500 (+2100)
  • U.S. stocks = $90,400 (-1000)
  • U.K. stocks = $19,700 (-200)
  • RRSP = $82,400 (-700)
  • Mortgage Funds = $31,500 (unch)
  • Peer-to-Peer Lending = $21,300 (+200)
  • SolarShare Bonds = $9,800
  • Home = $270,000
  • Farms = $436,000
  • Debts: = $478,700 total (-2,900)
  • Mortgage = $182,100 (-400)
  • Farm Loans = $187,800 (-500)
  • Margin Loans = $57,700 (-200)
  • TD Line of Credit = $11,200  (-1200)
  • CIBC Line of Credit = $24,000 (-500)
  • HELOC = $15,900 (-100)

*Total Net Worth = $633,900 (+$3,800 / +0.6%) 
All numbers above are in $CDN. 

 

 

——————————————————————–
Random Useless Fact

According to Wikipedia, Iceland does not have a standing army. But it is recognized as the world’s most peaceful country.

Aug 312017
 

There’s a general rule of thumb that says if you retire you can safely withdrawal up to 4% of your nest egg every year without it running out before you kick the bucket. Financial advisor Bill Bengen, now retired, came up with this guideline after testing a variety of withdrawal rates using historical rates of returns for stocks and bonds. He published a study in 1994 about how 4% was the highest sustainable withdrawal rate retirees could use.

But 1994 was over two decade ago. How does the 4% rule hold up today, after the great recession? Bill recently did some further research into the topic and according to him, the 4% rule still holds true today. 🙂 In fact, he is even confident that retirees can safely withdrawal not just 4%, but actually 4.5% if they are okay with their nest eggs lasting for only 30 years.

15-08-retirement-plan

In a Q&A session on Reddit last week, Bill explained the methodology, details, and implications of his findings. He says that 4.5% is the “percentage you could “safely” withdraw from a tax-advantaged portfolio (such as an IRA, 401(k), RRSP, or TFSA) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you “throw away the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year’s inflation rate.”

For example, if you had $1,000,000 in an RRIF, you would withdraw $45,000 in the first year of your retirement. Let’s say inflation during this year was 2%. This means in the second year you may withdrawal $45,900. Overall, Bill recommends a 50% equities/50% bonds mixture at the beginning of one’s retirement.

As for how recessions, interest rates, and government policies affect the safe withdrawal rate over time, Bill reassures us that these factors have little bearing on the safe withdrawal rate. There are only 2 major factors that count.

  1. Encountering a major bear market early in retirement.
  2. Encountering high inflation during retirement.

Bill explains that both these factors “drive the safe withdrawal rate down.” His research is based on data going back to 1926. He tests the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 300+ hypothetical retirees is, “believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970’s, and it takes you down to 4.5%.” So far, Bill has not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing okay with 4.5%.” 🙂

Continue reading »

Aug 172017
 

Holding some cash for emergencies or opportunities is a sound idea. But having too much cash sitting around instead of putting the money into investments can be financially unwise.

Like most things in life, there is a cost component to cash – which is that cash usually produces lower returns than other asset classes such as stocks or bonds. One advantage of holding cash is to deflect volatility in a portfolio. But with a longer time horizon investors can manage volatility by using fixed income vehicles instead of cash. Long term corporate bonds from large, stable companies such as Enbridge pay 3.5% or higher annual returns, easily beating the interest earned in a savings account. 🙂

According to investment management company, BlackRock, people who have allocated their money towards cash or cash equivalent assets actually lost purchasing power in the past. The value of their savings slowly whittled away at 0.8% per year on average between 1926 and 2014. This gives a whole new meaning to cash poor.

Holding cash for one or two years isn’t a big deal because the loss is very small. But over time it can build up to significant loss of buying power. The longer the investment time horizon, the less cash investors should consider holding. For a multi-decade horizon and high return objectives, which is the strategy I’m personally using, having excess cash savings would be a liability because it produces negative real returns. Sometimes the risk is not being aggressive enough with our investment plan and losing out on easy gains.

According to a survey by State Street’s Center for Applied Research, globally retail investors are holding 40% of their assets in cash. Uh oh. If someone has 60% of their portfolio in bonds, and the rest in cash then they could be making zero progress with their portfolio after inflation and tax.

If I’m sure I won’t touch my money until I retire, then I should take advantage of my long time horizon. This is why I don’t keep more than 1% of my net worth in cash, unless I’ve earmarked savings for a large, specific purchase. 🙂

 

——————————————————————–
Random Useless Fact