What do you call the world’s largest bulletin board which has 174 million users? Reddit! Registered members provide content on this social news website, and everyone decides, through voting, what’s important and what’s rubbish. Submitted pictures, links, and articles that receive community approval get pushed towards the top, so the front page is constantly updating with fresh, interesting entries.
New contents are organized by areas of interest called “subreddits”. Think of these as message boards with specific topics. Today I’d like to share some subreddits that I frequent from time to time to either learn something new, or simply read about interesting news and stories related to personal finance.
The debt to disposable income (DTI) ratio represents the ratio of one’s debt to his after tax income. I want to know who’s daft idea it was to make this number the most widely used and talked about metric to determine our financial risk. It’s rubbish.
“Debt” is a balance sheet item (net worth,) but “income” deals with budgeting (income statement.) Debt is simply a static number, while 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 variables that make up the ratio are loosely correlated at best, but it’s not a very relevant measurement for any practical purpose.
The other problem with this ratio is it’s heavily influenced by monetary policy. 30 years ago the typical mortgage rate was 18%. The cost of carrying a loan 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 DTI ratio. We consumers will naturally increase our borrowing if the cost of credit is cheaper. But that doesn’t necessarily mean we’re at greater risk of insolvency.
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 and income to begin with. The added effects of changing interest rates only makes the wonky ratio even less valid.
Statistics Canada recently announced that our average household debt to disposable income ratio hit a record high of 162.6% in the third quarter, which has generated a lot of discussion in the media. But giving so much attention to this insignificant ratio is like rearranging the deck chairs on the Titanic. Don’t we have more important data to study?
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.
What you can buy for a Canadian dollar these days is absolute noncents. 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.
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. 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.
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.
To most girls, the word “wedding” will have a nice ring to it. 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.”
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.