May 222017
 

Some people are so debt averse they even refuse to borrow money when interest rates are at rock bottom. They save up for a 30% down payment for a home instead of 20% because they want to save on interest costs. This is despite the fact that Canadian mortgages only cost about 2.5% currently, or sometimes lower like in my case. These people also refuse to invest on margin. I’ve explained in the past how anyone with at least $10,000 can open an account with Interactive Brokers, put in some money, and safely borrow modest amounts of money at just 2% interest rate, with practically no risk of getting a margin call.

Can’t have it both ways

Yet, many people who are debt averse and won’t borrow money under any circumstances also believe in the 4% rule of investing. But this kind of thinking is contradictory. It’s silly to make the argument that paying down their mortgage is a guaranteed rate of return, but investing is uncertain and they can’t be sure they’ll make more than 2.5% return in the markets. While at the same time, also claim that the 4% rule is valid.

The four percent rule is a widely accepted rule of thumb used by many investors and financial experts. There are slightly varying definitions of it, but for the purpose of today’s post we’ll define it as the maximum sustainable rate of withdrawal from a retirement account each year without depleting the account itself. This is because 4% is considered a “safe” rate of withdrawal over the long run for a balanced and diversified portfolio.

So if a person really believes in the 4% rule and uses it as part of his retirement planning, then it would only be rational to consider borrowing money to invest if the cost to borrow is lower. The 4% rule says that this person will make at least 4% return on his investments per year on average. So if he always borrow money at less than 4%, then he is virtually guaranteed to profit in the long run! assuming the 4% rule holds true.

This is why I always buy properties using very low down payments, and use controlled margin borrowing to invest. Since I believe in the 4% rule, it would be illogical if I didn’t try to take advantage of low interest rates. If my margin or mortgage interest rate were to increase to 5% or 6% some day, then of course I would no longer take out new loans to invest. At that point it wouldn’t make sense to use leverage anymore. Sometimes it may seem like being debt free is more safe. But there is risk in being overly debt averse, the risk of not seeing perfectly good opportunities to earn higher investment returns.

Obviously just because a rule has held up in the past doesn’t mean it will continue to hold true in the future. Whether or not you think the 4% rule is valid is up to you. 🙂 But this principal can work with any other withdrawal rate. If you believe you can safely and sustainably withdrawal 3% a year, then you must also accept that your portfolio will return 3% a year minimum on average. You can then use this number as your reference point when deciding when to use leverage and how much.

 

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Random Useless Fact:

Some grocery stores have an aisle dedicated to strong, independent women. 😄

 

May 182017
 
cooking steak with Liquid

Welcome to this edition of cooking with Liquid. 😀 Today we’ll be making a simple yet delicious cheeseburger. As many of you may already know, McDonald’s recently started to sell its secret sauces in grocery stores across Canada. This is the first time ordinary consumers can recreate the iconic tastes of the famous restaurant at home without buying dozens of separate ingredients. So in today’s post let’s learn how to make the world renowned Big Mac sandwich! 🙂

Easy Big Mac Recipe

Ingredients:

  • Hamburger buns
  • Hamburger patties
  • Shredded lettuce
  • Chopped onions
  • Sliced pickles
  • Sliced cheddar cheese
  • McDonald’s Big Mac sauce

 

Cooking Instructions:

  1. Cook 2 hamburger patties.
  2. Place some lettuce and a slice of cheese on a bottom bun and toast it in an oven until the cheese melts.
  3. Place 1 cooked patty on top of the cheese, followed by another bottom bun.
  4. Continue stacking with Big Mac sauce, lettuce, pickles, another patty, and finally the top bun.

Eh Voila! Within 15 minutes you have yourself a juicy cheeseburger, Big Mac style. 🙂

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May 152017
 

Different Priorities for People in Different Income Groups

According to the U.S. Bureau of Labor Statistics, people from across the income spectrum have different priorities when it comes to their spending. The graph below from npr.org shows average spending patterns for U.S. households in 3 income categories — one just below the poverty line, one at the middle of the income distribution, and finally one at the top of the distribution. 🙂

Here are some interesting notes to take away from this data:

  • Everyone pretty much spends the same ratio of their income on housing, clothing, shoes, and entertainment.
  • Poorer households tend to spend a larger share of their income on home cooked meals and utilities.
  • Richer households allocate a bigger chunk of their spending to education and saving for retirement.

Some expenses are more elastic than others. They take up a bigger piece of the household budget if the household has more access to money. Earning more income is generally a good thing for financial security. But if all new income is being squandered on entertainment then that’s not going to help someone in retirement.

Since my priority is financial independence here is how I like to use the information from the chart. The average person buys a bigger home when he makes a bigger income, as represented by the data. But housing is one of the largest expenses and does not need to be bigger than necessary. By living in my current home for the past 8 years while doubling my income I have effectively reduced my spending on housing by 50% over time. 🙂 I can use these savings to put towards my retirement portfolio so I can reach FI/RE sooner. The same concept can be applied to transportation and gasoline as well. Instead of upgrading to a gas-guzzling luxury SUV, I’m still driving my 10 year old hatchback.

The idea is to keep expenses the same, while increasing income, and investing the difference. 🙂 Of course there are times when it’s appropriate to capitulate to lifestyle inflation. When I start a family I will probably need a larger home and a bigger car. Knowing when to delay gratification, and when to upgrade is a personal decision that everyone is capable of making for themselves in their own way. That’s why personal finance doesn’t start with our money. It actually starts with our personal priorities and values, I think.

 

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Random Useless Fact:

Say what you want about North Korea, but they are better at celebrating Earth Day than any other country.

May 112017
 

Investment Outlook

BlackRock, Inc. based in New York City, is the world’s largest asset manager with $5.4 trillion ($5,400,000,000,000) assets under management, which is even more than what Vanguard has. Due to its power and influence, BlackRock is often referred to as the world’s largest shadow bank. So when this company releases a report, investors tend to pay attention. 🙂

Last month BlackRock published its Q2 2017 global outlook. Below are some highlights.

BlackRock prefers equities over fixed income in general. For the next 5 years, BlackRock believes global equities (except U.S.) and emerging market equities are the best asset classes to be in. When it comes to debt BlackRock suggests high yield bonds and emerging market debts are likely to outperform.
 .
However, high yield bonds can be risky for investors with shorter investment horizons. So BlackRock says it actually prefers medium to long term U.S. investment grade bonds.
BlackRock also likes emerging market and global equities. It also believes the U.S. financial sector can benefit from rising interest rates if the trend of monetary tightening continues in the U.S.
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You can download the full BlackRock report here. 🙂

How does this change my current plan? Not much. After seeing the second chart, I have decided to continue investing in high yield bonds since it’s one of the best performers in the model. The duration is also relatively short (around 5 years.) This lowers interest rate risk. The only fixed income asset that has a higher yield is Latin American government bonds. But I don’t like it due to tax reasons. I can shelter U.S. investments in my RRSP thanks to NAFTA. But Brazilian investments in my portfolio will be subject to the full brunt of taxation. What about diversification though? I do want Latin American exposure. But that’s why I have equity of companies such as BNS conducting business there, instead of owning debt directly.

 

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Random Useless Fact:

This is how to annoy a gamer.

May 102017
 

The following post is contributed by a staff writer.

A credit report is a very important part of our financial lives, yet many of us rarely see ours. We simply let it carry us wherever its information allows us to go, not realizing what opportunities and money may be escaping from us because of what it says.

We all know that a bad credit score leads to higher interest rates, or even to denial for loans. And we all know that better scores get us lower rates and the opportunity to save a lot of money.

But what we don’t always fully appreciate is the possibility that something on our credit report may not be accurate. When that happens, we could lose dozens of points for several years before the negative element finally expires. By that time, it could cost us thousands of dollars–without us ever knowing it’s there.

Most people are intelligent enough to realize why some things are on their credit reports. They make late payments, file bankruptcy, or otherwise mismanage their money, and end up with the credit score they deserve.

But there can be things on your report that don’t belong there, and they can be hurting you financially. Going through the process of disputing credit reports that contained errors has proven very beneficial to many people over the years. Successful challenges typically stem from problems in these three areas.

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