Liquid Independence

Liquid is the main editor of the Freedom 35 Blog.

Oct 182017
 

Knowledge is not enough. It must also be applied.

Good financial advice is easy to come by, but not always implemented effectively. The tips and suggestions on personal finance blogs are, for the most part, pretty generic. Unfortunately most people would read a few articles and quickly become bored of the topic because they don’t get anything meaningful out of them. Only personal finance enthusiasts are committed to read new material about money regularly, because they know how to turn generic advice into a more personalized form of advice that is practical and effective. Let’s look at some examples of this below. 🙂

How to turn generic advice into personalized advice.

A good rule of thumb to follow is to spend less than we earn. Well, okay. That’s great. But this is generic advice. Most people will roll their eyes at something so obvious. To personalize this principle, we can find a way to apply it practically. For example, we can pay ourselves 20% of our income by transferring money to an investment account. This can be automated to re-occur every paycheck period. This insures that we always spend less than we earn. Setting up a systematic rule based approach before we even start to save will improve our odds of success. 🙂

Another generic advice is to look for value when investing. Once again, this is pretty good advice, but not practical. So let’s find a way to personalize it. For example, the capitalization rate of a house in Toronto, Ontario is about 3% which is not a great return on investment. But a similar house near Barrie which is a smaller municipality in the same province can have a cap rate of 4% to 5%. So by simply zooming out and looking at a broader area, we are able to find more opportunities for value. If we search countrywide, we will find more, and possibly better bargains, than in any single city.

My favorite generic advice is don’t put all your eggs in one basket. To personalize this we can determine which different asset classes we should hold in our portfolio, how much of each we should have, and find low cost index funds to satisfy each class. The 100 minus age rule is a good place to start when it comes to determining one’s asset allocation.

Generic advice is good. But personalized advice is always better. Generic advice tells us what to do given a certain situation. But personalized advice shows us how to do it, and how to make a practical plan to tackle any situation. 🙂

Continue reading »

Oct 032017
 

We are now 3 quarters into the year. The S&P 500 and Nasdaq both hit an all time high to close out September. Up here in Canada the S&P/TSX Composite grew by 3.7%. Gross domestic product (GDP) was essentially unchanged, at zero per cent growth in July compared with June, Statistics Canada said last week. I suspect that the slower start to Q3 is indicative of what’s to come for the rest of the year. The good thing is inflation should remain low at sub 1.6%. I wonder if the Bank of Canada raised interest rates too quickly over the summer.

September had turned out to be a great month. A rising stock market raises all boats so my brokerage accounts performed well across the board. I’m quite happy with the outcome. 🙂

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $700
  • Freelance = $1200
  • Dividends = $800
  • Interest = $600
*Discretionary Spending:
  • Fun = $400
  • Debt Interest = $1300

*Net Worth: (ΔMoM)

  • Assets: = $1,121,700 total (+9,100)
  • Cash = $3,600 (+600)
  • Canadian stocks = $151,700 (+3200)
  • U.S. stocks = $93,900 (+3500)
  • U.K. stocks = $20,200 (+500)
  • RRSP = $83,900 (+1500)
  • Mortgage Funds = $31,300 (-200)
  • Peer-to-Peer Lending = $21,500 (+200)
  • SolarShare Bonds = $9,600 (-200)
  • Home = $270,000
  • Farms = $436,000
  • Debts: = $474,700 total (-4,000)
  • Mortgage = $181,700 (-400)
  • Farm Loans = $187,300 (-500)
  • Margin Loans = $57,600 (-100)
  • TD Line of Credit = $9,400  (-1800)
  • CIBC Line of Credit = $23,000 (-1000)
  • HELOC = $15,700 (-200)

*Total Net Worth = $647,000 (+$13,100 / +2.1%)
All numbers above are in $CDN. 

My year over year net worth gain is $109,500. I plan to continue paying down debt while building up my retirement fund over the next 3 months. By the end of this year I hope to have a net worth of $675,000.

 

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Random Useless Fact

Sep 272017
 

Understand Why You Invest Before You Invest

There should always be a goal, or objective attached to an investment. But not all investments require them to have the same goal. Here’s a list of some objectives, and how they’re different.

Investment Objectives
  • Capital Preservation – To seek maximum stability for our investment by investing in assets that are associated with extremely low risk. For example, I usually have a couple thousand of dollars on hand.
  • Hedging – To take long or short positions of an asset in order to hedge or offset the risk of another asset. For example, I hold gold and silver to hedge against inflation, which is gradual devaluation of currency.
  • Income – To generate dividend, interest, RoC, or other types of income instead of capital appreciation. The peer to peer lending platform, Lending Loop, is a good example of this. My effective annual yield on the platform is currently over 10%. 🙂
  • Growth – To increase the principal value of our investments over time through capital appreciation. Investors can expect attractive long term gains but also assume relatively higher levels of risk. My farmland and growth stocks such as Amazon, Netflix, and Facebook, are all examples of this objective.
  • Speculation – To greatly increase the principal value of our investments by taking on substantially high levels of risks. Examples of this would be trading cryptocurrencies, or penny stocks.

Some investments could fit into multiple objectives. And much like anything else with personal finance, our investment objectives can change over time. But the important thing is to be mindful about what we want our money to do, and re-evaluate those objectives periodically (ie: annually,) based on our changing financial situations.

At this time my primary objective is growth. Most of my financial decisions are based on this objective. 😀 I’m willing to overlook short term gains in favor of maximizing the potential for long term total returns. Much of my choices, such as using leverage, makes sense when viewed in this context. But having said that, it wouldn’t be wise to rely 100% on a single investment objective. 😉 This is why about 20% of my net worth is allocated to investments that strictly produce income. Naturally over time, in preparation for retirement, my investments will focus more on income and capital preservation, and less on growth and speculation. 🙂

Whatever our investment objectives may be, the important thing is to make a decision. 🙂 As fund manager Sir John Templeton once said, “the only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future. The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing. The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.”

 

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Random Useless Fact:

 

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

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Random Useless Fact