Jul 072015
 

Determining which account (Tax Free, Retirement, or Taxable) to hold different investment types in

Today’s post is targeted specificity at Canadians and assumes the reader is already familiar with the TFSA, RRSP, and regular taxable accounts.

There are two parts to every investment decision we make; the investment itself, and the type of account to hold that investment in. Asset allocation is important because we don’t want to put all our eggs in one basket. But asset location is also important because different types of investment incomes are taxed at different rates. Thankfully we can hold our investments in special tax advantaged accounts to shelter our profits so we don’t pay more tax than we have to. 😉

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In an ideal world all of our investments would be bought inside tax advantaged accounts such as a TFSA or RRSP. There’s little reason to use a non-registered (taxable account) if there is still contribution room remaining in our tax free or registered retirement accounts. However its possible to purchase more investments than what our tax advantaged accounts will hold. If that’s the case then investment income that is typically taxed at higher rates should take priority inside a TFSA or RRSP. So with that in mind let’s get down to the nitty-gritty. :)

Which Investment Vehicles to use: TFSA, RRSP, or Non-Registered

Where is the best place to put stocks, bonds, mutual funds, and ETFs? Should they go in an RRSP or a TFSA? There is no categorically correct answer but here are some general guidelines that I follow.

  • Use RRSPs for interest producing investments and U.S. dividend paying companies.
  • Use non-registered accounts for Canadian dividend paying companies and preferred shares.
  • Use TFSAs for everything else.

For a deeper look, below are two charts that go into specifics. The first chart shows how different types of investment income is taxed in different kinds of accounts for someone in the 31% marginal tax bracket. The second chart suggests the best accounts to buy different types of specific investments in. 😀

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Additional notes to consider:

  • If we hold U.S. dividend stocks in a taxable account we’ll pay the 15% U.S. withholding tax off the top. But we can claim a foreign tax credit on our tax returns to recover some or all of this amount. However we’ll pay tax at our marginal rate on the full amount of the U.S. dividend. The net result is that U.S. dividends held in a non-registered account will be taxed at the same rate as interest income.
  • Dividend income from U.S. dividend stocks in a Tax Free Savings Account (TFSA) is also subject to the 15% withholding tax, however this tax is non-recoverable. But the remaining dividend and any capital gains is not taxed.
  • Dividend income from U.S. stocks in an RRSP are exempt from the 15% withholding tax. But this only applies if we directly hold a stock or ETF traded on a U.S. exchange. If the U.S. stocks are held in a Canadian mutual fund or ETF, we will need to pay the unrecoverable 15% withholding tax on the dividends.
  • Keep in mind that although many investment incomes are tax efficient while being held in an RRSP, any money withdrawn from the RRSP or RRIF later on will be subject to income tax at the full marginal rate and could trigger claw-backs for income tested government benefits like OAS.
  • Tax efficiency should not be the only factor when deciding which account to put an investment into. Simplification of record keeping, personal financial situation, risk tolerance, and retirement goals all have to be considered.
  • For most intents and taxation purposes RESPs behave the same way as TFSAs. RRIFs and LIRAs behave similar to RRSPs.

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Jun 252015
 

Some people may think of me as frugal, but that’s actually not entirely true. For example, I spend a lot of money (over $2,000 every month) on interest payments. 😉 It’s fun to find out how much other people spend on their hobbies. But in the end it’s pointless to judge their behavior because money contains different meaning to different people. This is because our real wealth is time. Money is merely a means to maximize the enjoyment we get out of our time in this world.

This is why some people who make $30,000 a year can live a happier, more fulfilling life than others who make $300,000 a year. The income gap between the rich and poor gets a lot of attention, but from a broader perspective most people have roughly the same amount of real wealth in this world, which is measured in years, not dollars. The truly unfortunate are those who are so poor that all they have is money, lol. If all my financial assets disappeared overnight I’d be fairly upset. But if I knew I only had a few more months to live I’d be devastated. 😱 I don’t blame Walter White for what he did. Dire times call for extreme measures.

So if our goal is to enjoy life to its fullest using our limited financial resources then we simply have to allocate the right amount of money for each block of time we spend living. This means if we watch more than 10 hours of live sports a week then spending $3,000 on a new 60 inch 4K Ultra HD LED TV is totally justified. 😀 After seeing a football or soccer match in 3840 x 2160 resolution there is no going back. 😉 But on the other hand if we use those 10 hours a week to play PC games then we should spend $3,000 on a new kick-ass gaming computer instead. :) The point is to choose what our interests, passions, and values are in life, and spend our money with the purpose to maximize our happiness in mind. This way, we’re less likely to second guess ourselves and regret our purchases.

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Jun 152015
 

There’s no shortage of personal finance blogs and financial new sites on the internet to help broaden your financial education. But many of those articles out there are regurgitated filler without much useful material. So I have gathered some practical one-liners I’ve found from around the web and placed them all in this one post. Below is a compilation of over 100 suggestions on financial management and quotes about money. 65 of these are chosen from Morgan Housel’s articles which I found on Huffington Post and fool.com. As usual there are no hard rules when it comes to finance. But this list is a good start to help you save, invest, and make overall better money decisions in your life. Master these financial tips and tricks and you’ll understand 99% of everything there is to know about personal finance and investing. 😉

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💸 Top Financial Tips From Around The Net 💸

  1. Spend less than you earn. Invest the difference in a diversified portfolio of index finds and you’ll retire richer than most people.
  2. Next time you’re about to make an impulse purchase, imagine someone offering you the product you want to buy in one hand, and an equivalent amount of cash to buy that product in the other hand. Then ask yourself which would you rather take?
  3. When in doubt choose the investment with the lowest fees.
  4. One of people’s biggest expense is interest, which comes from living beyond their means, and buying things they think will impress others.
  5. You don’t need to spend a lot of money to have a good time. Adopting cheap or free hobbies such as hiking, biking, or reading, can be a large, yet hidden, asset on your personal balance sheet.
  6. Index investing works for most people because you can afford not to be a great investor, but you probably can’t afford to be a bad one.
  7. Some people hate finance, think it’s confusing, and don’t want anything to do with it. But they love money. And they don’t see the irony in this.
  8. Dollar-cost average for your entire life and you’ll beat almost everyone who doesn’t.
  9. The business models of banks and other financial institutions rely on exploiting the fears, emotions, and lack of eduction of their customers.
  10. Only invest in products and companies you can explain to a 6 year old.
  11. Wanting to become a millionaire because you want to spend a million dollars is actually the opposite of being a millionaire.
  12. Don’t accept or reject an argument based on how well it fits your pre-defined beliefs. Treat your finances objectively.
  13. Only invest in businesses that you truly understand.
  14. Every 5 to 8 years, people tend to forget that recessions usually occur every 5 to 8 years.
  15. Don’t underestimate how fast a company can go from “blue chip” to bankrupt.
  16. Most people are twice as biased as they think they are.
  17. You have to change your opinions about markets, the economy, and your investments when the fundamental change. Don’t be stubborn. Change your mind as often as the facts change.
  18. Read more books, and fewer articles.
  19. Don’t cave to peer pressure and go to college just because your friends are. Post secondary education is expensive. Only attend college if you are serious, have a game plan for post graduation, and are well prepared.
  20. Don’t worry about things you can’t control. Focus on things that you can.
  21. Read more history, and fewer forecasts.
  22. You don’t need to check your bank account balance or investments every day. Financial planning is long term. You don’t need to micro manage it. After all, your health is probably more important than money but you only go to the doctor for a check up once a year.
  23. Don’t ignore history, only to base your actions on your own limited experience.
  24. “Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” James W. Frick
  25. When reading about how stupid and irrational retail investors can act, be mindful that you are reading about people like yourself.
  26. Take a balanced approach to life and finances. Don’t work so long and hard to make money that you don’t have time to even plan your finances or enjoy what you have.
  27. Your circle of competence is probably 80% smaller than you think it is.
  28. Your portfolio is only diversified when some of your investments perform worse than others.
  29. If you plan to retire at 62 keep in mind that if you live to be 90 years old, you would be spending almost 1/3rd of your life living off your investments.
  30. Large risks will always be played down. Small risks tend to be blown out of proportion.
  31. Don’t rely too much on what the economy is doing to make your stock investment decisions because the two really have very little correlation.
  32. Check your brokerage account as infrequently as it takes to prevent rash decisions.
  33. Renting a home is not throwing money away because it provides a constant roof over your head, and is a better alternative to owning for some people.
  34. Owning a home has been one of the most common ways for the middle class to successfully grow their net worths in the long run.
  35. Don’t think of the stock market as numbers that go up and down. Instead, think of them as ownership stakes in real businesses with real assets, products, services, and value.
  36. A 2% management fee may not sound like much, but if the market returns 8% a year on average, then that management fee is costing you a quarter (25%) of your long term returns.
  37. Once your basic needs are met the amount of happiness each additional dollar of income provides diminishes quickly. Don’t spend your life chasing some arbitrary number which probably won’t make you happy.
  38. Emotional intelligence is more important than book intelligence.
  39. A 10% annual return for 20 years generates more money than a 20% return for 10 years. Time can be a more important factor than the rate of return when building wealth. Time is also the one thing you have control over.
  40. The more you learn about the economy, the more you realize you have no idea what’s going on.
  41. Don’t blow money on frivolous stuff to impress people. In reality it makes you look like an insecure, pompous jerk. This is particularly common among young people who obtain a lot of money for the first time.
  42. When you receive any kind of inheritance. Leave it in your savings account for at least a week before spending any of it. Use that time to work out a calculated plan on how to use it.
  43. “Business is the art of extracting money from another man’s pocket without resorting to violence.” Max Amsterdam
  44. Start saving for college before your kid is even born. You might feel silly when you start but you’ll feel like a genius when you finish.
  45. Travelling to a poorer country can make people realize what true financial hardship looks like, and that life doesn’t care how entitled one feels, what one think is “fair.”
  46. The most powerful way to grow your money is learning to live with less. Any money you save now will last longer because you don’t need as much of it later. You also have complete control over your spending.
  47. If you spend money on things, you will end up with the things and not the money.
  48. The stock market is risky because it’s volatile. But the bigger risk you face isn’t volatility; It’s not being able to grow your assets enough by the time you want to retire.
  49. “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”  Mark Twain
  50. You have no obligation to have an opinion about anything. But for the benefit of your finances you do have an obligation to not have an opinion about things you don’t understand.
  51. No one attending private school should be on student loans. Community and state schools provide just as good an education for a fraction of the price.
  52. You shouldn’t feel strongly about any investment you haven’t spent at least a week thinking about.
  53. Holding 60% of your assets in stocks and 40% in bonds isn’t perfect for everyone; but there are probably 1,000 worse strategies.
  54. Acknowledge the role luck plays when you make the occasional successful investment. And respect the role luck has played on some of your role models.
  55. It’s probably not a good idea to take out $100,000 in student loans for anything other than medical school.
  56. Many so called “legendary” investors whose only real skill is marketing themselves. Their career track record probably lags a money market fund.
  57. Read last year’s market predictions and you’ll never again take this year’s predictions seriously.
  58. Being greedy when others are fearful is not something everyone can do. Theory and practice are two separate things.
  59. Sleep on every major investment decision for at least 72 hours, then run it by a trusted friend before acting.
  60. High SAT scores and Ivy League degrees doesn’t qualify anyone of being a financial genius. The most important skill in finance is control over one’s emotions, not control over a Greek formula.
  61. “Formal education will make you a living; self-education will make you a fortune.” Jim Rohn
  62. To make yourself a better investor, increase both the amount of time you’re investing for and the humility you put into your ideas.
  63. Some people’s perception of history extends back about five years when economic cycles can last for up to decades.
  64. Some people anchor to whatever price they bought a stock for, without realizing that the market neither knows nor cares what they think is a “fair” price.
  65. Just as you should dress appropriately for your age, you should spend appropriately for your income.
  66. Admit and own up to your financial mistakes. Don’t ignore them, bury them, blame others, or make excuses. Be truthful to yourself.
  67. Don’t associate all of your financial successes with skill, and all of your financial failures with bad luck.
  68. Don’t try to make money you don’t have and don’t need by risking what you do have and do need.
  69. $1 million use to be a glamorously large amount of money but today it’s just enough to cover a pretty mediocre retirement.
  70. Most people are twice as gullible as they think they are.
  71. There’s no need to try to keep up with the Joneses or be jealous of them because the Joneses are buried in debt, and are no happier than you.
  72. Learn more from your poor financial judgements than your good ones.
  73. Be an optimist when it comes to money. The universal law of attraction suggests what we focus on grows. Banish toxic money thoughts. If you psych yourself out before you even get started (“I’ll never pay off debt!”), then you’re setting yourself up to fail.
  74. Judge investors by the quality of their arguments, not the performance of their last trade.
  75. Some people choose to work in a stressful job in order to make enough money to have a stress-free life, and they don’t see the irony in that.
  76. Buying and holding onto stable, large cap, dividend paying stocks may be boring, but the purpose of investing isn’t to minimize boredom; it’s to maximize returns.
  77. Teach your kids about money before they’re old enough to earn their own.
  78. “Early to bed, early to rise, keeps you healthy, wealthy and wise.” Benjamin Franklin
  79. Don’t be thrilled that the credit card you’re paying 22% interest on offers 1% cash back on all purchases.
  80. About half of all Americans can’t come up with $2,000 in 30 days for an emergency. But practically everyone will run into an emergency sooner or later.
  81. Imagine how much crap you’d have to make up if you were forced to talk money every day. Remember this when watching financial news on TV.
  82. Many young adults think they’re invincible, and don’t need health insurance. Then icy sidewalks, moving cars, and rapidly dividing cells prove them wrong.
  83. Assume the worst, hope for the best, accept reality.
  84. Save for your own retirement in full; assume Social Security and private pensions won’t be around (even though they probably will.)
  85. Learn vicariously from other people’s financial misfortunes.
  86. If you’re not good at predicting the market, then don’t predict the market. Focus on what you actually know.
  87. The correlation between confidence and future regret is incredibly high.
  88. During the last 100 years, there have been more 10% market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.
  89. Don’t spend lots of money on material stuff to impress other people because those people simply don’t care that much about you and your purchases.
  90. For people who don’t understand the value of a dollar, when they receive a $1 raise their desires increase by $2.
  91. Not taking advantage of an employer match on your 401(k)/RRSP is no different than declining a raise.
  92. “Money never made a man happy yet, nor will it. The more a man has, the more he wants. Instead of filling a vacuum, it makes one.” Benjamin Franklin
  93. You may suffer unknowingly from the Dunning-Kruger effect, which can falsely mislead you into believing you know more about finances than you actually do.
  94. Don’t let your definition of “long term” be defined by the time between now and the next bear market, whenever that is.
  95. Don’t let politics sway your investment decisions. Congress has been a dysfunctional body since 1789, and stocks have done well since then.
  96. Sometimes things take longer to happen than you think they will, and then happen faster than you thought they could.
  97. “Invest in what you know” is dangerously simplified.
  98. Most day-traders should quit, and donate their money to charity instead. Same financial result for them, but a better outcome for society.
  99. Reaching for yield to increase your income is often like sticking your hands in a fire to warm them up — good in theory, disastrous in practice.
  100. There’s a strong negative correlation between flaunting money and being rich.
  101. Investors were probably better informed 20 years ago when there was 90% less financial news.
  102. Get paid what you’re worth and spend less than you earn. Conduct an evaluation of your skills, productivity, tasks, and contribution to the company.
  103. Contrary to what some people believe maintaining a balance on a credit card does not improve your credit score so it’s better to pay off the balance every month.
  104. Drink less alcohol. Especially when eating out, booze can drive further frivolous consumption and is a very high margin product for restaurants and bars.
  105. Cancel unused club memberships and subscriptions you don’t use anymore.
  106. “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” Ayn Rand
  107. The art to financial success is not in making money, but in keeping it.
  108. Money is usually attracted, not pursued.
  109. De-clutter to simplify your living environment. Donate your unwanted items or sell them for cash. A less cluttered home also saves you time and money cleaning it.
  110. Track your spending and net worth. You will discover areas where you can cut back spending, save more money, and watch your wealth grow over time.
  111. “Beware of little expenses. A small leak will sink a great ship.” Benjamin Franklin
  112. “Wealth consists not in having great possessions, but in having few wants.” Epictetus
  113. “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” Warren Buffett
  114. Finding money in your clothes is like a gift to you, from yourself.
  115. “A bank is a place that will lend you money if you can prove that you don’t need it.” Bob Hope
  116. Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.
  117. “Opportunity is missed by most people because it is dressed in overalls and looks like work.” Thomas Edison
  118. “Look outside of the financial services industry for information on the true risks of equity investing.” Kurt
  119. Risk comes from not know what you are getting yourself into.
  120. Experiences become more meaningful and will outweigh possessions.
  121. Get a money buddy. Friends with similar traits can pick up good habits from each other – this applies to your money too.
  122. Keep your credit use below 30% of your total available credit. If your credit utilization rate is too high it can ding your credit score.
  123. There are 4 typical financial emergencies. Losing a job, car breaks down, unexpected home expenses (like a leaky roof,) and travel for a funeral.
  124. “A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.” Suze Orman
  125. To thrive in today’s economy, you must challenge the status quo and get the financial education necessary to succeed.
  126. Sometimes you will have to step out of your comfort zone when investing to realize meaningful returns because what is comfortable is rarely profitable.
  127. “Know what you own, and know why you own it.”  Peter Lynch
  128. “Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” Dave Ramsey

As with other lists shared on this blog I will probably add more content to this page over time.

Reaching financial enlightenment is easier to achieve than most people think. Fortunately it’s not about making more money. There are plenty of unhappy millionaires who are constantly stressed out. 😕 The secret to financial success is actually fostering a positive relationship with money and understanding the important role that money can play in your life. You do this by asking yourself questions like what does money mean to you? How do you feel about losing money? Do you buy things for yourself or to impress someone else? What kind of life do you want to live? Once you have a clear understanding of what money means to you, the next step is developing your overall financial knowledge. :) This means learning about budgets, debt, investing, retirement, and other financial topics.

Ultimately what you want to do is combine your personal relationship towards money with a healthy dose of financial literacy to develop your own financial identity! Your financial identity is unique to you and defines who you are when it comes to financial matters. You will have a solid understanding of how money can be applied in almost every aspect of your life. This understanding removes uncertainty and creates confidence. Confidence leads to a sense of control, purpose, and security. You will have control over your life, purpose in your decision making, and most importantly, you will attain financial security. Becoming financially enlightened is all about being content and comfortable with your personal money situation and never worry about money again. 😀

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Apr 252015
 

I recently read a study suggesting that there is a correlation between the cost of engagement rings and the duration of marriages. Researchers looked at 3,000 U.S. adults who had been married at some point in their lives, and found that subjects were more likely to end up divorced if they had spent large sums of money on engagement rings and weddings.

For example, male participants who spent $2,000 To $4,000 on engagement rings were 30% more likely to end up divorced than guys who only spent between $500 to $2,000.

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Similarly, people who spent $20,000 or more on their weddings were 3.5 times more likely to end up divorced than people who spent $5,000 to $10,000.

The authors of the study believe the correlation between high wedding and engagement ring costs and high divorce rates is probably due to the financial stress placed on couples who are overly determined to have the “perfect day,” regardless of their actually ability to afford it. 😕

The diamond and wedding industry has done an excellent job promoting their businesses over time. Before the second world war, only 10% of engagement rings contained a diamond. But by the year 2000, about 80% of rings did. In 2012 alone, Americans collectively spent roughly $7 billion on diamond rings. 😯

Here’s my analysis on all this. People who want expensive rings and fancy weddings are generally more materialistically demanding in the first place. Later on in the marriage they’re more likely to live in expensive neighbourhoods, drive fancier cars than their friends, and shop at high end stores. These kinds of behaviours usually lead to debt and other money problems, and we all know how financial stress is often the primary contributor for divorce.

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Apr 192015
 

If money didn’t exist, we’d all be rich. However the reality is that society needs a simple and effective medium of exchange so the economy can run efficiently. Since money is so ubiquitous, yet also finite, we should try to maximize its utility by controlling and spreading our spending over time. Sometimes this means delaying a purchase until a future date or just not buy it altogether.

Chronic shoppers often have to overcome a sense of deprivation when they pass up an opportunity to spend. But changing the way we think about delayed gratification can help. :) Instead of dwelling on what we will potentially miss out on we can think in terms of what we will gain instead. 😉

Next time we decide to not buy something, we can tell ourselves that since we’re not spending $X on that, we can add this $X to our emergency fund, or build up a larger down payment for a future home to raise a family in. Or we can use this $X to pay down our debts. Once our debts are completely gone we can work less, travel more, and take up new hobbies like pottery making. 😀

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Everyone’s reasons will be different. But the basic idea is use our goals, aspirations, and dreams to convince our brains to not feel deprived because of our decision, by replacing the temptation for an immediate reward with a larger, or more enduring reward. Rather than wallow in self pity we should feel proud and anticipative of a better life tomorrow.

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