Nobody likes to pay banking fees. But most monthly service charges can be waived if we sign up for additional accounts/services, or keep the minimum monthly balance in the account. (eg: maintain at least $1,500 in a Bank of Montreal chequing account to waive the $4 fee.)
My personal account is with TD Canada Trust, which charges $3.95/month unless a minimum balance of $1,500 is held in the account at all times. But sitting on unused money can be a waste of capital. So 3 years ago I introduced an alternative solution to deal with those pesky bank fees. Rather than pay the bank to hold my money, I made the bank pay me instead!
Hedge Bank Fees with Bank Stocks
Here’s what I did in a nutshell.
Transfer the $1,500 from my chequing acct to my brokerage acct and use it all to buy TD shares (38 in today’s shares)
Receive dividend payments every quarter as a TD Bank shareholder
Use said dividends to pay for the $3.95 monthly service fee associated with my chequing account
“We can’t get the numbers to work and would appreciate some help,” pleads Eric, a 41 year old physician who lives in Vancouver, B.C. and makes $300,000 a year. His wife is a dentist and together they typically earn a combined household income of $450,000. Eric regrets “not having bought a house years ago.” He further admits that he has “no pension whatsover.” It’s clear that the couple in this Globe & Mail article has trouble making ends meet.
Furthermore, Eric and his wife do not have life nor disability insurance, which is a dangerous and unnecessary risk, especially when they have five children. With annual expenses totaling $300,000 a year, this desultory family is basically living paycheque to paycheque. So far they’ve put their lifestyles ahead of their financial matters and now, like a crab in financial difficulty, they are starting to feel the pinch. Oh woe is them.
Vancouver may not be the cheapest city to raise a family in, but no amount of money can fix the problem of living carelessly beyond one’s means. Money can buy a lot of things, but ironically it cannot buy financial freedom, which is where financial literacy comes in. Having money alone is not enough to be complacent. Financial literacy is also paramount to our financial security, and helps us discover what money truly represents. Because what does $1,000,000 in the bank actually mean if we don’t even understand the value of money.
We can also learn to spend with value in mind, prioritizing what’s important to us over the non-essential expenses. We can use these strategies to experience satisfaction and the raptures of life without spending an arm and a leg. Unfortunately no one ever told Eric and his wife about this because they spend $24,000 a year on family vacations, and send their kids to private schools, yet they can barely afford to keep their heads above water, let alone save for their own retirements.
Many celebrities, professional athletes, and lottery winners who were once wealthy are now facing financial difficulties. All those people, just like Eric, have one thing in common; they lack basic financial management skills like budgeting, investing, and financial planning.
Medical professionals are some of the hardest working, and smartest people I know. And they deserve every dollar they make. But having money alone clearly isn’t enough. We must also be financially literate to survive in today’s economy. Intelligence and talent will only affect our abilities to earn a living, but they DO NOT determine our aptitude to keep any of it. Hard work leads to money, but financial literacy shows us what to do with the money once we get it.
The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us.
Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to.
Year of the Debt
It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.
Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.
Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes.
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.