Mar 142018

A revolving line of credit is a very useful tool. It can be used to pay down higher interest credit card debts, cover business expenses, or pay regular household bills. To use a line of credit (LOC) properly we should understand how it works, and how the interest is calculated.

At the time of set up a new LOC account will start with a balance of $0. Unlike a mortgage, car loan, or other amortized loan, the interest cost on a LOC is only calculated based on the amount of outstanding balance we use. This means if we don’t use the LOC we don’t pay any interest. 🙂

Interest Calculation

The interest rate on a LOC will typically range from 3% to 12% depending on the borrower’s credit history and their relationship with their banks. Interest is calculated on a daily basis on the amount of principal balance. For example, let’s say we borrow $1,000 on March 1st. Then on March 10th we pay down half of the debt, $500, and don’t do anything else for the rest of the month. In this case interest will be charged on the $1,000 for 10 days, and on $500 for the remaining 21 days of March. The interest amount will be accumulated and charged at the end of every month.

Using 5% interest rate as an example, we can calculate the cost of borrowing in the example above.

Interest cost from March 1st to March 10th = 0.05 x ($1000)*(10/365) = $1.37
Interest cost from March 11th to March 31st = 0.05 x ($500)*(21/365) = $1.44

We add the two amounts together to get $2.81. This is how much interest will be charged for the month of March. If we pay down the remaining $500 principal balance on March 31st and do not borrow anymore, then there will be no interest charges in April.

Different Ways to Use LOCs

Since LOCs often have lower interest rates than credit cards we can transfer balance from a LOC to a credit card to save on interest costs. I also like to use my LOCs for emergency liquidity to pounce on a time sensitive investment opportunity or to cover a major car repair. I have also used a LOC in the past to pay down my student loans which was at a higher interest rate.

LOCs can be accessed through online banking. We can use it pay bills online, or send Interac e-Transfers. We can even order cheque books for our LOC accounts so we can write cheques to anyone. My regular chequing account only allows up to 10 free withdrawals every month. So sometimes I would use my LOC to cover some bill payments if I don’t want to exceed my chequing account limit. 😀

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Nov 242017

For long term investors, earning 5% to 7% annual return (after tax) is a suitable target to aim for. But this is difficult to pull off today. The current expected returns of the financial markets are extremely low by historical standards. Traditional asset classes such as stocks and bonds are generally overvalued now.

Stock Market Expected Return = 3.2%

The Shiller P/E ratio is currently about 31 for the S&P 500 stock market index. This is much higher than the historical average ratio of 16. The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years.  The inverse of the ratio (1/31) is how much the market is expected to earn for investors going forward.

Bond Market Expected Return = 2.3%

Here are some popular bond ETFs.

  • BMO Aggregate Bond Index ETF (ZAG) – Weighted Average Yield to Maturity = 2.34%
  • Canadian Aggregate Bond Index ETF (VAB) – Weighted Average Yield to Maturity = 2.28%
  • iShares Core Canadian Universe Bond Index ETF (XBB) – Weighted Average Yield to Maturity = 2.35%

As we can see, all their Avg YTMs are below 3%. The 10 year Canadian government bond is paying only 1.9% as of writing this post. 🙁

As a long term investor I don’t see the point of buying a bond that pays less than 2% interest when the Bank of Canada openly declared it wants to erode the Canadian dollar’s value by 2% a year. That effectively creates a projected negative real return on investment, 😮 ouch. This is why I stay away from ETFs like these which primarily hold low yielding government bonds. These funds aren’t necessarily bad investments. I’m just saying they’re not for me. We can find slightly higher yields in U.S. bonds, but not much better.

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Nov 092017

tl:dr. The answer is yes, Enbridge is a good buy. 🙂

Fair Market Value of Enbridge (ENB) 

Canadian pipeline company Enbridge is currently trading at around $47 per share. But based on Benjamin Graham’s formula for valuing stocks, which I’ve discussed before, the fair market value of Enbridge should be around $62.

Enbridge stock’s EPS is $1.96. The growth rate (g) is 10.5% a year according to And long term high quality corporate bonds currently yield 4.1%, which represents the (Y) variable in the equation above. So we can see that (1.96x(8.5+2×10.5))x4.4/4.1 = $62

$62 per share is in line with what most analysts have determined as well. For example TD Equity Research recently posted a 12 month target of $62 for Enbridge. Here is the full research paper for anyone interested. This indicates that ENB may be oversold right now.

If Enbridge climbs to $62 per share that would be a 37% increase in total return. That’s pretty darn good! 😀 This is why I believe Enbridge is potentially oversold right now and is a good buy. 😀 Over the past decade ENB dividends have increased by 10% annually. Enbridge plans to continue growing its dividends by at least 10% every year through 2024.

Enbridge has one of the strongest economic moats of any company. Since pipelines require a lot of capital and regulatory approval, it’s not an industry where anyone can easily get in. Much like the railway industry, it’s pretty much an oligopoly without much competition.

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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. 🙂

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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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