Jun 152018
 

Lifestyle inflation is when we spend more money when our income increases. This can feel natural because the more we earn the more we can afford to spend. But this can make it very difficult to save for retirement or meet other financial goals. Lifestyle inflation is what causes many folks to get stuck in the rat race instead of being able to retire sooner. Here are some ideas to help curb lifestyle inflation when we get that big raise next time. 🙂

  1. Visualize the net amount of a raise after paying payroll and income tax.
  2. We don’t necessarily deserve nice things. But we deserve to be happy – which can be jeopardized if we overspend on nice things by sacrificing financial security.
  3. Hang out with friends who have similar spending habits to ourselves.
  4. Pay ourselves first. Set up an automatic transfer for a fixed amount of money from our bank account to an investment account every month.
  5. Define our goals and only spend new money if it will get us closer to those goals.
  6. Have inexpensive hobbies such as reading, blogging, hiking, playing music, and cooking.
  7. Realize that success doesn’t equate to material possessions. Better indicators of success are health, love, friends, family, and experiences. We should be happy with our quality of life without feeling the need to prove it to others.

Reaching a good balance of spending and saving is a personal journey for everyone. There are some people who save too much without enjoying life as it comes. There are others who impetuously spend too much without thinking of their future. Finding the sweet spot between the two extremes will bring us financial happiness. 🙂 Happiness is like peeing our pants. People around us can see it, but only we can truly feel the warmth of it. 😀 Live for today but don’t forget to plan for tomorrow.

 

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Random Useless Fact:

QiZai is the only giant brown panda in the world left. He is literally one of a kind.

Jan 292018
 

The Next Recession is Coming

Although not directly correlated to the stock market in the short term, the economy also experiences cycles of ups and downs. Here are some graphs that have historically been very reliable when used to forecast recessions in the United States. Recessions occur when the total economic output of the country declines in two consecutive 3-month periods.

The Yield Curve is Flattening

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion phase. The vertical gray bars on the graph represent periods of recession. Every time the yield difference falls below 0% a recession happens soon after. Looking at the chart it appears we’re approaching 0% again.

 

 

Unemployment Rate Nearing A Turning Point

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. In the past a long period of declining unemployment rate has always lead to a spike up and a recession.

This rate has fallen from 10% eight years ago to 4% today. Practically speaking it cannot go much lower than this. The lowest the rate has been over the last 60 years is 3.5%. So this downward trend in the civilian unemployment rate is almost over. It’s not hard to imagine what will follow after the rate stops heading lower.

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Jan 152018
 

How to Prepare for Higher Borrowing Costs

My debt to income ratio is about 500% while the national average is around 173%. Readers sometimes email me and ask what I will do when interest rates rise. My answer is simple.

I tell them I will pay down my debts in an accelerated manner prioritizing the highest interest loan first. I will limit my monthly interest expense to no more than $1,500. Doing this will adequately protect myself from interest rate risk. Sounds like a solid plan, right? 😉

But I know not everyone will agree. :/ Back in 2014 I noticed some people were concerned that I had taken on excessive risk because my debt level was too high. This sentiment echoed around various internet forums. Here are some examples I’ve saved.

The last commentator wanted to know how I’m doing now. That’s what I’ll be discussing in today’s post. 🙂

But first, here’s a look at my debt summary in 2014. The numbers are taken from my net worth update 4 yrs ago.

Liquid’s 2014 Debts Balance Interest Rate Annual Interest Cost
Mortgage$200,0002.95%$5,900
Farmloans$208,3003.40%$7,082
Margin Loans$52,9004.25%$2,248
HELOC$17,9003.60%$644
TD Line of Credit$33,7005.25%$1,769
CIBC Line of Credit$14,0004.50%$630
RRSP Loan$5,0004.00%$200
Total Debt Balance$531,800  
Average Weighted Interest Rate 3.47% 
Total Cost of Debts$18,474

 

Back then I had nearly $532K of debt, charging me an average interest rate of 3.47% per year.

I was paying $1,540 per month in interest. But I was cash flow positive and saving about $1,000 per month. I felt like I had everything under control. So I didn’t understand why people claimed I was overly leveraged. I thought maybe I was missing something. But as Bobby McFerrin would say, “don’t worry, be happy.” 😀 So that’s what I did.

And here’s what my debt looks like today, 4 years later. 🙂

Liquid’s 2018 DebtsBalance Interest Rate Annual Interest Cost
Mortgage$180,3002.80%$5,048
Farmloans$185,3004.30%$7,968
Margin Loans$57,0002.40%$1,368
HELOC$14,9003.70%$551
TD Line of Credit$5,0005.45%$273
CIBC Line of Credit$17,5005.00%$875
Total Debt Balance$459,000  
Average Weighted Interest Rate 3.49% 
Total Cost of Debts$16,083

 

So my debt costs me $16,083/yr or $1,340 per month right now. This is actually $200 per month lower than in 2014, despite interest rates being higher today.

Yay. Bobby was right. There was no need to be worried. 😀

Nearly every asset class I hold long positions in has produced decent returns since 2014. Had I not borrowed and used other people’s money to invest I would have missed out on all the investment gains.

 

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Dec 182017
 

Significant Inheritance Coming for Half of Households

According to data from Statistics Canada, nearly 50% of households can expect to inherit a significant amount. In fact, the aggregate net worth in 2012 of all senior households was $2.18 trillion while the number of households headed by someone between 45 and 65 was 5.8 million. Dividing the numbers, each household would receive an average inheritable amount of $375,000 prior to factoring in taxes. And studies have shown that seniors over 70, and even more so over 80, are net savers (probably mostly from pension benefits,) which means their net worths are likely to get even bigger before passing down their inheritances. 🙂

In a more recent survey of about 1,500 people, investment firm Edward Jones reported that 49% of Canadians are not expecting a “significant” inheritance. I’m not sure what defines significant in this case. But that would also mean 51% of Canadians do expect a meaningful inheritance. Yay! The survey also found that “61% of those aged 55 to 64 and 57% of those aged 65 and older are expecting to leave a “significant contribution” after they die.” This is good news. It means most of us are getting some kind of inheritance. 🙂

Don’t Screw Up Your Inheritance

For those of us who are lucky enough to receive an estate windfall, it is important that we know how to move money safely. Be sure to avoid what Lorette Taylor did in this CBC article. After her father passed away she was tasked with disbursing the inheritance money. This includes giving $846,648 to her brother who lives 5 hours away from her by car. So she obtained a bank draft for $846,648 which was addressed to her brother and sent it to him via UPS.

However, UPS lost the package. 🙁 It became an uphill battle for Lorette, but after nearly a year TD has finally agreed to settle the matter and write her another bank draft.

Something silly like this should never happen to anyone. In terms of who was at fault, I think everyone made some mistakes. UPS messed up because it failed to deliver a basic service and lost the client’s bank draft. TD screwed up because it didn’t train its worker properly to advise a wire transfer or EFT in this situation, instead of a bank draft. And Lorette also should do some research and ask more questions before handling the inheritance money. A bank draft is as good as cash. Unlike a regular cheque, the money is immediately taken out of a client’s bank account as soon as the bank draft is created. You can’t cancel an existing bank draft in the same way you can a personal cheque. If Lorette understood how bank drafts works in the beginning she probably wouldn’t have trusted it to UPS. This is why no matter how much money we have, we also need financial literacy if we plan to hold onto our money.

The lesson here is to use wire transfers (which is traceable) when moving large sums of money, such as an inheritance. And also, never send a bank draft in the mail. 🙂

 

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Random Useless Fact:

Superstition in Bangladesh leads to overweight crocodiles.

Nov 162017
 

Why Do Governments Target 2% Inflation?

The Bank of Canada maintains an inflation rate target of 2%. The official websites of Central Banks in the U.S., in Europe, and in Japan all appear to target this magical number when deciding how to conduct their monetary policies. But why? Inflation isn’t necessarily a good thing. There are ways to grow the economy and generate prosperity without increasing the cost of goods and services. But inflation does provide the government with two major advantages!

Governments tend to target 2% inflation rate

1. Taxation by Inflation

In the book, The Greatest Con, author Irwin Schiff explains that, “inflation is the government’s silent partner,” because it allows the government to earn more tax revenue, without officially increasing tax rates. For example, a mechanic who made $40,000/yr in the 1980s could be making $80,000/yr doing the same work today due to inflation. If his cost of living also doubled then this looks fine on the surface. However, an $80,000 income is subject to a higher tax bracket than $40,000. Since his marginal tax rate went up, the mechanic will pay a larger proportion of his earned income to taxes today than in the past. This is how federal income tax rates can remain the same, but workers end up paying more tax over time.

2. Eroding the Value of Debt

Inflation reduces the value of money. Let’s say we owe $100 to a friend and inflation is at 2%. We can pay back the $100 after a year. But by then its value would only be $98. Just about every major country in the world owes debt. The U.S. owes about $20 trillion. At 2% inflation, the value of this huge liability would fall by $400 billion a year. That’s a lot of debt to be forgiven. 🙂 The typical investor who buys fixed income funds would likely have government bonds in their portfolios. Unfortunately as a result of inflation, the bond holders (savers) get the short end of the stick while the government (borrower) becomes better off.

“As inflation shrinks the value of currency, it increases the relative value of equity investment. Thus, inflation is a process by which purchasing power is shifted from the middle and lower classes, who have their savings in fixed dollar investments, to the upper classes, who have the bulk of their wealth in equities.” ~Irwin Schiff

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