Jan 162017
 

There is a lot of misinformation online about personal finance, especially from all those amateur blogs. This is why you should read everything on the internet like you would drink a shot of tequila – with a pinch of salt. 😀 Today I will try to debunk some of the most common financial myths out there.

Myth #1. Credit cards are bad.

Credit cards can make you a lot of money. Fellow blogger Tawcan generates thousands of dollars in passive income through the use of his credit cards. My no annual fee Tangerine Mastercard gives me 2% cash back on most of my credit card purchases. Promotional credit card rates can be used to pay down higher interest debt. There are so many benefits to using credit cards. 🙂

 

Myth #2. Renting gives you more freedom than owning.

One argument renters use to justify their decision to not buy property is that they can move around more freely. But don’t be fooled by this appeal to popular opinion. Throughout human history, power and financial freedom actually went to those who owned the most resources and assets. Modern day real estate is no different.

Sure, a renter in Vancouver can move to Toronto. But as homeowner, so can I. A renter has to give notice before moving out. But I can move any time I want. I can choose between selling my existing property, or rent it out to make extra income. There are even professional property management services to help me find a suitable tenant. I received this ad in my mailbox the other day.

Everyone has to live somewhere. Being a homeowner simply gives you dominion and veto power over a real piece of land. This gives you more opportunities in life, not less. Anyone who can afford a security deposit can be a renter, including me. So a homeowner has all the same freedoms as a renter. But not vice versa.

Homeowners are generally more financially free. Most can use their properties to secure a low cost loan (HELOC) for major purchases or other liquidity needs. Over 90% of millionaires own their own homes. Meanwhile, not many renters have become millionaires by investing the difference they’ve saved over the years in the financial markets.

 

Myth #3. You need an emergency fund.

An emergency fund is like an insurance policy. It insures against unexpected financial emergencies. But like any other insurance plan, there’s a cost to having one. In this case it’s the opportunity cost of not doing something more productive with your pile of money. Unless you live in a third world country, consider the probability that you don’t actually need an emergency fund (EF.) I have never created an EF for myself, and I have never run into a financial emergency in my entire life. Most western societies already have generous social safety nets. Frankly, I  can’t think of anything that could possibly happen to me right now that would require me to have 3 to 6 months of expenses saved up.

If we already have proper insurance for ourselves, and stress test our finances, then having a rainy day fund is nothing more than holding a redundant insurance policy. Oh, but wait. I actually do have something prepared for a rainy day!

It’s called an umbrella. 😄

 

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Sep 152015
 

Where to put your extra savings

Let’s say you earn $3,000 a month and spend $2,500. Great! You are living within your means. But saving is only half the battle. Now you must decide how to allocate your extra $500. Should you pay down your debt or invest and watch your money grow? Should you max out your Tax Free Savings Account or contribute to your RRSP? Knowing the proper way to allocate your money can prevent a lot of costly mistakes.

Back when I was saving up for a car I guess you could say I had a lot of driving ambition. But sometimes there are more immediate and pressing concerns to address before spending money on wants and non-essentials. Below is a chart that shows where to put your savings in descending order starting from most important priority. It’s not perfect but it’s a relevant starting point for most people. 🙂

16-01-personal-finance-savings-priority

 

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Apr 172013
 

Earlier this week Farm Credit Canada, the leading agriculture lender, released their farmland prices report for spring of 2013. FCC appraisers estimate market value using recent comparable sales. These sales must be arm’s-length transactions. Here’s a summary of the report. During the second half of 2012 Quebec experienced the highest average increase at 19.4%. Saskatchewan, where my farm is located, experienced a 9.7% increase. Remember folks these are not annualized appreciation. The changes were only during the span of 6 months ending December 2012.

13_04_fccreport, farmland prices in 2013

Last year I wrote about my experience buying a farm near Regina, SK and included all the details like working with a tenant, the rental rate, the financing process, etc.  Near the end of that long post I wondered if my new farm would be a good investment or not. Well now we can find out 😀 With this FCC report I can finally adjust the price of my farm to reflect its more current value by taking the average of the FCC report and the inflation rate. This valuation method is designed to keep my net worth less volatile, and curb the effects of false signals such as speculation. Since I bought the farm in October which was right in the middle of this reporting period, it wouldn’t be fair to use the full 9.7% appreciation for Saskatchewan farms. So let’s use 3% instead to stay on the conservative side. Meanwhile inflation (CPI) was about 0.3% during the same Oct to Dec period. Average = 3.3% ÷ 2 = 1.65%

So the farm I purchased last year for $150,000 should be worth at least 1.65%, or roughly $2,500 more at the beginning of this year. Woot! So yes, my farm HAS turned out to be a good investment so far. It feels good when an investment pays off like that!

13-farmpuntomatoes

13_04_fccvaluereportAnyone who followed me into the exciting world of farmland investing last year probably have also done pretty well, especially if they bought in Quebec haha. $2,500 return in 3 months is not too shabby 😀 This is why I love investing! After making the initial investment I literally did nothing with my new farm except sit back and watch it appreciate. This was the easiest $2,500 I’ve ever made, at least on paper anyway 😉 The stock market had a bad start this week, especially resource companies 🙁 but that’s why it’s important to diversify 😀 When one investment fails to perform it’s good to have others to fall back on.

And thank goodness for leverage. By using other people’s money, I was able to purchase the farm with just $20,000 of my own money. A subtle 1.65% increase in the value of the land is like a ($2,500/$20,000) 12.5% return on my initial investment! I’m so thankful for people who keep large deposits and emergency funds in their bank accounts instead of investing that money for themselves. These generous people with their rainy day funds deserve more recognition for saving hard every day to keep our financial institutions well capitalized and filled with liquidity so that banks can continue to lend money to investors like myself 😀 TD would have never lent me $130,000 to buy the farm if we didn’t have such a supporting and robust financial system in this country 😉

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Quick updates:
[Edit on Aug 24th, 2013] Just read a news release from last month that Ontario loses about 100 acres of farmland every day. This is part of the reason why agricultural real estate is a great investment right now. When supplies diminish, people are willing to pay more for it. Farmland in other provinces are going through the same trend. Good news for farm owner 🙂 [/edit]

[Edit on Sept 29th, 2013] Just read a recent RE/MAX report on the latest Canadian farmland price trends. The average price of Saskatchewan farmland is now well over $1000 per acre. A huge change compared to previous years.

13-9-farmprice-canada

The location of my farm is in East Central Saskatchewan. According to this report prices in 2013 are 6% to 25% higher in that region than last year. Jumping jellybeans! That’s great news for farmland owners 🙂 You may download the full report in PDF format here. [/edit]

Mar 222012
 

RRSPs can be used to lower our overall tax burden. Continued from How to Use the RRSP: Part 1

Another use for an RRSP is to treat it as a jobless fund. I don’t have an emergency fund in the traditional sense, but if for whatever reason I stopped working, didn’t qualify for E.I. benefits, and ran out of TFSA money, I would immediately sell $12,000 of the stocks in my RRSP account and withdraw small amounts of money from it each month to cover my living expenses until I can find a more permanent solution. Luckily I have never had to resort to such an emergency ( ´_⊃`) I do have to pay a withholding tax when I withdraw money from an RRSP account, but depending on the circumstances I might get that tax refunded. Spending RRSP money when I have NO other taxable income is even better than spending it when I retire when I’ll have CPP benefits, (social security,) OAS,and other government or private pensions to push my income into a higher tax bracket. I do lose the contribution room, but I will likely be using spousal RRSPs to lower my RRSP portfolio anyway.

In the tables above, an RRSP strategy can help save $3,000 in taxes. Money invested in RRSPs can grow tax free so it’s a good place to hold bonds and US equities.

Another possible use for RRSPs is the Home Buyer’s Plan. As long as contributions are made to an RRSP for at least 90 days, home buyers can take up to $25,000 out of their RRSPs without any penalty to buy a qualifying home. For couples, that means they can take out $50,000 to help pay for their home together. Certain restrictions apply such as the couple will need to repay all their RRSP withdrawals within 15 years. But it’s another option for people with large retirement accounts, but very little savings otherwise. Similarly the Lifelong Learning Plan allows you to borrow money from your RRSP to finance full-time schooling for either you or your spouse. So if your wife or husband is going through school, this is another option besides student loans. But you do have to pay back the withdrawn RRSP funds within 10 years.

Like I said before, the RRSP is not a retirement tool, but rather it’s a tool for creating wealth. Next time, spousal RRSPs (゜∀゜)

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Random Useless Fact: One third of Americans now plan on working past the age of 70.