Alison Griffiths

Uncle Sam Wants You!

2012-06-19T10:06:44-06:00

Uncle Sam wants an annual report from Snowbirds and the American born

Your taxes are well behind you for another year, right? Maybe not! For tens of thousands of Americans living here not to mention Canadian snowbirds, Uncle Sam wants you --- to get in touch.

June 15^th is the deadline for US citizens to file a required tax return south of the border even if they have been in this country since infancy.

In the last year there was a rumble of panic among US ex-pats as the IRS started flexing its muscle by threatening to chase down and punish those who had fallen behind in their tax returns. Many Americans in Canada don’t even realize they are required to file in the country of their birth. Since then the IRS has relaxed their stance a bit but US citizens still need to comply.

According to H&R Block Canada, US citizens and green card holders (including those whose green card has expired) are required to file Form 1040 annually. Go to http://www.irs.gov and search for Form 1040.

Those who paid taxes in Canada will receive a foreign tax credit on their US returns and if you are receiving CPP and or Old Age Security here they are exempt from US tax.

Anyone who kept a US home as a rental after moving to Canada, or has any other income south of 49, will have to declare it on the US return.

The big tax surprise for many Canadian snowbirds is a requirement to communicate with the IRS. If you spent more than 121 days in the US in 2011 or a total of 183 days over the past three years, Uncle Sam is interested.

Filing IRS Form 8840 (the Closer Connection Exception Statement for Aliens) is an annual requirement. You’ll be asked about your Canadian ties including passport, family, car registration, where you are registered to vote and even your religious affiliation. Most snowbirds can demonstrate a closer connection to Canada than the US so nothing else is needed.

Again, go to http://www.irs.gov, search Form 8840 and mail it to the Department of the Treasury, IRS Centre, Austin, Texas, 73301-0215.

Taxes -- you can run but you can’t hide.

Sidebar

900,000 to 2.5 million – the estimate of Americans living in Canada.

Six reasons to hire the disabled.

2012-06-19T09:22:24-06:00

A couple of weeks ago I wrote a column (http://www.moneyville.ca/article/1183044--griffiths-finance-minister-jim-flaherty-could-i-have-a-word) about the difficulty my daughter, who is deaf and a newly graduated chef, is having finding work in her field.

Granted its tough for every young adult in this job market, but for those with disabilities the difficulty is an entirely different order of magnitude. According to Statistics Canada 54 per cent are unemployed or not in the work force, but some believe the number is actually around 70 per cent after factoring in people who have given up looking. (The unemployment rate for the general population was 7.3 per cent on May 11.)

I got a torrent of letters from the disabled and their families cataloguing their often heart-breaking unemployment stories. Then, an email arrived from Toronto businessman Mark Wafer.

“I am deaf, I have about 20 per cent hearing and have since birth. I could not keep a job as a young man but became a successful business owner. I began hiring people with disabilities in my first Tim Horton’s in 1995,” he writes. To date he has hired 82 people with disabilities including 33 currently in his workforce of 210 spread over six locations.

“Why did I do this?” Wafer continues. “Simply because I saw a business benefit as time went on! Of course it was the right thing to do but that isn't reason enough for business owners to hire PWD's (people with disabilities.)”

So thank you, Mark Wafer, for reminding me that hiring the disabled is just good business.

Here are six reasons why:

1. Good qualifications. More of the disabled have a trade certificate, 11 per cent, than the regular population, 9 percent. As well 17 per cent of adults with disabilities have a college degree or diploma – exactly the same as the general population.

2. Innovation. Many years ago I flew with Rick Hansen, the renowned wheel-chair athlete, to an event. Before we left I happened to see him get out of his van by himself, collect his briefcase and a large suitcase. It was an impressive exercise using the minimum of effort to do something that looked very difficult. For example, he had a cable attached to van’s hatchback door so he could pull closed, because when open it was well out of his reach.

“A person in a wheelchair has to be innovative just to get through the day,” points out Mark Wafer. “Imagine how that mindset helps a pod or team at a workplace.”

3. Low maintenance. Contrary to popular belief disabled people require very little accommodation in the work place. According to the Conference Board of Canada only 20 per cent require any accommodation at all on the job and the cost for doing so in 65 per cent of cases was between $1 and $500.

My daughter Quinn, for example, worked in a testing lab one summer as a technician. The government supported Ontario Interpreting Service provided an interpreter for two hours on her first day, while she learned about the complex tasks she had to perform. Thereafter she managed fine without one.

4. Motivation. The disabled are very motivated employees. Research studies on this are sparse but there is plenty of anecdotal evidence. Mark Wafer maintains that “employees who have a disability work 97 per cent safer, have attendance records 86 greater greater, stay on the job up to 5 times longer [and] increase morale to the point that non disabled staff stay longer (huge win for me.)”

5. Untapped labour pool. There are clear indicators that there’s going to be a shortage of labour in Canada as baby boomers age. Representing 12.5 per cent of the population the disabled are ready, willing and able to fill the gap.

6. Everyone benefits: When the disabled have meaningful employment (or any employment for that matter) the burden on the taxpayer is lessened. Looked at another way, every dollar not needed for social assistance is a dollar available for something else.

As Mark Wafer points out, there is tremendous opportunity for both employers and the disabled. Together with Joe Dale of Rotary International, he created a program called Rotary at Work (www.rotaryatwork.com) to convince employers that the disabled can become an important part of the workforce

“The result since 2009 is huge,” he says. “137 people with a disability hired in meaningful positions. No charity. That means competitive salaries. This includes every department from managers to front line staff, production and logistics.”

An initiative like Rotary at Work, writ large, could make a significant social and financial impact on Canadian society.

Consumer power of one

2012-05-02T09:53:05-06:00

You have tremendous power as a consumer when you use spending as leverage.

Gasoline prices recently hit $4.93 a gallon for regular in Los Angeles and the average price for regular gas in the US was $3.88 on April 20. But, while Republicans are trying to pin it on President Obama, something amazing is occurring; American consumers are taking action. Through a combination of driving less and purchasing more fuel-efficient cars, they’re using dramatically less gas.

According to the Federal Highway Administration, as of January 1st the total vehicle miles driven was lower than any year since 2004. On top of that, the average fuel efficiency of cars and SUVs reached 29.6 miles per gallon (US), that’s up 4 miles per gallon since 2007. As a result, not including the latest gas spike, gasoline consumption in the US is down 6 percent since 2007.

The mini-revolution taking place south of the border reminds us that though we often feel impotent as consumers we do have the power to effect change. Here are 3 ways I’m going to make my consumer voice heard.

Say no to non-recyclable plastic containers.

It drives me nuts that my favourite organic yogurt comes in a non-recyclable container. The company is negating the organic good by using the wrong type of packaging. I will stop buying that brand and write a letter to the company to tell them why. From my experience, smart businesses pay close attention to each missive.

Cut my gas consumption.

I already own a 5-year-old Camry hybrid and I just replaced my 10-year-old farm truck, a Toyota Tundra, with a Ford 150 equipped with the Eco boost 6 cylinder engine. It tows better than the 8 cylinder and gets almost twice the gas mileage.

Even so, I think I can conserve even more by cutting down on unnecessary trips, doing a longer list of errands each time out and by easing up on my pedal-to-the-metal tendency (my husband will be so pleased.)

Deep six the phone companies.

I’m heartily sick of expensive phone service, the arcane complexity of the packages, numerous billing mistakes, and interminable waiting in telephone queues to get service.

I intend to investigate alternatives such as Vonage, Skype, Convergia and MagicJack and perhaps move to a text only cell phone package. If you have made the switch, let me know.

Side Bar: On average, Canadian gas prices are 25 % higher than in the U.S.

Susanna

2012-05-02T09:49:08-06:00

Susanna (not her real name) recently won a contest created by publisher Simon & Schuster to promote my new book, Count on Yourself: Take Charge of Your Money. The prize was a phone conversation with me about money. She was thrilled and I was humbled by her eager excitement -- as if she’d won the lottery.

I expected an easy-going chat about debt, saving and RRSPs. Then Susanna sent me her list of concerns. The email ran to a couple of thousand words and outlined a life of financial and personal struggle. Here’s a thumbnail sketch.

Susanna is a 44-year-old single parent with a son in his twenties. She owns a condo purchased in 2003 with a variable rate, 3.1 per cent, $64,000 mortgage. After some ill-considered spending she ran up a $32,000 credit line at 4.5 per cent. She is paying more than required on her mortgage and interest only on her credit line.

Susanna has been on disability for most of her adult life. She has had several health crises including one during the purchase of her home. As a result of her preoccupation, she ended up with post-purchase repairs.

Her car is on its last legs and her stove packed it in late last year. “I am terrified when I am 65,” she wrote. “The problems I had when purchasing this condo made me aware than I am not always the best person to be looking after my financial business.”

However, as I have told so many people who come to me with financial problems, Susanna knows more than she gives herself credit for and she has made four smart decisions.

1. Once she realized her health would not allow her to work again she applied for a Disability Tax Credit Certificate.

2. With it in hand, Susanna opened a Registered Disability Savings Plan (RDSP) at her bank.

3. She set up an automatic contribution plan of $125 monthly ($1500 a year), the minimum needed to get the maximum government grants totaling $4500 annually.

4. She catalogued her financial problems. This process, while sometimes torturous, forces you to organize your thoughts and let priorities emerge.

For example, Susanna’s overriding concern – to the point of paralysis -- was about her income after age 65. “Am I going to be sleeping in my broken-down car and living on canned beans?” But it is impossible to predict what is going to happen 21 years hence.

Other issues she raised were more immediate and she can do something about them right away. There’s nothing like making a financial decision and carrying it through to give you a sense of control.

We started with some easy improvements.

1. Debt: It makes no sense to pay the minimum on her higher interest line of credit. Instead, she will change the mortgage to monthly, stop irregular lump sum payments while increasing the credit line payments. Freeing up an extra $200 a month means paying off the credit line in about 10 years, compared to never with her current strategy. Meanwhile, she will continue to reduce her mortgage.

Even better, when the mortgage comes due she can investigate adding the credit line to it. This will save money long term.

2. Variable vs. Fixed: Susanna is fretting about which to choose next year when her mortgage term is up. I suggested she stick with variable, assuming the spread between variable and fixed is at least 2 per cent. Interest rates will have to rise by that amount before she is worse off. Even so if the idea of a variable mortgage adds to her stress level, she may be better off with a fixed rate.

3. RDSP: Susanna planned to contribute to her RDSP until age 65 and then start withdrawing funds. But the government RDSP grants cease at 49. Instead, at 49 she could devote the money to debt and\or contribute to a Tax Free Savings Account (TFSA) allowing her to be debt free quicker and also have money outside a registered account for emergencies.

4. Investments: Susanna wonders if she made a good choice with the RBC Balanced fund. A single, balanced fund with cash, bonds and equities does make life simpler. However, while RBC Balanced isn’t the worst, it’s far from the best underperforming both its category and the benchmark index over time with a higher than average management fee (MER) of 2.35 per cent.

Because RBC only offers an RDSP account at the branch level rather than through the bank’s investment arm, she is largely limited to GICs and funds sponsored by RBC or Phillips, Hagar & North (PH&N).

A single, cheaper and better performing replacement was tough to find. However, for equities either PH&N Canadian Income (equity, 1.79 per cent MER) or RBC Canadian Equity Income (1.75 MER), combined with either PH&N Short Term Bond and Mortgage (.89 per cent MER) or RBC Bond (1.2 per cent MER) could work nicely. All these funds garner four or five stars by rating agencies.

The balanced fund had only 40 per cent in bonds and cash but Susanna could be even more conservative. With 50 per cent or more in fixed income and the rest in the equity fund she will get some growth and have lower risk.

Susanna is going to put these changes into effect over the next few months, when that’s complete we’re going to tackle some of her other concerns.

Pension splitting

2012-04-17T11:41:17-06:00

There are a number of seniors and other retired folk out there who are more than a little confused about what is and isn’t allowed in the area of pension splitting.

On the surface, splitting pensions with lower income spouses seems eminently fair. A stay-at-home spouse, usually the woman, who cares for children and household, is just as much a contributor to the family and society as the income earner. But those of us old enough to recall the bra-burning rallies and sit-ins of the 1960s and 70s know that our mothers were, essentially, non persons when it came to fair treatment in regards to pensions and tax.

Despite protests back then not everything has changed. Had my recently deceased mother outlived my father, for example, she would have received only a small Canada Pension Plan survivor benefit and just 50 percent of his military pension but none of his disability payments. His service related disability had an impact on his ability to work when he retired from the Canadian Armed Forces, which in turn affected her. And because we hopped frequently from base to base during those hyper-vigilant Cold War years, she could not work and contribute to the Canada Pension Plan in order to ensure a retirement income.

There are still many inequities, particularly in the treatment of lower income spouses, regarding pension survivor benefits and also pension splitting, however some progress has been made. And this is where a herd of readers stampeded to their computers to comment on my last column, which mentioned splitting CPP as good strategy to lower taxable income for the higher earning spouse.

Many quoted the Canada Revenue Agency’s information on the topic, http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/qlfy-eng.html, “The following amounts received by the pensioner are not eligible for pension income splitting:

Old Age Security payments;
Canada Pension Plan, Quebec Pension Plan; and
Amounts received under a retirement compensation arrangement.”

That seems abundantly clear. Furthermore, a number of TurboTax users cited its table listing eligible and ineligible pensions for splitting. CPP and QPP (Quebec Pension Plan) fall into the not eligible category. UFile offers the same information.

But wait a minute, surf over to Service Canada’s site, http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/cppretirement/sharing.shtml, and you’ll find this, “Spouses or common-law partners who are together, who are both at least 60 years old, and who are both receiving the CPP retirement pension can share their CPP retirement benefits. This is called pension sharing, and may result in tax savings. If only one of you is a CPP contributor, you share that one pension. The overall benefits paid do not increase or decrease with pension sharing.”

Querying CRA about this seeming discrepancy yielded nothing as the agency refused to answer any questions relating to CPP because it is administered by Service Canada. But a little digging illuminated the nearly invisible line between pension splitting and pension sharing.

The key to the confusion is found in the following Service Canada note: “To share your CPP retirement pension, you must apply.”

Aha, now I get it! After application and approval, CPP is physically split between spouses or common-law partners. Both receive a monthly cheque and both receive a TFA (CPP) slip. This has been allowed since 1987.

On the other hand, splitting eligible pension benefits while you are completing your tax return has only been in effect since 2007. Eligible income includes any pension that qualifies for the $2,000 Pension Income Tax Credit. (That credit, by the way, is multiplied by 15 per cent to reduce federal tax payable by $300 annually and a similar amount provincially.)

If your head isn’t hurting yet, pay attention to tax expert Evelyn Jacks’ tip in her book, Essential Tax Facts, (2012 edition.) “To maximize the benefit of this credit, it is extremely important and valuable to split at least $2,000 to a spouse’s tax return so that this benefit could be doubled for the family, each and every year.” This means that both spouses should have at least $2,000 of pension income to qualify for the credit.

Generally speaking, most pension income that is paid regularly can be split for those over 65. Typically, lump sum payments are not eligible for splitting. However, before you jump in, check the CRA’s site http://www.cra.gc.ca/pensionsplitting for a broader explanation. Note that some foreign pensions can be split but not, for example, income from a US Individual Retirement Account.

Because 2011 is behind us applying for CPP pension sharing now won’t be reflected in your tax return. However, Cleo Hamel, senior tax analyst with H&R Block believes that there is still time to split CPP for at least half of 2012 if the application is made soon. Go to http://www.hrsdc.gc.ca/cgi-bin/search/eforms/index.cgi?app=prfl&frm=isp1002&ln=eng or search for “Application for sharing of retirement pensions” on the Human Resources and Skills Development Canada website, http://www.hrsdc.gc.ca.

But before you complete it make sure that beefing up the income of your spouse won’t affect that person’s government benefits including the age amount deduction of $6,537 which starts being reduced when income reaches $32,961.

Last minute tax tips

2012-04-10T10:20:47-06:00

Pay yourself first by double-checking all your tax deductions and credits.

There’s a very good reason why death and taxes often occupy the same sentence. Neither is appealing to contemplate. While death can sometimes be delayed there’s no avoiding the latter at this time of year.

As sure as April follows March every year there is a stampede to file returns once Easter and Passover indulgences have been digested. Your friend in these last minute situations is, in my opinion, the best tax book available for consumers. Essential Tax Facts: Simple tips for preparing your taxes so you can build wealth (2012 edition), by Evelyn Jacks, tax expert and founder of the Knowledge Bureau in Winnipeg.

Jacks points out that taxpayers leave thousands, sometimes hundreds of thousands of dollars on the table over their lifetimes by paying too much tax. It’s tough these days to increase your income. But being vigilant about every penny sent to Ottawa and your provincial government is something everyone can do.

Here are some of the changes Jacks highlights for 2011:

1. Children’s Arts Tax Credit – similar to the Fitness Tax Credit, parents can claim (or share the claim) for up to $500 if the child is enrolled in a broad range of artistic, environmental or cultural activities.

2. Tuition Tax Credit – Examination fee. This is claimable for examinations and pre-requisite study materials purchased in order to achieve a recognizable license or professional status.

3. Study abroad. The study period has been reduced to 3 weeks from 13 for students in full-time programs at Canadian universities and colleges. So if you are off to Italy to study Michelangelo’s David for 3 weeks as part of your degree, you can claim the tuition and education amount and withdraw Education Assistance Payments from an RESP.

4. Sharing an RESP with a sibling. Transferring from one RESP to another will not trigger repayment of the government Canada Education Savings Grant as long as the sibling receiving the funds is under 21.

5. Money from babes. The Canada Child Tax Benefit, Universal Child Care Benefit and GST credit can now be split 50\50 between parents (for payments received after June 2011), assuming they live with the child.

One of Jacks’ top tax tips is a recommendation that couples (married or common-law) file taxes jointly to maximize credits and deductions including medical expenses and amounts for public transit, children’s fitness and arts and the new home buyer’s credit.

Sidebar:

On the TV show Million Dollar Neighbourhood, a review by H&R Block found that nearly a third of tax filers made at least one error on their return.

Saving Seniors Tax

2012-04-10T10:17:57-06:00

Erica Melanson’s father worked in a bank for 32 years before retiring at age 63. Every March he was a busy man, happily completing tax returns for five family members.

Last year Erica’s father Gil, then 86, surprised her by asking for help in finding an accountant. “Dad read a few articles in the newspaper which got him thinking that maybe he wasn’t getting all the deductions he should for him and Mom.” Gil Melanson was right.

A review of his recent returns showed a number of areas where he could lower household net income. Her mother Margaret, for example, has been largely confined to a wheelchair with oxygen support for the past three years and her father has diabetes and requires dialysis. Both of them qualified for the disability tax credit (DTC) and they have applied for adjustments going back three years for Margaret and five for Gil.

While seniors with low income might not benefit, the DTC ($7341 for 2011) could be transferred to a relative. According to a CRA spokesperson, “If the senior is being cared for in your home or is dependent on you for all or some of the basic necessities of life (food, shelter, and clothing) on a regular and consistent basis,” then the DTC (line 316) can be transferred.

In order to make the DTC claim on your return the qualifying person needs to be a close relative including parent, grandparent, uncle or aunt. You must also have claimed, or been eligible to claim, an amount for them on line 306 (for infirm dependents 18 or older) or on line 315 (caregiver amount.)

The key to the tax credit is the disability tax certificate. To qualify an individual must have a mental or physical condition (or combination) that significantly impairs their daily functioning. The CRA form T2201 requires a self-assessment plus an assessment by an appropriate medical practitioner. If you can prove that the disability has existed for some time you can request a review going back up to 10 years.

There is often confusion and disappointment surrounding the DTC. A person can receive CPP or Quebec Pension Plan disability benefits, workers’ compensation or insurance related to an inability to work. But this doesn’t automatically mean eligibility for the tax certificate.

Moreover, because age-related physical and mental impairment often happens gradually over a long time period, seniors (and their caregivers) might not consider the DTC. Also, disabled is a loaded word. Many don’t think of themselves that way, even if it is for tax purposes.

This was the case with my father who didn’t apply for my mother, though she had advanced dementia. And though virtually deaf, he didn’t investigate the DTC for himself because the deterioration had happened over more than 20 years. But he was certainly thrilled when I filled out the forms on their behalf and he got a sizable refund as a result.

The federal caregiver amount of $4,282 could benefit a family member if the senior lives with them and has a net income of less than $14,624. This can result in tax savings of up to $640. Up to an income of $18, 906 a partial amount can be claimed.

Another often-missed deduction is attendant care paid to a retirement home. A senior who is eligible for the DTC can claim this amount as a medical expense. Included are services such as housekeeping, laundry, transportation and meal preparation. The retirement home should provide a detailed invoice that separates rent and the cost of food (different than meal preparation.)

“If someone claims the disability amount for the senior (including the senior himself), the maximum that may be claimed for attendant care is $10,000,” explains Cleo Hamel, senior tax analyst with H&R Block. “A senior can claim part-time attendant care in their home as long as that condition is met.” There is more information on this and the DTC in the booklet, RC4064 Medical and Disability Related Information.

Low-income seniors may also be eligible for the Refundable Medical Expense Supplement if their net income is greater than $3,179 but less than $24,108. The maximum amount refundable is $1,089 for 2011. Also seniors with simple returns may be able to file their taxes by phone (1-800-959-1110.) A social insurance number and telefile access code is required.

On a slightly different not, H&R Block reminds older Canadians that they can claim the cost of purchasing medical insurance to travel to another country or if they live part of the year outside Canada.

Also qualifying low-income seniors can file their taxes by phone. Call 1-800-959-Lowering taxable income can have an impact on government benefit claw backs. Many seniors don’t realize that the age amount tax credit ($6,537 for 2011) for those 65 and older declines once net income reaches $32,961. It disappears completely when net income exceeds $76,541. So, any credits or deductions missed means not only more tax payable but also reduced benefits.

One of the most valuable tax strategies for senior couples is pension splitting (up to half of CPP and other eligible pensions.) Not only can this have a significant impact when one spouse has no or little taxable income but it could affect eligibility for the Guaranteed Income Supplement (GIS), which is reduced as income rises.

Income tax rules change annually so if you are a senior or have one in the family, it’s worth taking a second look to ensure every possible deduction is maximized.

ETF Questions

2012-04-03T10:11:12-06:00

After writing about the various options when switching from a mutual fund or stock and bond portfolio into one holding Exchange Traded Funds (March 5th), I was deluged by reader’s queries.

ETFs, once called index products, are low fee investments for do-it-yourselfers and those with appropriately licensed advisors. Annual management fees for ETFs start at .07 per cent while average annual mutual fund fees range between 2.25 and 2.5 per cent.

Many prefaced their queries with some variation of, “Sorry for the dumb question.” My first rule of money – there is no such thing as a stupid question. Whether it is investing, mortgages, tax, insurance or debt, there is much to confuse. Even financial journalists get mired in the complexity and ever-changing world of money. So ask away until the light dawns.

Here’s a summary of the more common questions posed by readers over the past two weeks, including the following tart comment from my sister who told me to bring my explanations down to earth:

1. I don’t think you realize how few of us get the language you use when you talk about these ETFs. What you do you mean when you say they track an index?

Fair enough. Picture a multi-berry pie. Let’s call that an index, such as the Canadian S&P\TSX Composite Index or the US Dow Jones Industrial Average. Each index, like the pie, contains a bunch of ingredients or stocks. For example, there are roughly 220 in the Composite Index and 30 in the Dow Jones.

How the stocks or companies get into a given index is based on a number of criteria. It could be the size of the company or the number and value of the shares held by the investing public.

When you buy units of an ETF you are essentially purchasing a slice of the index. And just as a slice of pie contains all the ingredients in the larger pie, an ETF unit contains all the elements of the index, and in the same proportion.

If you bought an ETF representing the S&P\TSX Composite for instance, you would own a proportionate piece of all the 220 companies in that index. You would get also receive a proportionate slice of all the dividends paid by those companies.

As the index goes, so does the ETF. When the value of that basket of stocks rises so does the unit value of the ETF. And, of course, vice versa.

Many people wanted to know if the ETF actually owns the stocks in the index. In some cases, yes, in other cases, especially with larger or international indices, the ETF might use derivatives to copy the stocks in an index.

There are also bond indices and ETFs, which track or mimic them. The key to ETFs is that they simply walk passively in the shadow of an index without the buying, selling and market timing of actively managed mutual funds or stock and bond portfolios. That’s why their management expense ratios or fees (MERs) are dramatically lower than comparable mutual funds.

However, as the popularity of these investments rises actively managed ETFs are proliferating but I consider them more appropriate for sophisticated investors. I also think the jury is still out on whether you will get a better return over time with these more complex products.

(How am I doing so far, Sis?)

2. How do you buy ETFs?

ETFs trade on a stock exchange just as shares of any publically listed company such as a bank. Each ETF has a ticker symbol and you can use it to look up the daily price in the newspaper, on your broker’s site or at a site such as Morningstar.ca.

With a discount brokerage trading account (an RRSP, RESP, RRIF or a non-registered account) you can buy and sell units or shares of an ETF easily, though there will be a trading fee. You can also purchase ETFs through your adviser. However, a person licensed to sell mutual funds may not be also licensed to sell ETFs (or stocks for that matter.)

Scotia iTrade, now offers 50 ETFs that you can purchase at no charge, Qtrade also has fee-free trading for 60 ETFs and Claymore Investments allows you to set up an automatic purchase and dividend reinvestment plan with any of its funds. Bank discount brokerages provide lower cost trades between $6.95 and $9.95 if you have between $50,000 and $100,000 in bank business.

3. I have raised ETFs to my adviser but I’m always told mutual funds are a better choice for me. Why is this?

That person may only be licensed to sell mutual funds is one obvious answer. Compensation is another. Most advisers are paid through commissions and fees imbedded in mutual funds. By and large, ETFs do not offer sales commissions to advisers. There is a small number of adviser-class ETFs – Claymore Investments Inc., Horizons ETFs and XTF Capital all have a suite of them.

The annual adviser fee or trailing commission ranges from .5 to .75 per cent. As a result these ETF versions have higher management fees.

Depending on your adviser, you could discuss paying directly for assistance in creating and\or managing an ETF portfolio. The fee will likely be a percentage of your portfolio’s value, 1 to 1.5 per cent is a reasonable industry range for this service. But if your advisor is only licensed to sell mutual funds then it’s a no go.

As with any investment, if you don’t understand ETFs, don’t buy them until you do.

Superhero 1%

2012-04-03T10:07:46-06:00

Wealth will be in your future just by increasing savings by a small percentage annually.

Is your savings plan a one step forward- two steps back exercise? Do you make tons of excellent resolutions, only to do a financial face plant when temptation beckons? Or perhaps you get distracted by job, family, life and never manage to keep track so you really don’t know where you are.

If you fit into one or more of these scenarios, a rescue by Superhero\ine 1% is in order. Yes, such a character exists – in fact, Marvel Comics has been beating down my door for the rights.

But while I’m waiting on millions in royalties, let’s put Superhero\ine 1% to work for you.

Say you earn $50,000 and are saving three percent of your income ($1500) annually by contributing to an RRSP, TFSA or a savings account. Ten percent is usually the gold standard for savings. But getting to 10 percent from three is like trying to lose 25 pounds in a couple of weeks. Maybe you can do it, but maintain it? Tougher.

If you stick with the current savings rate and manage a 4 percent return over the next 10 years you’ll have just over $18,500 tucked away. I’m also adding in a salary boost of 2 percent annually and assuming inflation is 3 per cent.

Now, take the hand of Superhero\ine 1% and increase your savings rate from three to four percent annually ($2,000). After ten years you’d have more than $24,600 squirrelled away. If this money is contributed to an RRSP, the net gain will actually be higher as your taxable income will be reduced.

Here’s where Superhero\ine 1% really produces magic. If you can increase your savings by a single percentage point every year you’d have $52,300 in hand.

Granted, at the end of 10 years your savings rate would be 13 percent of income. To many that’s too big a leap. Not only that, you might be saying, “In your dreams!” when looking at my salary increase projection of 2 percent annually.

My point is that by increasing your savings a small amount annually or until you reach a specific goal – say 10 per cent of income – you can conquer savings paralysis.

And it’s all thanks to Superhero\ine 1%. You can play with your own figures with The New York Times’ The 1% more calculator. (You can play with your own figures at www.nytimes.com and search for “The 1% more calculator.”)

Sidebar: 2.3% of gross income (or 4.9% of after-tax income) is the average Canadian savings rate.

How to avoid the RRSP deadline

2012-03-14T11:46:14-06:00

Don’t wait until your financial ship comes in. Save for retirement monthly to achieve the most secure nest egg.

You did it again. You went down to the RRSP wire, raided the kids’ piggy banks, maybe leaned on your line of credit or put the touch on a grandparent then rushed off to make your last minute contribution.

With just under a year until the next RRSP deadline you resolutely swear you’re not going to do the last minute thing again. But I find that RRSP contribution vows, like New Year’s resolutions, tend to get tossed aside in the stampede of life.

Take heart, I have a solution. Before the week is over set up an automatic transfer from your bank account to your RRSP. Just do it! Money that is out of sight is out of mind and, better yet, sheltered from spending urges.

While it would be nice to max out your RRSP contributions through monthly deposits, that’s unrealistic for many, especially those with families, mortgages and car loans.

Instead, pick a number you can live with that won’t stress you financially. Even $50 or $100 will start you off and chances are the money won’t be missed if it is out of your account before you even have time to think about spending it. To be safe, set up the transfer a couple of days after your paycheque is deposited.

Here’s a trick to go along with an automatic contribution plan. Give yourself an RRSP raise on a regular basis. Every six months or so bump up the transfer into your RRSP by a bit. You won’t feel the pinch but the habit, once ingrained, will eventually turn into a nice tax deduction year in and year out.

Another rationale to this plan is the benefit of regular investing, called dollar cost averaging. If you contribute to your RRSP monthly, and invest in a group of quality products at the same time, you will have a much better return over time than those who make haphazard lump sum contributions and investments.

Dollar cost averaging evens out the ups and downs of the stock market and interest rates and also saves you from trying to guess when is the best time to invest. Research shows pretty much everyone gets it wrong over time.

Sidebar

53% of 18 to 34 year-olds do not have an RRSP account

Switching to ETFs

2012-03-14T11:44:24-06:00

Contemplate standing at the edge of a dock on a lake. It’s steamy hot and you’ll feel better after taking the plunge. Dipping a toe chills you, despite the soaring mercury. “C’mon, do it!“ you urge yourself. Even so you hesitate.

You look to the shore. Surely it would be easier to wade rather than jump. You could walk in up to your hips then do a graceful dive into the deeps. Or, you might simply stand in the water half in and half out -- bottom wet, top dry.

Still, you hesitate. Which will bring the most pleasure with the least pain?

This just about sums up the conundrum facing dozens and dozens of you who have written to me recently about switching from a mutual fund or stock portfolio into Exchange Traded Funds (ETFs).

For quick review: ETFs are investments which track or mimic a given index such as the S&P\TSX Composite or the Dow Jones Industrial Average. The majority are passive meaning there is no active management (buying and selling stocks or other securities.) They are listed on a stock exchange and each one has a ticker symbol. In most cases, you pay a trading fee to purchase or sell ETFs and management fees are a fraction of those charged by mutual funds. On average, equity or stock mutual funds in Canada have annual management expense ratios or fees (MERs) of between 2.25 and 2.5 per cent. The majority of ETF fees clock in at less than .5 per cent and some are as low as .07 per cent.

In addition to wanting lower fees, many investors have become dissatisfied with the performance of mutual funds or frustrated by their lack of transparency. This has created an increasing appetite for ETFs.

But, as Norman Waits wrote, “I have a $237,000 RRSP in eight mutual funds none of which I understand. I want to change to an ETF portfolio such as you write about in your book, Count on Yourself, but I’m not sure the best way to do this.”

Waits also noted that while he has a good relationship with and trusts his current, long-time advisor she is less than enthusiastic about the change. You can hardly blame her since the ETF switch will eliminate the sales commissions she receives from Norman’s mutual fund portfolio.

There are three basic ways to convert to an ETF portfolio.

1. Plunge – sell everything and reinvest in ETFs.

2. Wade and dive – dump poorer performing funds or stocks and reinvest the proceeds in ETFs. Or, sell the allowable quantity of funds over time to avoid sales commissions and put that money into ETFs as it becomes available.

3. Half and half - hang on to all your existing investments and create a separate portfolio with new money invested in ETFs.

The advantage to the plunge is that you have a clean slate. All that’s needed is to determine what asset allocation suits you (e.g.; 10 percent cash, 30 per cent bonds, 40 per cent Canadian stocks, 20 per cent US stocks) and which ETF products to buy.

The plunge approach is also simple and when it comes to investing simplicity has a lot going for it.

The disadvantage is that there may be deferred sales charges (aka DSC or back end loads) to pay on mutual fund units purchased in the last few years. However, you are probably better off paying the sales fee and starting fresh rather than holding on to poor quality mutual funds.

Another disadvantage is that there will be trading fees to pay on the sale of stocks and, depending on your brokerage, possibly on mutual funds sales. Again, if you have sub-par stocks or funds the exit fee, in the form of a trading commission, may be a small price to pay.

The gradual wade and dive conversion to an ETF portfolio will lessen sales charges, especially since you can usually redeem 10 per cent of mutual fund units without incurring DSC fees. However, it creates a bit of a management nightmare. You will have years of a lopsided portfolio and likely will be in the dark about your asset allocation.

The half and half approach does have the advantage of keeping good quality investments in your portfolio but the disadvantage of leaving malingerers there also. More sophisticated investors might choose this strategy if they are able to distinguish the good from the bad and also if they can interpret their asset allocation properly. The latter is easier to do with a stock and bond portfolio than with a mutual fund portfolio.

For example, I have an RRSP statement from a reader in hand which lists her asset allocation thusly: Cash – 12 per cent, Fixed Income – 32 per cent, Equities – 21 per cent, Mutual Funds – 35 per cent. But wait, mutual funds aren’t an asset class unto themselves. In this case, the reader has three balanced funds each holding varying amounts of cash, bonds and equities so the asset allocation listed is completely wrong.

Another issue faces those who hold bonds individually rather than bond mutual funds. Should they be sold in favour of bond ETFs? On balance, you are probably better off waiting until the bond matures and then reinvesting the money. There is also the risk of loss if a bond is worth less currently than you paid for it. On the flip side, if you hold a bond outside a registered account and you purchased it prior to the interest rate slide, there may be a capital gain if you sell.

Those who are converting to ETFs from either stock and bond or mutual fund portfolios have a number of options. There is no single right way to proceed. I prefer to take the plunge but there is an argument in favour of the more gradual approaches. Before you do anything, evaluate yourself, your knowledge, your comfort level and the costs involved.

4 Lessons From the Death of My Father

2012-02-27T13:18:25-07:00

On January 31 my nearly 90-year-old Dad died, ending a journey which started in England, took him to India for his school years, into bomber aircraft during World War 2 and finally to Canada where he had one career in the air force, a second as a university administrator and, in his fifties, a third one as a lawyer. He never had a lot of money but the world of finance, economics and investing fascinated him. I think he was always a bit disappointed when writing diverted me from becoming an economist.

Dad bought mutual funds in their early days and ventured into exchange traded funds (investments which track or mimic an index) back when they were called index products. That got me interested in them long before they became popular with the public. He also dabbled in stocks from time to time.

Despite my urging Dad never had a plan for his small RRIF portfolio. As a result, it was lumpy, all of one thing then all of something else. But because he had a defined benefit pension plan what happened in his RRIF didn’t change his life. He enjoyed looking up his investments in the paper every morning and kept tidy files on his various holdings. He also maintained a list of his accounts, bills and passwords in a safety deposit box. That was an early lesson in financial organization for me.

When someone dies things happen quickly. Executors, such as I am for my father’s estate, have many decisions to make. Unfortunately, financial institutions move quickly also. After I inquired about the process of winding up my father’s affairs the bank swiftly cancelled his debit and client cards and removed his name from chequing and savings accounts.

Lesson #1 – It is helpful to have a joint account with an elderly person when you are managing their financial lives.

I was joint with my father, but until he died didn’t realize the implications. Suddenly all transactions in his name ceased. Since my power of attorney ended with his death, if the account hadn’t been in both names I couldn’t have paid bills or withdrawn cash.

Also, without access to his account online I couldn’t ensure all was in order without going into the bank physically with the will in hand.

Lesson #2 – Watch accounts like a hawk. Banks don’t always follow their own rules. I was told that any deposits in my father’s name would be returned in order to be re-issued to The Estate of Peter Griffiths. Automatic debits should have been treated the same way. But three days after he died, the bank put through a large payment to his retirement residence.

I had already given the residence notice and, since they had the last month’s rent in hand, withdrawals should have stopped. Fortunately, I happened to check the account, noticed the debit and had it reversed the same day.

Lesson #3 – An authorized user’s access to a credit card ends when the primary account holder dies.

The bank mistakenly made me an authorized user on my father’s credit card rather than a joint cardholder last fall. I intended to correct this but never got around to it. So when I tried to pay for his funeral with the card it was denied.

Also, I couldn’t see the statement on-line because I now only had access to the two bank accounts not the RRIF or credit card. Just recently I got a “courtesy call” from his branch telling me his Visa bill was overdue, though it was only one day past the payment date. The person would not tell me what the balance was nor would she fax me the bill. I informed her that I didn’t intend to pay a bill I couldn’t see but she was obdurate.

When I phoned the bank’s estate department directly I got lucky with someone who was willing to “bend the rules.” He read me all the charges in the last three weeks, plus the balance.

However, since the card essentially no longer existed and wasn’t attached to the bank account I had access to, I couldn’t pay the balance by transferring funds from the chequing account as I had always done. The only option was to come into the branch with a cheque or mail it. Being out of the country for the next few weeks, I chose the latter.

Lesson #4 – Talk directly to the brokerage when closing a RRIF.

A bank branch advisor categorically told me that the proceeds from my father’s RRIF could not be deposited in the bank account, now only in my name, or even in an estate account. Instead, it had to go to the beneficiary. I explained the RRIF had been my mother’s, was transferred to my father when she died and there was no beneficiary. The employee was firm.

It was a different story at the bank’s brokerage arm. They offered me a number of options for the RRIF including a cheque payable to the estate, which I, as executor, could then deposit. However, the helpful person did tell me that whether I was able to deposit the cheque in the account in my name or be required to open an estate account depended on “my relationship with the bank.” Such lack of clear policy is disturbing.

These four lessons are important considerations for those with elderly parents. Though many are concerned, and rightly so, with elder financial abuse a little bit of foresight can make it far easier to manage an estate at an emotional time when nothing is easy.

I just know my Dad is smiling somewhere and saying, “I’m glad I can still teach you a thing or two.”

Should you contribute to an RRSP?

2012-01-20T11:24:00-07:00

There are sometimes better ways to save for retirement than through RRSPs

This is the time of year when you tell yourself to save more and contribute more to my RRSP. Yes to the first one but the second, perhaps not.

Certainly Canadians need to save more than the current rate of 4 percent of income. However, the default destination for those savings, an RRSP, isn’t necessarily the right one.

Anyone who is likely to qualify for the Guaranteed Income Supplement (GIS) after age 65 is better off with a non-registered investment account or a Tax Free Savings Account (TFSA). Mandatory RRIF withdrawals could result in a reduced or eliminated GIS.

GIS eligibility is reduced as net income rises and disappears entirely at about $16,000 for singles and $21,500 for couples (OAS does not count as income.)

At the other end of the scale, those likely to have significant incomes after retirement from a combination of pensions, non-registered investments and other income could face not only a high post-retirement tax rate, but claw back of OAS and a reduction in their personal exemption.

The latter is not well known and can be a considerable shock. Though OAS claw back doesn’t kick in until a net income of around $68,000, the age amount tax credit for those 65 and over will be reduced once net income reaches roughly $33,000.

TFSAs are great alternatives for those wanting to save outside an RRSP. However, you can only deposit $5,000 annually. Another alternative are non-registered investment accounts though you will pay tax on income or capital gains.

A final “savings” alternative is to pay down debt. Even though your interest costs may be low every dollar you put on debt is a form of savings.

I hope Toronto readers will join me at the Toronto Reference Library on January 25^th at 6:30 p.m. for a discussion about how to take control of your finances, especially your investments.

And last week I included details of a contest to win a one-on-one consultation with me. Unfortunately the link was not live. But it is now at my website, www.alisongriffiths.ca.

Sidebar

96% of tax filers were eligible to contribute to RRSPs in 2010

26% of tax filers contributed to RRSPs in 2010

Borrowing for an RRSP

2012-01-11T08:17:09-07:00

6 Problems with RRSP loans

The staff at the branch where a close friend does her banking had a meeting sometime in late 2011 – or maybe they just received a memo from head office – either way, I can tell you the gist of the conversation\directive; get out there and sell RRSP loans.

I know this because the bank employee who has shepherded my friend and her husband, both in their early thirties, into RESPs, RRSPs, TFSAs, a mortgage and a personal line of credit (LOC), gave them a call. Since he has their most recent notice of assessment on file, a requirement of the LOC, he is aware that they haven’t maxed out their RRSP contributions for years.

The deadline for 2011 RRSP deposits is February 29^th and my friends have over $21,000 of contribution room each. The bank employee suggested an RRSP loan to reduce their taxes and get a leg up on their eventual goal of an early and well-funded retirement. He increased the pressure by noting that neither have a company pension plan so they really should max out their RRSP contributions annually.

Of course, the bank wins both ways on RRSP loans by pocketing the interest on the transaction as well as the fees on the investments the advisor recommends, usually mutual funds. That’s why thousands of bank advisers will be having similar conversations with clients over the next few weeks.

I couldn’t agree more with the points raised – except for the loan part. Yes, my friend and hubby should contribute more to their retirement savings. Yes, they will endanger their retirement if they don’t save a larger percentage of their income (right now it is about 5 percent but that includes RESP savings.) And yes, a big contribution for 2011 will result in a fat refund cheque. But can they handle the additional debt and, even if they’re able to, should they?

I say no, not only to my friend, but also to the majority of those considering an RRSP loan.

Here’s the problem. First of all, the interest on RRSP loans isn’t tax deductible, which helps ameliorate the cost of borrowing. You could argue that the additional tax credit from the RRSP contribution functions the same way. However, the second problem for all investment loans is that to make them pay off long term your investment return must be higher than your borrowing costs.

Easy peasy, you might say. Since interest rates are so very low it should be a no-brainer to eek out a return that is higher than the cost of the loan. Let’s take a look at some broad stock market returns for 2011.

United States 2 per cent

United Kingdom -2 per cent

Canada -12 per cent

Germany -15 per cent

India -24 per cent

If my friends had taken out RRSP loans at the beginning of last year and put the entire $42,000 into Canadian mutual funds there’s a good chance their investments would be down $5,000 or more (not including fees), as many funds underperformed the overall market, and they still have to pay back the loan plus interest. They might have chosen top performers but the returns for average investors, particularly those purchasing mutual funds, rarely exceed the market indices.

Of course, 2012 could produce positive double-digit returns across the board. But who knows?

The third problem for those borrowing to contribute to RRSPs is about lack of discipline. If you have the self-control to use your tax refund to pay down the RRSP loan and eliminate it completely by the time the next RRSP season rolls around, then the strategy could work. But I find most people who get on the RRSP loan treadmill have a tough time getting off.

The fourth problem with RRSP loans relates to other debt. In addition to a mortgage and a personal line of credit my friend and her husband have a car loan at 6 per cent and credit card debt at 12 per cent. The combination of RRSP investment returns and tax refund will have to be considerable in order for a retirement savings loan to make sense rather than paying off that higher interest debt.

The fifth concern for those considering an RRSP loan is taxable income. There’s no point in borrowing to contribute if you aren’t paying income tax. Last week a stay-at-home Mom asked about taking out a home equity line of credit to contribute to her RRSP. She can carry the contribution forward to higher earning years but as long as she has other debt (and she does) she’s going to be better off getting rid of it first.

A last caution about RRSP loans is for those close to retirement, by that I mean within a decade or so. I frequently hear from those contemplating an RRSP loan to force feed their savings because they’re terrified about retiring with a meagre pension and a skinny RRSP\RRIF. Often they intend to downsize their home to pay off the loan if it is still lurking around by retirement.

But this approach involves considerable risk. What if real estate takes a tumble? What if the market hits another bad patch? What if interest rates jump? All of these are possibilities so those who are within sight of retirement should try to reduce current spending in order to make contributions, rather than gamble on having more debt in retirement.

The siren call of an RRSP loan is hard to resist at this time of year. But the risks can overwhelm the rewards.

Looking Ahead

2012-01-03T13:40:33-07:00

Journalists either love this time of year or absolutely hate it. ‘Tis the season for best of, worst of, top ten lists and recaps that marked (or scarred) the year before. The best producers of these well-read summaries probably start singling out material right about now to prepare for 12 months hence. I suspect the Star’s David Olive has an entire file drawer and an external hard drive devoted to the task, as his looking back-stories are so rich.

I, however, am among the group who hate this time of year because I only start coming up with ideas in the weeks before the New Year. Even with the help of Internet research who can remember that terrible, brilliant or hilarious financial event that occurred in mid-February.

Therefore I will change horses and, instead, provide a looking ahead list. Here are the top 4 financial topics that must be addressed individually and, in some cases, as a nation in 2012. If you’re a bit of a laggard in the New Year’s resolution department, you might find a few ideas here.

1. Debt: I know, I know you are sick to death of the topic. But not sick enough to bring down that fearsome household debt number. What we now owe amounts to over 152 per cent of our annual disposable income. That’s a new high, or rather, low. Perhaps it is our eternal optimism about real estate prices continuing to rise well into the next decade that keeps us borrowing. Or perhaps we are convinced our incomes will eventually catch up to our spending. Or maybe we’ve caught the live-for-today bug. The why doesn’t really matter. What’s important is breaking the cycle.

For the debt mired, try a few months of no spending. You have to eat and get around but axing clothes, entertainment, takeout and even booze (ouch!) from your spending will free up a large sum to help you whittle down your debt. And just like a food diet, after a no-spend regime you’ll find yourself far more careful when you loosen the purse strings again.

At the government level it is clear Canadians need help. Just as our American cousins are in danger of eating themselves to death, we are in danger of borrowing and spending ourselves into impoverished retirements. In 2012 governments must tackle the burden of student debt and take some very bold measures such as bringing allowable mortgage amortizations back to 25 years. And more resources should be devoted to educating and counseling Canadians about debt and financial management.

2. Savings: In 2008, the Canadian saving rate hovered near zero. Where once we saved nearly 20 per cent of our earnings, we had changed to spending virtually 100 per cent of our incomes and then some as we started borrowing more to finance our lifestyles. The recession scared us and savings rates have climbed to about 4 per cent, but it is far from enough.

Urging savings of at least 10 per cent of income will likely elicit, “In your dreams,” from those who have big mortgages and lots of credit card debt. But Gen X, Y and Z must have it as a goal in order to have any hope of a well-funded retirement. Don’t forget, whatever you contribute to a company pension plan or group RRSP counts toward that 10 per cent.

3. Safety: Safe money is as important as safe sex. Just the other day, yet another supposedly impenetrable cyber wall was breached in the US. I recently spoke to a senior security executive at the Rand Corporation who repeated an increasingly common phrase, “The corporate world is divided into two groups, those who have been hacked and those who don’t know they’ve been hacked.”

You may not be able to guard against mass theft of credit card data but you can be personally vigilant. Protect your information and resist anyone or any company that asks you to expose yourself by providing e-mail addresses, phone numbers or social insurance numbers. Create strong passwords and update your computer security. Steer clear of financial aggregators, sites that manage financial data but need to have access to your accounts in order to do so. Best of all, read your credit card, bank, loan, investment and insurance statements thoroughly.

4. Kids: I declare 2012 to be the Year of the Financially Smart Kid. Everything I’ve written to this point needs to be passed on to the younger set – if for no other reason that we’re probably going to need them in retirement, thanks to points one and two above.

We are still a long way from thoroughly incorporating financial education into curricula, though a start has been made in most provinces. However, parents are the first and most important educators and role models. A recent survey for the Canadian Institute of Chartered Accountants (CICA) found that 85 per cent of youth think that teenagers who are taught financial skills by their parents are more likely to be financially successful in life. Those kids might measure success by a fat wallet but I measure it by an individual’s ability to understand and be in control of their finances.

And speaking of control, my new book Count on Yourself: Take Charge of Your Money is out this week. And with it comes a contest to win a one on one telephone consult with yours truly about anything to do with personal finance or investments. If I don’t have the answer, I’ll find it. You can enter at Count On Yourself. (http://www.facebook.com/pages/Alison-Griffiths/150581741711950?sk=app_205521576149308)

Count On Yourself

2012-01-03T13:39:55-07:00

Read my new book, Count on Yourself: Take charge of your money, to help turn around your financial life in 2012

This is an important day for me. My new book Count on Yourself: Take Charge of Your Money (Simon & Schuster Canada) is now in stores and available online. This marks book number 11 (the rest co-authored with David Cruise) so you wouldn’t think I’d find it such a big deal any more.

But I do and it’s because the topic has never been so important. With the economic events of the past few years, our increasing debt load and the terrible state of so many retirement portfolios and savings plans; we must start taking charge of our money. You don’t need to be good in math or even comfortable with numbers in order to do so. All that’s required is a plan.

It’s particularly vital for us to seize control in the realm of investing. Most people hand over decisions about what they buy for RRSPs, RESPs, RRIFs and TFSAs to someone else because they are intimidated. The financial services industry has done a superb job of convincing us that investing is way too complicated for the average Joe and Jill. Not so!

My goal in Count on Yourself is to give you the confidence and tools to set up and monitor a simple, safe, low-fee investment portfolio – and the best news is that it will out-perform most professionally constructed portfolios.

The first part of the book explores our attitudes towards money and how they stop us from taking charge of our money. The second section offers tips to help you become financially organized while the third shows you how to evaluate your situation and needs. Finally, I introduce you to a group of low-fee, low stress and easily understandable sample portfolios using Exchange Traded Funds (ETFs) and index mutual funds.

When you’re finished you will be in control of your money whether you use an advisor or prefer to do it yourself. After the initial setup it will only take thirty minutes a month to stay on top of your investments.

There’s also a contest to win a one-on-one telephone consult with yours truly about anything to do with personal finance or investments. You can enter through the Count on Yourself link on my website, www.alisongriffiths.ca.

Happy New Year all and I hope 2012 becomes a take-charge-of-your-money year.

Family Loan

2011-11-28T09:02:36-07:00

You can make family loans work if you are strict about the conditions.

How would you like to have a $500,000 loan outstanding and be in doubt about ever getting it back? Add in the fact that family members are involved and you have a recipe for financial and relationship disaster.

This is exactly what is facing a couple who wrote to me last week. The loan in question was to their daughter and son-in-law to buy a home. Recently the daughter quit work to become a stay at home Mom. As a result, they can’t afford the loan payments and want to “renegotiate.”

Just imagine the acrimony that this loan has birthed. Mom and Dad need the income from the loan. The kids are looking for payment relief. Mess.

Many financial experts counsel against lending money to kids, parents or siblings. In a perfect world, I would agree. However, deserving people often can’t get loans for legitimate purposes. Perhaps they have a short credit history, are self-employed or have experienced job loss or illness.

I won’t tell you not to lend money to family members, but keep it businesslike. You will be doing everyone concerned a favour. Here are some guidelines:

1. Know the reason. As the lender you have the right to ask about the purpose of the loan. If you are uncomfortable with where the money is going, keep it in your wallet.

2. Assess affordability. The borrower should draw up a budget proving they can make the payments. The lender must also ensure they can afford to lend the money and do without the income if the borrower defaults.

3. Put it on paper. A signed agreement should detail principal, interest, payments and the term. For a house purchase, have a legal mortgage drawn up which gives you recourse if payments aren’t made.

4. Get post-dated cheques or set up a separate bank account with an automatic transfer of the payments from the borrower.

None of this protects you from a family loan gone wrong. But at least you will have done your best to ensure both sides are clear about the conditions.

Pruning your electrical bill

2011-11-28T09:01:59-07:00

Nibbling away at electricity expenses will put nearly $24,000 in my pocket.

With household debt at historically high levels, small surprise that nearly half of all Canadians confess to living pay cheque to pay cheque. And, judging by my inbox, many of you despair about ever getting ahead.

Forget the big picture for the moment. It just makes your head ache. Instead, focus on creating a little financial buffer by saving a few dollars on everyday expenses. With winter approaching it’s an excellent time to reduce your electricity footprint. I tackled mine three years ago.

My husband and I live in a leaky 160-year-old stone house so our experience won’t match a townhouse dweller. Still, every buck not spent is a buck back in your pocket. With very little effort we saved at least $150 a month, or $1,800 a year.

1. I had an ancient fridge in my basement chugging away. The Ontario Power Authority hauled it away (and will still do so) for free. Check your own jurisdiction. BC Hydro, for instance, picks up 10 to 24 cubic foot fridges gratis and gives you $30 to boot.

2. I’ve always been pretty good at turning off lights but I went one step further, turning off power bars, the satellite receiver and everything else that had a standby setting.

3. Changed to incandescent bulbs in low traffic, non-reading areas. We initially switched everything but found they didn’t provide enough illumination for intensive reading or computer work.

4. We weatherstripped, caulked like crazy and applied plastic film to windows facing the north westerly’s.

5. The temp got tweaked and we adapted pretty well to higher air conditioning and lower heat settings. I estimate about $80 of that $150 monthly through heat and cooling alone.

6. It’s become a matter of pride in our house that we use the dryer only for emergencies, eg. It’s 10 p.m. and someone forgot to hang out the sheets. I now actually prefer the crinkly feel of air-dried clothes and no longer use those icky anti-static sheets.

Voila! $150 saved monthly = $23,636 over 10 years at an average 5% rate of return. Even more if you put it in your RESP or RRSP.

Sidebar

Electricity costs:

Clothes dryer -- $500 to $1,000 annually
Clothes washer -- $100 annually
Old fridge or freezer -- $150 annually
Heating and cooling -- 60 percent of total electricity bill

Stock Market Bear Protection

2011-11-28T09:00:40-07:00

In times of turmoil a guaranteed return is something to love.

With the Canadian market officially in bear territory last week, down 20 per cent for the year, and global markets not far behind many investment statements are looking pretty ugly.

Where on earth can we find a safe haven to ride this one out? I have one. Cash.

Having a portion of your portfolio in cash investments, like GICs, offers a guaranteed return that helps keep your portfolio afloat. Inside a TFSA or RRSP you won’t pay tax on the income.

Because rates are so miserably low it pays to comparison-shop. For example, at my bank brokerage the best rate for a 1-year GIC issued by the bank was 0.9 percent last Friday. But there’s a little known alternative called third-party GICs. They are issued by other financial institutions such as credit unions and also available through your brokerage. The top 1-year rate I found was 1.75 percent for an AGF Trust GIC. There is less difference for longer maturities like three and five years.

Treat GICs as a fixed term investment and plan to hold them until they mature, otherwise you will loose some or all of your interest. There are cashable GICs but they offer lower interest rates.

Another option I really like is the only Canadian money market exchange traded fund (ETF.) ETFs are investment products – not mutual funds – that simply track an index. They are cheap and transparent.

The Claymore Premium Money ETF is listed on the Toronto Stock Exchange, ticker symbol CRM, and has a management fee of just 0.25 percent. You can set up an automatic purchase plan with Claymore to avoid paying a trading commission with each purchase. Go to www.claymoreinvestments.ca and click on PACC (pre-authorized cash contribution.)

The current yield on CRM is about 1.1 percent. Not as good as you’d get from a locked in GIC but you can make small purchases monthly and the yield will rise in lock step with rates. If you need more information call Claymore, 866-417-4640.

Evaluate Your Funds

2011-11-28T08:59:42-07:00

A down market is the perfect time to evaluate the quality of your mutual funds.

As the last 10 days, and indeed the last 10 years of the stock market have taught us, the financial you-know-what hits the fan on a pretty regular basis.

Recently, many pundits have urged us not to sell our holdings (usually mutual funds) in a panic because good investments will survive the carnage. This is essentially the buy and hold philosophy, which has been a staple bit of investment advice for decades. The trouble is it works just fine for mutual fund companies and commission based advisors because they get paid through fees as long as you hang on to your funds. But it doesn’t work for most investors.

The reason is that during market meltdowns bad investments are hauled down further than good ones. They also take longer to recover and some never do.

How do you know you’ve got a stinker of a fund? Easy, look it up. One of the best sites is www.morningstar.ca. Type in the name of your fund then click View Quicktake Reports. Look down the Quote page to the performance chart to see how well the fund has done over time compared to its category.

The chart will show a graph with three lines indicating how your fund fares relative to its category and also relative to the broader market. For example, a broad-based Canadian equity fund would be compared against its category and also against the S&P\TSX Composite Index.

The chart below shows you what it would look like with a fund that has lagged both its category and the broad index over time. You can also ask your advisor to pull up the same information for you on each of the funds you hold.

Note that most mutual funds will not perform as well as the index. Your goal is to have funds that out-perform their category.

If any of your funds are sub-par you may want to sell and buy better ones in the same category (check into deferred sales charges first). You will likely still get sucked down by stock market meltdowns when they happen but a good fund will ride it out much better than its lower quality cousin.

7 Drawbacks of working at home

2011-11-28T08:59:03-07:00

Make working from home effective with a strict schedule and a Do Not Disturb sign.

I’ve worked at home for more than 25 years and almost everyone I know who doesn’t, envies me. There are workplace benefits galore: short commute, no wardrobe issues, few distractions, no time clock and excellent coffee.

But it’s not Shangri La. So as a public service to all you work-at-home wannabes, here is a list of drawbacks.

1.The if-you’re-at home-you-can’t-be-working effect. This can range from unexpected and unwanted drop-ins during prime work hours to family calling for a lengthy chinwag.

2. No water cooler! It can get lonely with no coworkers for time-wasting chats. I’ve found myself trying to keep delivery people hanging around for company.

3. No work, no pay. Sure you can take a break or vacation any time you want, but when you’re not working you don’t get paid. Most self-employed people I know rarely take holidays. And sick days? Forget about it!

4. The office is always open. Nights and weekends are fair game because the office is right there. Even on a Sunday morning an unfinished job seems to find you and push the guilt button. And employers know you’re there so they don’t hesitate to call outside normal office hours.

5. Hey! I’m working here! Guests never seem to get it that you have a job to do when you’re in the office. Recently I had a visitor who loudly sang off key while I tried to work to a deadline.

6. Too many bosses! Everyone you do business with is a potential boss. Juggling them all is often a challenge.

7. The kids hate it. When mine were in the tween and teen years they yearned to be latch key kids. How can you get into after school trouble if Mom is always there when you get off the school bus?

Sidebar
• Nearly 12 per cent of all paid employees in Canada work at home.
• 25 per cent work at home because it is a job requirement.
• 23 per cent work at home because they prefer the working conditions.

Mum's Envelope

2011-11-28T08:58:26-07:00

A simple envelope could change your money experience

Last week I was the MC of the joint FCAC-OECD Partnering to turn Financial Literacy into Action conference held in Toronto. Attending were over 400 delegates from all over the world.

As part of my introductory remarks I told the story of growing up in the 1950s in Canada the daughter of an air force officer and a stay-at-home housewife. My dear old dad was the absolute monarch of our family finances. He got his pay on the last Friday of every month and immediately deposited it in the bank. He kept some cash for himself and placed some more in a plain white envelope, which he sealed and bestowed upon my mother as she mixed their Friday night Manhattans.

Mum guarded her housekeeping money zealously. I never knew how much he gave her, and that envelope was a source of endless mystery to me.

In those days, a woman was considered a poor housekeeper and wife if she couldn’t make the money last until the end of the month. If she was particularly careful, there would be some left over, and she could use that for herself. My mother was quite brilliant at squirrelling away nickels and dimes for an extra visit to the hairdresser.

Looking back, I told the delegates, I think that if all the world’s financial affairs had been turned over to women of the “housekeeping money” generation, there would have been no sovereign defaults, no asset-backed commercial paper debacle, no subprime mortgage meltdown.

And most certainly no budget overruns!

I have this image of a woman, like my late mother, passing out envelopes to government ministers, banks and other corporations and issuing a stern warning. “When it’s gone, it’s gone. Don’t bother coming back for more!”

Throughout the conference my mother’s envelope took on a life of its own. Numerous delegates came to tell me that it had been raised in their workshop and a number of presenters wove it into their speech.

I think the message is that something as tangible as cash in an envelope, designated for a certain purpose provides the kind of spending limit no debit or credit card can do. Maybe it is time to turn back the clock.

Sidebar

There are wonderful resources for financial literacy at the Financial Consumer Agency of Canada - www.fcac-acfc.gc.ca/fcac-oecdconference.

Rule of Threes

2011-11-28T08:57:50-07:00

When you’re buying significant items always have three on the table at the same time for comparison’s sake.

I was introduced to the concept of threes by an economics professor in Edmonton who specialized in buying small businesses. His method was to have at least three in hand to compare before making a decision.

His strategy wasn’t just about getting the best deal, rather he found that by having three legitimate contenders to evaluate, the emotion involved in buying was reduced. He also discovered that after putting the companies through a rigorous analysis, he often chose the one that he’d initially found least attractive. He estimated that the rule of threes had made him a profit of millions over the years.

Apply the same principle to houses, cars and other big ticket items. Even if it’s love at first sight with a house and or a condo, for instance, have at least two other properties to compare it with.

Make a detailed list of the attributes of each contender from price to square footage, needed repairs or renovations, location, distance to work and services, taxes, utility costs, and other characteristics such as natural light and potential for expansion.

Next, go over the list thoroughly with your partner, friend or family member and compare the houses item by item. This discussion will help you focus on what is really important to you.

Frankly, this strategy has saved me from buying the wrong house a couple of times and never fails to give me insight into what my family really needs and wants in a house, which is sometimes different than what we think.

For example, I’m a real sucker for bright homes with vaulting ceilings and my infatuation has lead me to overlook glaring deficiencies such as the lack of a family room, essential when we still had school age children at home.

Spring gets the buying juices flowing but use the rule of threes to make the best purchase decisions.

SIDEBAR

76% Women who say they often experience buyer’s remorse
49% Men say they often experience buyer’s remorse

Global Investing without leaving North America

2011-11-28T08:56:27-07:00

You can invest globally without leaving North America.

Perhaps you’d like to participate in the economic juggernaut of China. You might also be feeling the siren call of India and the hard charging South Korea. And what about Latin America which may be the next stock market big thing?

The problem investors face is wading through tens of thousands of stocks, ETFs and mutual funds in order to pick investments in those far flung places.

There is a better way. Take advantage of the strong loonie and don’t stray from the United States. Think of it as investing the way Arnold Swartzeneggar went on holiday in the movie Total Recall. He plugged into a machine which transported him around the galaxy. You can do more or less the same thing with your investments.

Here’s an interesting stat. Over 40 per cent of the revenue generated by companies in the S&P 500 Index comes from outside the United States.

According to RBC analyst Rajan Bansi, YUM, which operates the KFC brand in China gleans roughly one third of its revenues from that country alone.

Bansi also points out that McDonald’s, long a global presence, earns over 50 per cent of its revenues outside the United States and Coke clocks in at 70 per cent.

You don’t need to focus just on food and drink to get global exposure with U.S. companies. Colgate-Palmolive, that staple of conservative investors, generates over 50 per cent of its revenues in countries other than the USA.

An advantage to global investing through North America is that most of the large companies doing business around the globe also pay good dividends which have proven to be quite stable over time.

Here’s another benefit to investing globally this way. If you have concerns that the U.S. is still a long way from any kind of sustained recovery, companies with a large percentage of revenues generated elsewhere will be less vulnerable to any continued flatness or further decline in our southern neighbour’s fortunes.

Sidebar:

Projected 2011 Gross Domestic Product Growth Rates

U.S. 2.6%
India 8.3%
China 9.6%

Parents! Tips and tools to teach your kids about money

2011-11-28T08:55:06-07:00

Teach your children well and early about money and the lessons will pay off throughout their lives.

Financial literacy is the flavour of the month. The federal government’s task force on the subject recently released a report full of common sense recommendations. But, so far, there is little money on the table for action.

Fortunately, one bank is ahead of the implementation game. Last week BMO launched a website to help parents raise financially literate children. Called SmartSteps for Parents (www.bmo.com/smartparents), it’s chock-a-block with tips, tools and techniques to engage kids, answer parental questions and even entertain with a series of reality-style webisodes showing real families dealing with money dilemmas.

Disclosure. I am consulting expert to the initiative. Allying myself with a financial services firm is something I’ve avoided because my job is to analyze and inform, which can conflict with the business of money.

But I’ve always been an advocate for financial literacy. The lack of it among the young is one of the most serious issues facing our nation. So, I was delighted when BMO asked me to consult on SmartSteps for Parents.

On the site I’m teamed with psychotherapist and parenting expert Alyson Schafer, author of many best selling books. Schafer’s straightforward advice provides plenty of outside-the-box ideas for parents.

What I particularly like about the site is its practicality. Rather than a lot of theories, the focus is on a step-by-step approach to foster financial know how. The articles, interactive tools and games address key money issues for separate age groups ranging from ages 5 to 15. You’ll also find:

Expert Blogs: Parents can interact with myself, Alyson Schafer and other parents who are often a valuable source of information.
The Zone: A place where tweens and teens can engage in activities including online games.
Web Series: See real parents relate their own experiences teaching their children the basics of money. Schafer and I provide commentary and tips.

Check out the website. I’d love your feedback which I’ll pass on to improve the site as it grows.

Sidebar

54% of parents have talked with their children about household finances.
37% of parents aren’t sure their children have a grasp of money management basics.

Source: Leger Marketing