Alison Griffiths

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

Can you be a millionaire by 65?

2011-11-28T08:54:22-07:00

Want to be a millionaire before you retire?

Who wants to be a millionaire? Who doesn’t? Though the number one, followed by six zeroes, doesn’t buy what it used to, the word millionaire still connotes luxury and ease. And while billionaires are the new normal for wealth, somehow that million dollar figure remains a pinnacle most would like to scale.

However, a TD Canada Trust poll released February 5 found young Canadians pessimistic about their ability to retire with a million bucks. In fact, 75 per cent of those aged 18 to 34 did not believe they would achieve that savings level. A third of respondents felt their best chance at a million was by winning the lottery. Sadly, only one in ten thought they could ever save that much.

Part of the problem, according to TD, is that 18 to 34-year-olds overestimate how much they need to save to become millionaires. Sixteen per cent think it would take savings of $1,000-$2,000 per month and the same number believe they would need to sock away $2,000 or more monthly to reach the millionaire pinnacle. The remaining 22% don’t believe it would be possible to accumulate one million dollars through personal savings alone.

Au contraire, says TD. "Start now,” emphasizes Carrie Russell, senior vice president, TD Canada Trust. “Save monthly. Increase your regular RRSP contributions as your salary increases. While there is no reliable quick win for getting rich, these three steps can help get you on your way to retiring comfortably… and maybe even a millionaire."

Here’s TD’s route to a million.

Age Savings per month
25 to 30 $100
30 to 35 $250
35 to 40 $500
40 to 50 $750
50 to 65 $1,000

*(TD Canada Trust’s chart assumes savings are contributed to an RRSP account and earn a 6.8% annual rate of return, compounded monthly.)

While I’m all in favor of saving I have a few quibbles with TD’s thinking.

1. Why $1 million? Is this what TD thinks this group will need to retire 40 years hence?

While the figure is a great strategy to grab attention and, presumably, encouraging the young to save now and save often, lives are vastly different across this country and throwing out a magic number implies this is what twenty-somethings need to aim for if they want to retire.

2. The 18 to 34 year group faces some very serious financial problems, not of their making.

According to Statistics Canada, employment income for 22 to 34–year-olds has decreased relatively, regardless of education, over the past two decades. At the same time, the cost of living, especially education, has increased dramatically.

It’s a pretty simple recipe for disaster -- less money chasing greater expenses. And the result is debt. On Feb 17, the Vanier Institute of the Family estimated the average debt load for university students with an undergraduate degree was $18,000. The real debt story could actually be worse as increasing numbers of parents take out lines of credit to help pay for their children’s education.

A September 2009 survey by the Canadian Payroll Association found that two-thirds of Canadians 18-34 would find themselves in trouble if their pay cheque was delayed by only one week.

High debt, fewer jobs and lower income delays when and how much this group can start saving.

The situation is so serious a new trend has developed to cope with it. Nearly a third of parents with a youngest child aged between 20 and 34 years old, have at least one offspring living at home with them, according to a recent Statistics Canada report. Twenty-five per cent of this group are boomerang kids who have returned to the parental nest after departing one or more times. The remainder, who never left home at all, “failed to launch” the Stats Can wits say.

In the face of these statistics the idea that young people simply have get cracking to hit the one million mark at 65 is simplistic. Many are struggling just to keep their heads above water, never mind saving.

3. Setting aside $750 monthly in the 40 to 50 age group seems overly optimistic.

Those with families and few workplace benefits -- an increasingly common phenomenon -- will find this decade laden with high expenses as children mature into the teen years and then head off to higher education.

4. What happened to save 10 per cent of what you make?

The TD route to becoming a millionaire bumps savings to $1,000 a month for the 50 to 65 group. Possible if you’ve got a good job, aren’t still supporting children or looking after elderly parents and have little or no debt. That’s a lot of ifs.

The average working Canadian makes just under $800 weekly, it’s a bit of a crude measure since it also includes part-timers. That puts an average annual income at nearly $42,000 a year. Saving $1000 a month between 50 and 65 represents nearly 30 per cent of gross income.

No one can argue with the value of savings, but I think TD Canada Trust’s projections are unrealistic (not to mention depressing) for a group who are off to a difficult financial start.

Financial lives of Girls and Women

2011-11-28T08:51:47-07:00

If you want to know how and why money is spent look to women.

Women are lousy drivers, shopaholics and emotional. These are all well-worn stereotypes in the gender game. Here are a couple more. Women aren’t good with money and we are intimidated by financial issues.

But, when the stereotype is subjected to the hard light of research a female of a whole different order emerges.

According to a new survey commissioned by Barbara Stewart (CFA), portfolio manager with Cumberland Private Wealth Management in Toronto, women today more closely resemble Rosy the Riveter in the realm of money than any blonde moment stereotype. We’re strong, confident, involved and in control.

After reading the results of a national Angus Reid Public Opinion poll released in December, one can only come to a single conclusion. Women are the boss of money.

Stewart, who has been advising high net worth clients for 15 years, had heard all the stereotypes about women and money and she was sick of them. And it irked her that much in the delivery of financial services to women was based on the stereotypes of a gentler, more conservative and fearful sex.

The survey, conducted in conjunction with six focus groups led by Stewart and 25 in-depth interviews, includes one jaw dropping stat. Eight-nine per cent of respondents laid claim to being the final decision maker on all matters of household spending.

Equally interesting, the same percentage indicated that financial decisions should be made in conjunction with their life partner. But only 51 per cent of respondents actually walked the walk and consulted their mates about spending decisions.

Household spending is a mammoth area. We’re not just talking about cereal and soap. It’s everything from clothes and renovations to electronics, recreation, medical and education. In 2009 household spending averaged over $71,000 per family, according to Statistics Canada. And women run the show.

My own informal research shows that women are increasingly making the decisions in the investment arena. That means anyone with RRSP investment products to sell over the next six weeks had better pay attention to the fairer sex.

SIDEBAR

63% Number of women who feel confident about their financial management capabilities.

Spend no money for this seasonal joy

2011-11-28T08:51:02-07:00

Joy is cheap this holiday season if you focus on feeding your soul

The holiday season is a tough time for many Canadians. The majority of us (60%) live pay cheque to pay cheque as we shoulder heavy debt loads. Just meeting the minimum of holiday expectations stretches some of us to the brink. To top it off, we’re inundated by articles extolling the virtues of cost cutting but there doesn’t seem to be anything else to prune.

My prescription for such woes is to focus on feeding your soul. It doesn’t involve much time or money but I guarantee it will help shed your financial woes and give you a dose of feel good at the same time.

1. Call up a family member or friend you haven’t spoken to for ages.

I grew up in a time when calling long distance was either an occasion or meant bad news. At Christmas we’d huddle around the phone for a few quick words with relatives across the continent. Now long distance rates are so cheap there’s no excuse not to call. And if it is long overdue you’ll spread considerable joy.

2. Visit a shut in

It’s a lonely time of year for many seniors in retirement facilities and nursing homes. Those who don’t see well enough to read would welcome hearing you read aloud a favorite book. Others might enjoy a drive to see Christmas lights.

3. Take part

In every city, town and village in the country there are pageants, parades, ceremonies and caroling. Most of them are free. Get out and enjoy yourself!

4. Take pleasure in the moment

Whether it’s walking your dog or even shoveling the snow try to live in the moment rather than seeing it as a chore. Yes, I know it’s a cliche, but it really works! Revel in the fact that you’ve got the health to do these things. My bit of mundane joy for 2011 will be polishing the furniture. Mmmm, love that lemon scent!

SIDEBAR

1.5% The maximum percentage of household income Canadians should spend on gift and holiday expenses -- according to the non-profit Investors Education Fund (www.getsmarteraboutmoney.ca).

Charity

2011-11-28T08:49:43-07:00

Putting some thought into giving will make your charitable donation more meaningful.

‘Tis the season of giving but, like anything to do with money, having a plan really improves both the experience and the outcome.

First of all make sure the charity of your choice is registered with the federal government. The Canada Revenue Agency has been eyeing charities more carefully lately and there has been an increase in revoked registrations.

Secondly, it is almost always more beneficial to give directly to a charity rather than via a telephone or mail solicitation. Some charities do their own mail blitzes at this time of the year but many hire fundraisers which take a substantial piece of the pie.

Thirdly, don’t spray your money all over the place. You will feel more connected to a couple of charities if you focus your giving than if you give little bits here and there to a dozen of them.

Choosing a charity can be overwhelming. There are so many good ones and so much need. One great place to start is with your, or your family’s, heart. My late father-in-law, Jack Cruise, was a ophthalmologist and in his seventies he travelled to India and Pakistan with Operation Eyesight Universal to perform cataract surgery in mobile clinics.

By giving to that organization my children felt connected to their grandfather.

In my single years wild animals were at the top of my love list and I gave to the World Wildlife Fund every year. A neighbour has two soccer loving boys so they give to a charity which provides balls, nets and uniforms to kids in places like Haiti.

I also find that children love causes where they get something back such as a letter, a photo or some tangible recognition that their efforts have made a difference. And if you do have children, by all means encourage them to save part of their allowance every year in a jar, envelope or bank account to give to a charity of their choice.

SIDEBAR

$260 Median cash donation in Canada

cra-arc.gc.ca/charities Go to Charity Listings for registered, suspended, annulled and penalized charities.

Family loans

2011-11-28T08:48:50-07:00

Family loans won’t ruin relationships if you do them right.

There’s good, bad and ugly debt. Borrowing for an education or a home is good debt, because you’ve got something to show for it and the asset will appreciate. Bad debt is credit card or credit line debt when you don’t know where the money went. Family debt, all too frequently, turns into ugly debt.

But sometimes, when all else fails, the family is the only source of necessary funds. Here are four ways to make it work.

1. Put It On Paper

Time passes and even with the best of intentions people can forget or be confused about the terms of the loan. That won’t happen if it’s written up, signed, dated and a copy given to all parties. Repayment problems can still arise but at least the borrowing conditions will be indisputable.

2. Consider Interest

Most family loans are interest free but, especially for young adults who may be first time borrowers, charging a small amount of interest teaches them what borrowing is all about.

3. Specify

A big irritant with family loans is when the money is borrowed for one purpose and then used for something else. For instance, if you loan money to a sibling so they can buy a car for work or purchase clothes for a new job, but instead they go on an expensive vacation, it will create bad feelings between the two of you.

Include the loan’s purpose right in the lending document. You probably can’t prevent the borrower from blowing the dough but it keeps things clear.

4. Pay Directly

If you are contemplating lending money to a family member for a particular purpose and you’re concerned the funds might get frittered away, bypass the borrower.

For example, if your grandchild needs braces, offer to pay for them directly. There may be some accusations about you being over-controlling. Stand your ground. It’s your money.

Sidebar

* According to a recent University of Michigan study, 41 percent of adults spend as much as 10% of their income providing financial support to their 23 to 28 year olds.

Save up for Xmas

2011-11-28T08:47:59-07:00

Keep your holiday gift debt to a minimum by building up a cash cushion now.

How would you like to have no holiday gift debt? Zero. None. Not a dime. Here’s how.

According to a moneyville.ca on-line poll the average holiday gift tab will be just over $600 this year. And it will all be spent during the seven weeks between now and Christmas.

With a little bit of belt tightening you will have the cash for holiday presents and no nasty credit card bill in the New Year.

1. Brown bag it. I know you’ve heard this one before but it really does work. Cut out three lunches a week at $6 a pop. Saved -- $126.

2. Can the take out coffee\tea\latte\capuccino\donut. This is another money saving nag but, as with the brown bag, it really works and once you get used to it the pain of deprivation disappears. Saved -- $100 (based on a medium coffee and donut once a day)

3. Scissors and Comb. I’ve been cutting my husband’s hair for 30 years. I also cut my two daughters’ hair and now my wiggly grandson. I figure I’ve saved thousands and one of these days they’re going to get an invoice. Cut out one haircut per family member between now and December 25. Saved -- $100 (1 adult, 2 children)

4. Do your own. Maybe not your hair! But manicures and pedicures are actually quite relaxing and fun to do on a cold winter evening. Saved -- $50

6. Eat In. You can do it! Try to make it to Christmas without eating out at night. Saved -- $225. (assuming you would normally eat out three times between now and December 25.)

TOTAL SAVED -- $601

Add in taxes and (depending on which province) you’ve kept $678 in your wallet. You are there!

Those living, working and shopping in the downtown area may scoff at my suburban prices. So take 30 minutes and see what you come up with. I’m betting you could hit $1000 easily.

Sidebar

Contribute your own holiday gift spending expectations to the on-line poll at www.moneyville.ca.

Personal Tax Tips

2011-11-28T08:46:14-07:00

A little tax prep now will pay dividends when filing time rolls around.

Death and taxes. If you wait until next April to think about the latter the experience can be a whole lot like the former.

A little thought and preparation now can save you time and money in the new year. Here are some proactive tax tips from Cleo Hamel, senior tax pro and national spokesperson for H&R Block.

1. Check your pay stub. Direct deposit may be convenient but there can be errors you don’t notice until it is too late. Take a few minute to look at your monthly deductions. Chloe has seen mistakes ranging from arithmetic to taxable benefits not shown and moving expenses paid out incorrectly. All of them can affect your tax situation.

2. Check your interest earning investments. Some banks don’t issue T5 slips for $50 less in interest earned. And some don’t provide tax slips for trades so you could be missing tax deductible investment expenses. Use your own records to list interest income and investment expenses.

3. Check the charity. Before donating money this holiday season contact the Canada Revenue Agency to ensure that charity is properly listed. Cleo Hamel notes there have been reversals in

4. Check on your health. If your family has known medical expenses coming up such braces, glasses or the purchase of any medical devices you could get a bigger tax benefit by loading them all into one year.

5. Check your investments. Even though the market has risen nicely since the 2008\09 meltdown many still have losses. Selling a losing investment (only those outside RRSPs and RRIFs qualify), provides a capital loss that can be carried back three years or carried forward indefinitely to reduce tax on capital gains.

6. Check the move. Provincial taxes are based on where you reside as of December 31. Depending on the tax rate it may be worthwhile to speed up or defer your move to a different province.

Tax Tip Sites:

www.cra.gc.ca Click on Tax Alert for tips and cautions.

www.hrbtaxtalk.ca

Incomes over $100,000 are taxed least (10%) in Alberta.

Most (17.5%) in Nova Scotia.

Pay cheque to pay cheque

2011-11-28T08:45:35-07:00

In today’s world saving is an absolute necessity.

Are you one of the 60 percenters?

A Canadian Payroll Association survey notes that nearly 60 per cent of Canadians live pay cheque to pay cheque and admit they would be in financial difficulty if their pay pack arrived a moment later than expected.

I know what this is all about. No savings. More specifically, no emergency savings. Lots of people do have savings-- group pension plans, RRSPs, RESPs but they’re reluctant to tap that money if the washing machine breaks down.

Most financial planners advise employed homeowners with children to set aside three months of net income -- six months for the self-employed. So, if you clear $32,000 annually you should have roughly $8000 in an emergency account, twice as much if you’re self-employed.

“Good luck with that,” you say.

You’re right. I’d settle for a single month.

Part of the reason to save is to protect from job loss but also to cover out-of-the-ordinary expenses. Typically, when you’re living pay cheque to pay cheque those unexpected expenses slide over to credit cards, credit lines, overdrafts or buy now pay later plans.

I find this is often a financial tipping point for a family. A large debt goes on the credit cards and suddenly you feel like there’s a noose around your neck getting tighter all the time.

Unfortunately, there are only two ways to solve this problem; make more money or cut spending. For most the latter is the only practical way to break the pay cheque to pay cheque cycle.

The good news here is that 60 per cent of those surveyed said they were trying to save more money. All you folks get a 10. For the rest of you there is some serious remedial work ahead. Next week I’ll motivate the sluggards with some 10 saving tips and tricks.

Sidebar

7% Canadian household debt increased by 7% last year.
2.5 Household debt has increased 2.5 times since 1989.
$41,740 The average per person household debt in Canada

RESPs = free money

2011-11-28T08:44:43-07:00

RESPs = free money. Don’t hesitate the money awaits.

Any moment now tuition bills are going to hit with a mighty thump. And lots of parents will be wishing they’d contributed more to their kid’s RESP, Registered Education Savings Plan.

An RESP is the best deal going. Here’s how it works. First comes the child, then you apply for a social insurance number and finally you open an RESP.

You can have individual RESPs for each child but there’s no need. Keep it simple smartie! One account is much easier to handle.

The best part is the Canada Education Savings Grant. Most will receive 20 cents on every dollar contributed, up to $2500 per child annually. You can’t beat that return these days.

High income earners will receive a bit less on the first $500 contributed and those with low incomes more. After that the CESG is the same for everyone.

Over the life of the plan, you’re allowed to contribute up to $50,000 per child and the Canada Education Savings Grant maxes out at $7200.

One caution. RESPs are not all the same.

Group RESPs may dazzle with visions of gold when its time for college. However, some of these plans are notorious for high fees and low returns.

Some sales pitches warn that with “other plans” you could lose your RESP contributions if your child doesn’t go on to post-secondary studies. Not true.

You can transfer the funds to another child or withdraw contributions though, depending on your income, you may pay tax on interest or capital gains earned inside the RESP. And you will have to pay back the government grant.

I’m a big fan of plain vanilla RESPs, the kind you open at most major financial institutions. Fees are low and your investment options are wide.

Sidebar

17 - Number of of post secondary students in 2010 who will draw on RESPs to pay tuition.

www.canlearn.ca A great site for all things about money and education.

Rules of thumb

2011-11-28T08:42:03-07:00

Take a hard look at 'common knowledge', 'rules of thumb' and 'conventional wisdom' because they’re often flat out wrong.

The problem with using conventional wisdom to make business, investment or personal financial decisions is that it’s frequently misleading. But we’re attracted to simplistic axioms because, these days, who doesn’t want things wrapped up into nice, bite-sized info bundles?

But before you chow down, take a good look. Here are 3 “common knowledge” nuggets we hear a lot.

1. Taxes are lower in the U.S than in Canada. Doesn’t matter what your political stripe, most of us believe this implicitly. On May 13 KPMG, the giant international accounting firm and hardly a bastion of leftism, issued a report ranking the corporate tax competitiveness of numerous countries. Canada came in second and the U.S. 6th with corporations there paying 36.1% more than in our supposedly high tax country.

2. Young people don’t read books like they used to. I raised this over lunch with Kevin Hanson, President of Simon & Schuster Canada and Alison Clarke, Director of Sales Operations. They took turns pummeling me with sales figures showing that young people are reading more and buying more books than ever.

3. Newspapers are dead. This is like the wide spread assumption held during the tech boom that the Internet would soon be the death of bricks and mortar businesses like banks and retail stores. They’ll all be gone, the belief went, cyber shopping and internet banking would rule. Didn’t happen.

About a month ago Paul Godfrey, a smart businessman, led a consortium which plunked down upwards of a billion dollars for the newspaper assets of CanWest Global Communications Corp. Are newspapers dead? Or are they, like banks and stores, going to adapt to the times?

Next week I’ll bash some conventional wisdom about saving and investing.

Side Bar

Investment industry Rules of Thumb that ain’t necessarily true.

• Buy and Hold is the smartest approach for the average investor.

• If you’re young you can afford to take risks.

• You’ll never be able to retire if you don’t have money in the stock market.

Credit scores

2011-11-28T08:40:06-07:00

A healthy credit score is like a newborn. Treat it well and you’ll receive a lifetime of dividends.

When was the last time you checked your credit history and score? If it was within 6 to 12 months go to the head of the class. If you said never or a couple of years ago then you don the dunce cap.

A strong credit score has never been more important. A poor one can stand in the way of everything from getting a car loan, a mortgage or even renting an apartment.

You can access an abbreviated credit report free from equifax.ca or transunion.ca. A full report plus your score will cost from $7.95 to $23.95. A credit score of 750 or above from either agency is considered good.

Here are some tips for a credit history.

Do pay your bills on time. Late payments will drag down your score.

Do pay at least the minimum plus a bit more on any bill, loan, LOC or credit card.

Do check your monthly bank and credit card statements to make sure every charge is correct.

Do read your credit card statements for changes to things like interest rates and fees.

Do contact creditors (including utility, phone and insurance companies) if you are having trouble paying your bills. You may get some extra time before the company reports late or non-payments.

Do build up a strong history with regular credit card use but pay the balance in full every month.

Don’t go over your credit card limit and don’t dip into your overdraft regularly. Both will lower your credit score.

Don’t apply for too many retail credit cards. You may get a discount on purchases when you apply but having a large amount of credit available, even if you don’t use it, can lower your credit score.

Don’t delay in reporting suspicious transactions on any bank account or credit card.

Don’t be tempted with Buy Now Pay Later schemes if your credit score is marginal or poor as many of them are actually credit cards and will affect your score.

Date on a dime

2011-11-28T08:39:30-07:00

Feeling the budget pinch doesn’t have to crimp your social life. Learn to date on a dime

Summer is the best time to ramp up your social life. Why? Because the now accessible great outdoors allows you to date on a dime without feeling guilty about being a tightwad.

A romantic candlelight dinner with cocktails and wine in the city can easily set you back $200. But the romance factor increases logarithmically when you set the table yourself under the stars. Cold roasted chicken, vegies and dip, a french bread stick and a bottle of wine tastes like it cost a million bucks with the constellations overhead.

Here are a few date-on-a-dime picnic tips:

Scout your location first. Spreading your blanket on the grass is lovely but not everyone’s knees and rump are made for an evening on the ground. Many parks have picnic tables but also look for cover in case of rain.

If you are pressed for time buy a grocery store roasted chicken and cut it up, the cost isn’t much different than cooking a bird from scratch. But do the vegies yourself the night before and wrap them in plastic to keep them fresh. Make a cheap and healthy dip with low fat sour cream, soft cream cheese, a spoonful of canned onion soup (get lots of the onions), a pinch of dill and chopped fresh or bottled garlic.

Buy plastic plates and glasses rather than disposable. Great sets are available everywhere now at a very inexpensive cost and you can re-use them for years.

Candles with lids are also a good purchase. They’ll last through many dinners and withstand a bit of wind. Another option is a collapsible or telescoping camping lantern with either candle or battery LED light.

Bug spray isn’t the most romantic scent but scratching and swatting can get in the way of cuddling. Bring a couple of light weight blankets instead.

An inexpensive wine for outdoor dining is rosέ -- not the nasty, sweet swill of years ago but the new, drier versions that taste of summer. And they’re nicer than white when they warm up.