Category: newsletters

“All but the most sophisticated Canadian citizen will spend a life time paying off their debt.”

Is that true? If so why? Is debt a fact of financial life?

The comments from respondents were very instructive. However, the lack of response was even more eye opening. Only 8 people bothered to send an answer. So maybe debt isn’t a big deal. Let’s find out.

The word ‘sophisticated’ caught a few readers’ attention. They wanted to know what it meant. In the context of that quote it means knowledgeable. It does NOT mean rich or well off.

One person asked if debt included mortgage payments. Technically it does, but the more worrisome part of most peoples’ debt load is the debt on depreciating liabilities or non tangibles. Want two examples? Depreciating liability: car. Non tangible: Putting a weekend away or a meal out on your credit card and still paying for it a year later.

Dear Joanne,

Here I am on Deerfoot Trail again, the 100km/h freeway that cuts through our city. You say I shouldn’t complain because in Montreal gas went from $1.03 to $1.34 in a matter of hours. But I can still see the loonies and toonies flying out the tailpipe. Now that wouldn’t be so bad if they actually fell on to ground where some needy person could pick them up. But the money is evaporating into thin air or should I say ending straight up in the oil companies’ coffers.

Sure my RRSP mutual funds have oil stocks but what a roundabout way to make money. Shouldn’t I be thinking of conserving gas and using that money to invest myself? We all know the answer to that question is YES! But caution:

As one successful mutual fund manager recently said: “If you do what everyone else is doing in investing you will get hurt”.

Credit has become so much a part of our lives that we don’t even give it a second thought.

Lila’s casual attitude towards her credit is due to her lack of knowledge.

Credit had its beginning in the 1850s. Isaac Singer wanted to increase sales of his sewing machines. Very few people could afford to buy them outright. His plan allowed buyers to put $5 down and $5 monthly. (1)

Today peoples’ credit histories are a critical reflection of their ability to be trusted.(2)Granting credit has grown into an extremely competitive multibillion dollar industry. The target? Our wallets!

So let’s dissect Lila’s situation for educational purposes.

1. As of 2002 there were millions of dollars in unclaimed refunds the Canada Revenue Agency could not find owners for?
2. Personal income tax was started in Canada as a means to finance World War One?
3. Tax avoidance is legal?
4. Tax evasion is illegal?
5. Tax deferral is impossible?
6. A tax deduction and a tax credit are the same?
7. A large tax refund is a good idea?
8. The Canada Pension Plan rate is double the rate for self employed people as it is for employees.
9. Only 50% of capital gains are tax free.
10. It is possible to sneeze with your eyes open.

Let’s start the New Year with some mental pushups to tone some of the post holiday spending flab.

Take you or your family’s gross,(yes I know you think it’s gross) before tax income. Annual salaries under $35,000 will be taxed at 26%. If you earn between $35,000-$70,000 tax owing will be 32%. Salaries above $70,000 but below $113,804 will be taxed at 36%, above $113,804 will be taxed at 39%. This includes provincial tax.

Step 1 – Subtract tax owing from your monthly salary.
Step 2 – Subtract debt payments from the remainder. Debt includes mortgage payments and any contractual fixed or variable payment such as lease payments or minimum payments on a credit card or line of credit.

Surprised at how little is left?

Let’s take a look at 2 examples:

1 is single person earning $42,000 annually which equates to $3500 monthly. Less tax of $1120 leaves $2380. Subtract debt payments of $1000 the remainder is $1380.

2 is a two income family earning $75,000 yearly. This works out to $6250 per month. Taxes will take away $2250, leaving $4000. If debt payments are $1500 they will have $2500 for saving and living expenses.

It’s no wonder that savings levels are far below the recommended 10%, and people feel squeezed.

A client sent me a website address recently. It promised to be one of the best tax shelters. She asked me to evaluate the information and give my opinion. The website advocated using universal life insurance as a tax shelter to ensure that neither during or after the investment would any tax be paid. It also mentioned the strategy of leveraging (more on that later) as a means of tax avoidance.

The information on the website had enough factual errors to damage the credibility of the idea it was presenting. The most obvious of the mistakes was that the home page ended with a quote from former Finance Minister GARTH Turner. Now some of you know that I am in my mid forties so I have been around long enough to know that JOHN not GARTH Turner was Finance Minister. If I am wrong please someone let me know and you readers can punish

A client asked me recently about his mutual fund investment. At that time the market value of his investment was below the price he had initially paid. He wanted to know where the difference between the purchase price and market value was. His words were, “In whose pocket was his lost money?”

This is an excellent way to open the discussion on the importance of the share price and market value of an investment.

When you purchase mutual funds your initial investment buys you a certain number of shares, for example, 1000 at $5. Unless you sell or redeem your investment you will always have 1000 shares. No matter if their market value is $3000 or $10000 you still have the same number of shares. In fact if you hold you investment long enough you will most likely end up with more than 1000 shares. The reason is if the mutual fund has enough profit to pay out to shareholders (a distribution) this profit is usually reinvested in your portfolio. This gives you more shares. The more shares you have the better your chances of making money.

Why are pelicans always short of cash? Because they have big bills.
Where do birds invest? The stork market.

Welcome new readers! Corny jokes aside, please refer to Issue #2. It is one you will find important.

Let’s continue the discussion on diversification. Asset classes were discussed in the last newsletter. Diversification also includes investment across geographic regions, industries eg. communication and entertainment, or sectors of the economy. For example you may have heard the term small cap funds. Small cap companies are companies with capitalization of under $1 billion.

What are some possible future economic trends? Here are two worth watching.

There has been alot of discussion lately about investing and its risks. Negative returns and unfavorable market conditions have caused many people to conclude that investing is unsafe and unprofitable. Saving, with its guaranteed return is thought to be more sensible.

The examination of the word risk is a good beginning for this newsletter. Risk is the chance of being harmed or being exposed to danger. In its strictest meaning it is incorrect to say investing is risky.

When people say risk they mean volatility. Volatility is the fluctuation in value of your investment. The value of an investment can fluctuate a lot, (major roller coaster ride), which is an aggressive investment or a little, which is a conservative investment. There are degrees in between.

The volatility of investments in recent times has made major headlines. It must be mentioned at this point that the real news has been the many more companies that have quietly been profitable despite the market downturn. Many people have concluded that the roller coaster ride has given them too much of an upset stomach and that they’d prefer the tamer totally horizontal railroad ride. Of course there is comfort in safety, but unlike Linus’ security blanket it comes at a price.