Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

The (Renewed) Case for GICs

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**This is a sponsored post written by me [Robb Engen] on behalf of EQ Bank. However, as always, all opinions are my own.

A guaranteed investment certificate (GIC) is unlikely to spark an exciting dinner party conversation but when stock markets are reeling, like they were earlier this year, investors often seek safe havens to wait out the storm. Cash is king for those who don’t have the stomach to watch their portfolio plunge in value, and GICs at least offer the promise of a modest return.

Back in February 2009, when the global financial crisis had just about reached rock-bottom, 30-year-old me was scrambling to meet the RRSP deadline and bought a five-year GIC. It was a costly mistake in hindsight. The Toronto Stock Exchange surged ahead for the next five years, earning annual returns of 9.52 per cent, while my five-year GIC earned an average annual return of 2.75 per cent.

Instead of turning my $7,000 contribution into nearly $10,000, I only had $7,800 to show for my decision. At the time, though, I thought the GIC was a smart move because I had to make a quick decision on what to do with my contribution, and the stock market still looked downright nasty.

Why invest in GICs?

The truth is there’s nothing wrong with stashing your savings inside the comfort of a GIC. Here are four times when it makes good sense to put your money in GICs:

1.) When your entire portfolio is sitting in cash, waiting for “the right time” to get into the market

If you’re the type of investor who can’t ignore the doom-and-gloom economic headlines, and who’s convinced that a market meltdown is always imminent, maybe the stock market isn’t right for you.

Having your retirement savings constantly sitting in cash and earning nothing is like sitting on the fence and being paralyzed to move for fear of making the wrong decision at the wrong time.

A GIC ladder, which might involve purchasing equal amounts of one, two, three, four, and five-year terms, will maximize your risk-free returns and still give you the option of dipping your toes in the market each year when one of the terms comes due.

2.) When your investing strategy boils down to chasing last year’s winning stocks or mutual funds

If you’re the type of investor who’s constantly looking for the latest fad, you might be falling victim to the behaviour gap – the difference between investment returns and investor returns.

Consider that, according to DALBAR, from 1986 to 2016 the S&P 500 Index averaged 10.16   a year, but the average equity fund investor earned just 3.98   a year.

When you think about our poor investor behaviour, coupled with sky-high mutual fund fees (at least, here in Canada), those investors who just can’t help themselves might be better off parking their savings in the best five-year GIC and earning a guaranteed return. Continue Reading…

Getting the best bang for your buck with everyday purchases

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By Sia Hasan

Special to the Financial Independence Hub

You work hard for your money, so it makes sense that you would want to stretch your dollar as far as possible. If you are like many other hard working adults, you may splurge here and there on a cup of coffee or a matinee movie. However, most of your take-home pay may go toward everyday or typical purchases. These may include food, gas, clothes and more.

It may seem challenging to stretch your dollar in these essential areas, but rest assured that there are several strategies you can employ to get the most bang for your buck. Before you make another purchase on regular or everyday items, consider how these tips can benefit you.

Choose your payment method carefully

The primary payment methods for standard purchases are cash or credit cards. Cash may be in the form of hard currency, checks or a debit card. Many people believe that paying with cash or a cash alternative is a smart option because it helps you avoid taking on expensive debt. It is true that debt can cost you money.

However, if you use credit cards responsibly, a credit card may be a better payment option. Consider that you can make all your regular purchases with a credit card, and you can pay the full balance off each month. Therefore, no interest is accrued, and there is not a cost for using the credit card. You may enjoy the benefit of bolstering your credit score with responsible use of your credit card. Keep in mind that higher credit scores may qualify you for a lower rate on a mortgage, a car loan, insurance rates and more. Therefore, this payment method can yield tremendous savings over time.

Take advantage of Credit Card Rewards

When you make purchases with credit cards regularly, you may also enjoy the additional benefit of earning rewards points. You can begin by searching for a good credit card for average credit and comparing rewards programs or opting into the rewards program on an existing account. Pay attention to the fine print as you compare programs. Some credit card rewards programs, for example, limit the points that you can earn within a specified period of time. Other programs require you to use the points within a certain period of time. These rewards may essentially give you cash back on your purchases, or the points may be redeemed for other items with financial value.

Shop around

Even when you take these steps to stretch your dollar, there may be other ways to save as well. Shopping around is easier to do than ever because of the Internet. Continue Reading…

The two main types of Financial Independence

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By Vicki Peuckert Cook

Special to the Financial Independence Hub

If you are financially savvy and on your way to a secure retirement, you may already know the steps you should take to work toward financial independence. Maybe you’re already there.

But if you are climbing out of debt and just taking control of your money, financial independence (aka “Findependence”) might seem entirely out of reach. If you have kids, focusing on solving your own money problems may be complicated by your concern about their financial future too.

Financial independence means two different things at two different points in life. And they are both significant milestones. You and your adult children may even be working toward them at the same time!

Here are explanations of both kinds of financial independence and actions to consider to make the path to “FI” attainable, no matter where you are starting from.

Becoming Financially Independent from your parents

Adult children who no longer require any monetary support from their parents are financially independent. This doesn’t mean that a parent can’t provide some kind of financial aid if they choose, it means a child can meet their financial obligations without parental help.

With money concerns including five-figure student loans, rising rents, and considerable consumer debt, many young adults face an uphill battle when trying to leave their parents ‘financial’ nest. And parents may also be “sandwiched in” – helping their kids and providing support for aging parents while trying to save for retirement.

For the benefit of everyone involved, parents and adult children have a responsibility to each other to focus on changes and develop a plan to make financial independence a priority.

What can young adults do?

They can learn how to track expenses and make (and stick to) a budget. Making choices like sharing housing with friends and buying used cars or taking public transportation can also help 20-somethings tackle debt.

Over time, increased income from second jobs paired with making frugal choices like cooking at home, can provide the money adult children need to minimize and finally eliminate the need for parents to provide financial support.

What should parents do?

Parents should start setting limits on the assistance they provide their children. And they should work closely with them to create a plan to end all financial support over a set period of time. Parents need to realize they may actually be harming their kids by enabling their kids to make decisions that aren’t always focused on them becoming financially secure.

If a parent always steps in with a solution, their kids may not learn the importance of meeting their needs while putting off wants for the future. And this will only lengthen the time needed to reach financial independence.

Providing advice, emotional support, and helping adult children problem solve money troubles shifts the financial relationship to adults talking, rather than a parent instructing their child on what to do.

Becoming Financially Independent from Work

The other definition of financial independence is one that’s sometimes debated. But there is little argument that it should be a future goal of everyone. In general, reaching financial independence means you have enough income to pay for your living expenses for the rest of your life without having to work. Continue Reading…

Retiring at home — and how to get the funds to do it

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By Darlene Vilas

Special to the Financial Independence Hub

I’ve spent many years helping a lot of retirees to stay in their home. So, I wasn’t surprised when a survey by HomeEquity Bank and IPSOS revealed that 93% of Canadians aged 65+ are determined to retire at home.

For people with a healthy pension and retirement savings, staying in their home is rarely a problem. However, many Canadians have inadequate retirement savings. According to a report by CIBC, 30% of people have no retirement savings at all, while another 19% have saved less than $50,000. I help people with lower retirement income to understand the financial options available to them, so they can retire comfortably in their home.

Why staying put is so important

According to HomeEquity’s research, maintaining independence is a key reason for retirees wanting to stay in their home, followed by staying close to family, friends and their community.

Many of my older clients find just the idea of moving to be very stressful. They don’t like the thought of downsizing, which means leaving behind loved ones and places they’re familiar with.

I can understand that, so I try to help people stay in their home, whatever their financial situation. Thankfully, for homeowners, there are several options available.

The financial tools that can help you stay at home

Taking out a mortgage or a line of credit can allow you to cash in on some of your home’s equity. However, the mortgage option is becoming increasingly difficult for retirees. With the new mortgage stress test, you have to qualify at a much higher rate than before, which means you can now borrow much less. Plus, taking on mortgage payments for up to 20 years can put a strain on your retirement income. If you miss some payments, you could lose your home.

A home equity line of credit can be a good option if your income qualifies.  They are fully open and can be repaid at any time without penalty. This is a very helpful option for homeowners who would like to access cash easily if they experience unforeseen home expenses such as emergency repairs to the home. Payments are typically interest only, which keeps your monthly obligation at a minimum.   The downside of a home equity line of credit is they are callable at the discretion of the bank.  This means you could be forced to sell your home to repay the line of credit.

With a reverse mortgage, you can borrow up to 55% of your home’s value. You never have to make a mortgage payment and you’ll never be forced to move out. Many of my clients use a reverse mortgage as an efficient way of cashing in some of their home’s equity. Because there are no regular mortgage payments, it can help them to greatly improve their financial situation, boost their disposable income and live the kind of retirement they’d hoped for.

Those people concerned about maintaining their home’s equity can make monthly interest payments, but the nice thing is, they don’t have to. Continue Reading…

It isn’t what it used to be: Prospects for interest rates and inflation

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When I talk to serious, successful investors, few ask, “Do you think the central banks will raise rates two or three times by a quarter-point before the end of the year?” or “Do you think inflation will hit 3% in the next year?” They are more likely to ask things like, “What are the chances that interest rates and/or inflation will get back up to the peaks of the 1970s/1980s?”

That is a much more important question.  A quarter-point change in interest rates or inflation is a fluctuation. A return to the peaks of the 1970s/1980s would be a disaster.

No one can predict the future, of course. The easy way out on the question would be to say, “Oh no, that could never happen again.” But the productive way to address a question like this is to look at those earlier decades and to try to figure out what was special about them.

It seems to me that in the years prior to those decades, three specific political/economic factors worked together to unlock a lot of pent-up demand for money, goods and services, and funnel it into a narrow timeframe where it could have great impact. These factors helped spur the rise in interest rates and inflation that followed.

The first factor was that, during four decades between the early 1930s and the early 1970s, the U.S. managed to fix the price of gold at around $35 U.S. per oz.

Greenback became a world currency in three crucial periods

This helped set up the U.S. dollar as something of a world currency during three crucial, historic periods: the 1930s depression, World War II and the post-war boom. The role of world-currency issuer let the U.S. expand its money supply without burdening itself with a heavy load of domestic inflation — not burdening itself right away, that is. But eventually the $35 gold peg gave way, like a dam that bursts when the force of a rising river becomes too much. The breaching of that $35 barrier helped set off a worldwide wave of inflation, as the value of the U.S. dollar withered in relation to the value of gold. Continue Reading…