MoneySense » 2011 » March

This and That: Home insurance, portfolio construction and more…

Canadian Capitalist — Fri, 01 Apr 2011 03:03:31 +0000

Royal Canadian Air Farce’s Roger Abbott passed away recently. Thanks for all the laughs Roger and may you rest in peace. In the following skit, rich sheiks are wondering how they are going to survive low oil prices.

Now on to this week’s selection of interesting articles:

Rob Carrick reports that insurance companies have actually been going easy on people buying home insurance. As a homeowner whose rates went up 14 per cent and 28 per cent in the past two years, all I can say is: Gee! Thanks guys!
In a column in The Star, Morningstar’s Rudy Luukko blames Canada’s “world-class bundling” for our high mutual fund fees. He urges investors to shop around and make price comparisons.
Larry MacDonald highlights the five most overlooked tax tips courtesy of tax-preparer H&R Block.
Canadian Financial Stuff reminds us to regularly change the password for online access to bank and credit card accounts.
Thicken My Wallet wears his lawyer hat to answer the question: Can you lose your home as a victim of real estate fraud?
Michael James doesn’t think eliminating GST on mutual funds will help investors all that much.
Money Smarts Blog takes a closer look at the claim that Canadians are withdrawing from RRSPs at an alarming rate and finds that the fears are overblown.
The Blunt Bean Counter explains why it is important to include valuable collectibles in the will.
In a pair of related blog posts, Larry Swedroe explains why even very conservative investors should include some stocks in their portfolio and why even very aggressive investors should have some bonds.
A Canadian Money Forum member shared his experience with literally flushing money down the toilet.
My Own Advisor explains why he hates debt. I hate it too and it’s a great feeling not owning anyone a single red cent.

That’s it for this week and have a great weekend everyone!

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This and That: Home insurance, portfolio construction and more… is brought to you by Canadian Capitalist — Helping you to invest & prosper.

What’s eroding your savings potential?

Gail Vaz-Oxlade — Thu, 31 Mar 2011 17:51:52 +0000

If there seems to be a disconnect between your budget and your bank balance it may be time to get out the magnifying glass and make like Sherlock Holmes.

Time to do some legwork: track your expenses to the penny for a month to get a sense of who the culprits are. It could be that daily coffee that grabs your wallet on the way to work. Or the crap-at-the-counter that dips into your purse when you’re going through the check-out. Maybe it’s an expense you’ve assumed need always remain the same: car or house insurance, or communication costs. Comparison-shopping on fixed expenses can save you big-time, so make the effort to find a better deal.

Perhaps your problem stems from not understanding the motive for the crime of overspending. Are you so tired from a hard day at work that you can’t be bothered to make dinner? As much as this looks like pleasure spending, it isn’t. You’re trying to compensate for no time and no energy. If you don’t want the solution to your no-time/no-energy problem to cost you big-time, you need to recognize the real problem and come up with a solution. Would meal planning, batch cooking and freezing one weekend a month eliminate the ordering in that suffocates your plans to save?

Or maybe it’s your modus operandi: you get bored, you go shopping; you get depressed, you go shopping; you want to spend time with your girlfriends, you go shopping. Recognizing what pushes your buttons or how you feel when you buy something new and changing how you do things could be the ticket to rescuing your savings goals.

It’s easy to let your money escape and then moan about having nothing left to save. But if you’re serious about saving, you’ll put in the time to figure out the crimes you’ve been committing against your budget so you can find the money to save.

Take it easy, Vancouver

Jody White — Thu, 31 Mar 2011 17:36:21 +0000

I’m beginning to notice a trend in the comments to our Best Places to Live list.

It seems that where you live in this great land of ours has a strong influence on how you’ll react to our findings.

For example, folks from Ottawa are (unsurprisingly) supportive of the study’s findings and rhyme off the reasons why they love their town.

Torontonians are largely AWOL from the comments section, and I think I know why. After coming in 88th spot (solidly mid-pack) two years running, there’s not much to say. Hear no evil, see no evil …

Meanwhile, Maritimers and Newfoundlanders lament their hometown’s showing on our list, but in their opinion it’s the greatest place to live in the country and that’s all that matters. Even the Mayor of last-place New Glasgow — who has ample reason to be annoyed with us — was nothing less than friendly while he told me he believes our methodology is flawed.

The few Northerners who took the time to comment seem content to have garnered a mention, and Albertans love the fact that five of the top 20 places are in Wild Rose Country.

However, the howls of indignation coming from the West Coast are nothing short of amazing. I’ve received so many emails that begin with “How can Vancouver not be on your list?” that it crashed my computer. “Where did the writers of this article get their education?” an enraged West-Coaster demands. “Vancouver is not even on this list… go and get it right people.”

It seems that for Vancouverites, expectations for their city’s showing on such lists are on par with those of Canadian Olympic hockey. Silver medals — while shiny — are for losers.

The outrage seems to stem from the city’s back-to-back wins in the Economist’s “Most Livable Cities” list. If such an august authority as the Economist deems Vancouver worthy of No. 1, what’s the deal with MoneySense?

The difference, in a word, is audience. Here at MoneySense, our audience is everyday Canadians who are trying to get the most out of every dollar they make and spend. For the most part, our readers are not rich. They are working, middle-class folk with a job, a mortgage, a family and all the associated expenses. This is why our Best Places to Live list is focused on financial issues such as job prospects, real estate values and taxes. It is aimed at the average Canadian who might be considering a move to another city. A quick look at our list will give them a good idea of the fundamentals of a place they’ve never visited, which may help them in their decision.

The Economist’s list is a whole different story. Even a cursory browse through that magazine makes it very clear that John and Jane Public from Main Street Canada do not fit their target demographic. The Economist caters to the world’s elite: executives, diplomats, hedge fund managers and politicians, all of whom typically have salaries with more figures than my SIN number. Their “Most Livable Cities” list caters to people who have the luxury of buying a property anywhere in the world. If you belong to that club, then yes, Vancouver is where it’s at: mountains, ocean, lots of beautiful parks and a temperate climate are but a few reasons to call the city home.

However, for the average Canadian Vancouver has some substantial obstacles to overcome. First of all, the average house price is $795,000, putting it dead last when it comes to housing affordability. This pushes the “time to buy” figure (average price divided by average 2011 estimated household income) to 9.47 years, dead last again.

Were Vancouver’s household income levels the best in the country, this wouldn’t matter so much. In this category the city scored 52nd — not a bad score, but not enough to balance out the astronomical real estate values.

Crime and job prospects are problems too. Vancouver ranked 111th (out of 180) in overall crime and 110th in unemployment. In crime severity, it ranked 148th.

And then there’s the weather. While relatively warm, the city gets 170 days of precipitation a year (ranking 134th) for a total of 1,275.5 mL of precipitation. If you like rain, Vancouver is paradise. But anyone who has spent time there knows that grey, wet skies can stretch on for weeks at a time, which can be hard on your mental outlook. There’s obviously nothing Vancouverites can do about this, but it does affect the overall “happiness” factor.

A note about the environment: Few will argue that Vancouver’s skyline places it amongst the most beautiful cities in the world. However, that can’t be measured in an empirical way, which is why “natural beauty” or “epic sunsets” are not found in our methodology.

So please, keep the comments coming. We’re all about interactive journalism around here. But before you let loose a scorching missive based on your city’s ranking, have a close look at the numbers. They don’t lie.

To the citizens of Vancouver, it’s great that you take pride in your city. But sometimes the truth hurts.

Just ask Toronto.

Jack Mintz on Family Taxation

Canadian Capitalist — Thu, 31 Mar 2011 04:23:54 +0000

In an article titled Taxing Families: Does the System Need an Overhaul? that appeared in a publication put out by the Institute of Marriage and Family Canada, Prof. Jack Mintz of the University of Calgary argues that our current tax system is unfair to families with one working parent. Prof. Mintz addresses the criticism that one-income families don’t incur some significant expenses that two-income families do such as childcare. He acknowledges that the criticism has some merit but can be addressed by making adjustments to the tax system. One suggestion he makes is to adjust the personal exemption downwards for the stay-at-home spouse and better recognizing the costs incurred in earning a living.

None of the problems associated with family taxation are insurmountable. The basic aim is to achieve efﬁciency and fairness under the tax system. It is impossible to see how limiting taxation to individual taxation supports these principles.

Nine industrial countries apply the family taxation principle. The French and Portuguese systems aggregate family income but explicitly allow for family size to reduce tax payments. The Czech Republic, Germany, Ireland, Luxembourg, Poland, Switzerland and the United States allow family members to ﬁle jointly and split income. Other industrialized countries rely primarily on individual taxation but often allow for family tax principles such as the transferability of deductions and credits or joint ﬁling or splitting of income of some sort.

Prof. Mintz goes on to propose three ideas for implementing a system of taxing families. Income splitting is one of them but Prof. Mintz says that while it may be the simplest, it does not address criticisms about equitable treatment of families.

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Lunch money

Gail Vaz-Oxlade — Wed, 30 Mar 2011 18:19:22 +0000

Find a way to trim your “outside food” costs down by half by packing lunch and making your own coffee and you could boost your savings by $1,875 a year. Save that for 30 years in a TFSA at an average return of 5% and you’ll have over $130,000. It’s got to be worth a little time packing lunch to save $130,000!

Creating a lunch for work does take some time and planning. The first thing out of most people’s mouth is, “I don’t have time in the mornings!” Really? Then get up earlier! Are you telling me it’s not worth almost $2,000 a year to you (in after-tax dollars) to get up 15 minutes earlier in the morning? Give your head a shake.

Some people say they buy lunch because they love the social aspect of eating out. Hey, I’m as social as the next guy, but being social at the cost of not saving is DUMB. Pick one day of the week when you’ll eat out with friends and give yourself something to look forward to. Maybe you’ll choose Wednesday (hump day) or Friday to celebrate the end of the week. Whatever day you choose, lunching out once a week instead of five will cut your spending a ton.

Start a lunch club at work and pick one day a week when you each bring something to contribute to a group lunch. Or challenge each other to find the cheapest good food in your area, and take advantage of the Lunch Special. All-day breakfasts at $2.99 can’t be beat for value.

Be creative. The idea is to have a great life and save some money too. It may take a little noodling, but if you create the right recipe, you can have your cake and eat it too!

10 must use online calculators

Romana King — Wed, 30 Mar 2011 13:25:31 +0000

Most of us know what calculator to use for that basic mortgage calculation—the amount you pay each month in relation to the home price, your amortization period and term and the prevailing interest rate.

But what about those more complex calculations, such as the cost to break your mortgage or the ability to compare three mortgage options while determining your effective interest rate (that’s the rate you actually pay when you factor in compounding interest over the term of the loan)?

I’ve compiled a list of 10 online calculators that will help you with the more complex or difficult calculations associated with home ownership. But, if, after scanning this short list, you notice that one of your favourite calculators isn’t listed here, then please add it to the list or email me directly at: romana.king@moneysense.rogers.com.

1) Will refinancing save you money?

Want to know how much you’ll save, overall, if you refinance your mortgage? Then use this calculator from Industry Canada. But you’ll need to know the penalty charge you’ll have to pay before you can sort out how much you’ll save. If you don’t know, use the penalty calculator (below). If you do know the cost of breaking your mortgage, then simply input all the data into the Industry Canada calculator to determine if you’ll really save by refinancing. Go to: Save Money Refinancing.

2) Penalty calculation.

Whether your moving and you need to terminate your current mortgage before the end of your term, or you want to break your current loan arrangement to get a better rate, you’ll need to factor in the penalty cost for breaking the mortgage. That’s where a powerful calculator from RateSuperMarket.ca comes in—it works with both variable rate mortgages (where the penalty is typically the equivalent of three months interest) as well as fixed rate mortgages (where the calculation can be quite complex, and quite expensive). Go to: Mortgage Penalty Calculator.

3) Compare mortgages.

Want to compare how the terms and rates of three different mortgages will impact your payments? Use this effective comparison calculator from TaxTip.ca. The added bonus is that you can calculate your effective interest rate—your nominal, or quoted, interest rate adjusted for the loan term and compounding interest—so you can really see how much your paying for that mortgage. Go to: Compare calculator.

4) Variable rate speculation.

Leaning towards a variable rate mortgage, but want to get an idea of how potential interest rate increases would impact your payments and final balance at the end of the term? Then use this calculator from Interest.com. While it’s an American calculator—so there’s no cap on compounding, which can result in higher payment amounts—it can give you a good idea of what to expect. Go to: Adjustable Future Comparison.

5) Actual monthly costs.

Want to know how much you’ll actually spend each month after purchasing a home? Use this calculator by DebtFreeby43.com. Designed as a downloadable Excel spreadsheet (no macros), this calculator lets you input your household budget (add up all your cable, phone, food, etc. costs and input as one lump sum) along with property taxes, water, heat, condo and other fees. Based on these fees, the calculator gives you the required down payment (based on 5%, 10%, 15%, and 20% increments), the mortgage insurance fees (where applicable) and the maximum mortgage you’d qualify for. Go to: Home Purchase Budget Calculator.

6) Rent vs. buy.

Are you still renting and want to know whether or not you should dive into the housing market? Then try this rent vs. buy calculator, conveniently housed on the NY Times websites. Go to: Rent vs. Buy.

7) Will refinancing save you money?

Want to know how much you’ll save if you refinance your mortgage? Then use this Industry Canada calculator. But before you can figure out your savings, you’ll need to calculate the penalty you’ll pay to break your mortgage. Go to: Refinance Savings calculator.

8) How much can you afford?

Want to get a rough estimate of how much mortgage you could get from the bank? Use this tool from Dinkytown.net. Go to: Pre-qualify Mortgage Amount. Or try Ratehub.ca’s Affordability Calculator, which asks you to input income, expenses and debt payments.

9) Down payment impact.

Want to compare what your monthly payment would be based on the size of your downpayment? Then use Ratehub.ca’s Mortgage Payment Calculator. This simple calculator allows you to enter one purchase price and then calculates the total mortgage you will borrow, including mortgage insurance fees, based on your down payment. Go to: Down payment Impact.

10) Land transfer tax.

If you live in anywhere but the provinces of Alberta and Saskatchewan then you’ll need to include the land transfer tax into your closing cost calculations. Use the calculator from Ratehub.ca. Go to: Land Transfer Tax.

Are You Ready For a Venture?

Canadian Couch Potato — Wed, 30 Mar 2011 11:00:35 +0000

As I discussed in Monday’s post, an American ETF provider launched the Global X S&P/TSX Venture 30 Canada ETF (NYSE Arca: TSXV) on March 17, the first index fund pegged to Canada’s junior stock exchange. iShares has announced that it will launch its own the S&P/TSX Venture Index Fund (XVX) in the coming months.

These new ETFs give Canadian index investors an opportunity to access a whole new market that was previously off-limits to anyone who wasn’t willing to trade individual stocks. But before you decide to add one of these funds to your portfolio, understand what you’re getting into.

A risky Venture

The Venture exchange is a play on commodities. If you think the broad Canadian market is poorly diversified, it has nothing on the Venture market. All 30 of the companies in TSXV are involved in either mining or energy (oil and gas). So don’t make the mistake of thinking that this fund gives you broad exposure to small companies in all sectors of the economy.

These are really small companies. It’s a stretch to call these companies small caps — all but the largest Venture-listed companies are micro caps (worth less than $300 million), and TSXV includes several penny stocks (those with share prices under $1). Indeed, all 2,400-odd companies on the Venture exchange have a combined market capitalization of about $78 billion. That’s significantly less than the market cap of Royal Bank alone.

Buckle up for the ride. You can expect Venture-tracking ETFs to be much more volatile than a broad-market Canadian index fund. According to the prospectus for the forthcoming iShares ETF, companies on this exchange “are subject to substantially greater risks of loss and highly volatile price fluctuations because their earnings and revenues tend to be less predictable and their markets less liquid than companies with larger market capitalizations. These companies may also be highly speculative in nature and may not have established businesses.”

Tracking error could be significant. I would take a wait-and-see approach with any new ETF as small as TSXV. (The fund currently has less than $5 million in assets, and many of its holdings amount to less than $100,000.) The iShares ETF sounds more promising, given BlackRock’s long record of prudent management. But it remains to be seen whether a Venture ETF can ever have the economies of scale it will need to keep its costs low and its tracking error small.

Other ways to think small

If you want to tilt your portfolio to small-cap stocks, investing in the TSX Venture Exchange is not the way to do that: TSXV, at the end of the day, is speculative investment in 30 extremely small mining and energy companies, and it’s not appropriate for most index investors. There are much broader options for those looking for small-cap exposure:

For Canadians, the iShares S&P/TSX Small Cap Index Fund (XCS) has more than 200 holdings and an MER of just 0.55%. Many of the companies are also part of the S&P/TSX Composite, though they carry more weight in this fund. Inevitably, XCS is skewed to mining and energy companies, too, but 40% of the fund is in other sectors.

The US small-cap market is incredibly rich, and the Vanguard Small-Cap ETF (VB) gives you more than 1,700 stocks for just 0.14%. Energy and materials are small parts of this fund, whose largest sectors are financials and technology (each about 20%), health care, industrials and consumer goods.

For global small-cap exposure, it’s hard to top the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS). Canada actually represents the largest share of this fund, at more than 15%. The ETF includes more than 2,700 companies from around the world, with the greatest weight in the industrial, financial and consumer sectors. The MER is 0.33%.

Family Tax Cut: A Tax Cut for the Rich

Canadian Capitalist — Wed, 30 Mar 2011 04:22:21 +0000

The Family Tax Cut that the Conservatives say makes “the tax system fairer” disproportionately benefits one-income families with very high household incomes. I ran some numbers using the excellent Income Tax Estimator available here to find out how much benefit accrues to a one-income household with two children at various income levels. If you look at dollar amounts, families with incomes of $50K or less will save little to nothing under the Tory income-splitting proposal. But, as you can see in the following graphic, families with household income exceeding $100,000 will save substantial amounts on their income taxes.

One could argue that, of course, higher income families would save more because they pay more in taxes. So, let’s look at the percentage of income tax a household could save when the Family Tax Cut is implemented. Ideally, what we’d like to see is lower income households saving a higher percentage on their income taxes than a household with a higher income. But, as the following graphic shows, that’s not the case with the Family Tax Cut. A household earning $50K will save 13% on their federal income taxes, which is less than the 16% that a household earning $200K would save. Single-income households with a household income of $90K will save a stunning 29% on their federal taxes.

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