Chapter Thirteen
Others
This chapter is intended to be quick snippets on topics that don’t really require an entire chapter to understand the basics. This doesn’t mean they cannot be infinitely more complicated than we are going to cover here.
You can expect point form commentary that is valuable for the majority of Canadians. This does not mean it is the optimal advice, but instead intended to be practical. As with the rest of the book, this knowledge will give you a great starting point. As your knowledge grows you will find this advice isn’t always the best.
Good debt? Bad debt?
• The concept of good debt and bad debt is a topic often debated. You will see lots of articles that list bad debts as credit cards, loans, lines of credits, payday loans, etc. and good debts as things like mortgages and student loans.
• The truth behind all of this stuff is that the only good debt is one that you can afford, and allows you to generate more cashflow and/or saves you money. For example: in my opinion, a consolidation loan that saves you $300 p/m and reduces your interest costs over time by $3000 is a good debt, relative to the old debt. Conversely a mortgage that you can barely afford is a bad debt, no matter the fact that there is an asset tied to it.
• It is interesting that there are definitions of good and bad debt because everything is situationally dependent. It is easy to say that a student loan is good debt and a personal loan is bad debt. But, if you are able to get a personal loan with a cheaper interest rate, a lower monthly payment paired with interest savings over the remaining term is the personal loan really a bad debt? Do you see what I mean?
• Basically, don’t listen to ‘traditional’ advice. Instead, take a look at your own situation. If a move benefits you, then it is good. If it does not, then it is bad.
• Where this can get complicated is if you think something will improve your life and it doesn’t. RV’s, campers, toys, etc. are great examples of this. Try and stay away from them.
Vehicle financing
• Vehicle financing is full of smoke and mirrors. Instead of aiming to get the cheapest interest rate, try and aim for the cheapest purchase price. Even with a higher interest rate you will almost always pay less overall.
• Stay away from expensive warranties, undercoating packages, etc. For most people these will simply be a money grab. Instead, put aside money to handle repairs.
• Not sure whether you should buy a new car or keep the old one? Definitely keep the old one. Repairing a vehicle is significantly cheaper than a new car payment.
TFSA
• A Tax-Free Savings Account (TFSA) is an account where any income/interest that you earn is tax free.
• Although it is named a ‘Savings’ account, you are able to invest in it.
• This is generally better for people than investing in an RRSP.
• You do not get any money ‘back’ in taxes when you invest in a TFSA. The reason is any of the money you earn inside of it is not taxed.
RRSP
• A Registered Retirement Savings Account (RRSP) is the traditional savings vehicle that most people use for retirement. The way that it works is the money you put into the account is subtracted from your yearly income and the income tax that you would have paid is returned to you by way of an income tax refund.
• For example, if your tax bracket is 20% and you invest $1,000, your taxable income would be reduced by $1000. This means you would pay approximately $200 less tax that year which may lead to a refund.
• For an RRSP to be operated efficiently, you should be taking any refunds you receive and reinvesting them right into the RRSP.
• Because most people do not do the last point, a TFSA is usually more favourable for people.
Insurances
• Home Insurance, Auto Insurance, Life Insurance, etc.
• I generally recommend shopping around.
• While not always true, paying more sometimes will yield better experiences.
• For example - it is easy to save $100 per year on insurance. But if you need to make a claim you may end up being out thousands. I have had this occur to me personally.
• The risk of not having insurance is too great.
Mortgages
• There are two types of mortgage rates: Fixed rates, and variable rates. A fixed rate mortgage has an interest rate that stays the same for the term of the mortgage. A variable rate mortgage changes based upon the bank’s prime rate. This rate fluctuates from time-to-time.
• Generally speaking, a variable rate mortgage will be cheaper overall than a fixed rate mortgage. Assuming there is enough of a difference between variable rate and fixed rate.
• However, for peace of mind (which can be extremely valuable) a fixed rate mortgage may be the better choice.
• It is generally better to not be nervous about your decision. So, if variable mortgage rates make you nervous then you should go with a fixed rate. Remember, behaviour makes people successful. This means that if you feel better with a fixed rate, go for it.
• Mortgage insurance is usually very expensive insurance. You can typically obtain your own private insurance cheaper. Shop around.
Stocks, mutual funds, seg funds, or ETFs?
• I strongly discourage investing in individual stocks. It is impossible to be smarter than the market as an individual. People study stocks as a living. It is impossible to think that you will know more than professional stock traders.
• This leaves you with Mutual funds, Segregated Funds, and ETFs.
• Mutual Funds and ETFs (Exchange Traded Funds) are similar. They both hold many individual stocks. Because of this, they are safer than investing individually. I recommend investing in board market funds (meaning funds that have many, many stocks).
• Avoid specific industries. For example: don’t invest in individual energy, pharmaceutical, or financial funds. Instead, invest in funds that contain a mixture of all industries.
• Segregated Funds come with guarantees. While they cost more than ETFs and traditional mutual funds, if you are nervous about investing they are a great place to start.
• The stock market has never lost money in a 20+ year period. Meaning that there is truly little risk as it pertains to retirement saving. The increased cost of segregated funds may not be worth it because of this. However, remember that peace of mind and your behaviour is what will make you successful, not the fees charged.
Life-style inflation
• Life-style inflation is a concept where when you make more, you will spend more. It is very real.
• I recommend using a percentage-based system. For example, whenever you get a pay raise or an extra sum of money save/invest a percentage and then spend the other.
• I find a 75/25 mix to be best. Save 75% of any extra earnings/lump sums, and freely spend 25%. This means you will always be saving more and more. If you get a pay raise that equates to $100 per month, save $75 and increase your spending by $25.
• Constantly evaluate your spending; see where you can cut easy items.
Student loans
• Student loans can be an unbelievably valuable tool in helping students pay for education they otherwise couldn’t afford.
• I strongly recommend comparing the cost of the overall education (and the monthly payment that would cost on the student loans) and the expected starting salary the education would provide.
• If the student loan is unaffordable at that point, it would be beneficial to look at another profession/program.