The following is a guest post. I’ll have my 2012 outlook up on Monday. Have a great weekend! ~ 2 Cents

Looking for a credit card can be difficult because there are so many different types of cards that offer their holders different advantages. Some credit cards have rewards for making purchases from certain stores, but others will offer people cash back when they spend a set amount of money with their cards. Finding the one that is perfect for them has gotten easier because of the credit card comparison sites that have begun to make their way to the Internet.

Credit Cards for People with Excellent Credit

The comparison sites cater to different types of people and cards. For example, some people are looking for a card that will give them a 0 percent interest rate, and these comparison sites will have several examples of credit cards that offer the 0 percent introductory rate for people with excellent credit. As this will not be the only advantage being offered by these cards, everything will be listed on this site. If people would like to apply for the card, they have the opportunity to do so right from the comparison site.

Credit Cards for People with Lower Credit Scores

Comparison sites will even have a list of cards for people with bad credit. Not everyone can qualify for the 0 percent interest rate cards mentioned above, but these sites make it easy for them to seek a credit card for average and low credit scores.

Frequent Flyer Miles or Cash Back

A popular feature for credit cards is the ability to earn points to receive frequent flyer miles. These credit cards may also have a feature that offers the card holders cash back when they have spent a set amount of money. For example, some cards will give people $200 cash back after they have spent $500 in a set amount of time, such as three months. The comparison sites will also help people find several examples of these cards.

The British Love Comparison Websites

The credit card comparison website is a favorite of the people in the United Kingdom. These sites give people hundreds of choices of credit cards, and help them choose the right one by listing the interest rate, the length of time the cards will have a 0 percent interest rate and whether or not balance transfers are allowed. They can also read the reviews written by current card holders. With all of this information on comparison sites, people looking for a credit card can find the best deals.

Related posts:

1. How to Effectively Use Cash Back Credit Cards and Maximize Rewards
2. What Happened to the Euro Deal Euphoria?
3. How Do You Deal with Financial Stress?

The following is a guest post with some good advice to kick off 2012. Enjoy!

The New Year is upon us, and for many, this time of the year signifies a time of new beginnings. People strive to better themselves by creating New Year’s resolutions, many of which are focused on health. While trying to be a better person in the new year is nothing to scoff at, there are a few New Year’s resolutions that are good for you both physically and mentally, as well as financially.

Losing Weight

Obesity is one of the greatest epidemics plaguing America today, making losing weight one of the most popular New Year’s resolutions this year. However, losing weight isn’t just ideal for your health, it is also highly beneficial to your wallet. In addition to saving money with reduced eating out and grocery bills, losing weight will also save you money longterm as it will provide you with lower health insurance premiums and keep you from suffering expensive medical conditions, such as diabetes.

Going Green

Going green has been on nearly everyone’s mind in recent years, and many are choosing to live more sustainably this year. While some aspects of going green aren’t always cheap, such as new solar paneling, everyday switches, such as switching to CDLs, adding weather stripping to doors and windows, and lowering the thermostat, can actually save you money while you help the environment.

Quitting Smoking

Smoking is in no doubt an expensive habit. Regular smokers can find themselves spending upwards of $200 a month on cigarettes, and even more so in the future should they begin to suffer from one of the numerous health conditions associated with smoking. By quitting smoking, you can save over $1,200 a year alone in cigarettes, and even more down the road by avoiding high medical bills.

Finding a Better Job

There is no doubt that millions of American’s are fighting for new jobs, whether it be selling car insurance or selling real estate, but that doesn’t mean that you should skip out of hunting for a new job yourself in the new year. Finding a new job can not only provide you with a better salary, but also with health insurance and 401(k) match that can provide you with thousands of extra dollars in the future.

Skipping the Coffee Shop

Caffeine is one of the most addictive, a socially acceptable, chemicals in our culture today, and it’s not uncommon to hear someone say, “You don’t want to see me before my morning coffee” or “I really need a Diet Coke right now.” However, that being said, caffeine is also a highly detrimental and expensive habit. The morning coffee that you grab on your way to work or that soda that you get at lunch can quickly add up. So by choosing to give up caffeine in the new year, you will be sure to save yourself a couple hundred dollars.

Everyone wants to get off on the right foot in the new year, and choosing the right New Year’s resolutions is a great way to do so. Just make sure that when you choose your resolutions that they are doing more for you than just making you feel like a better person – make sure that they will also increase your monthly budget too.

Related posts:

1. A Dozen Good Reasons to Move to Canada
2. Are GICs a Good Substitute for Bonds?
3. Is This a Good Time to Invest in Banks?

The following is a guest post. While it speaks to American consumerism, there may be some food for thought for debt-laden Canadians here too.

The economy is in shambles, and while many would like to blame the deterioration of our economy on big government and big business, a large percentage of the blame also lies in the spending habits of the American people. As a whole, we spend too much, borrow too much, and save too little.

“Look at consumption levels and control for purchasing power over the last several decades, and America is simply in a league of its own.” states Sheldon Garon, Princeton Professor and recent author of Beyond Our Means: Why America Spends While the World Saves. “The only people who come close are people in Britain, but they are about 85 percent of the level of American consumption. Germans, French and others are in the 70 percent range, Japanese even a little lower. So American’s spend like no one else.”

We’re willing to pay a couple dollars for a phone number lookup when there are other free services. We are willing to pay $5 a day for coffee when we could just make it at home and save nearly $25 a week. America is a consumerist society and even in the face of the economic downturn we are still struggling to find a balance between saving and spending.

Most entering retirement age are being forced to prolong their careers due to inadequate savings. Many recent college graduates are being forced to move back in with parents because they borrowed too much during college, and are now struggling to find a job that pay enough to cover those high monthly bills.

Consumerism is definitely in every aspect of American culture. It is advertised everywhere and can even be found being promoted in seemingly innocuous institutions such as universities and banks. Other countries provide free or low tuition rates for students while American universities promote spending tens of thousands of dollars by pulling out loans to afford prestigious universities – much like a person who overspends to purchase a nice car. Other countries provide incentives for savings and offer tax breaks to smaller savings accounts while US banks tax small savings accounts and make small banking nearly impossible for lower income households.

For many, binging on credit cards and excessive shopping are no longer an option. Because of the credit crisis, many credit card companies have made it harder to obtain cards which should help limit the amount of debt certain individuals have. But it shouldn’t be the inability to get credit that keeps American consumers from overspending.

If Americans wish to have the comfortable future they have all been raised to believe they are entitled to, they are going to have to remember what it is to work for it and save for it. Taking the time to actually decipher between needs and wants will have to become a priority, and looking at debt in such a cavalier fashion. Not everyone has an excessive mortgage, a high car payment, and thousands of dollars in credit card debt. This should not be our norm.

“If we can’t even talk about the benefits of some saving and we think that only consumer spending is good for the economy, then we’re not even getting to first base on this. We have to begin talking about the benefits of saving, and how we might restore a balance between saving and spending.”

So instead of running through that drive thru for coffee or going out to a fancy lunch or dinner, think about how much you could actually save by choosing to opt out of these luxuries. Overspending shouldn’t be a way of life, and passing rampant and uncontrolled consumerism down through younger generations is only going to continue to trouble our economy. The best financial practice is responsibility, and Americans are going to have to learn it if they wish to be prosperous without excessive debt in the future.

No related posts.

Simplicity is the ultimate sophistication.

~Leonardo DaVinci

When the Tax Free Savings Account was introduced in Canada in 2009, it was hailed for its practicality and simplicity. Any Canadian 18 years or older can now contribute up to $5000 per year to a TFSA and have those savings grow completely tax free. While TFSA contributions are not tax deductible, you will not have to pay any tax on the money you withdraw from your TFSA.

You can put just about any type of investment in your TFSA, or choose a number of different TFSA accounts for different purposes. You could simply have a TFSA savings account, or you could open a TFSA brokerage account whereby you could include stocks, bonds, ETFs or just about any other type of investment vehicle. Whether you earn interest, dividends or capital gains on your savings, your money can be withdrawn tax free. Sounds pretty simple eh?

A Few Asterisks

While I love TFSAs as an alternate savings vehicle for Canadians, they aren’t always as simple as we’d like them to be. I guess that’s just how these things go. Life is complicated. No matter how much we’d like to simplify things, there are always details, exceptions and little asterisks to contend with. TFSA rules are no different.

There has been some confusion over what happens to your TFSA contribution room if you withdraw your gains as well as your original contributions. We addressed that here in January. The latest question peppering search engines seems to be about the TFSA contribution limit for 2012. Why the confusion? Aren’t we allowed to contribute another $5000 each year?

Inflation Indexation for TFSA Limits

In addition to any unused contribution room from other years, you are usually allowed to contribute an additional $5000 per year. You may notice that there’s sometimes a little asterisk (*) next to this figure because it is indexed for inflation in $500 increments. That means that when the inflation rate applied to that $5000 causes it to rise above $5250, the government will raise the limit to $5500.

The consensus seems to be that if the CPI (Consumer Price Index) runs around 2%, that would mean we should exceed the threshold as of 2012. While that looks likely to happen, the CRA hasn’t officially announced the 2012 TFSA limit as of initial publication of this article. I spoke to someone at CRA last week and they said that the official determination hasn’t been made yet, but that it will (obviously) be out by the end of 2011. He advised us to keep watching the CRA website for TFSA updates. (Update: The CRA has left the TFSA contribution limit at $5000 for 2012.)

With the latest Canadian CPI numbers showing inflation running over 3%, it’s hard to imagine that the TFSA limit for 2012 will not be raised to $5500, but we will find out for sure within the next couple of months. I’m sure that many Canadian financial websites will carry the news once it breaks.

For Math Geeks Only

In case you’re wondering about the details of how inflation indexation is applied to the $5000 contribution limit, I thought I might include a chart* here that shows the calculations. It’s actually very simple math. For this example, I’m using a sample annual inflation rate of 2%. *I shamelessly copied this chart from Gordon Pape’s book on Tax-Free Savings Accounts.

Given that the inflation rate is not static, I’m not sure exactly which CPI rate the government uses. They could use an annual average of the monthly inflation data. I’m also not sure whether they use the headline CPI rate or the core rate, which excludes food and energy.

If you follow the chart, you can see that the cumulative inflation factor just adds 2% to the figure from the previous year. So 2% of $5000 is $100 and that is added to the $5000 amount from 2009. For 2011, you just take 2% of $5100 (which is $102) and add it to the 2010 figure like this:

2011 Cumulative Inflation Factor = $5100 x 1.02 = $5202

Since the cumulative inflation factor will put our $5000 over the $5250 needed to round it up to the next $500 increment in 2012, it seems likely that the TFSA limit will indeed be raised for that year. Again, this example is for demonstration purposes only. I’m not sure exactly which CPI rate the CRA will use. If anyone can enlighten us on that, I’d be most grateful.

I hope this answers some of the questions floating around out there regarding the 2012 TFSA contribution limit.

Update: The CRA has left the TFSA contribution limit at $5000 for 2012.

Your comments are always welcome.

Related posts:

1. TFSA: Investment Gains, Withdrawals and Contribution Room
2. TFSA Withdrawal Rules
3. TFSA vs. RRSP Duel: Who Wins?

Starting today, there’s a new financial resource for Canadians out there. It’s called Finizi. Basically, Finizi is a free online service that allows financial institutions to compete for your business. At this time they are only offering GICs, but there are plans in the works to offer competitive bidding on rates for car loans and mortgages as well.

How It Works

Basically, you just need to go to finizi.com and:

1.  Request a GIC rate

Select the type of GIC you want and specify the amount you’d like to invest.

2.  Financial Institutions Bid for Your Money

Review your bids in a live auction environment. Financial institutions bidding for your business may include credit unions, trust companies or chartered banks. So far, they have about 5 institutions on board, but many have said that they would be interested in joining once the platform is up and running. You are notified when the auction closes.

3.  Choose a Winner

Finizi will show you the top 3 rates for the auction and you can choose an in-branch or online fulfillment process. Once you choose the institution and rate you prefer, the winning bank will contact you to complete the transaction.

There is no cost to you as the customer. The bank just pays Finizi a finder’s fee. Finizi doesn’t collect money or sell the GICs directly. They simply facilitate the auction.

Win Win for Banks and Customers

Finizi provides a low cost means for financial institutions to acquire new customers. You may enjoy your GIC experience so much that you decide to use that institution for other products as well. There are no fixed costs associated with using the service, so the bank only has to pay Finizi for closed transactions. This is a great way for banks to take advantage of the huge move toward online banking with very little risk or cost.

For customers, this is just an extension of the increasing move to online financial transactions. The auction model is designed to increase flexibility and transparency for financial consumers – no more shopping around for the best rate. This way, banks can compete for your business and you can complete the whole process online from the comfort of your home if you like.

You can learn more about Finizi by visiting their website or you can watch an interview with Finizi founder and CEO Daniel Shain. If enough financial institutions avail themselves of this technology a great competitive marketplace for Canadians could emerge. It’s great to see Canadian entrepreneurs at work! Congratulations to Daniel and his team and best of luck with this new venture.

(Disclosure: I have no financial or business interest in this company, nor was I compensated in any way for writing this review.)

What do you think of this new way of buying GICs?

Related posts:

1. High Interest Savings Accounts for Canadians: BJ Guest Post
2. 3 New ETFs for Canadians
3. 2010 Financial Plan: Q3 Update

What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.

~ Bill Black

Today I’d like to review an article on the financial sector that I came across via The Big Picture. It’s by Bill Black, author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He is also “a white-collar criminologist who has spent years working on regulatory policy and fraud prevention.”

The debate over whether and how much to regulate the financial industry often devolves into a left vs. right political battle about issues that are actually irrelevant to the core problems in the financial industry and the economic system. Critics who lean left say that the “fat cat” bankers earn way too much money and the industry should be regulated with salary caps and other measures. Those on the political right say that if capitalism allows those financial firms to prosper to the point that executives can reap billion dollar paydays, so be it. (I’ve argued that bailouts mean we can no longer call our system capitalism but that’s a debate for another day.)

How the Servant Became a Predator: Finance’s Five Fatal Flaws

In this article, Bill Black spells out some of the ways in which the financial sector has gradually become too big and too powerful to be of any economic utility. Here are his 5 Fatal Flaws:

1. The Financial Sector Harms the Real Economy

Black sees a number of ways in which the financial services industry, which is just supposed to act as a middleman to the real economy, not only fails to contribute to economic growth, but actually detracts from it:

• It’s Too Big: Forty years ago the financial sector received about 2% of the total profits and the economy did just fine. Now, it takes a 40% of those profits. When you read that statistic, Black’s characterization of the sector as “bloated” and “grossly over-compensated” seems a lot less hyperbolic.
• From Parasite to Predator: Black cites a book by James Galbraith, called The Predator Statein which he shows that “[i]n addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation.”
• Capital Markets Have Decapitalized the Real Economy: This decade, corporate stock buybacks and grants to officers have exceeded new capital raised by the U.S. capital markets.
• Skimming the Brain Trust: While the U.S. economy suffers a critical shortage of educated mathematicians, engineers, and scientists, many of the graduates from these areas choose to enter the financial sector instead because of the exponentially lucrative pay scales.
• Recurrent Financial Bubbles: Black asserts that the financial sector has become expert at creating and implementing what he calls “accounting control frauds”, which are entities that seem legitimate but ultimately allow their creators to enrich themselves at the expense of the real economy. They maximize short-term profits and somehow evade losses and prosecution once the bubbles burst. The ongoing mortgage fraud crisis is just one example of this.
• Capital Misallocation: Capital is denied to the entrepreneurs who could use it to grow the real economy, but require a longer-term view in order to realize the benefits of their investments.
• Government Complicity: Many of these huge financial firms carry great sway in the halls of government by virtue of their generous campaign contributions and massive lobbying efforts – all of which is funded using the piles of capital they have skimmed from the real economy.

2. The Financial Sector Produces Recurrent, Intensifying Economic Crises Here and Abroad

I’ll let Mr. Black speak for himself here:

“The current crisis is only the latest in a long list of economic crises caused by the financial sector. When it is not regulated and policed effectively, the financial sector produces and hyper-inflates bubbles that cause severe economic crises. The current crisis, absent massive, global governmental bailouts, would have caused the catastrophic failure of the global economy. The financial sector has become far more unstable since this crisis began and its members used their lobbying power to convince Congress to gimmick the accounting rules to hide their massive losses.”

3. Extraordinary Predation

The financial sector drives the upper one percent of U.S. income distribution and is responsible for the dramatic increase in “grotesque income inequality.”

4. Cheaters Always Prosper

The financial sector’s leading role in committing, aiding and abetting accounting control fraud has the following consequences:

• Corrupt financial elites
• Rise in Social Darwinism and Gresham’s Dynamic, where “bad money drives out good” and “honest professionals are pushed out” so that the charade can continue. If you read Matt Taibbi’s latest indictment of the corruption in the financial sector and its incestuous relationship with government, you’ll understand that this stuff is really happening. If you haven’t read it, please do, but be prepared to be more than a little angry by the time you finish it: Why Isn’t Wall Street in Jail?

5. Concentration of Power Puts Economy and Democracy at Risk

The CEOs of the largest financial firms wield so much power that it has put the financial, economic and democratic systems in peril:

“This excessive power was a major contributor to the ongoing crisis. Effective financial and securities regulation was anathema to the CEOs’ ideology (and the greatest danger to their frauds, wealth, and power) and they successfully set out to destroy it. That produced what criminologists refer to as a “criminogenic environment” (an atmosphere that breeds criminal activity) that prompted the epidemic of accounting control fraud that hyper-inflated the housing bubble.”

Why Does It Continue?

The one question that occurs to me every time I read articles about the corruption that has become rampant in our financial system is “Why does it continue?” Why do we endure this type of criminal behaviour and stand by silently as it goes unprosecuted? A few ideas occur to me:

• The average citizen is too busy worrying about their day to day concerns to learn about it, much less take a stand.
• The details of many of these financial Frankenstein products are pretty complex and most of us have neither the time nor the desire to acquaint ourselves with them.
• Many of us feel powerless to do anything about the corruption, even if we recognize it and understand its implications.
• With the exception of the odd opinion piece, and a few reporters like Matt Taibbi and Jonathan Weil of Bloomberg, the financial and mass media have been grossly negligent in investigating and reporting on these issues.
• The masses will remain apathetic until one or more of these factors directly and meaningfully interrupts their lives. Besides, the markets are on a tear. That means everything is peachy, right?
• Anyone who brings up the truth of these matters is very quickly, and usually successfully, labeled a conspiracy theorist and written off as a wingnut, the veracity of their reporting notwithstanding.

Recent weeks have proven that even the most well-entrenched despots have an expiration date. The words “plutocracy” and “oligarchy” are popping in more articles. I wonder what the tipping point will be for the financial sector. How long can the Federal Reserve’s shut-up money keep the peace? Will QE3 do the trick?

How do you view the financial sector? Has our society become a plutocracy?

(Image Credit: Barry Barnes)

Related posts:

1. How the Leadership Void Feeds the Financial Crisis
2. Financial Literacy Update #2
3. 5 Financial Toxins and Antidotes

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.

~F. Scott Fitzgerald

Update: Thanks to Arjun at Investing Thesis for including this article in the Canadian Personal Finance and Investing Carnival #16.

Very few topics elicit the kind of virulent debate that the TFSA vs. RRSP argument has generated in Canada this RRSP season. To be honest, those of us who cover finance are probably a little tired of writing about the TFSA vs. RRSP war. I’m sure a lot of readers don’t care to read about it anymore. And yet we (including me, apparently) just can’t seem to let it go. (The RRSP deadline for the 2010 tax year is March 1, 2011, so it should be over soon. )

For years, the RRSP was the stalwart, and really only, widely available tax deferral tool for the average Canadian. Rarely did it come under any real criticism in the mainstream media – until the TFSA came along. Now we see articles almost daily comparing the two. If you point out the short-comings of RRSPs, you can expect a rebuttal accusing you of being an RRSP basher or of “railing against” RRSPs as if you had lost control of your senses. Others will just come right out and say that you’re stupid. Now that really advances the conversation.

On the other side, those who staunchly defend the virtues of RRSPs are sometimes accused of being old-fashioned or in the pocket of the financial industry. Really? Some citizen blogger who works in a completely unrelated industry is conspiring with the Bay Street elite? As a Mom, this is the point at which I would step in between my sons and say “Come now boys. Let’s put this in perspective.”

How about a Little Perspective?

Let’s face it. Those of us who are knee-deep in the nitty-gritty of these financial issues can get a little carried away arguing over the details. To most people, it’s pretty obvious that both RRSPs and TFSAs are great savings and tax management tools for Canadians. Perhaps Jim Yih put it best in his recent article: TFSA or RRSP: Why Not Do Both?

The average Canadian is probably not interested in who’s right or wrong on the most minute details of either product. They just want to understand how they work and how they apply to their personal financial picture. There are some really good basic comparisons out there. Young and Thrifty recently posted a very comprehensive head to head comparison of the two. I wrote a TFSA vs. RRSP comparison last year too. If you’re interested in a little more detail, Larry MacDonald pointed out a few pitfalls to watch out for in 13 RRSP Blunders.

It can also be helpful to read about how other Canadians are choosing to allocate their savings. Paul Brent recently asked me how my family was handling the TFSA vs. RRSP quandary for a Globe and Mail article asking Why Choose a TFSA over an RRSP? The point of the article was simply to give some examples of scenarios where you might choose to top up your TFSA before, or instead of your RRSP.

When you couple the brief quotation in that article with an article I wrote more recently on 5 Reasons to Skip the RRSP Contribution this Year, it’s easy to see how some might put me in the RRSP-basher camp. To be clear, no one has done that to my knowledge. Still, I thought it might be helpful if I spelled my our current thinking on TFSAs vs. RRSPs vs. paying down debt.

Our RRSP Strategy

One area where I do sympathize with the RRSP critics is that I think we need to make sure to remember that we will pay a withdrawal tax when we initially draw down our RRSP accounts, and that the amount of tax we ultimately pay on those withdrawals won’t be finalized until we file our taxes for the year of the withdrawal. It’s important to realize that anything you take out of an RRSP is treated as ordinary income, whether it came from your deposits, capital gains, dividends, or interest income.

On the other hand, TFSAs don’t provide the up-front tax deduction that RRSPs offer. In 2009, we happened to receive a one-time deferred compensation payment from a former employer that would have boosted our income beyond the highest tax bracket. We put some of that money toward our mortgage balance and the remainder in an RRSP. We were able to simultaneously pay down debt, reduce our tax burden, and shore up our retirement savings. This is a good example of an instance where the RRSP makes a lot more sense.

We also maxed out our TFSAs in 2009, the first year they were offered. During the period from 2008 to 2010, our income was uncertain as my husband changed jobs a few times. The money in the TFSA provided a cushion in case of further volatility in our income.

We put a little more money into our TFSA in 2010, but nothing in our RRSP. Our income wasn’t as high, and we chose to put almost all of our disposable income into paying down the mortgage. In 2011, we will pay down the mortgage first, since we don’t have much left owing on it. Next, we will need to contribute to our sons’ RESPs. Two of them will turn 16 this year, so next year is the last year we can contribute for them and still receive the 20% CESG kick.

Larry MacDonald’s article made a good point about the perils of paying down your mortgage at the expense of saving for retirement. We felt OK pursuing this strategy now because we already have a decent emergency fund saved as well as a good start on retirement savings. If we had nothing saved for retirement, we probably wouldn’t be as aggressive about paying down our last remaining debt.

For me, the hardest part of deciding whether (or how much) to contribute to an RRSP in a given year is trying to guess what the future might hold. How will our current marginal tax rate compare to the one we’ll pay in retirement? If our income hits the upper tax brackets in a given year, we will certainly take advantage of the RRSP tax deduction. In addition, Mr. Cents will be eligible for the company RRSP plan this year, so we’ll take advantage of their offer to match monthly contributions up to a certain level as well.

The Bottom Line

TFSAs are better than RRSPs for some Canadians in some years. RRSPs are the better choice for some Canadians in some years. For the majority of Canadians in most years, a little of each is probably a good idea. Declaring a winner is so much less important than understanding how both vehicles work and more importantly, how best to apply them to your own circumstances each year.

How are you handling your savings this year?

(Photo Credit: Feng Yu)

Related posts:

1. TFSA vs. RRSP Duel: Who Wins?
2. 5 Reasons to Skip the RRSP Contribution this Year
3. TFSA Withdrawal Rules

It’s not that I’m so smart, it’s just that I stay with problems longer.

~Albert Einstein

Last week our electricity meter was taken out and replaced with a smart meter. I live in Ontario, the first Canadian province to install smart meters for all homes and small businesses. The program has cost about $1 billion and has been the source of much debate and political posturing.

I guess I should have done the research before the meter was installed, but human nature and my nature being what they are, I didn’t fully comprehend what the program was all about or how I felt about it until it actually happened. It looks like this type of program is going to be rolled out in British Columbia as well, so I thought I would write about the experience to give others an idea of what may be coming to their neighbourhoods at some point down the road.

What’s a Smart Meter?

A smart meter is a new type of electricity meter that measures your electricity usage more often, allowing the utility company to charge different rates based on time of use (TOU). The idea is to promote conservation and offer a cost savings for those who use energy during off-peak hours. There are basically 3 price points:

• On-Peak: In the winter, on-peak hours are weekdays from 7 AM to 11 AM and from  5 PM to 9 PM. In the summer, they are weekdays from 11 AM to 5 PM. The rate is 9.9¢/kWh.
• Mid-Peak: In the winter, medium-use hours are weekdays from 11 AM to 5 PM. In the summer, they are weekdays from 7 AM to 11 AM and 5 PM to 9PM. The rate is 8.1¢/kWh.
• Off-Peak: All weekends and holidays are considered off-peak times. For both winter and summer weekdays, lower demand hours include 9 PM to 7 AM. The rate is 5.1¢/kWh.

Currently, we’re paying 6.4¢/kWh for the first 1000 kilowatt hours and 7.4¢/kWh for any additional usage. You can see from the information above that, unless you do most of your cooking and laundry on weekends or in the middle of the night, you’re going to see a pretty big bump in your electricity bill once the time of use billing kicks in. It hasn’t become mandatory here yet, but it should take effect in 2012.

In the meantime, many consumers have been less than impressed with smart meters so far. Some have complained that their bills are much higher, even when they try to adjust their usage. Opposition politicians have jumped on the critical bandwagon, going so far as to say that the program should be scrapped.

Big Brother Calling

When I first heard about the smart meter concept, I thought it seemed like a decent idea. I liked the idea of being able to save a few dollars and help out with conservation by adjusting our consumption a little. Now that I’ve seen the math, however, it seems like the amount of adjustment we’re going to realistically be able to implement will be minimal and the charge for using electricity during peak hours is downright punitive.

A couple of aspects of the program didn’t sit well with us:

• We didn’t have a choice. This was happening whether we liked it or not.
• We didn’t like the idea of information about our electricity usage being transmitted wirelessly.
• We didn’t like the thought of having to drastically adjust our electricity consumption just to keep from experiencing an even larger spike in our electricity bills. (The HST has already added considerably to our electricity expenses.)

Concerns about privacy are addressed by our utility in an information brochure:

“Ontario’s electricity distribution companies are required,by law, to ensure that the SMART METERS and communication networks that are put into place are equipped with security features to prevent unauthorized access. We must also comply with federal laws regarding the privacy, protection and disclosure of personal information. Any data that is sent to the central data repository will be provided in such a way as to prevent identification of an individual customer.”

That sounds great, but when I read about the Peaksaver program, where the utility has the ability to lower your air conditioner use during peak times, I realized that the smart meter might be handing over more information and control than I would like. Now the Peaksaver program is optional and it does serve the purpose of reducing the load on the grid, ostensibly when people are at work during the day and wouldn’t be affected anyway.

I’m definitely in favour of energy conservation and sustainability, but I don’t like the idea of someone else being able to control the temperature in my home. Whether it’s for a good cause or not, that just sounds a little too Orwellian for me. I know that the Peaksaver program is optional for now, but I wonder how optional it might be if we really had an energy crunch.

In general, I can see that the smart meter idea could serve a purpose. And we’ve already spent a billion dollars on this, so scrapping it doesn’t seem prudent. But I think it needs a little fine tuning to really make it work for everyone.

What do you think of smart meters? Do you have any experience with them?

Related posts:

1. Free Book: Smart Tips for Estate Planning
2. Book Review: Smart Tips for Estate Planning
3. Revenge of the Dumb Money

Money often costs too much.

~Ralph Waldo Emerson

Update: This article was included in the 13th Canadian Personal Finance and Investing Carnvial posted at Investing Thesis. Thanks!

As if earning enough money to live wasn’t hard enough, we have to figure out a way to put enough aside for the days when we are no longer earning income. Even more arduous is the task of finding the best vehicle for growing that money. And then there are the taxes . . .

In Canada, we have a new product that is supposed to help defray some of our tax burden. The Tax Free Savings Account became available in 2009 and was considered to be a simple, efficient way for Canadians to save money and avoid paying taxes on the growth of that money. I love TFSAs and I think they’re a great product for everyone. They do seem pretty simple on the surface, but, as always, the devil is in the details.

Capital Growth, Withdrawals, and Contribution Limits

Last year I wrote about TFSA Withdrawal Rules, giving some examples of how they work. In the last couple of weeks, however, I’ve received a lot of questions from readers on how capital growth affects your TFSA contribution room. One reader asked this question:

“If I contribute in 2009 – $5000.00 and in 2010 $5000.00 and in 2011 – $5000.00 for a total of $15,000.00 and say this summer of 2011 it has grown to $75,000.00 and I take out the $75000.00. Is it true that in January 2012 that I can put back $75,000.plus the 2012 $5000.00 for a total of $80,000.00.“

Another reader had a similar question:

“I am also curious about something about gains. I contributed the max $10K in the first two years but doubled it through investing. If I withdraw $20K in 2010, does that mean I can contribute back the $20K in 2011? Someone told me that even if the max contribution over the next 5yrs is $25K, if you build the account to $100K then that is the limit of the account. In other words, if I withdraw $100K in year 6, I can contribute back $105K in year 7. Does this make sense? (naturally the growth numbers are fictional)“

When I tried to verify the answers to these questions, I realized why so many people were asking them. None of the examples on the CRA (Canada Revenue Agency) website address this directly. So I called CRA. The gentleman I spoke to basically looked up the information in the TFSA guide and said that the best way to figure out your contribution room is to just follow the formula given by CRA:

The TFSA contribution room is made up of:

•    your TFSA dollar limit ($5,000 per year plus indexation, if applicable);

•    any unused TFSA contribution room in the previous year; and

•    any withdrawals made from the TFSA in the previous year, excluding qualifying transfers.

The $5,000 TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500. For example, assuming that the inflation rate is 2% for 2009 to 2011, the TFSA dollar limit would be $5,000 for 2009, 2010 and 2011, but would increase to $5,500 for 2012.

Doing the Math

Scenario #1: Investment Gains

Taking the first reader’s scenario into account, the contribution room calculation for 2012 would look like this:

2012 TFSA Limit: .     .     .     .     .     .     .     .   $  5500 (Remember the inflation indexing kicks in in 2012, hence the extra $500)

Unused Contribution Room from 2011: .    .  + $       0 (Note that unused contribution room can be negative if you over-contributed in previous years.)

2011 Withdrawals: .     .     .     .     .     .     .  + $75 000

2012 Contribution Room: .     .     .     .      .     $80 500

In terms of the second reader’s question, he is correct. If you contributed a total of $10 000 in the first two years (2009 and 2010) and by tremendous skill or luck doubled that money, you could withdraw the $20 000 at the end of 2010 and contribute back the $20 000 plus your $5000 for 2011. He is also correct, in theory, that if you grew the account to $100 000 in 5 years, you could take that $100K out at the end of the 5 years and recontribute it starting the following January.

I qualified this explanation with “in theory” because this scenario assumes that there were no other withdrawals and no over-contributions. Also, it may not be entirely correct to say that your contribution limit has permanently grown to $100 000 because you could sustain investment losses down the road that would reduce the size of the TFSA. Let’s look at an example that includes some investment losses:

Scenario #2: Investment Losses

Suppose, as in Scenario #1, that you had contributed $5000 per year in each of the first 3 years (2009, 2010, & 2011) for a total of $15 000 in contributions. However, instead of growing the account by 5 fold as in our extremely optimistic first case study, you sustained a substantial 33% loss. Ouch. Your TFSA would then be worth about $10 000 instead of $15 000. If you withdrew the entire $10 000 in 2011, here’s what your 2012 contribution limit calculation would look like:

2012 TFSA Limit: .     .     .     .     .     .     .     .   $  5500

Unused Contribution Room from 2011: .   .   +  $       0      

2011 Withdrawals: .     .     .     .     .     .     .  + $10 000

2012 Contribution Room: .     .      .     .     .     $15 500

Note that this contribution room limit is lower than what your limit would have been if you had not sustained any losses. An investor who had contributed the maximum $5000 in the first three years and (in theory) incurred neither gains nor losses would have $20 500 in contribution room: $5000 for 2009-2011 plus the inflation indexed $5500 for 2012.

Final Thoughts

The examples above are very simple. Your personal scenario may be more complicated if you have done any transfers or over-contributed at any time. If you really want to know what your contribution room is, you’re best to just do the math following the CRA formula. You can also get TFSA contribution room information from your My Account page on the CRA website or from the CRA’s T.I.P.S. telephone service at 1-800-267-6999. From the CRA website:

“The Canada Revenue Agency (CRA) will determine the TFSA contribution room for each eligible individual based on information provided by you and the TFSA issuers. Your TFSA contribution room will be shown on your income tax notice of assessment or reassessment.“

You could just look for your contribution room on your notice of assessment, but if you want to do some planning ahead based on different scenarios, it’s good to have an understanding of how these limits are calculated. If you want more information, you can find the TFSA pamphlet on the CRA’s site in HTML or PDF format. I hope this helps those who have been wondering about this.

Your comments are always welcome.

Related posts:

1. TFSA Contribution Limit for 2012
2. TFSA Withdrawal Rules
3. 5 Reasons to Skip the RRSP Contribution this Year

To decide is to walk facing forward with nary a crick in your neck from looking back at the crossroads.

~ Betsy Cañas Garmon

Update: This article was included in the 279th Carnival of Personal Finance – 80s Music Edition posted at Dough Roller. Thanks!

I’ve received a couple of questions from readers on how exactly I have allocated our GIC portfolio. Previously, I’ve written about how set up a GIC ladder, but in reality the numbers don’t always work out as neatly as they do in the examples. The idea behind a GIC ladder is to diversify your interest rate exposure. You can do this by owning GICs with durations of 1-5 years or simply buying a new 5-year GIC each year and rolling money back into 5-year GICs as they mature.

The hope is that you can take the confusion of trying to guess where interest rates are headed out of the equation. But what if you are unable to contribute equal amounts each year to a new 5-year GIC? What if your financial situation isn’t quite as smooth as the ones in the examples?

Interest Rate Confusion

Interest rates are always difficult to predict no matter how much you know about economics and finance. The fact is that no one knows what will happen, so we need to try to include multiple scenarios in our planning process. Having said that, I do believe that the current environment is quite unique in that interest rates are, for the most part, at record low levels. Given that, it would be easy to predict that rates have nowhere to go but up.

The flip side of that argument, however, is that rates have already been low for quite some time and there is a chance that they could remain low much longer. You will recall from our biflation discussion that there are strong deflationary forces present in our economy even while inflationary influences like rising commodity prices continue to exert influence as well. So inflation levels aren’t currently very helpful in determining the direction of interest rates.

Given the bipolar economy with which we are faced, it seems prudent to plan for a couple of different scenarios:

1. Interest rates could remain low, or even move lower, for some time to come.
2. Interest rates could spike much higher if monetary policy triggers inflation and/or currency wars.

It’s easy to get caught up with predictions like these: “Well, I think deflation will keep rates low in the near term, but the Fed will cause hyperflation down the road.” That may very well be true, but unless you know exactly when rates will begin to rise, it’s very difficult to allocate your capital perfectly. Alternately, such predictions could easily prove to be completely incorrect.

So what’s a GIC investor to do? I don’t have the perfect answer, but I can offer you a couple of really important questions. These are the questions I ask myself before I invest in anything, including GICs:

A. What was I thinking?

B. What if I’m wrong?

Our GIC Allocation

As I mentioned in our Q3 Financial Plan Update, I recently added to our GIC portfolio. Previously, we had most of our RRSP in a savings account because we wanted that money to be liquid in case of emergency. Our income situation was quite uncertain and we wanted to have that money available as a nuclear option if things really went downhill.

Since then, things have firmed up for us, so I felt better about allocating more of that money to GICs in order to gain a few more basis points of interest income. Here’s a rough before and after snapshot of our RRSP cash allocation:

Before

Savings Account:  75%

5-Year (September 2014 @ 3.00%) GIC:  12.5% 

5-Year (May 2015 @ 3.25%) GIC: 12.5%

After

Savings Account: 14%

5-Year (September 2014 @ 3.00%) GIC:  12%

5-Year (May, 2015 @ 3.25%) GIC:  12%

5-Year (August 2015 @3.25%)  GIC:  25%

2-Year (August, 2012 @ 2.5%) GIC:  25%

1.5-Year (February, 2012 @2%) GIC:  12%

What Was I Thinking?

When I bought these new GICs, I wrote down my rationale. This way, if my strategy doesn’t turn out well, I will at least have some idea where I went wrong. Here’s what I wrote in August:

“Wanted to lock in these rates as bond yields have been falling. Deflation (perhaps for a number of years) is possible. But if inflation occurs and rates rise sooner than I think, we have some cash to put to work, and some shorter-term GICs maturing within 1.5-2 years. If we get some kind of really quick interest rate spike, we still have the option of early redemption.”

So for better or for worse, that’s our plan. You can see that it’s not a textbook GIC ladder. For one thing, it’s heavier on both the 1.5- 2-year and the 5-year ends. I chose this kind of barbell strategy because the shorter term rates are still better than what we’re getting in the savings account, but I didn’t want all of the money locked up for 5 years.  The 3 and 4-year rates didn’t offer a whole lot more interest than the 2-year. Besides, one of the 5-year GICs is effectively a 4-year GIC because we’ve had it for over a year already.

What If I’m Wrong?

You can see by my rationale that I’ve tried to cover both inflationary and deflationary concerns. My base assumption is that rates will remain low for at least a couple more years – maybe even longer. If I’m wrong and interest rates spike sooner rather than later, we can redeem these and buy higher-yielding GICs. If we redeem before maturity, we will only receive 0.5% interest. Obviously, we would have to look at a cost-benefit analysis to decide whether or not that would be worth it.

The fact is that there is no single correct way to invest in GICs anymore than there is a right way to invest in stocks or bonds. Each of us has to look at our own financial situation and make the best decision we can with the information we have at the moment. Only time will tell whether we made the best possible choice or not. I hope this helps anyone who had questions.

What’s your GIC strategy?

Related posts:

1. GIC Primer: Frequently Asked Questions
2. How to Ladder GICs
3. What’s More Important Than the Debt Ceiling?

Nothing diminishes anxiety faster than action.

~Walter Anderson, The Confidence Course, 1997

Update: This story was included in the Carnival of Money Stories #74 posted at Sustainable Life Blog. Thanks!

When we had our home built 7 years ago, we went with a rental for our hot water heater. I realize now that this is not the norm everywhere, although it seems to be the route most people here in Ontario choose. It seemed, at the time, like a good call.

Renting a hot water tank means that your up-front costs are zero, and you just pay a monthly rental fee of $15 – $30. Service is covered for as long as you rent the tank, so you don’t have to worry about unexpected expenses. A couple of years ago, a sensor went on our hot water heater. A technician showed up the same day, fixed the problem, and we had hot water again pretty quickly. Can’t you just hear a giant “but” coming?

The Water Heater Vendetta Is Born . . .

When we moved into our new home at the end of June, 2003, our hot water heater rental was a little less than $19/month. Over the years, however, the rental company regularly raised our rates. Each time I sat down to draft our new annual budget, I had to bump up that water heater rental amount a little more. I grumbled like a grumpy old man, but did nothing about it.

I’m not sure what the reason for consistently raising our rates might have been, but the reality is that we now had a 7-year-old water heater that was costing us almost 40% more than it did when it was brand new. In March of this year, our rate went from $23.45/month to $24.27/month. This month, they raised the rate again to $26.11.

That was the last straw. The simmering anxiety/annoyance we had been feeling for a few years now boiled over and Mr. Cents and I decided that enough was enough. Mr. Cents did a bunch of research that same weekend on what it would cost us to buy a new hot water heater and get out of that money trap once and for all.

Hot Water Heater Math

I always say that doing the math is one of the keys to good personal finance habits. A few minutes with a pencil, paper and calculator have been instrumental in some of our best financial decisions. Many times, just getting started is a lot harder than actually doing the work.

Mr. Cents spoke to a very helpful associate at Home Depot. They chose a 189L tank with a 6-year warranty on parts and a life expectancy of 6-9 years. It’s a little smaller than our current tank, but it’s supposed to be suitable for a 2500 square foot home. (Ours is about 2200 square feet.) It’s also supposed to be more efficient.

Here’s what the math looked like:

Water Heater:   $953.72

Accessories:       $105.88

Installation:       $0

Return Fee:        $40

TOTAL COST:  $1099.60

It would have cost about $150 to have the water heater installed, but Mr. Cents decided to do it himself, so that saved us some money. He tells me it’s not that hard to do, but I would say you have to be pretty handy to pull it off. I’m not sure what the opposite of handy is, but that’s me. So I would have been happily paying the $150 if not for my husband. (The “accessories” included pipe elbows, couplings, a valve that broke, and a couple of patio stones on which to set the new tank.)

I should mention that renters do have the option of calling the company and buying out the rental. That would have cost us $770 – for a 7-year-old tank. Really?

The bottom line is that the up-front cost of the new hot water tank represents about 42 months of rent if you include the $40 they are charging us to take back their old tank. That’s about 3 and a half years and it suits us fine. We used some money from our savings to cover the cost, but we still have a very nice emergency cushion.

Michael James and Canadian Capitalist have written some good articles on this topic as well. If you’re looking for more information, there’s a decent overview at Natural Resources Canada.

One Last Poke in the Eye

So what happens to the old hot water tank? Well, of course, the rental company does not make it easy. This is another one of those “You’re kidding, right?” situations.

When Mr. Cents called to find out how to do it, they tried to convince us to stay with them, but eventually outlined the following bureaucratic nightmare scenario: We need to bring the tank to a Reliance Home Comfort location during a very limited set of hours. They will give us a receipt for the return. It takes 4-6 weeks for customer service to get the paperwork. In the meantime, we will still be charged rent.

At the end of the 4-6 weeks, they will issue a final bill, which includes the $40 return fee, and a credit for the interim rent they charged. This should net out to a credit for us. In order to get that money, we need to call them and have them issue a cheque. I’m not sure how long it will take to get that cheque, but I would guess it might be the old 4-6 week thing again.

Mr. Cents installed the new hot water tank on Friday night. It took about 4 hours in total, and we were without water for about 2 hours. A round of showers on Saturday morning confirmed that the new tank is working fine. Just before I sat down to write this, I cathartically removed the water heater rental line from our budget. We won’t miss it.

Do you rent or own your hot water heater?

No related posts.

You can never get enough of what you don’t need to make you happy.

~ Eric Hoffer

Remember when you were a kid and you begged, pleaded with, and nagged your parents to buy you something for months on end? You wanted it so badly. It would solve all of your problems and provide you with endless happiness.

When your birthday came along and you finally received the desired treasure, it probably did give you the boost you predicted. But how long was it before that treasure ended up collecting dust somewhere and you moved on to the next desperately needed gadget, trinket, or toy?

For many of us, this cycle repeated over the course of our youth. For some of us, it continued well into our adult years. Indeed, the decades following World War II saw society as a whole adopt much the same pattern. Our homes gradually “needed” to be larger, even as the average family size decreased. One car, television, or garage was not enough. The age of consumerism was born. The line between wants and needs blurred until it all but disappeared. Did this increasing consumption lead to increasing satisfaction?

The Law of Diminishing Returns

In economics, the Law of Diminishing Returns states that if one factor of production is increased while other factors are held constant, the amount of resulting output increase will level off over time, and eventually start to decline. In layman’s terms, it basically means getting less bang for your buck over time, much like the child who is continually indulged but somehow less satisfied on each occasion. I’m going to refer to the Law of Diminishing Returns in the latter sense, so I’ll ask for some latitude from the economists out there.

The post war era has seen a dramatic increase in many factors. The returns on these have steadily increased as well – until recently. Let’s take a look at a few different types of factors, the relative returns they provide, and what some of the future trends might look like.

Corporate Factors

Corporations contributed to the economic success (and excess?) of the post war era in a couple of ways:

Mergers & Acquisitions

Many companies, particularly in the financial sector, grew by merging with or acquiring other businesses. This type of activity is stimulative to the economy and the stock market as it provides a lot of revenue for the bankers, lawyers and accountants necessary to facilitate these transactions. M&A activity took a break during the recent credit crisis, but has recently seen a resurgence with several large deals recently announced.

It seems, however, that investors are not viewing this activity quite so positively as they have in the past. The stock market was generally flat to down when these moves were announced. Some have speculated that the lack of enthusiasm might be due to the fact that corporate consolidation often leads to layoffs and hiring reductions. In a market craving jobs more than anything else, this is not a good thing. So M&A doesn’t seem to be providing as much bang for your buck as it did a few years ago because of reduced activity as well as reduced economic benefits.

Stock Buybacks

In the equity heyday, all it took was a rumour that some company was going to buy back its stock and you could count on a sizeable boost in its share price. Like M&A activity, stock buybacks have slowed and so has the enthusiasm with which they are greeted. Investors are generally less confident in equity price increases due to economic and financial market instability and flat to lower returns over the past decade. And in the end, wouldn’t you rather see the company you’re invested in putting cash into R&D or organic growth strategies rather than incestuous stock buybacks?

Government and Central Banking Factors

Global governments and central banks have done everything they can to incite consumers to spend and corporations to grow. The resulting outputs have been accelerated economic growth, an increased perception of prosperity, and a mountain of debt. Here are a few of the ways in which governments and central banks have contributed to economic growth:

Low Interest Rates & QE

Once Paul Volcker conquered inflation by raising interest rates in the early 1980s, a period of steadily declining rates began. The Greenspan era saw the Federal Reserve dramatically lower rates whenever the economy looked like it was ready to take a breather. Lower rates led to asset price increases and higher growth rates as consumers, corporations, and governments took advantage of the cheap borrowing costs to spend, spend, spend.

The result, as we know, was a series of financial bubbles and trillions of dollars of debt on household and sovereign balance sheets. With rates at or near zero, there’s no more bang to be had for your buck in this area – unless you believe further quantitative easing will be effective. Even if it does provide some temporary confidence boost, it seems apparent with each new round that the Law of Diminishing Returns is at work here as well.

Government Stimulus Programs

In the wake of the recent spending and debt-induced financial crisis, governments around the globe came to our rescue with more spending and debt. Cash for clunkers, various incentives and programs for underwater homeowners, and lots of borrowed taxpayer cash for stimulus programs were heralded as the reason for the economic and stock market bounce of 2009.

As recently as August 2nd of this year, U.S. Treasury Secretary Tim Geithner penned an Op-Ed in the New York Times entitled Welcome to the Recovery. Once again, the Law of Diminishing Returns was evident. The market saw a bit of a bump up following Secretary Geithner’s article, and then proceeded to sell off for the remainder of the month of August. The actual economic data painted a picture of sparse to declining activity compared to the lovely pastoral the Treasury Secretary tried to sell.

Consumer Factors

Consumers contributed to the post war boom by buying what the government and advertisers were selling – usually with no money down and easy monthly payments.

Spending on Stuff & Self

In an earlier article entitled How Did We Get Here? I wrote about the post war transition from austerity and selflessness to prosperity and mindfulness to temerity and selfishness. Gradually, we came to believe that we needed – no, deserved - more gadgets, bling and stuff in order to be happy. Did all of this stuff fill a void, distract us from that void, or create a new one?

We’re finally starting to see some signs that these socioeconomic bubbles may be ready to pop, or at least deflate a little. Somehow that Hummer isn’t bringing us the joy we thought it might. Neither is the 3-car garage, the coolest gadget, or the hottest fashion. In fact, dealing with the debt we incurred to buy all this stuff is starting to get downright stressful. Retail therapy just isn’t providing the same bang for your buck it did a few years ago.

Are you noticing any signs of the law of diminishing returns out there? Do you think that’s a good thing?

Related posts:

1. Variable Returns Can Work Against You in Retirement

Failure is only the opportunity to begin again more intelligently.

~ Henry Ford

Update: This article was featured in the Carnival of Money Stories – Starting a Sideline Edition posted at The Financial Blogger. Thanks!

If only the government had followed the advice of Henry Ford when it came time to decide whether or not to let GM and Chrysler fail. I recently made the case that a failure to fail has made a pretty big contribution to our current financial problems and I pointed to the auto bailouts as an example of this unhealthy trend. I live in Windsor, Ontario, traditionally a huge employment centre for the big 3 automakers. Mr. Cents and I both grew up here. We lived in various parts of the GTA (Greater Toronto Area) for about 5 years, but returned home 12 years ago. (Has it been that long already?)

Unions carry a pretty big stick in this city. Many of my relatives, neighbours, and friends are directly or indirectly employed in (or retired from) the auto industry. There is a prevailing, if somewhat shaken, support for unions in general and the CAW (Canadian Auto Workers) specifically. Many people here support the idea that we should all buy vehicles made by GM, Ford, or Chrysler.

Out of a Job Yet? Keep Buying Foreign.

I’m not sure what it’s like where you live, but I can’t hit the road in Windsor without coming face to face with numerous bumper stickers carrying slogans like the one in the title of this section. I felt terrible when the financial crisis hit and decimated our local economy – not that you couldn’t have seen it coming the way the auto industry was proceeding.  A lot of folks here were out of work for a long time while Chrysler and GM were in bankruptcy.

Still, I can’t help but feel upset when I see those bumper stickers. After all, the majority of us don’t have the inflated wages or gold-plated benefits and pension packages that many of these employees enjoy. Further, our tax dollars have gone to bailing out GM and Chrysler, as well as the jobs, benefits, and pensions that go with them.

A lot of other people lost their businesses and jobs. They received no government loans. They have no pension. And now, as these big 3 supporters drive down the road in their subsidized vehicles, they also want to tell us which car we should buy – or else.

That doesn’t sit well with me. I’m sure I’m not alone, but it’s not advisable to make opinions like that known in these parts. You can become persona non grata (or worse) pretty quickly.

Still, there are those, even in this city, who draw a direct line from the government loans given to Chrysler and GM, to the growing government deficits and debt, to the new HST here in Ontario. They see it as no coincidence that, less than 2 years after the auto bailout, they are being hit with increased expenses as a result of the Harmonized Sales Tax, which went into effect in Ontario on July 1st, 2010. Oh Canada.

What’s a Foreign Car?

I guess the idea is that we should support our local economy by buying domestic vehicles. But what is a domestic vehicle? What if your GM car is built in Mexico? What about a Toyota that’s built in the southern U.S., or even a few kilometres down the 401 in Woodstock, Ontario? What if it’s assembled here, but all of the parts come from offshore, or vice versa? What about the fact that Chrysler is mostly owned by Fiat (an Italian car maker)?

I actually do like the idea of supporting local businesses whenever possible. But I think I would be more likely to buy their products if I actually felt like they were superior to the alternatives. I’m less likely to want to support a company with a history of shoddy management which I already support through generous government loans, or one that uses coercion or veiled threats to get me to buy.

Should I patronize a restaurant owned by a friend even though the service isn’t very good and I don’t like the food? The whole idea of capitalism is that the cream is supposed to rise to the top. If your company makes a product that suits my needs at a price I can afford to pay, and offers consistently higher quality and service, I’m going to buy from you rather than your competitor. If your competitor offers the better product, service or experience, I think I should be free to buy from them without a guilty conscience.

Do you think it’s wrong to buy a car from anyone but the big 3? Does it factor into your purchase decision at all?

No related posts.

When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished at how much he had learned in seven years.

~ Mark Twain

Update: This article was included in the Carnival of Personal Finance #262 posted at Personal Finance Journey. Thanks!

The financial habits of society at large over the past few decades have been, in some ways, reflective of the attitude of the 14-year-old in the opening quote. In an article entitled How Did We Get Here? I pondered the progression of social and financial values from the 1950s to the present era. I speculated that the Baby Boomers’ rejection of their parents’ social mores gave birth to some great new ideas, but that we may have allowed the pendulum to swing a little too far in the other direction as a result.

The hippies of the 1960s railed against many of the social, political and financial conventions of their teenage years, calling for massive change and a new way of doing just about everything. Perhaps it was the sheer size of the cohort that allowed the Boomers to actually implement many of these changes, or maybe we were all just ready for something new.

Either way, the Boomer revolutions and evolutions have spawned some positive changes. Does anyone regret the move toward racial and gender equality? Still, it’s been my contention that, in our quest for renewal, we may have inadvertently thrown out some necessary, foundational ideas long with those truly in need of an overhaul. As such, I thought Father’s Day might be a good time for us to remind ourselves of some of those foundational ideas.

Financial Wisdom from Warren

Warren Buffet will turn 80 in August. I think he definitely has the requisite experience and performance record to be considered a father figure on all matters pertaining to money. Now I’m not one of those Buffet worshippers, but I really like many of his homespun truisms. I found a nice listing of some of them on Trading and Wisdom Quotes. Here are a few fatherly pearls from the Oracle of Omaha:

Spending: If you buy things you don’t need, you’ll soon sell things you need.

Saving: Don’t save what is left after spending; spend what is left after saving.

Hard Work: All hard work brings profit; but mere talk leads only to poverty.

Laziness: A sleeping lobster is carried away by the water current.

Earnings: Never depend on a single source of income.

Borrowing: The borrower becomes the lender’s slave.

Accounting: It’s no use carrying an umbrella if your shoes are leaking.

Auditing: Beware of small expenses; a small leak can sink a large ship

Risk- Taking: Never test the depth of the river with both feet.

Investment: Don’t put all your eggs in one basket.

Like many pieces of fatherly advice, these aphorisms are so elegant in their simplicity, and so painfully obvious once uttered or employed that we often wonder why we didn’t appreciate them before. And yet they elude us. We can hear these truths, understand that they make sense, and not follow through on them. I know that I’m guilty of intermittently neglecting at least 4 out of the 10.

Consider the Source

A lot of times the best advice that our fathers have to give is the advice we least want to hear. Who wants to save up enough money to pay cash for a modest car? Who wants to forgo the latest gadget now in order save for education in the future? The truth is, the best fatherly advice can be the hardest to follow.

But we must always consider the source. Our Dads usually offer us their ideas for two main reasons:

1. They don’t want us to experience the pain of making mistakes.
2. They love us.

So the next time your Dad offers you some advice, whether it was solicited or not, just consider the source and remember this English proverb:

“Write down the advice of him who loves you, though you like it not at present.”

Happy Father’s Day to all the Dads out there!

Related posts:

1. Financial Wisdom from The Princess Bride
2. Investment Wisdom: 5 Key Lessons
3. Financial Literacy Update #1

My problem lies in reconciling my gross habits with my net income.

~ Errol Flynn

Update: This article was included in the Festival of Frugality: Summer Edition posted at Where’s My Rolling Pin? Thanks!

I recently received a request from a doctoral student to fill out a short questionnaire on savings methods. The survey was directed at personal finance bloggers. Two different savings approaches were explained, and then respondents were asked which they would prefer, and to what degree. I wasn’t quite sure if I completely grasped the spirit of each approach, but I answered the questions to the best of my ability.

The two approaches proposed by the doctoral student are the circular savings method and the linear savings method. I’m going to outline both of them as explained by the author here, and I’d be

interested in your thoughts on them.

Circular Savings Method

This savings method involves setting aside a certain amount of money at regular intervals, such as each pay period. The idea is to focus on saving the amount that you want to save now, not next month, and not next year. “The future will be exactly like the present: if you save money now, you will save in the next pay period. If you don’t save money during the present pay cycle, it is likely you won’t save money in the next cycle. We want you to focus on your personal savings in the present”.

If you continue to save money each pay period, you will be able to look back at some point and realize that you’ve accumulated a nice nest egg. This method views life as consisting of “many small and large cycles”. I understood the focus of this approach to be saving regularly to the best of your ability given your current circumstances rather than looking very far into the future and trying to come up with an end goal to achieve.

Linear Savings Method

This method views life as composed of “separate time compartments such as the past, present, and future. We want you to think of the personal savings task as part of such a linear progress. Make your saving task a planned one: just focus on the total amount of your savings goal for the future. Think about discrete savings tasks and do each task one at a time. Do not think about what you have or have not saved in the past.”

If you save money now, you’ll be in a much better position in the future. But “saving is not an action that is the end goal, but rather a means to the more important goal of attaining something which lies in the future, such as your retirement or a better life”.

A Balanced Approach

When I really thought about it, I had to conclude that an approach that incorporates both a linear and circular component would probably serve most people well. The survey asked the following question: “If you had to suggest one of these approaches to your blog’s readers, which one would you choose and why?” My answer was as follows:

I can see some merit in both approaches, but I would likely choose the circular method if I had to choose only one. This method makes saving a habit. I think you might be able to use the two in conjunction if you used the linear method to choose a circular savings amount based on your current resources and time horizon.

For example: You could use the linear method to set short and long term savings targets, and examine areas in which to cut spending, or earn more income in order to achieve those big picture targets. Setting a regular savings amount is key to achieving those goals. This savings amount can be adjusted periodically as your life unfolds, but always saving something is imperative.

Another question posed was: “In your opinion, what are the reasons people use a linear or circular savings method for their savings?” Here’s how I answered that one:

Circular savers understand that regular saving is a good way to maintain a disciplined approach to achieving their savings goals. Linear savers are probably more concerned with the big picture and end goals and less concerned with the details of getting there.

It seems like the linear approach would work better for those who are extremely self-disciplined and are able to keep a close eye on the big picture and the end goals. Unfortunately, many of us do not fit this profile and need regular, circular savings to help us enforce that discipline on ourselves. We tend to live in the present and can sometimes forget about or ignore the future consequences of our present actions.

Perhaps one of the reasons we, as a society, have not been saving enough is that we are using the linear saving strategy, but not carrying out the discrete savings tasks necessary to achieve our goals. Including a circular component to our savings strategy would go a long way toward increasing the overall savings rate.

I like to think of myself as pretty well-disciplined. As such, my approach tends to be more linear. But that hasn’t served us all that well over the past couple of tumultuous years as we haven’t been saving regularly. In the past, our income was extremely variable with a modest regular income punctuated by some fairly consistent and sometimes substantial commission windfalls.

As such, I would plan our savings based on this type of linear progression. We’ve managed to save a decent amount without contributing monthly. Still, I’m reconsidering that approach based on some recent changes. I’d like to add a circular savings component to our financial plans in order to make saving a real habit that we can maintain through good times and bad. I’ll have more on that in the next quarterly update, scheduled for the end of June.

What do you think of these two savings methods? Would you lean toward one more than the other, or would you prefer a combination approach?

Related posts:

1. 10 Ways to Save on Insurance
2. Book Review: Your Money Ratios
3. Get Your Inheritance Early – And Other Ways Your Parents Can Save Thousands in Taxes in Retirement