Category Archives: Finance

Economic Theory Run Amok

For economics buffs out there (is there really such a person?) and those of you who are really just trying to figure out why the world is so messed up, I have to recommend a paper by Dan Ciuriak and John Curtis called What if Everything We Know About Economic Policy is Wrong?

Ciuriak and Curtis take a look at the current global economic situation and examine how Economic Policy has failed. They contrast the promises of Trickle Down Theory with the actuality of recession, high unemployment and government debt.

Download the pdf here for free.

I recommend that you print off a copy and hand deliver it to your local member of parliament, congressman or other favourite member of the political beau monde.

.

Advertisements

Leave a comment

Filed under Economics, Economy, Employment, Finance, How It Works, Inflation, Regulation, Uncategorized

The Consequences of Debt

The US government is in the process of learning one of the key lessons of the debtor.

The Creditor calls the tune.

The Chinese who hold trillions of dollars in US are not happy, and they are not afraid to let the US know that they need to shape up and fly right. Let’s hope that this credit downgrade is treated as a wake-up call, and the US uses the opportunity to get their fiscal house in order.

But don’t count on it.

The disfunctional houses of congress are too busy stabbing each other in the back in a pointless and self defeating series of internecine battles.

If the US doesn’t sort this out, expect more dire consequences in the future.

In the meantime, use this dip in the Dow to snap up any high quality blue chips while they are on sale. Just make sure you go for quality, look for income in the form of dividends to  tide you over until the markets recover.

Leave a comment

Filed under Dow Jones, Economy, Finance, How It Works, Inflation, Investing, Recession, Stock Market, Uncategorized, US Debt

When You Inherit Money

What happens when you inherit money? or a house? or stuff?

It depends on how you treat the money when it first arrives. If you put an inheritance into a joint bank account, or into a joint trading account, in the future the money will be treated as a joint asset. This means if you get divorced down the road you could lose half of your inheritance. So as a general principle, inheritances should always go into a separate account.

Houses are treated specially. If you put a house you inherited from grandma in both names, then it will definitely be split in a divorce. Even if you don’t put both names on the house, your partner could claim that it was the primary marital residence and make a claim for a share.

Alberta operates under the dower act, which is designed to ensure that a spouse cannot be disenfranchised from their share of marital property. The western provinces also have the homestead act which ensures that a spouse can make a claim on the family farm.

This is especially important for someone who inherits a farm or a family business outright. It is very important to discuss the future of this asset with your lawyer and financial advisor before it is even transferred to you.

If you keep the money separate, the original inheritance will probably not be included in any future divorce settlement or separation agreement. However, it is possible that income produced by the asset or the increased value of the asset might be.

So what do you do? Pre-nup. Or co-habitation agreement. Or post-nup. Talk to your significant other, spousal equivalent or current bed-buddy about money, who owns what, who gets what, and how it could play out if things don’t work out.

Talk to your lawyer. A simple pre-nup/co-habitation agreement shouldn’t cost more than a couple hundred bucks, and can save you thousands of dollars and tons of heartbreak down the road. Define who gets what, and where the money goes if something happens.

Although it’s pretty common for someone to leave that inheritance to their own kids, or grandkids, nothing says that you can’t keep the asset separate, and subject to a pre-nup/co-hab agreement in the event of a couple separating, and yet leave the asset to your significant other in your will later.

 

Was this helpful?

.

5 Comments

Filed under Estate Planning, Estates, Finance, How It Works, inheritance, pre-nuptial agreement, Saving, Wills

Flaherty’s Changes to Mortgage Rules

What will the changes to Canadian mortgage rules announced on January 17 mean to you?

If you already have a mortgage – not much. If you buy a house within the next 60 days (before the changes take effect) – not much. If you plan on buying a house during the next few years – not much.

If you are ass deep in debt, and looking to refinance to the hilt with a nice low interest rate, flexible payment, Home Equity Line of Credit in order to bail yourself out – lots.

New rules will restrict the number of years you can stretch out a normal mortgage to 30 years. No more 35 year mortgages with CMHC. You will also need to come up with a minimum down payment. No more “no-money-down” mortgages.

But that’s not the big news. The big news is that the Government through CMHC will no longer insure Home Equity Lines of Credit – called HELOCs.

For the last number of years home owners have been flocking to the banks (and others) to refinance their homes with Helocs. This allows them to use the equity they have built up in their homes to refinance debts like credit cards, or buy things like fancy cars, boats and cottages, or heck, just pay for a trip to Aruba.

These Helocs are sold to people by highlighting the flexibility of the payments, the low interest rates and your ability to pay off as much as you want. In reality most people only pay the minimum interest payment, never reduce their principal, and will get killed if the interest rates go up by more than a percentage or two.

Helocs are a form of never-never plan. Most of them allow you to make minimum or interest only payments, and never actually pay down the principal. I  can’t tell you how many of these things I helped people convert into real mortgages during the last few years I was advising clients.

You could live in your house forever and never succeed in paying it off. These lines of credit are as bad as credit cards, they’re a guaranteed source of monthly income for the banks that you never escape.

And with their floating interest rates on a principal that never declines, they are a time bomb waiting to happen in a world where interest rates have no-where to go but up.

As soon as CMHC insurance for these Home Equity Lines of Credit dries up, expect to the see the banks pull back their helping hands, and tighten up their credit granting procedures.

With any luck Mr. Flaherty will have prevented the banks from letting a few unlucky people from getting in over their heads in the future. If these rules work as intended, uninhibited, intemperate consumer spending will be marginally reduced, and those least able to cope will be protected from the bank’s grasping fingers.

What can you do?

If you have one of these never-never plans, talk to your mortgage lender. You have two options, set up a declining balance payment, which will pay off both principal and interest – or – convert to a regular mortgage with a defined amortization and a fixed interest rate on regular monthly payments.

As soon as you can, stop giving your life away to the banks, and get your house in order.

 

Leave a comment

Filed under CMHC, Economy, Finance, HELOC, Home Equity Line of Credit, interest rates, mortgages, Saving

Financial Train Wreck

Stephen Roach, chief of Morgan Stanley’s Asia unit, says that Asian economies will not be able to withstand the “Tsunami” of American cash which Bernanke is flooding into the financial markets.  http://www.bbc.co.uk/news/business-11756677

American fiscal policy is a train wreck that is set to sideswipe the rest of the planet. The little guys are likely to get squashed.

I see inflation becoming a threat before the global economy has had time to fully recover from the recession. We could be facing a period of stagflation which would be as bad or worse than what we have seen so far. It would most certainly drag out the jobless recovery in the US for a very long time.

Leave a comment

Filed under Economy, Employment, Finance, How It Works, Inflation, interest rates, Recovery, Stock Market, Uncategorized, US Debt, US Dollar

RRSP or TFSA?

It’s alphabet soup time out there. Ads everywhere telling you to top up your TFSA overriding the usual February cacophony of RRSP season.

What are you supposed to do? Either ? Both? If you have limited funds which one gets priority?

Many of us are sitting here today looking at RRSP accounts that are still slightly battered from all the recent upheavals, although I think most of us can see the light at the end of the tunnel. But disillusioned by the past year and a half, we ask if we are ready to go down that path again.

At the same time, those near to retirement look at the measly $5,000 annual limit on a TFSA and laugh. There isn’t enough useable space to make a realistic difference in anyone’s immediate plans.

What to choose actually depends on a number of factors; What is your current tax rate? What is the tax rate are you likely to pay in retirement? How old are you? Do you have a pension? What are your current savings? Do you have an emergency fund?

As guidance, I’ll lay out a couple scenarios.

1) 50 year old management type with a good pension and current RRSP holdings, with the house almost paid off.

a) This person is currently in a high tax bracket, and likely to be in a fairly high tax bracket in retirement. Pension income splitting will reduce a couple’s tax burden, and allow them full benefit of their retirement income. Advice – concentrate on the debt, and funnel extra savings to a TFSA which can provide the “fun money” which will make retirement more enjoyable.

b) If you are single or have a spouse who will also have substantial post retirement income, income splitting isn’t likely to help you very much. Advice – forget the RRSPs entirely, they will just create a bigger future tax burden. Pay off the debt, max out TFSAs and if there is still ability to increase savings, investigate unregistered corporate class mutual funds which have a number of tax deferral advantages. Don’t forget the preferential tax status given to Dividend income.

2) 35 years old,with an annual income less than $35,000, no current savings. 20 years left to pay on a 25 year mortgage amortization. A few bucks in an RRSP, no other current savings, no emergency fund.

a) An annual income less than $35,000 is sort of the cut off tax bracket where RRSP contributions are of questionable value. The tax refund you get today, will be pretty well entirely eaten up by the tax you will pay when you start withdrawing the money in retirement. The lower your income the less efficient the RRSP becomes. Advice – get a TFSA to do double duty. Immediate savings can function as an emergency fund because withdrawals will not be penalized. Long term, the TFSA will replace the RRSP for this person, and all income withdrawn from it will be tax free in retirement, which will not affect the person’s eligibility for programs such as OAS. For this person the focus should be on saving, build that nest egg, protect against emergencies. The mortgage, which will pay itself off over time, will be done well before retirement, I wouldn’t worry about it. The trick here is avoiding further debt.

3) Young person, just starting out, lower income, good prospects for the future, no savings, renting. Advice – no question, max out the TFSAs. When the time comes to buy a home, the down payment can be withdrawn from the TFSA without all the headaches of the RSP Homeownership plan. Not only does it not have to be repaid, but you get the available room back the following year, so you are not penalized. During the growing and accumulating years the TFSA can act as an emergency fund, and in the long term will provide tax free income in retirement exactly as above. If this young person does move up in income and tax brackets there may come a day when the tax deduction of an RRSP contribution would be beneficial, however I would continue to advise maxing out the TFSA first.

What to avoid – Tax Free Savings Accounts which are set up like a plain jane savings account, paying pitiful daily or monthly interest. Forget it. At current (and foreseeable likely future) interest rates, these accounts are pointless. The amount of income which could possibly be generated isn’t worth the effort of protecting. We are talking pennies in tax savings here folks. Most of us alive today aren’t likely to live long enough for this to do us any good at all.

What to do – Get a Tax Free Savings Account which is set up like a regular investment account at your local bank, brokerage or investment dealer. Then treat it exactly like you would an RRSP. Same type of investments. GICs, mutual funds, ETFs, stocks, bonds – whatever sets your little heart afire. Think long term, but always keep a little short term money in there on the side in a money market fund or short term GIC, just in case.

 

Was this helpful?

Leave a comment

Filed under Finance, Investing, Mutual funds, Pensions, Recovery, Saving, Tax Free Savings Accounts

More on the Loonie

The Bank of Canada announced today that they were keeping interest rates the same for the time being. The Canadian central bankers have been on a campaign to talk down the Loonie, which has been rising against the American dollar, yesterday closing over 97 cents. Inflation is under control, commodity prices are stable, and the GDP forecasts are on track for a sustainable recovery. 

There is concern that the rising Loonie could impact the price of Canadian goods on foreign markets which could stall the momentum of our economic recovery.

At least part of the worry is because the increase in the price of the Loonie has been uncoupled from an increase in the value of the commodities like oil, gas, minerals, lumber which we produce and export. An increase which is driven by speculators betting on the direction of the currency, and not on true economic value could have very negative consequences when the speculators turn to play in another area, and abandon the Loonie for richer pastures, leaving us to pick up the pieces and repair the damage to our economy.

http://www.bank-banque-canada.ca/en/fixed-dates/2009/rate_201009.html

Leave a comment

Filed under Canadian Dollar, Finance, Inflation, US Debt, US Dollar