Tag: getting ahead

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Scary October: A bad month for spending

We try to do our best here at Casa del CIQY, but sometimes, things can get away from you. This October was one of those bad months for us and saw a big spike in our household spending.

Maybe you’re thinking to yourself “they must go overboard for Halloween and Thanksgiving” (recall we are Canadian so Thanksgiving is in October for us). Well, we do like Halloween around here and we did host Thanksgiving, but we did pretty well in terms of spending on both of those fronts. What we did have though was a number of irregular expenses that all ended up arriving at around the same time, leading to a month where our net income was very much in the red.

The Expenses

So what were these expenses? Well for starters, our home renovations picked up some serious steam during the month of October, which also accounts for the dearth of blog posts during that month. Our renovations were put on the back burner for a lot of the summer so we could enjoy the weather and each other. Mrs. CIQY and I tend to work opposite shifts, so if we don’t see each other on weekends, we pretty much just don’t see each other. But when the weather started to turn cold we also realized that New Baby was not that far from arriving and we needed to finish our renos before that happened, so we kicked the renovations back into high gear. Consequently, even though we’re doing the work ourselves to save money, there was significant spending on materials during the month.

Next, we had to buy new tires. Eight new tires, to be exact. My wife’s winter tires had worn down their tread far enough that they wouldn’t last another winter, so we needed new winter tires for her car. Meanwhile, I replaced my car over the summer (which I bought used and got a great deal, thankyouverymuch) and I needed winter tires for my car as well. So there was another big expense for the month. Two, if you want to nitpick.

If that wasn’t enough, we bought a new vacuum. I’m not sure when the last time was that you bought a vacuum, but they tend to not come super cheap. And given that we live in a household with three fur babies who shed, this was not an expense we wanted to cheap out on. We have needed a new vacuum for a while and have been on the lookout for a while as well. It just so happened that this was the month when we finally ended up pulling the trigger.

And to round it all out, there was a property tax bill due. Now maybe this doesn’t necessarily count as “irregular expense”, but it’s also not one that is due every month. In our case, taxes are paid in five installments, on five different month-ends. October happens to be one of those months.

The Silver Linings

On the other hand, I don’t view any of these expenses with any regret. They were all justified, they were all arguably necessary, and furthermore each case represents good value (except maybe the property taxes, but there’s really not a whole lot you can do about that one. Taxes gots to get paid).

Let’s start with the renovations. As I have mentioned, we’re doing the work ourselves with a lot of help from my handy dad. So right away, we’re saving a lot of money on labour. My dad and I both estimate that if we had hired contractors to do this work for us, it would have cost us approximately $25,000. So far we’re on budget to have it all done for about $6000-7000.

Furthermore, we’re significantly adding to the value of our house. We’re adding a full bath, turning our formerly 1.5 bath house into a 2.5 bath house. And in refinishing our old rec room, we’re adding insulation where there was none before to the external walls. So we’ll be saving a lot of money in future years in heating costs. And of course, most important of all, finishing these renovations will bring us more enjoyment of our house, we’ll get better use out of our basement space, and we’ll be making our lives easier. Win-win-win. No brainer.

Next, the winter tires. I’m of the opinion that when you live in Canada (at least in our part), winter tires are essential. Especially when I think about the safety of my wife and kids, this is something that is well worth the expense. So I’m definitely not second-guessing the purchase of winter tires in general. That’s a good start.

But beyond their being essential, we also got a good deal on the tires too. My wife got a great deal at Canadian Tire during their “Biggest Tire Sale of the Year” or whatever it’s called. And we had them installed on a set of steel rims that we got for free, along with the old set of winter tires, from my brother after he got a new car and his old winter tires didn’t fit. As for the tires I got for my car, I found them on Kijiji. They are fantastic tires. Top of the line Nokians, from Finland. Normally these things retail for about $200, per tire. I got a set of four, on rims, for $350. And lots of tread left. These babies should last me for a good 3 or 4 winters I’d wager. Not to mention the man I bought them from was very nice, and had even marked them for me, for proper tire rotation. This was definitely an example of good value for a dollar. Kijiji, baby!

Finally the vacuum. Like I said, we have pets. Three of them, to be precise; two cats and a dog. And a toddler, and a baby on the way. Our old vacuum had become unreliable. It was also heavy and had a broken power switch (we had to just plug it in to turn it on and unplug to turn it off). We had gotten several glowing reviews for Dyson vacuums from family and friends, and decided we wanted to get one for our next vacuum. When someone you respect and trust says “it’s the last vacuum you’ll ever buy”, that is the best endorsement you can hear. This was something we already knew we wanted. So when we came across an older model that was marked down at Canadian Tire and came with a $50 rebate, we recognized our window of opportunity and climbed through it.

As for the property tax… well if you know a way to get out of paying that bill, I’d love to hear it. On the other hand, as a good citizen I recognize the value of paying my taxes and I do it willingly. Personally I think there’s some good value in this expense too. As long as my plumbing keeps working, my trash keeps getting picked up, my streets cleaned, my traffic lights stay operational,…

So add it all up and it was an expensive month. There’s no two ways about it. On the other hand, we’re closer to having an extra bathroom and an awesome rec room to play in, we have peace of mind when it comes to driving safely this winter and for the next few winters, and we’ve got an amazing vacuum that should last us a lifetime. So it’s not exactly like we’ve got nothing to show for all that extra money being spent. Sometimes it’s better to focus on what you get, rather than on what you have to give to get it.

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Happy anniversary to me

Today is a bit of an anniversary of sorts for me. It might be a bit of an odd one to celebrate, but this is the anniversary of the day I was fired.

To be sure, “celebrate” is not really the right word here. The truth is that I have an odd talent when it comes to dates. I just remember stuff. Friends refer to it as my superpower. I remember people’s birthdays, dates of historical events, and dates that have personal meaning to me. I used to be good with phone numbers too, until owning cell phones destroyed my ability (or maybe just my will) to remember seven digits. I can also probably still tell you the postal code of every place I’ve ever lived in, and I’ve lived in a lot of places. But I digress.

Regardless, I feel this was an important day for me. A little background is probably in order.

In a way, this was my first big boy job. After being a student for years and years and then working for the family business for a while, this was my first job “in my field”. It was a job at a Big Company. A company with a name most people recognize. It was meant to be the first step in my career. A career that I thought was supposed to move forward, in a straight line forever. But of course real life doesn’t always work that way.

Why was I fired? Many reasons. Truthfully it wasn’t really a job I loved. The main reason I even took the was because it seemed like a good job at what seemed like a great company. My thinking was that I would get in the door and work my way into a role that I was truly excited about. And that is what I tried to do. I discovered a different group within the company that I wanted to join, I made some inquiries through the proper channels and tried to transfer. But the group I wanted to join didn’t really have a need for more people. Oh, did I mention that this was 2008? Well it was. So when the Big Company decided that it needed to let some people go, to weather the storm through the ensuing global economic meltdown, it was easy enough for my boss to say “listen, I really like you, but I happen to know that you’re not really passionate about this work”. Because I had basically told him so by asking to move to a different group.

And it stung. Like I said, I thought a career was always supposed to move forward in a straight line. You were supposed to graduate, get a big boy (or girl) job, start earning some money, get raises and promotions at somewhat regular intervals and leave your job only on your own terms and only if and when something better came along. But that was not my reality. I had failed. I was moving backwards. How was I going to find another job? I had a black mark on my resume: I had been fired. Canned. Downsized. Let go. Laid off. Made redundant. Any way I tried to dress it up, it stung.

The next day, the sun came up. It came up the day after that too. I got to work trying to find my next gig. It wasn’t easy. I was one of thousands who had lost their jobs at around that time. Finding my next job literally took months. Finding any job at that time was difficult, and I didn’t just want any job. I wanted the right job. It didn’t need to be perfect, or prestigious, or high-paying, but it needed to make sense for me and my career. My career wasn’t going to be a straight line from that point but I felt it still needed to go somewhere. And it did.

It is now nine years and two jobs hence. I think I will always remember the date. I will also always remember the things I have learned from the experience.

First, it’s never a good idea to take a job that you don’t want just because it’s a job you think you should take. Your standing within a company will be determined by the quality of work you do. If you’re doing something you don’t enjoy, faking it can be tough. Even if I hadn’t asked for a transfer to a different group, I’m guessing my boss could tell that my heart wasn’t into the work. How can you succeed at a job you don’t really want? You can’t. No success means no raises or promotions which means the next time the axe has to fall there’s a good chance it will be your neck.

Secondly, when I started interviewing I was happy to discover that being fired wasn’t the black mark I thought it would be. Smart managers know that people will lose their jobs for all sorts of reasons (like for example, because it’s 2008). Sometimes a job just ends up being a poor fit. They tend to be more concerned about whether they think you can do the job for which they are hiring, which often has nothing to do with the job from which you got fired.

Third, a career is not a straight line. It can be, but it often isn’t, and that’s just fine. It’s more important to have the career you want rather than the one you think you’re supposed to have. I have spent far too many years working jobs that made me miserable for my liking. I don’t want to spend a third of my waking hours doing something that makes me miserable. I have come to believe that it’s more important to be mindful of your finances than to worry about earning as much as possible. It’s not so much the size of the pie as how much of it is left over at the end of the day. Do work you enjoy and be smart with your money and you’ll be okay.

Finally, sometimes crappy things happen, and when they do, remember that you can and will get through this.  There is no shortage of motivational quotes, posters, or other media to choose from, but my personal favourite comes from Douglas Adams: “Don’t panic.” I have been pretty fortunate in my life and I realize now that people have gone through far worse hardships that losing a job. We all have our own struggles and we all find our own way to get through them.

When I think back to that day, I still remember the sting, and the shock, and the sense of failure. But I also am able to look at what I have done since then and where I am now. And in light of all this, it doesn’t seem quite so bad anymore.

Happy anniversary to me.

 

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Variable vs. Fixed Rate Mortgages: An email correspondence

Subject: So You’re an Economics Kinda guy…
Boba Fett <bfett@slave1.com> Sun, Sep 24, 2017 at 5:37 PM
To: Mr CIQY <me@caniquityet.com>

hey man,

Mrs. Fett and I were talking mortgage after the Bank of Canada raised rates, and realized we don’t really know squat.  and we thought, who does know squat? and the answer was: maybe Mr. CIQY?
As one of a very few economics minded friends, wondering if you had any thoughts regarding rate increases and fixed mortgages?
Mr. CIQY <me@caniquityet.com> Mon, Sep 25, 2017 at 7:37 AM
To: Boba Fett <bfett@slave1.com>

Oh I have thoughts on a lot of things. Doesn’t always mean they’re right though.

I guess it depends on a lot of factors. Are you asking because you guys currently have a variable rate and you’re debating whether/when to lock in to a fixed? If that’s the case, then it kind of depends on the spread. We’re in that situation now ourselves. Last time I checked, for us the spread was 0.55%. So in our example, that basically represents two more rate hikes, or close enough. meaning that in two more rate hikes, assuming our lender passes both those hikes along to us, we will be paying the same rate as if we locked in to the fixed rate now. There’s a school of thought that says you’re better off going with the variable because in the interim, you’re still paying less interest. Which makes sense to me. Of course, then it becomes a question of when the hypothetical third rate hike will be, at which point you’re worse off than if you acted today. But again, you will have paid less interest in the interim.

Some people really like certainty and knowing exactly how much they’ll be paying for X years and if that’s you, then going fixed might make sense. But in most cases you’ll end up paying more interest by going fixed.

What specifically were you guys wondering about or wanting to know?
 
Boba Fett <bfett@slave1.com> Mon, Sep 25, 2017 at 8:48 AM
To: Mr. CIQY <me@caniquityet.com>

Brother, you nailed it in one.

Effectively, we’re going through the variable–>fixed should-we? talk based on essentially the numbers you’ve got there; around a .5% difference.  So, as you say, we’re looking at a likely 2-hike equivalence in the rates.
Mrs. Fett’s read that the rates could go up as much at 1%, in which case, locking in a fixed rate now would make sense.  But she’s also read that a hike like that would put a bunch of people out of their homes because people think a mortgage is a free house from the bank.
Based on your reply, can i assume you guys will remain variable?  We’re trending in thinking that way, but hoping we won’t regret it if the rate keeps climbing.
sigh.  I remember when finance talks were “should i get that comic book, or the creamsicle”.  Thanks for the thoughts (right or wrong) – it’s good to hear.
 
Mr. CIQY <me@caniquityet.com> Mon, Sep 25, 2017 at 9:14 AM
To: Boba Fett <bfett@slave1.com>
Well for us, we’ve got 3 more years left before we get to renew our mortgage. Our strategy has been and continues to be a) make minimum payments; b) save as much as we can and invest in TFSAs, hoping to earn some nice returns; c) on the eve of mortgage renewal, make a lump sum payment from our savings and investment income to the mortgage principal to try and get our monthly minimums lower for years 6-10. Trying to predict what will happen to the economy is a mugs game and if I knew how to do it properly… well let’s just say I don’t.

That said, there are reasons to believe that interest rates might not continue to climb uninterrupted over the next few years. For starters, inflation just isn’t that high yet, which suggests maybe more rate hikes might not be a sure thing. Secondly, all it takes is for another recession to hit and then we’re definitely not likely to see rates climb higher. And recessions tend to happen every so often for all sorts of reasons. It’s possible we’re about due for one soon. Looking for reasons why? I dunno… an end to NAFTA? Other major catastrophe? Start of a new war? Another big drop in oil prices? A strong Canadian dollar that crowds out manufacturing exports? A major housing collapse due to rising interest rates (irony!)?

Or who knows? Maybe we’re at the start of a historic economic boom? I’ve been wrong about lots of things before. Anyway, we’re going to stay variable for now I think. But check back with me in a year when I’m paying 5% on my mortgage and kicking myself for not locking in.

[
Boba Fett <bfett@slave1.com> Mon, Sep 25, 2017 at 10:42 AM
To: Mr. CIQY <me@caniquityet.com>

Thanks for the sanity check – i think we’re largely in the same boat, but your one-time lump sum payment makes way more sense.  We have the opportunity to pay down the principal via acceleration, but it would make more sense to invest those payments and then use the resulting interest as well.  See, you’re the economic guy for sure.  Also, thanks for the context – it’s easy to freak the f out when you hear “rate increase” but what you say also makes sense.  and some of that context is TERRIFYING.

Thanks again homes!
 
Mr. CIQY <me@caniquityet.com> Wed, Sep 27, 2017 at 10:55 AM
To: Boba Fett <bfett@slave1.com>

Hey, so uh, I started a blog a little while ago, and it’s about personal finance, frugality, etc.

I was wondering if you would mind if I mined this email thread and made a blog post out of it? I would be obfuscating your identity as well, but I kinda thought an email exchange about fixed vs variable mortgages might be a semi-interesting way to address a topic that fits within my blog’s subject matter.

Would you mind if I published this exchange, lightly edited with all identifying information scrubbed? I’ll even let you pick your alias, if that appeals to you. 😉

 
Boba Fett <bfett@slave1.com> Thu, Sep 28, 2017 at 8:01 AM
To: Mr. CIQY <me@caniquityet.com>
Yeah, absolutely, go nuts!
As for aliases, is in like the Dear Abby write-ins?  “Worried in Weston” or “Scared in Scarborough”?  or just a name? In which case, can i get ‘Boba Fett’?
 
Mr. CIQY <me@caniquityet.com> Thu, Sep 28, 2017 at 8:14 AM
To: Boba Fett <bfett@slave1.com>
You can get whatever you want. Boba Fett is a good choice.
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Savings and Investment for Noobs

A friend recently came to me with a “problem”. He had recently come into some money. Prior to this my friend didn’t really have anything in the way of savings, nor any knowledge of what to do to put this money to good use. This is one of those good problems to have. He had money, but needed knowledge. Money can be hard to come by. Knowledge is easy to acquire. You just need to know where to look.

So this post is basically an answer to my friend, as well as a handy guide to others in similar situations who maybe know they want to save and invest but have no idea how to start.

Up front, I’ll just say I understand how daunting this all can be to anyone who has never learned anything about investing or banking or finance at all. There’s a lot of factors to keep track of. I’ll do my best here to try and make it simple enough to follow.

Factor #1: What type of account

Regardless of what types of investments you are looking to hold, those investments need to be held in some kind of account. For the purpose of this piece for beginners, I’ll address four different types. Once again for my readers, this is Canada-specific. If you don’t live in Canada then the particular account options will be different and have different names, but the concepts may be similar. I have already touched on some of these considerations in a former post, but I’ll give a bit more detail here:

  1. Normal, non-registered accounts. Most if not all banks will have some investments they will happily sell you. If you happen to hold these investments in a non-registered account, then they will be subject to tax of some kind. So if the investments pay dividends or have some other income stream, then you will have to pay income tax on that income in the year in which it is received. Likewise if you sell any assets in a non-registered account and make money on the sale, you will pay tax on the capital gains. Capital gains just means profit when selling investment assets. This is the “normal” situation, so to speak. If you make money, the government wants their share of the tax on it.
  2. Tax Free Savings Acount (TFSA). This is a registered account. The main thing to be aware of here is that there are limits to the amount of money you can put into this account. The details of contribution limits are explained here. The tax benefits of this account are right in the name; any income or profits earned in this account are tax free, which is great. You are free to withdraw money out of this account at any time, but you have to be very careful about putting money back in, to make sure you don’t breach the contribution limit. This makes this account great for short-to-medium term investing if you are looking to earn a little income on your money and want access to it before you retire.
  3. Registered Retirement Savings Plan (RRSP). This is also a registered account, as it says in the name. It also has contribution limits, but those limits are much greater than the limits for TFSAs. Its main benefit is for deferring tax. What this means is any contributions made this year will reduce this year‘s taxable income. So if you contribute $1000 now, your taxable income for this year at tax time is reduced by $1000. That is because this type of account is geared toward retirement. Tax will be paid on any money taken out of it during retirement, as if you had earned it in the year it was withdrawn. Because it is designed with retirement in mind, there are witholding tax penalties if you withdraw money early. This type of account is great if you are currently in a higher tax bracket and want to reduce your tax payable this year, but not so great if you plan on using the money before you are 65 because it is locked away.
  4. Registered Education Savings Plan (RESP). This account is a bit unique because it is designed specifically for saving for a child’s education. If you have no children (or your children are already over 18) then this account doesn’t really apply to you, but I’m including it here because if you do have children under 18 then this account is a no-brainer.  Why? Because the government will match 20 cents per dollar on the first $2500 invested each year to a maximum of $500 per year, up to a maximum amount of $7200 per child. This extra money is called the Canada Education Savings Grant (CESG). This is free money, and a 20% return on your investment without doing a single thing. Of course, if your child doesn’t go to college or university then you do have to give the CESG portion back, or transfer it to a sibling who still has contribution room, but why not take that money in case your child does want to pursue post secondary education? An RESP can stay open until the child is 36, just in case he or she isn’t sure they want to go to school right away. If they definitely don’t, then the money (after returning the CESG portion to the government) can be transferred to an RRSP.

All four are useful and have their respective merits and flaws. RRSPs are great, especially when your employer also contributes to one for you, but only if you don’t plan on using that money before age 65. TFSAs are great but they don’t really do anything for your income taxes in the current year, and there are limits to how much you can put in. If you’re lucky enough to have maxed out your registered account contribution room, then you have no choice but to use a non-registered account. You get the idea.

Once you have decided which type of account you want to open and hold your investments in, it’s time to decide what to put in it. But before we get in too much detail about the different options, we have to address two major concepts: volatility and diversification.

Volatility

If you’ve ever taken an economics or finance class, and probably even if you haven’t, you might be aware of the “risk vs reward” trade-off. The idea is simple; the riskier an investment is, the greater the potential returns. The classic Economics 101 example of a risk-free asset is a government bond. So a sovereign government issues a bond and that bond has a yield of say 3%. The reason this is risk free is because the government is guaranteeing you that you will get your 3% return. The only risk in holding this bond is the risk in the government going broke and not being able to pay you your 3% (or your principal back!), but since most governments are also in the money-printing business, this risk is pretty darn low. Some countries are on shakier financial ground of course, and maybe their risk of default is greater than that of other countries. Well guess what? Those countries will have to offer a higher yield on their bonds in order to get people to buy them. That is your risk vs reward paradigm in action; riskier bond, higher yield. Corporations also can issue bonds and they tend to be a bit riskier than government bonds, which of course means they offer even higher yields. But once again, the only real risk to the investor is if the company goes broke. Bonds are safe because outside of the rare event when a country or company goes belly-up, you get your yield, guaranteed.

On the other end of the volatility spectrum, you have the corporate stock. Stock prices go up and down all the time. For the most part when you’re talking about stable, major corporations, prices do go up in the long run. But between now and “the long run”, their stock prices can go way up or way down, depending on a lot of factors. They are volatile. So say you invest $1000 in ABC Corp today, and promptly forget about your investment. Two months later you look at their stock price and realize that it has gone down and your initial investment is only worth $800. Boo! That’s terrible! You’ve lost money. But you hold onto your stock, because you’re a lazy investor. A couple of months later you check back and see that the stock price has gone up again! Now your investment is worth $1100! You’re a brilliant investor because you have earned a 10% profit on your investment and now you are rich. Bully for you!

Of course, one day, ABC Corp could get mired in a major scandal and reveal that they are completely broke, making your investment worth essentially $0.

This is the concept of volatility. Riskier assets will pay greater returns, but they are also a bigger gamble. If you can stomach watching your investment go down for a while in the hopes that it will recover and not go broke, then you are okay with risk and are capable of seeking higher returns. Historically, stocks are a better bet for making money than unrisky bonds. The danger is that in the interim, risk averse people watch their investment shrink in a crisis and want to cut their losses by selling while things are low. This is very common. It is also the wrong thing to do, because historically, most companies don’t go broke, and most company’s stock prices recover. Most. The majority of investors hold stocks and bonds, but mostly stocks. The higher your appetite for risk, the higher your proportion of stocks in your portfolio.

Diversification

This is a word that gets used a lot but I wonder how many people don’t understand what it means? Basically this is the “don’t put all your eggs in one basket” principle. Again, let’s go back to Econ 101…

Imagine you lived in a world with only two types of fruit: apples and pears. Some people only eat apples, some only eat pears, and some people eat both to varying degrees. Now imagine some event has done great damage to the apple crop. There is an apple shortage and consequently the price of apples has gone through the roof. What do you as a consumer do? Well, if you’re wealthy and you hate pears, then maybe you just pay through the nose for your apples and gripe about it. But if you’re most people, you change your consumption and buy more pears until the price of apples comes down again.

Now assume instead that rather than being a consumer, you’re the owner of Apple Co. (okay, maybe this was a bad example… Apple Corp? No, that’s no good… Granny’s Apples Inc? Whatever, you get the idea). Your supply has been hit and you’ve had to raise your prices. Consequently your sales are terrible because now everyone is buying pears instead. Well if you own this company’s stock, then guess what? You effectively are one of it’s owners. In this scenario, the share price for this company would tumble and your investment and net worth would take a hit. Meanwhile shares in Pears Inc. are probably getting a nice healthy boost from all those additional sales.

So how do you avoid this potential calamity? Well, you own both companies. By buying shares in both the apples company and the pears company, you hedge your bets and reduce the volatility of your portfolio. This is what diversification means.

In the real world, sometimes individual companies suffer. Sometimes entire industries suffer. Sometimes the economies of entire countries suffer. A well diversified portfolio spreads around your risk so that your investment can withhold certain shocks and keep things even keel, in the hopes that if one part of your investment goes down, another might go up, or at least go down to a lesser degree. Diversification can occur within a market (owning stock in both Coke and Pepsi), within an economy (owning Canadian mining stocks, banking stocks, manufacturing stocks, etc.), and also internationally (owning investments in Canada, the U.S., Europe, Asia, etc.).

Diversification is essential. It is also a lot of work. You want to pick a number of assets from different industries and countries, with varying levels of risk to make your portfolio relatively stable while also taking enough risk to get some return on your investment. Well good news: you can get others to do that for you. The downside is that everything comes at a cost. Which segues nicely into our next section.

Factor #2: What type of investment

Once you have chosen the right type of account for your situation you will want to decide what to put in it. Well, you have some choices. Once again there are trade-offs. Here is a list of investment types in order of lowest return (and risk) to highest.

A savings account

Technically I suppose this is also a “type of account”, but I’m putting it in this list here because you can get both TFSA savings accounts and non-registered savings accounts at your bank. Under most circumstances, I would not advise someone to keep a lot of money in a vanilla savings account at their local bank. The exception would be if you had some money that you absolutely 100% needed all of within the next couple of years. Most commercial banks in Canada will offer these accounts and most of them will offer 0.5-1.0% on these accounts. This isn’t very good, but still better than having your money in a chequing account that offers no interest. Want to do better? Skip the bank and open an account at a local credit union. Not all credit unions are created equal so you’ll want to do your research but their banking fees are lower and their savings accounts can offer more in the 1.5%-2.5% range, which is better than the banks offer.

Mutual Funds

Mutual funds are great for beginner investors. Why? Because someone else has already done the diversification for you. Mutual funds are managed to be balanced investments, so one share of a mutual fund is like a tiny basket of assets featuring investments in different countries, industries, and asset classes. But this management and balancing has a cost. This is why each mutual fund has a Management Expense Ratio (MER), which represents the cost. Most mutual funds will have an MER of approximately 2.5%, give or take. So what does this number mean? Well lets say your little basket of goods of a mutual fund appreciates by 7% over the course of the year. If the MER is 2.5%, then your investment returns will end up being 4.5% (7-2.5=4.5). It is this MER that gives mutual funds a bad name among many investors, because you’re not getting your full rate of return.

I would argue that if you’re a beginner investor who isn’t really sure what he or she is doing, then the MER is worth it. 4.5% is better than 1%, which is better than nothing. Really, savings of any kind is the most important thing, so complaining that you’re “only” getting 4.5% return is silly when you used to earn nothing on your money. The other great thing about mutual funds? Every bank or credit union or investment firm has them. All you need to do is approach a financial advisor or ask someone at a bank. They will then ask you a few questions to assess your risk tolerance and help you pick the fund that is right for you. Then you buy that fund (hopefully repeatedly and regularly through regular contributions) and watch your savings grow. In my mind, it’s more important that you save, rather than waste too much time worrying about exactly whose mutual fund is the best choice. Just buy one. If you find a better one, then at that point start buying that better one instead. Don’t delay!

Exchange Traded Funds (ETFs)

So let’s say you’ve been squirreling away your pennies into mutual funds for several years and watching your savings grow. You’re pleased, but also aware that maybe you have some colleagues who are talking about their own investment portfolios and they’re doing even better than you. Suddenly, you’re starting to question if that 2.5% MER is really worth it. Enter the ETF.

ETFs are actually similar to mutual funds in that they also represent baskets of assets. The main difference is that they are more focused, less balanced, less managed, and therefore have lower MERs. Maybe before, you were buying a single mutual fund with all your savings and it was doing everything for you. By switching to ETFs, now maybe you have to buy 3-5 different ETFs to achieve the same diversification that your one mutual fund gave you. So you have to do a bit more work yourself. On the other hand, you’re saving money now because while before you were paying a MER of 2.5%, now you’re only paying 0.2%. Your 4.5% profit based on 7% return has now become a 6.8% profit in exchange for you doing more of the work yourself.

But there is another catch, and it represents another cost to you. Recall that ETF stands for Exchange Traded Funds. That means they are traded on a stock exchange, like the NYSE or the TSX. How do you as an investor access those exchanges? You need a brokerage account. Getting brokerage accounts is easy enough. There are several to choose from. But the catch is you usually need to pay a commission for each trade. There may be some newer brokerages that have reduced commissions but in general in Canada the going rate is about $9-10 a trade. It might not seem like much, but think about the investor who tries to save $500 a month. Once a month, he goes to his brokerage and has to buy 3 ETFs (one for domestic stocks, one for foreign stocks, one for bonds). Once a month, he has to pay $30 in trading commissions. That’s 6% of his investment amount going to commission. And $30 a month can add up. Clearly, ETFs aren’t for everybody. This is why if you’re just starting off, mutual funds might be a better option for you since they’re less work.

(Worth mentioning: some brokerages will offer a list of commission-free ETFs. If you pick a brokerage that offers one and can come up with a nice asset mix, then the worry about commissions goes away.)

The other thing to keep in mind if investing with ETFs is that at least once a year you need to re-balance your portfolio. What does this mean? Well, let’s say you’re shooting for 70% stocks and 30% bonds. At the end of the year, let’s say your stock ETFs have outperformed your bond ETFs (the value of your stock ETFs has gone up by more than the value of your bond ETFs has).  The stocks in your portfolio now represent 80% of its value and the value of your bonds is therefore 20%. Now you need to buy relatively more of your bond ETF to get back to 70-30% and have things properly balanced. Again, this is something that the managers of mutual funds will do for you which helps to justify their larger MERs.

Individual stock and bond trading

You are confident in your abilities to pick a stock based on sound market principles. You know how to craft a well diversified portfolio to protect yourself against risk and maximize your return. You’re pretty sure you can beat the market. Congratulations! You’re far better at this than most people are. You are probably also not reading this blog entry right now. If this doesn’t describe you, then you should not do this. Stock trading is a great way to go broke and/or turn yourself off investing. Do not do this.

Final thoughts

One thing you’ll notice I haven’t done is recommend any particular funds or ETFs or assets of any kind. There are plenty of online resources for you to pick investments you think are worth buying. I like Canadian Couch Potato, so feel free to give him a try. But the online investing community is quite large and it’s typically pretty easy to find recommendations.

Everyone has their own things to consider. We all have to look at all factors. Why are you investing? When do you want access to your money? Are you looking for a way to reduce your tax bill right now, or is it not a huge problem for you? And crucially how much work are you willing to put into managing your investments? Hopefully for anyone who is able to answer all these questions for themselves, this blog post has been helpful. If not, feel free to ask me questions in the comments, via email, Twitter, or however you wish.

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My philosophy of work, and how I got here

I currently have a good old fashioned, nine to five desk job. I do not like it very much. Surprise! The guy who started a blog called “Can I Quit Yet?” doesn’t like his job. Big shock, right?

Obviously the ultimate goal is early retirement. With a tip of the top hat to Mr. Money Mustache, and others like him, I am aware this is possible. But this is one of those goals that is simple, but difficult. Simple because the formula is straightforward: maximize your savings by minimizing your expenses and/or increasing your income. But saying “minimizing your expenses” is one thing and actually doing it is another. There are lots of areas where the average family can trim the fat and live more cheaply; I’ll get to a lot of those in future posts (or go back and follow that Mr. Money Mustache link… seriously, he’s great) but in my case there was a pretty obvious elephant in the room, and that is our mortgage. We have one, and it’s kinda big. And I know we can do lots to chip away at that mortgage and pay it down faster but it’s going to take a little time. What it all boils down to is this: for now, I gotta keep working.  It’s the only way we’re going to reduce and ultimately eliminate that mortgage so we can live more cheaply and achieve financial independence.

So I have established that I have to work, but I don’t like my current job. So the simple solution is of course to try and find another job. Well that’s proving to be a little difficult. To explain why, allow me first to explain how I got here.

I have always felt there are three things that make a job good, or worth having. 1) Interesting or fulfilling work; 2) Good pay; and 3) Good people.

Interesting or fulfilling work – In the simplest of terms, do you enjoy what you do? Are you spending your working hours doing the type of work you enjoy, or that motivates you? This is the big one for most people, and according to a lot of the stuff I have been reading lately about millennials and “kids these days” it’s more commonly becoming the most important factor. This of course makes sense because if you’re spending approximately eight hours a day doing a thing, it’s best that you enjoy doing that thing. Of course in many ways it’s also a first world problem, as the opposing viewpoint is that work is work, a job is a job, we all need to make money, so suck it up buttercup quit your whining and be thankful for your paycheque. Fair enough. That’s why I personally see it as only one of three major factors to job fulfillment.

Good pay – This one is a bit obvious to me. The pay is the main reason why most of us are working in the first place. Is money everything? Of course not. But to think of things a different way, if you’re working a job and finding that the pay just isn’t enough, that you’re struggling to get by and barely making it to your next paycheque, don’t you at that point start to consider looking for a new job? I figure for a lot of people the answer to that question is yes. On the flip side, if you’re working a job that isn’t necessarily your dream job but the money is good, you’re likely to stick around a bit longer than you otherwise might. I know that for me at least this is true.

Good people – For anyone who has ever worked a job where they had serious issues with their coworkers or managers, they’re likely reading this and nodding their heads vigorously. At the same time, a boring job with great coworkers can easily become a pretty good job. I find that if I like the people I work with, I like the job a lot more. It really can make all the difference, especially when you consider the fact that a lot of people spend more time with their coworkers than their families. If you don’t believe me ask yourself a few questions: How many hours do you sleep on the average night? How about your family members? Are you at home the same time as the rest of your family? Do you and the rest of your family ever do things separately? Do the math and then let me know if you think you spend more time with your spouse or the person you sit next to at work.

So those are the three things. In my estimation, if you have all three of those things in your job, then you’re laughing. Good for you! You’re probably in no hurry to retire early and therefore most likely not reading this right now. If you have two out of those three things, then you’re probably still pretty content. But if you have only one out of three… well if you’re like me, then at that point you’re probably starting to at least browse job ads. If you’re oh-for-three, well then I’d wager you’re not very happy about things and maybe doing more than just browsing job ads. And if you’re not, maybe you’re thinking about it. Maybe you should?

So that’s our scorecard. Now let’s see how I am doing based on these criteria.

Interesting work? Not so much. When I was first hired, I was brought in to help on a project that I thought was very interesting. Unfortunately, that project met an untimely death about six months into my jew job. After that happened, I was brought onto a project that was way behind schedule and needed help. It was in serious trouble and needed people. I never really cared too much for the project, nor did I have much in the way of expertise going in. In addition, the people in charge didn’t need or want the kind of help I like providing. I’m more of a big picture guy, who thrives in strategy, planning, and problem solving. I like to be invested, to have skin in the game. The role I was tasked to play on this project is basically that of a grunt; do what you’re told and let the adults in the room make the tough decisions. I was okay with helping out when help was needed, but now it’s been over five years. This project is still a going concern and I’m still stuck in it, not making what I consider to be any meaningful contributions. It’s definitely not doing my career any favours, unless I want to keep doing what I’m doing forever, and I don’t.

Good pay? Well this one is tricky… When I first started this job I was able to negotiate a salary that was a significant jump for me, compared to my last job. Part of the reason was due to the new job being in the big city as opposed to a smaller one, and that usually means a jump in money for reasons outlined in my last post. Another part of the reason was probably due to the fact that I was moving along in my career, now a more experienced hire, and the fact remains that a jump in salary is often the reason why people decide to switch jobs in the first place. When I made the switch, I was pretty happy about the money. Well it’s now over six years later. How many raises have I earned in that time? Zero. As I already hinted at, I’m not exactly in a role where I’m able to thrive and have a real impact, so there have been no performance-based raises or promotions. There also haven’t been any inflation-based or cost-of-living-based adjustments either. It’s become pretty obvious to me that pay increases at my current job just don’t really seem to happen very often at all. Do I think I’m entitled to the occasional raise? Well, no, not necessarily. But the fact remains that even if inflation over the past 6+ years has only been in the 1-2% range, a dollar earned today is worth less than it was 6 years ago. It doesn’t go as far. Plus when I started this job I was a freewheeling bachelor. Now I have a family to provide for and that family is growing. So if my pay hasn’t changed, but a dollar is worth less today, then in real terms, I’m actually earning less today than I was when I started. Let me be clear: I know that I am fortunate, that I do earn a very decent salary, and that I realize there are a great many people out there who are worse off than I am. But my goal in life is to get ahead, so that one day I can retire and have more time with my family. Right now it’s fair to say I’m not moving ahead.

Good people? At one point, I definitely would have said yes. Emphatically. I do work with some great people who I consider friends and not just work friends. The people were, and still are the best thing about my job. But I’m afraid the situation there has deteriorated somewhat as well. When I first started in this job, our team would go out to lunch on a daily basis. We would have after-work drinks almost as frequently. So what happened? Well, my life and priorities changed. The daily lunches were getting expensive, so I started brown-bagging. The after work drinks all but stopped too. When I was a local bachelor, they were fun and easy. Now, I think twice about spending too much on beer. Plus, living in the ‘burbs means I’m a commuter, and even staying for a single drink often means putting me on a much later train which means potentially not seeing my daughter before she goes to bed. It seems a much bigger sacrifice, because I actually really like my family and spending time with them. Some work friends have left the company and moved on to other things. But unfortunately my unhappiness with my job has affected some of my work relationships. My frustrations with my role and career have caused some resentment toward some of my superiors who I used to think of as friends. It’s a huge bummer.

When I started in this job, I was excited about the work, ecstatic about my coworkers, and happy to be earning more than I was before. When the work became less interesting I told myself that at least it was an easy job and I was still working with great people and better off than I was. That’s probably why I stuck around as long as I did. But before I knew it, years had passed, I was bored, frustrated about my stagnant career, losing hope for future progress, and then working with good people just wasn’t enough. On my three-point scale, I was barely scoring a 1/3. Just barely. Time to move on.

So now what? How do I fix things? What’s my game plan?

I’ll save that for next time.