Financial New Year resolutions (making it simple to help make it work)

In the wake of over eating and over spending during the Holidays Season's.  It makes sense to visit the top new year resolutions, these usually involve fitness and of course finances.  Let's face it, we all make new year resolutions but to maintain them over 12 months is always the challenge.  To help you along, I've make financial new year resolutions as simple as possible, after all a simple idea is easy to think about and maintain in everyone's busy life.

1. I resolve to figure out my finances.

To make it simple, lets not discuss over spending or trying to figure out how much my bank is charging me in fees.  My suggestion here, tracking.  Why not make it easy, do what you are comfortable with.  There are many apps (Mint is a popular app) for smart phones that will help you track your expenses and income with ease.  Not everyone is comfortable with these apps, everyone has a reason.  I say start with a simple excel spreadsheet and separate by month and category.  I am not going to shove categories at you, you do what you feel are your categories, after all its you that will need to figure out your finances for the year. Bottom line, figure out your income and expenses using methods you are comfortable with.

2. I need a budget, I think I am spending too much but am not sure.

Once you get down to figuring out your finances, you will need to establish a budget, once you categorize your fixed expenses like car insurance, utilities, cell phone bill, etc you will see how much you have in variable expenses.  Most people who see in writing how much they spend each month just to maintain a basic standard of living are shocked.  Mortgage and car insurances are usually the biggest numbers in the fixed expenses area.  Bottom line, the 1st few months you can live normally before you can establish a budget.  All this time, track everything.

3. I resolve to get out of debt.

Now this resolution will require a bit of work.  Now before we get into debt, I would like to categorize debt into good debt and bad debt.  Good debt is something like rent/mortgage payments, we all need to live under a roof.  This is good debt.  Bad debt is a bit more obvious but needs to be put into writing.  Bad debt includes things like luxury vacations, renovations to the house, leasing a car.  Now before you lynch mob me, yes those are bad debts, most times these type of items go onto a credit car or line of credit which are not paid off completely to zero each month.  This could go into the budget section, think about it, do I need that luxury vacation 2 times a year?  Maybe cut it down to once a year and make it not a luxury getaway, make it a simpler vacation.  Do I need my basement renovated at the beginning of the summer and then do a deck in the backyard in August?  Budget those renovations.  Leasing a car, everyone thinks its good, a new car every 2 years.  No ownership.  This matches well to the Buy a house or rent an apartment idea, where renting is waste of money.  Do some thinking here, do you want to lease a car for 20 years?  Back to the heading, simple ideas to think about to get the mind thinking about things.  After all no one will be helping you with your finances but you alone, so get those ideas into your head and act on them.

4. I resolve to save more.

If you are reading this article, I hope that you have opened an RRSP or a TFSA account already.  If not, make it a point to open one this year.  Once when I was 27 years old and 2 years into my RRSP contributions, I had a friend who was 25 ask me why am I so crazy about RRSPs.  Her comment was "are you looking to retire soon?"  She thought RRSP were totally for retirement.  A bit of this is true, money should be withdrawn from an RRSP when annual income is next to zero which means in retirement or (knock on wood) in case of disability where you can not work and your annual income is close to zero.  How much should I save you ask?  There is no concrete answer to this question, it depends on the person.  Generally, it should be 5 to 10% of your after tax annual income.  You might want to either open up automatic withdrawals intros your RRSP.  Fees are another item that can be tracked and once again looked at carefully.  Am I sick and tired of the bank charging me $11.95 a month for my checking account?  Do you homework, there can be options.  Saving can also involve the dreaded Mutual fund MER Fee.  In my opinion, i found out of the MER fees while doing a new year resolution and it put ideas into my head for weeks until I found out all about them.  If you need to save money, read my previous posts on Mutual Fund MER fees.   It will open your eyes.

5. I resolve to stop wasting money.

This should really be an every day thing but as a new year resolution.  A big waste would have to be cell phone, television, and internet bills.  Cell phone plans in Canada are controlled by the big 3 providers in Canada, everyone has Rogers/Bell/Te;us.  How can I save there?  Well there are other options, a very good choice could be Wind Mobile.  They have unlimited data plans and are placed as a solid 4th place provider.  As of this article, yours truly has just switched to wind mobile from Telus.  I will post my experiences in a future post once I have more experience with their plan.  What happened to me is that I got sick and tired of Telus and did homework, there are options out there.  Once again planting ideas for future action.  Effective March 1, 2016, cable providers will need to offer customers an a al carte choice for television channels.  This is in response to customers complaining about bundles with channels they never use but have to pay for.  (there will be a future post on this topic also).  Internet bills, yes everyone has their stories with over priced internet.  Again, there are choices out there, you just need to plant the idea and think.  Now there are a lot of adds out there for COMWAVE for unlimited internet.  It features former Leaf Tie Domi saying stand up to the big guys.  Their internet is probably just as good as the big guys, they might be lacking in certain options or features like longer wait times for a service guy to come out or no coverage in certain communities but again plant that idea.


There you have it, a top 5 new year resolutions and how you can actually make it work.  I tried not to give examples in every section but some I had to, just to get you started off with and idea and making it work for the year.

How about you, do you have any resolutions that may fit into this article?

Shaw Communications purchases Wind Mobile for $1.6 Billion - makes Wind 4th larges wireless player in Canada and catching up

http://www.thestar.com/business/2015/12/17/shaw-to-keep-wind-mobile-a-discount-mobile-carrier.html

Toronto Star article summarizes Shaw's purchase of of Wind Mobile.  Shaw will continue to offer Wind as a discount model to the big three providers, Bell, Telus, and Rogers.  Now there is a reason that Wind is a discount to the big three, Wind has primary coverage for the big cities in Canada.  If you look at their coverage map, that is basically what it is, you go far away from the big cities, and you run into dropped calls or roaming onto someone else's network.  Now you think, why is that great, who would want that?  Well Wind offsets that with unlimited talk and data within the city boundaries.  This has been well received by consumers, making this 6 year provider the 4th largest provider of cell phones in Canada.  Now everyone think of their plan and now consider Wind can give you unlimited data for $40 a month, talk and text is included.

Last week, Wind also secured $425 Million from a  group of banks to upgrade their 3G network to a higher LTE network.  This new LTE network is planned to roll out across the Wind Network by the end of 2017.

Before Shaw, there was no serious inroads or competition scare for the big 3, why would there be any? The big three control the Canadian landscape.  But to see how serious this Shaw/Wind deal is, the next day on the stock market, Bell, Rogers and Telus sharply dropped.  With Telus dropping the most in 1 day in 2 years.  It looks like the big 3 heard the announcement, well at least the investors.

Wind is the 4th largest provider but only controls 3% of the market.  At the end of the 3rd quarter, Wind had 940,000 customers, compared to market leader Rogers with 9.8 million and 8.4 million for Telus.

Shaw plans to bundle their internet and cable services with existing cell customers and increase their footprint beyond B.C. and Alberta where the majority of their customers are.

All positive happenings for both Shaw and Wind, expect to hear more from both in the upcoming year. With that I leave you with the following stat.

Average revenue per wireless user

Bell Canada $65.37

Telus $64.22

Rogers $61.02

Wind Mobile $38

Industry average $61

Sources : company reports, Bank of America, Merril Lynch, Toronto Star

Are you house rich or house poor?

According to Statistics Canada, about one-quarter of Canadians are spending too much on housing costs.  "Too much" is defined by Canada Mortgage and Housing Corporation (CMHC) as 30% or more of household income.  So saying that,  Are you House rich or House poor?

The CMHC refers to household income as being pre-tax.  Now the take home for most households will be different due to the tax system and it's many variables.  There can be a big difference in after-tax income between 2 households with identical incomes.  

According to CMHC, housing costs refer to costs such as rent, utilities for renters.  For homeowners, it includes mortgage payments, property taxes, condo fees and utilities.

The 30% rule does ignore other substantial factors.  What if the household has 2 cars and the other household has no cars.  What if one household has kids, the other household none.  Cars and kids are not cheap.  There will be differences for sure as no 2 households have the same variables.

With young couples, they are often wondering if they can afford their dream house, without breaking the bank.  Taking on a bigger house and a bigger mortgage can limit other things which may or may not be important.  Retirement savings might need to be scaled back.  The annual family vacation might need to be scaled back.

The baby boomers, are considering downsizing their home.  In some cases, it's because the person has more house then needed once the kids grow up and move out.  Also if they sell and move outside an expensive city like Toronto or Vancouver, the money from the sale can pad retirement.

House poor can also be determined by how much savings is readily available?  Do you have 6 months of emergency money in case of loss of income for whatever reason, loss of job, injury, sickness?  This 6 months of savings should be outside of any registered accounts but if the worse happens, then registered accounts can be used.  Mind you, tax considerations should be kept in mind.

I have known more than my share of people within my circle that have ignored RRSP contributions entirely for their entire working career.  Their objection is that they have to pay the tax back eventually and they do not want to be stuck with that burden in their golden years.  This starts a deep conversation at social events.  They pour all monies into their house, which is fine but remember that when they stop working, and it will happen, the house will be paid off but savings will be almost non-existence.  That would be a definition of house poor.  Beautiful house, no money to buy anything else.  The flip side of having to pay the tax back later in life can be argued also but they fail to realize that they can somewhat control the tax paid back later in life, either as straight RRSP withdraws (with no other income of course) or through a RRIP, the tax will be a bit lower than the 40% rate paid during your peak working years.  you can withdraw as much or as little and pay the tax rate associated with your withdraw amount.  Hopefully your mortgage will be close to finished but then you will not be house poor.

One thing to remember that the 30% rule is just a guideline or rule of thumb.  No important decision should be made without doing your home homework on the topic.

To sum up the main points to determine if you are house poor:

Is your mortgage payments more than 30% of your after tax income?

How much is your after tax income?

Do you have 6 months of emergency money in case of loss of income for whatever reason?

Do not pour all your money into your house and ignore your RRSP.

Are you house poor or house rich?

TFSA dividends spent wisely - why not put them into an RRSP?

An idea occurred to me the other day.  The news kept talking about the TFSA limits next year and how it was going to revert back to $5,500.  As Justin Trudeau's government finalizes all the new taxes and everything else that comes with running a government.  Now opinions will vary of course but there seems to be a growing community of knowledge investors out there supporting the idea that the TFSA is more valuable than the RRSP.  This is of course a topic I can comment on but not today.  While thinking of the TFSA, I thought about the dividends.  The general consensus seems to be that you keep your money inside a TFSA and any capital gains and dividends are tax free.  Correct.  But if the dividends are tax free, what do you do with them?  DRIP them?  you could do that but I am already doing that in my entire RRSP portfolio.

So what to do with these tax free dividends.  Can we withdraw them and use them to buy things, why of course you can, again the general consenus is to use this money for emergencies or a giant screen tv.  Sounds great, but why not use these dividends to pay for some of your RRSP contributions?  Yes you know how some people contribute monthly into their self directed account or they lump sum the amount at the beginning or end of the year.  Well can these tax free dividends be used to reduce that amount?

We start off by assuming that you have the Savings Account TFSA that really pays a savings account rate of like 0.5% or something like that (this rate is what BMO is currently offering).  This is very low.  So if for example, you have $20,000 (this is an average amount given you started in year 1 of the TFSA and you did not max out)  in your savings account TFSA.  That will preserve your initial investment of $20,000 yes, but you will earn $100 a year on this $20,000.  This is really not enough to spend on an emergency or flat screen TV.  you get this amount dividend by 12 months if lucky so you get $8 a month if you are lucky enough they pay monthly.  Everyone talks about the cost of living or inflation some call it.  The most recent cost of living for 2014 is 2.5%.  You are going backwards with your $20,000.  Your $100 is eroded by the cost of living and guess what else, the bank makes money on your $20,000 so they love you.

So Peter, what are you talking about spending the TFSA dividends wisely?

Here comes my example.  First off, you have to sign up for the self directed TFSA that I have discussed in previous posts.  Again read the description of what you can put in a TFSA, mutual funds, stocks, GICs, bonds, etc.  So why does the bank keep promoting a freaking savings account?  They know that that product makes the most money for them.  Once you sign up for the self directed TFSA account, you transfer the $20,000 from the savings account TFSA to your self directed TFSA similar to the RRSP example I did in my BIG BANG post.  Now you control everything, what you buy, how much, etc.  My example we will use BCE.  This stock is considered by many to be blue chip stock and is as low volatile as you can get yet they have a very good yield.  Currently BCE is yielding 4.5% at at stock price of $57.00  What does this mean?  For those who like math, here we go.

Buy 350 shares of BCE at $57.00 for a total of $19,950.  There will be the commission fee of $9.99 for most accounts so you have $19,959.99 taken out of cash and used to buy BCE.  That's all you pay for to buy.  You only need to pay that $9.99 again if you sell.  But that will be far into the future.  No ongoing MERs, nothing.  Now it's just the stock price going up and down and more importantly, the dividends.  Like I said, this is a good stock but it will go down or up, but historically it's all up as BCE is a very large company, Bell cell phones, Bell television, Bell internet, sports, etc.

So now BCE will pay you $0.65 for each share 4 times a year if you do not activate the DRIP.  Let's see, that's $227.50 each quarter or $910.00 a year.  This amount is as close to guaranteed as you could get as there are thousands of investors across Canada getting the same dividend, $0.65 a share.  Wait a minute Peter, you are telling me instead $100 a year, I can get $910 a year with the same $20,000.  Yes you can, and also if you listen to the news, and do your homework, you will notice that BCE raises it's dividend once a year for almost 30 years straight now.  So what happens if they raise their dividend to $0.67 year which is a modest 3% and very reasonable for BCE to do, instead of $910 you get $938.

Now do not DRIP this amount, instead withdraw it from you self directed TFSA and put right away into your self directed RRSP.  Now you have tax free dividends helping you pay for your annual RRSP contribution.  If you decide to contribute say $8,000 for 2016.  now you only need to contribute out of pocket, about $7,000 as you will get $900 from your TFSA.  You get your RRSP receipt at the end of 2016 for $8,00, file your income tax return.  Get refund. Done.

Now I still love deferring my taxes through the RRSP.  They say if you know that your highest tax rate is now and you know you will be in a lower tax rate later than the RRSP is the way to go

Comments and remarks on the above example are always welcomed.

Thanks for reading.

Peter