Oh My – Are We in a Sideways Market?

Posted on March 6, 2011 by Rick

by Rick Sutherland, CLU, CFP, FDS, R.F.P

There has been some speculation that we are in the midst of a long-term sideways market, and have been since 2000. All you have to do is Google the chart of major stock indexes from around the world and you will see that most are flat to negative. The same is true for many individual equities.

We are all familiar with bull markets, long periods of rising equity prices, and bear markets, long periods of declining equity prices. A sideways market is a long period of flat equity prices. It is difficult to make money investing in equities during sideways markets.

Vitality Katsenelson explains the concept in his book “The Little Book of Sideways Markets.” He talks about bull, bear and sideways markets, and the environment that is present for each to occur. He also talks about the wild card in the mix, human emotion.

Human emotion is probably the most influential factor that affects the direction of the market. No one knows when we have reached the top or the bottom of the market. But one thing is certain: it becomes really easy to make a decision to sell at the bottom of the market and to hold at the top. Emotion takes over, although it is precisely at these points in time that you should be doing the exact opposite.

Human emotion is one of the main reasons we have bull and bear markets. When markets rise from low points at the end of a bear market and become reasonably priced, the emotion of greed takes over and drives the market even higher. Sometimes so high it becomes ridiculous. The same holds true in declining markets. Markets fall from these ridiculous heights to more reasonable levels, and then continue to fall because the fear emotion dictates that prices will continue to fall. And they do fall to ridiculous lows.

So how can you make money in a sideways market? You, yourself, or the professionals you hire on your behalf, must become more actively engaged in the investment process. Don’t allow emotion to dictate your buy and sell decisions. Buy your equities when they are cheap, below fair market value. Then sell when the price rises to fair value.

There is money to be made during sideways markets; however, emotion must be removed from the equation. If you are not able to remove your emotion from your investment decisions, then it becomes very important to hire a professional. Look for someone who is disciplined and has an investment strategy that matches your goals. Understand what they own and why they own it. Only then will you be empowered to ride the waves of a sideways market and make some money.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

Posted in financial goals, financial planning, investing | Comments Off

RRSP vs. TFSA

Posted on March 6, 2011 by Rick

by Rick Sutherland, CLU, CFP, FDS, R.F.P

Well it’s here, the annual hustle and bustle of the “RRSP Season.” Most Canadians know the value of contributing to their Registered Retirement Savings Plan (RRSP) and many have also contributed to their Tax Free Savings Account (TFSA). With tighter economic times and limited cash available for savings, we are frequently asked which is a better vehicle for long-term saving, the RRSP or the TFSA.

The short answer is that they are almost identical from a tax point of view. In the interest of not losing anyone in the numbers, we will attempt to walk you through the math. Three simple examples will show you how an individual’s personal tax rate at the time of contribution and at the time of withdrawal will determine which is better.

In our first example we will assume a 40% tax rate and a compound growth rate of 7.18% for 10 years. We use this return to keep the numbers simple. Money doubles in 10 years at this rate of return.

First let’s look at the TFSA. If you earn $1,000 gross income you will have $600 net to invest. Your $600 will grow to $1,200 at the end of 10 years. That $1,200 is yours to withdraw and spend with no tax owing. Now let’s look at the RRSP option. Since the RRSP is tax deductible, the full $1,000 is available to be invested. It will be worth $2,000 in 10 years. However you must pay the tax when you withdraw from your RRSP. Assuming a tax rate of 40% you will have $1,200 after tax to spend. In this example both are equal.

But is that a realistic example? Will you be in the same tax bracket when you make your contributions as when you withdraw the money from either program? If we assume a tax rate of 40% when contributions are made and 20% when withdrawals occur, the RRSP will have a clear advantage. Because the TFSA has no tax impact when withdrawals are made, you will have the same $1,200 available at the end of 10 years. However, if you are in a lower tax bracket when withdrawals are made from the RRSP there will be an increased value. Using the same example above and assuming that you are in a 20% tax bracket when you withdraw from your RRSP, you will have $1,600 available to spend, a $400 advantage over the TFSA.

The reverse of this example is that you will be in a higher tax bracket when you make your withdrawals. If you assume a 20% tax bracket at the time of your TFSA contribution, you will have $800 to invest, which will grow to $1,600 at the end of 10 years. The RRSP will still have a value of $2,000; however, if we assume a higher tax bracket of 40% at the time of withdrawal then the amount available to spend from your RRSP will be $1,200. In this example the TFSA has come out the winner by $400.

So as with most important financial decisions, you must do some planning to decide which program will meet your needs and be most beneficial from a tax point of view. Consult with your trusted financial advisor before making decisions.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

Posted in financial planning, investing, retirement, saving | 1 Comment

Budgeting Tips for Single-Parent Families

Posted on February 6, 2011 by Alban Smith

Contributed by Alban, a personal finance writer at Home Loan Finder.

Being a single parent is hard enough when you have no one to discuss your feelings with, no one to back you up on punishments, and no one to share your childrens’ milestones with. On top of the loneliness, the financial stress and constant worry can be even more isolating, especially as everyone else seems to be able to give their children every luxury – not to mention every new toy and game.

As a result, budgeting in single parent families looks a little different to how families with two parents do it, even if only one parent in a two parent household is working. As a single parent the same rules apply when it comes to your budget, but at the same time you need to find ways to be more committed, more frugal, and more independent. If you are a single parent struggling with your budget and finances, try out these five tips:

1 – Know your expenses

The first step to any budget – married or single – is to know where your money is going. Start by listing all of your monthly costs from the phone bill to the new phone cover you had to buy after your toddler stepped on your mobile.

As you look at where your money is currently being spent, make sure your list is accurate and detailed. Look over bank statements, or keep notes of your spending if you forget where your cash goes once you withdraw it from the ATM. You will then need to keep your budget updated from month to month so that you know at any one time how much money you have left to spend.

The website that accompanies this blog is designed to help you track your spending. Try it out at www.spendingprofile.com.

2 – Look for places to cut back

The key to financial security as a single parent is to spend less than you earn. Even if your budget shows a surplus at the end of the month – and especially if it doesn’t – look for places you can save money. For example:

  • Cut back on pay TV as there is a lot of time you’re not watching all of the channels, and getting outside with the kids is not only cheaper, but better for everyone.
  • Cut back on bad habits such as smoking and drinking, not only because these are expensive vices, but also because as a single parent, you need to make sure you’ll always be there for your children.
  • Drink as much water as possible and avoid buying cordials and soft drinks for your family. Water is much cheaper as it comes from the tap, and if you don’t like the taste, invest in a $20 water filter jug to keep in the fridge.
  • Make your own lunches so you can avoid costly food court food, and your children can have an affordable and healthy alternative to the canteen. Simply make larger batches of meals for dinner to ensure left overs, or pack sandwiches or soft tortillas with their favourite fillings.
  • Clip coupons or search online for deals and specials at your local stores and supermarkets.
  • Have a family movie night at home by renting movies or swapping with friends instead of paying for parking, tickets, snacks and drinks at the theatre.
  • Conserve water and power as these are likely to be some of your bigger bills. You can do this by turning down the water level on your dishwasher and washing machine, opening windows in summer and putting on more clothes in winter to save on cooling and heating. Plus, don’t forget to turn off the lights, and encourage your children to do the same.
  • Make sure your finances are working for you by shopping around for a fee-free transaction account to avoid monthly and transaction fees.
  • Use your mobile less and look for a home phone plan which gives you free local calls. Alternatively, email your friends to catch up for free.

3 – Look after your emergency fund

When you are a single parent there is no one else there to bail you out, so you need to be financially prepared for an emergency. In your budget you should already be saving the surplus from your wages, and you can add to that by cutting back on expenses.

Also make sure you avoid credit card debt, no matter how much of a perfect solution it seems. A credit card is a short-term solution and can lead to more financial issues in the future when the balance needs to be repaid and interest keeps on compounding.

As you make regular contributions to your emergency fund, make sure you are using a dedicated high-interest savings account. High-interest savings accounts are usually online accounts, which means you can avoid account keeping and transaction fees and avoid the the temptation to use the funds, as they are not accessible through an ATM card.

4 – Save and plan for your future

You should also consider budgeting for contributions to your long-term savings plans, to help you save for your retirement, save up to buy a house to get out of the rent trap, or save for your childrens’ future and education.

As a single parent you rely on yourself, and you need to be independent. At the same time you need to be doing more than just surviving; you also need to remember – and achieve – your life goals. You can do this by opening a term deposit account which will lock your savings away for up to five years at an even higher interest rate.

5 – Adjust your expectations

The key to sticking to any budget or financial plan is believing in it. Therefore, you need to adjust your expectations and realise that you can’t compare yourself or your life to two parent or two income families. Instead, you may have to work full time, and you may miss some school events. You probably can’t afford the same extravagant holidays that your childrens’ friends are going on with their parents, but what you can do is work out what you can afford to do.

Look at ways to make your situation work for you by negotiating flex time at work so you can see your kids on their sports day or in the school play. Make up the time by working later or earlier two days a week. You may have to save a little longer for your holidays, but that doesn’t mean you can’t take your family on an adventure.

Remember that there is no such thing as quality time; there is just time with your family. Your kids will be happy to be with you when you go to the bank or the grocery store, as long as you are happy and secure for them.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

Posted in budget, financial goals, financial planning, saving, security | 4 Comments

The Debt Snowball Method

Posted on February 6, 2011 by Lisa

Post contributed by Maria Smith of http://www.debtconsolidationcare.com/.

If you’re drowning in an ocean of debt and you don’t know how to stay afloat, there’s hope for you. The debt snowball method can help you pull yourself out of the vicious cycle of credit card debt. The debt snowball method can be a life-saver at times when you have no other way of dealing with the multiple credit card debts that you’ve incurred due to your poor spending habits. Debt snowball can be an effective solution to your debt problems where you pay off debt starting off with the account that carries the smallest principal amount. You can add an extra amount of money to the smallest debt until it’s paid off and then take that amount and concentrate on clearing the next biggest amount. This way you can easily pay off all your debts within a short span of time. Here are the basic steps involved in the debt snowball method:

  1. Prioritize your debts: The first step is to organize all your credit card debt accounts and prioritize them from the smallest to the largest principal balance. As the debt snowball method involves starting with the lowest balance first, it is crucial for you to know the exact amount that you have to start with.
  2. Keep on making the other minimum payments: As you add all the extra payments towards the debt with the smallest balance, you must also make sure that you do not fall behind on the minimum monthly payments on the rest of your debts. This will unnecessarily increase the interest rates on the rest of your debts, making it tougher for you to get out of debt. Therefore, keep on making the minimum monthly payments on your debt accounts, leaving out the one with the smallest principal amount.
  3. Find an extra amount: You need to funnel all extra and available income to the loan on which you have incurred the lowest principal amount. The amount that you are able to apply towards the lowest balance account is commonly known as the snowball amount, and the faster you save money and pay off the entire amount on the smallest debt, the faster you can move on to the next biggest debt.
  4. Add the minimum amount to the extra amount: As you pay off the entire balance of the smallest debt account, you can then add the minimum monthly payment of the last account and add it to the extra payment to enhance your snowball. As you apply this bigger amount to the next big debt, you can start paying it off in the same way you paid off the last account.
  5. Repeat the process until you have paid off your entire debt: The above process needs to be repeated while addressing each of your debts so that you can repay all your debts and regain control of your personal finances.

Curtail your spending in other areas so that you can end up making the snowball larger and pay off debt easily. Try to find as much extra money as possible and resist the urge of spending the extra money until you’ve paid off your debts. Live below your means until you become debt free and relieve the financial stress from your lives.

Posted in budget, credit, financial goals, financial planning | 2 Comments

Patience Rewarded for Those Who Wait

Posted on January 18, 2011 by Rick

by Rick Sutherland, CLU, CFP, FDS, R.F.P

Welcome to 2011. We trust you had an enjoyable and relaxing holiday season. Well it’s time to get back to work and planning for your future. More specifically your retirement future, as you have until March 1, 2011 to top up your RRSP and make a deduction on your 2010 tax return. How will you invest your RRSP this year?

Many have avoided equity investing over the past two years and opted for the safer alternatives of bonds and guaranteed investments. This was done at historic lows in interest rates. Yes you are safe but have you met your retirement savings return on investment objectives? Let’s recap where we have been over the past few years and speculate on what the future may have in store for us.

It wasn’t that long ago, the fall of 2008 and winter of 2009, when investor emotions were being tested at extreme levels. The media would have had us believe that it really was different this time and the sky really was falling. The world as we knew it would never be the same. Many panicked out of the market and will forever question that decision.

At the time of writing, mid December 2010, we are seeing the losses of the past couple of years erased and indexes are tapping new all time highs. The market has once again rewarded patience for those who stayed the course and stayed invested. And those who continued to invest, because that was their long-term financial plan, have been in a profit position for some time now.

We are not economists and cannot comment on how economic factors will impact your savings and investments going forward. What we do know is that corporate earnings, cash flow, profits and liquidity (cash available) are at all time highs. This is very positive for equity investing.

So how do you feel now about your RRSP investment for the winter of 2011? We cannot guarantee that what happened in the fall of 2008 and winter of 2009 will not happen again. In fact we can almost guarantee that it will happen sometime in the future, but we don’t know when. As an investor you must be emotionally prepared for a market decline about once every four to five years. The average decline, historically speaking, is about 30%. Be emotionally ready for this magnitude of decline at any time and you will be prepared for almost anything the media can throw at you.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

Posted in financial goals, financial planning, investing, retirement, saving, security | Comments Off

‘Tis the Season for Planning

Posted on January 18, 2011 by Rick

by Rick Sutherland, CLU, CFP, FDS, R.F.P

As the year 2010 draws to a close our thoughts are turning toward the festive season, family and celebration. The year-end also brings another deadline well worth considering. With the exception of RRSP contributions and maybe a few other tax planning strategies, you have until December 31 to take any final action related to your tax reduction plans for 2010.

Here are some ideas that you may wish to consider before the end of the year. Then again, you may wish to implement these ideas on an ongoing basis and reduce your income tax bill in future years.

For your non-registered accounts you may have some investments that increased in value and others that declined in value. You may want to speak to your financial advisor about selling your losers and apply the losses against your gains. It is recommended that you make these decisions before Friday December 19 in order for trades to be placed, settled and be eligible for use in 2010. Otherwise the trade may settle in 2011 and not be useful in 2010. Capital losses can be used in the current year, carried back three years or carried forward indefinitely. Be careful of the superficial loss rule which states that when you sell a property for a loss and then buy it back within 30 days your loss will be disallowed.

If you are going to buy an interest-bearing investment with a maturity of one year or more, and it is held outside your RRSP, wait until after December 31. By waiting until January 2011 the first anniversary for interest earned will be January 2012. The interest income will be reported in the spring of 2013 on your 2012 tax return. This is almost a two year tax deferral strategy.

Make your charitable donations before the end of the year. You may want to consider donating publicly traded securities. Any resulting capital gains on donated securities are not subject to tax and you receive a donation receipt for the full market value of the donated investment. It might make more sense, from a tax point of view, to donate securities rather than cash.

There are a multitude of ideas and strategies one can use for year end tax planning. Whether you’re considering tax shelters or charity donations you should speak to your trusted financial planner and accountant to go over your ideas and discuss any last minute tax strategies that can be completed before the end of the year.

So while you are mulling over your decision to go with turkey or ham for your holiday feasting, you may want to devote a little time toward tax planning. These and many other tax reduction strategies should be practiced year round, not just at year-end. We wish our readers a happy holiday and a prosperous 2011.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

Posted in Uncategorized | Comments Off

Frugality: Lessons from the Past

Posted on December 7, 2010 by Alban Smith

No doubt you have heard your parents tell you – on more than one occasion – that when they were your age they didn’t have a credit card, their home was repaid, and they had a healthy nest egg for a rainy day. Well, before you discount lessons from the past as irrelevant for the future, there are some frugal tips which can be taken from the lifestyles of the 1950s and 60s and applied to your finances today.

1 – Local seasonal produce

Fifty years ago, many people didn’t have fridges, and if they did it was a small ice box. So people would go to the market every day for the food they needed for the day’s meals. This meant that food wasn’t wasted, because you only bought what you needed, rather than what you planned to use and then forgot about.

If you do your shopping daily or every few days at the market, you can buy fresh local produce, save money at the supermarket on processed foods, and stop wasting money by throwing away unused food. Not to mention you’ll feel healthier and happier too.

2 – Buy only what you can afford

When your parents were growing up, most families didn’t have a credit card, so if you spent all of your money in a week there was nothing you could do about it. When you can’t buy on credit to get yourself out of a tight financial spot, you have to budget for all of your expenses and avoid those tight spots in the first place.

Take this frugal lesson as a chance to set up a budget and look at how your income really relates to your outgoings. Review your expenses, and aim to spend only what you can afford. Because you’ve surely heard your parents say, “If we couldn’t afford it we had to save up or go without.”

3 – Old fashioned fun

Few families in the 1950s and 60s had televisions, but that just meant they found cheap – or free – ways to entertain themselves. Entertainment costs are likely to be a large part of your budget at the moment. If you want to enjoy more frugal forms of entertainment, consider having afternoon tea on the porch with your neighbours rather than going to the mall for coffee, cake and a bit of impulse buying.

On the weekends plan a family Sunday drive, and if you’re rationing fuel, you don’t usually have to go too far to find a beach or a park to picnic at, and enjoy your home-packed snacks.

4 – Money was under control

As sexist or unbalanced as many modern women may think it was, money was under control 50 years ago when the man of the house worked and the lady of the house asked him for her expenses. This has nothing to do with whether men or women are better with money; the benefits came from the fact that all purchases were discussed.

An amount was designated for each purchase, and that is how much was spent. If not all of the money his wife received for the groceries was spent, the family could be treated to something special that week. In this scenario, both partners know where the money is going and what the family can afford. There is no notion of mine and yours, and couples are instead open and collaborative with their purchases.

5 – Do it yourself

If you list all the services you pay for, you will see where a large portion of your income goes. You can be more frugal buy doing a lot of these things yourself the way families did 50 years ago. For example:

  • Plan your meals so you can cook more often and avoid take-away.
  • Make your own lunch at home rather than buying it every day at work.
  • Set aside half a day each week, and you can take care of all of your cleaning rather than pay a housekeeper.
  • Walk your dog and you’ll save on pet walking costs while at the same time getting fitter.
  • Mow your own lawn and you’ll be getting fresh air and achieving a sense of pride in your home.
  • Wash and polish your own car as it won’t take very long, and after all, no one else cares as much as you do about how your car looks.
  • Use your family or neighbours as babysitters rather than childcare, and return the favour for them.

6 – If it ain’t broke

Something else you will hear your parents abhor is consumerism, so to be more frugal, try not to buy something new just for the sake of it. It is tempting to upgrade your car, your TV or your couch when a new model comes out, but if you use something until it is no longer useful, then you are able to get the most value from it.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

Posted in budget, financial planning, saving | Comments Off

Credit vs. Debit Cards: Which is Better for You?

Posted on November 10, 2010 by Lisa

“Debit or credit?” It’s a question we are all asked each time we step up to a cash register with our purchases. Credit cards and debit cards may be used interchangeably, but there are many very real differences between the two types of card. With a growing awareness of indebtedness, debit cards are rising in popularity thanks to their ease of us, lack of fees, and the fact that they are linked directly to a bank account, making overspending more difficult. However, credit cards, for all their faults, have their distinct benefits too, especially for those who are able to manage their spending habits well. So if the choice arises between purchasing with a credit or debit card, which should you choose? Let’s start with credit cards and examine the differences, pros and cons.

Credit Cards

Credit cards have been around since the 1950′s. Using a credit card is simple, convenient, and secure. There are advantages to using a credit card over a debit card, but there are also some disadvantages.

Advantages of Using a Credit Card

  1. Protection against theft and poor or undelivered merchandise. You can file a dispute claim if you see a fraudulent charge on your credit card statement, and the company will normally remove the fraudulent charge from your balance. Should you have a dispute with a charge for an unsatisfactory or undelivered item, that charge is removed from your balance until the dispute is resolved.
  2. Easy payments for big-ticket items. Many people use a credit card for major purchases for this reason alone. Some people may not have the funds to pay for a large item in full when it is needed. A credit card makes the purchase easier to handle with smaller payments.
  3. Great rewards for credit card use. Rewards such as cash back, gifts, and discounts for certain products, services, or special events make using a credit card more tempting. These perks can make it beneficial for some to use a credit card strategically for their purchases.

Disadvantages of Using a Credit Card

  1. Increases mindless spending. If you do not pay the full amount owed within the 15 to 45 billing period, interest is automatically added to the purchase amount. Not paying down outstanding debt, coupled with frequent usage of the card, is exactly how consumers end up in high dollar credit card debt.
  2. Hidden fees. There is a whole range of these. Here are a few examples:
    • Redemption fees if you decide to take advantage of the “free” rewards.
    • Activity (or inactivity) fees to encourage you to spend more, and more often.
    • Payment protection fees to cover minimum payments if you experience a financial hardship.
    • International transaction fees charged on purchases involving a foreign bank.
    • Paper statement fees for printing and mailing credit card statements each month.
  3. High interest rates. Some credit cards can have an interest rate as high as 25% or 30%, making your convenient purchase much more expensive in the long run.

Debit Cards

Now let’s talk about debit cards. Debit cards were first introduced in the mid-1970′s and are linked to your bank account. This offers advantages and disadvantages also.

Advantages of Using a Debit Card

  1. Funds automatically withdrawn from your bank account. The fact that money comes straight out of your bank account when you buy something with your debit card really curbs overspending. Using a debit card helps keep track of where a your money goes and helps with budgeting so you tend to only spend what you have in your account, and no more.
  2. No hidden fees. The only amounts deducted from your account are the purchases you make, so you aren’t charged for the privilege of charging it to your card!
  3. No interest charges. Since the purchase price is immediately deducted from your account, no interest is charged at all, ever. There are no bills to come out each month for using a debit card either, so you can’t get caught out with late payments that would damage your credit rating.

Disadvantages of Using a Debit Card

  1. Limited protection against theft or poor merchandise. Once the money is gone, there is little recourse if your debit card is stolen or if the merchandise you receive is unsatisfactory. It can take weeks for your bank to resolve an issue regarding an unauthorized debit from your account, all while you are experiencing bounced checks and overdraft fees. Visa debit cards do offer a similar level of cover as Visa credit cards, but you need to check that with your bank first.
  2. Low daily spending limit. As money comes straight out of your bank account, banks tend to place daily spending limits on your card as a security feature. However, this also means you could struggle to make major purchases with a debit card. Even calling your bank beforehand to temporarily lift the daily spending limit can be unreliable, which isn’t ideal.
  3. “Blocking”. When you use a debit card, retailers can “block off” more than the cost of the transaction to ensure any extra costs incurred will be available. For example, when you pay at the pump for gas using a debit card, an extra $25 or more can be held back, since it is unknown in the beginning how much fuel you will pump. This extra money doesn’t go to the retailer, but it may take a few days for it to be released for your use. This doesn’t happen with every type of transaction, but it’s a possibility consumers should be aware of.

One common practice when considering which card to use is to choose the debit card for smaller purchases and monthly bills, and to have a credit card for major purchases and emergencies only.

So, debit or credit? Which is right for your spending habits? Tom Becker works at Money Choices, where Aussies can compare interest rates and read thorough reviews of financial products.

Posted in budget, credit, security | Comments Off

The Truth about Investing in Equities

Posted on November 3, 2010 by Lisa

The past couple of years have been a reality check for many who invest in equities (stocks or stock-based mutual funds). Some sold off at, or near the bottom, and will forever look back on the stellar returns that the equity market delivered after March 2009. Others have left more recently after recouping some of their “losses.” There are still others who are seeking a direction. They need a reason to stay in or leave and join the masses that have flocked into historically low interest deposit accounts. They state that they do not ever again want to experience the volatility that we saw in 2008-2009.

Let’s first clarify the volatility issue about investing in equities. You must expect that your equity investments will go through a significant decline in one year out of every four or five years. This is not a promise but it is what history tells us. Anyone who says that you can solve all your volatility worries and still be invested in equities is not being honest with either you or themselves.

By investing in equities you will experience volatility, ups and downs of the market. The truth is that equity markets suffer a severe decline about once every four or five years. The average decline, historically speaking, is about a 30%. Sometimes the decline has been less severe, and other times, harsher. We saw some global market declines approaching the 50% range during 2008-2009.

It is these periods of decline that test the nerves and emotions of investors. Those who panic and flee the market will only set themselves up for disappointment and missed opportunity. The cycle of selling at the bottom because of fear and panic and then buying back in at, or near the top because everybody else is “making a killing in the market” is a sure recipe for financial frustration.

The real question is, “Why are you investing in equities?” Ultimately the answer is growth and a higher return than offered through guaranteed investments. But the real answer must be, and can only be, to achieve a better lifestyle in the future. If your future depends on achieving a certain return that cannot be achieved using guaranteed investments, then you must seriously consider equity investing. But if guaranteed investments can provide you with the lifestyle you desire, then you should avoid equity investing altogether.

By being an equity investor you must somehow overcome the urge to panic during market lows. Understand how equity markets behave, learn to embrace volatility, and above all, relax. Good quality businesses that are well managed, have expanding markets, pay dividends, and have a history of rising share prices, have historically rewarded investors many times more that guaranteed investments.

So the next time the equity market goes into decline, remember that it should be no surprise to you. In fact, you were expecting it. You are emotionally prepared for it and you may even want to take advantage of the weakness and buy low instead of selling. This is the only truth about investing in equities.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

Posted in investing | Comments Off

Changes in the Canada Pension Plan

Posted on November 3, 2010 by Lisa

Some Canadians want to retire early, while others wish to keep working past age 65. Many more wish to ease into retirement and work part time. Regardless of your individual circumstances the following changes will affect most Canadians.

On December 15, 2009 Bill C-51 received Royal Assent. This Bill will change the rules regarding the Canada Pension Plan, CPP. These changes will become effective between 2011 and 2014.

If you are currently collecting CPP retirement, disability or survivor benefits or will begin collecting your pension prior to 2012, you will not be affected by these changes unless you are a CPP recipient who continues to work. The Quebec Pension Plan (QPP) is very similar but not identical. This brief deals strictly with the CPP.

1) Pension Adjustments for early and late CPP pensions

Possibly the biggest change is an increased incentive to wait to collect until you are 65, or at the latest, age 70. Currently, the age for Canadians to begin receiving CPP benefits is 65. It is possible to receive a reduced CPP as early as age 60, even if you continue to work.

Currently the reduction is 0.5% per month. The early pension reduction will gradually increase to 0.6% over a 5-year period starting in 2012 for each month that the pension is taken before age 65. The late pension augmentation will gradually increase to 0.7% per month for each month that the pension is taken after age 65, up to age 70. This will be phased in over 3 years, starting in 2011.

2) Continued CPP participation while receiving benefits

Currently, CPP contributions are no longer paid once you begin receiving a CPP retirement pension, or once you reach age 70, whichever is earlier. With the changes, a person under 65 who chooses to receive CPP benefits may continue working and thus continue to earn CPP benefits, but will be required to continue contributing to the CPP until age 65.

Although this could cost working retirees hundreds of dollars more a year in payroll deductions, these contributions will result in increased retirement benefits. The exact amount depends on the earnings level of the contributor. Additional CPP pension ‘purchased’ in any one year will commence in the following year, subject to any applicable early retirement reduction. The effective date of this change is 2011.

3) Change in calculating average career earnings

The CPP uses a career average calculation which allows for certain years of low or no earnings to be disregarded in arriving at average earnings. If you take the CPP at age 65, the span of your career is considered to be 47 years. If the CPP is taken at age 60, the span of your career is considered to be 42 years.

Currently, 15% of an employee’s potential working career may be disregarded. Under the new rules, the drop-out percentage will be increased as follows: 16%, in 2012 to allow a maximum of 7.5 years to be dropped, based on a working career of 47 years (age 18 to 65) and 17% in 2014 to allow a maximum of eight years to be dropped.

This change will also increase the average CPP disability and survivor pensions, which are based on the retirement benefit calculation.

4) Removal of the Work Cessation Test

Under current rules, in order to qualify for a CPP benefit before age 65, you must not earn more than a certain amount in the month the CPP pension commences or the month before. Currently this amount is approximately $900. This earnings test is referred to by the government as the “Work Cessation Test”.

Under the new rules, the Work Cessation Test will be removed for employees who commence their CPP pension in 2012 and later. However, as discussed earlier, employees under the age of 65 will be required to continue to contribute while working, in return for an increased benefit.

For more information, speak to your trusted financial advisor, or log on to the CPP website at http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca.

Posted in financial goals, retirement, saving | Comments Off