July 31, 2008, 6:00 am

I Hope that You Have Lived a Good Life Because the End is Near…

by: The Financial Blogger    Category: Investment, Market and Risk,Personal Finance

Ok, here’s what you need to do now: go outside your house, jump in your car and go to the grocery store nearby. Then, go at the first cashier and help any old woman with 10 bags or more to pack them in her car. If you have to, help her to cross the street and walk her home. In your way back, try to see if there is any cat stuck in a three or a kid missing his lollypop. Do as many good actions as you can because the end is near!

 

world end

We are about to die from our own greed! This is what I would tell you if I would believe what is being said in the economic world sometimes.


The latest news came from a well known economist: Mr. Nouriel Roubini, economics teacher at the Stern School of Business / New York University. He claims that the United States are about to crash into their most important recession since the Montreal Canadiens won the Stanley Cup… I mean since 1929!

This is quite a statement, even for a reputable economist such as Mr. Roubini. He based his thoughts on the following facts:

– Several small banks will declare bankruptcy due to the subprime crisis. They are actually the financial institutions that are the most vulnerable, holding near 67% of all “b class” mortgages. It seems that a few regional and national banks are in the same basket.

– The Federal Deposit Insurance Corporation (FDIC) already disbursed 10% of its fund in the Indy Mac story a few weeks ago. This is only the first time of a series of actions to save financials from catastrophe.

– Regardless how many cheques they will receive from the Government, US consumers can’t buy anything any more since they are maxed out on all their credit facilities. If people stop buying, it will only leads to a bigger economic depression.

Mr. Roubini also states that the US stock market should go down 40% from its 2007 high. Therefore, we are only half way done. According to his estimations, the recession should last 12 to 18 months instead of 6 months which was previously forecasted.

When we look at his arguments, I can’t really say that Mr. Roubini is wrong. In addition to that, he definitely has more experience than me in the market 😉 However, he would not be the first one to make false prediction. Is so different this time than any other crisis we encountered in the market? I honestly don’t know but I must say that human beings tend to be euphoric or panicked for not much.

Therefore, I only wish I had the time to go back and read editorials from brilliant economist during 9-1-1 or the techno bubble. I guess they were writing the same thing 😉

image source: flickr.com

 

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July 30, 2008, 6:00 am

Saving Money with Financial Institutions

by: The Financial Blogger    Category: Frugal,Investment, Market and Risk,Personal Finance

Since there is not much to make on the stock market these days (it is time to invest but you will surely not see the result right away) and the global economy is slowing down, we need to turn on different ways to keep more money in our pockets. One of them is by saving fees with your bank, broker and insurance agent. Today, I am giving some tips on how to save money with them.


Investments

Regardless if you deal with a broker or you leave your financial advisor managing your money (like they do with wealth management), they are all after new money in these difficult time. Therefore, if you have assets held in more than one institution, it is the perfect time to put the pressure back on your different financial consultants to see what they can offer if you transfer everything at the same institutions.

Most of them will negotiate and several mutual funds (as well as most wealth management program) have a depreciation rate grid. For example, most of them will charge about 1.75% if you have 150k-250K with them. However, you can hit below the 1% if you reach a million. You might not be there yet (I wish I was!) but even if you can transfer 25K – 50K, they might try to lower their management fees.

You would probably save a lot if you look at different mutual funds and their MER’s. If you have mutual funds that can’t beat their index, you might also want to switch strategy and get ETF’s. They will get a similar result for only a portion of the fees.

Money Management

Give a call to your banker in order to review your credit facilities along with your bank account package. You might be paying extra bank fees for nothing. You should bring a special attention to accounts that are not charging fees if you maintain a minimum balance (usually $2,500 to $5,000).

Then, if you have credit cards, why don’t you just pay them with a personal loan? Variable rates are pretty low and you will be forced to pay it back. Outstanding balance on credit cards cost a fortune in interest since we take forever to pay them back. Transferring your balance to a 0% credit card for 6 months? That is simply postponing the problem later on in the same year. If you don’t expect a money entry that will pay it off (a bonus or a job settlement for example), don’t bother and go with the personal loan.

Insurance

I know two easy tricks to save on insurance premium: keeping a high credit score and consolidating all my insurance with one company. When I combined my house and car insurance with the same insurance company, I saved a few hundred bucks right away. You are usually able to save between 10% and 15% by doing so.

Remember that saving 1$ worth actually more than making an extra buck. Especially if you have a high marginal tax rate (as it is the case with most Canadian!), you will probably end up saving almost 2$ while making an extra buck will leave you about 55 cents in your pocket once the government got its due 😉

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July 29, 2008, 6:00 am

How to Do a Bond Ladder

by: The Financial Blogger    Category: Financial Planning,Investment, Market and Risk

Are you looking for a way to maximize your fixed income strategy? For most people, having fixed income in their portfolio in a certain percentage is a really good idea. In fact, most asset allocations offered by financial institutions will include this investment category.

bond ladder

 

Fixed income are pretty useful to stabilized your portfolio and reduce its fluctuation. I guess that it will become even more popular with what is going on on the stock markets.

Therefore, several people will simply buy “the best bonds” on the market, i.e. the one with the best yield. They are usually tempted to do the same thing with GIC’s. Even though I am not a big fan of this product, GIC’s can still be optimized through a ladder system. So you can apply the bond ladder strategy to GIC’s with the same success (with probably a lower interest rate!).


The first thing to consider is your investment horizon. If you plan that you need your money within the next 5 years, chances are that the bond ladder won’t be of any help. However, this strategy will help you out getting the best return on your fixed income over a long period of time. I would suggest this strategy for RRSP portfolio for example.

How does this thing work?

The simplest example is to do it with a 5 years strategy. Let say you have $100,000 to invest; the logic would be to find the highest paying bond/GIC on the market and wait 5 years to renew it, right? Since nobody can predict the future and you might freeze your money for five years and rates could go up in six months from now. If this situation occurs, you won’t be able to benefit from the situation. You could also secure your amount today with a very good rates but having super low rates in 5 years at the time of your renewal.

This is where the ladder comes into play. You have to take your 100K and split it into 5 equal parts. So each 20K is invested for a different period according to the rates offered on the market. Then you will get the following portfolio:

1 year 20K

2 years 20K

3 years 20K

4 years 20K

5 years 20K

One year from now, you will have 20K to be renewed. At that time, you will have 20K in liquidity (to be reinvested) and no more 5 years investment. You take your 20K and invest it for another 5 years on the market.

If you repeat this strategy year after years, in 5 years from now, you will benefit only from 5 years investments (which usually have better interest rate than 1 years) and you will also be able to benefit from the best rate every year. Sometime you will renew the amount for a smaller rate but you will be sure to get the best deal every year.

Along with providing the best rates possible, this strategy also allows you to benefit from liquidity every year. Therefore, if you need money for an unexpected expense, you know that you will have enough liquid assets to face it. If you have a very long term investment horizon, you can do the same ladder with investments to be renewed every 2 years (so 2, 4, 6, 8 and 10 years bond will be available).

image source : flickr.com

 

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July 28, 2008, 6:00 am

Basics of Estate Planning Part 3

by: The Financial Blogger    Category: Financial Planning

The first two posts of this series were more oriented on the necessity of having a will and the different ways to have a will. So now that you read these two posts and that you updated (or wrote!) your will, you think you are done with estate planning. After all, you just made sure that everything will be distributed as you wish, right? Sorry to tell you that people but you still have some homework to do in order to have a complete estate planning.


The next step is to determine your estate balance sheet. The first purpose of this exercise is obviously to determine if you leave more debts than assets to your estate. One important thing to know is that you have the right to refuse a heritage even though you are the will. Who would like to inherit from their old uncle’s debt anyway?

Once you pass away, you are deemed to have disposed of all your assets a second before your death. I guess the government wanted somehow to be part on your will. Therefore, if you are deemed to sell all your assets before you pass away, this means potential taxes in the government pockets 😉 However, this topic will be treated in another post.

In order to write down your estate balance sheet, you must start from your existing net worth. Now, for the purpose of the calculation, let’s define the term “net worth”. You can argue on the definition as you want but in financial planning, the net worth is the sum of all your assets (bank account, registered and non-registered investments, all properties (including your personal residence) and cars) minus all you liabilities (credit cars, loans, lines of credit, mortgages, etc.).

So the first line of your estate net worth is your existing net worth. Then you will add some elements that are not part of your “living” net worth such as life insurances on debts, personal life insurance (individual or from work) along with government allocation (in Quebec, your estate receive $2,500 taxable 😉 ).

Once you are done with the insurances, you have to make some deductions. For example, you will have the cost of your death (church, reception, flowers, etc.). I would recommend using 10K to 15K as a rule of thumb. Funerals are like weddings; they start at 10K and there is no maximum! Then, you have to include the taxes to be paid by the estate. Remember at the beginning of this post I was saying that the government was putting his name on your will, this is where it comes to play. My next post on this series will be related to this topic.

So now you should have an estate balance sheet similar to the following:

Net worth: $300,000

+

Life insurance $100,000

Car life insurance: $15,000

Mortgage life insurance: $150,000

Government allocation: $2,500

Sub-total: $567,500

Funeral expenses: ($15,000)

Estate taxes: ($75,000)

Sub-total: ($90,000)

Total estate net worth: $477,500

Bravo! Now you have your estate net worth and you just realized that you worth more dead than alive… Beware of the person with the kitchen knife smiling in your back…

 

Basics of Estate Planning Part 1

Basics of Estate Planning Part 2

Basics of Estate Planning Part 3

Basics of Estate Planning Part 4

 

 

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July 26, 2008, 6:00 am

Financial Ramblings

by: The Financial Blogger    Category: Financial Rambling

Here are some cool article this week:

 

Money Answer Guy is saying that personal finance books suck. His point is that most of them don’t reinvent the wheel. I can’t really disagree with him as all financial gurus are saying the same thing : save money, pay yourself first and pay down your debts… However, I still think that reading 1 or 2 books from Robert Kiyosaki and certainly the Wealthy Barber will give you a great start in the personal finance world!

The Simple Dollar wrote a very inspiring post about quitting his job a few months ago. He is now working at home while raising his 2 kids at the same time. Sometimes, the demon of adventure is whispering in my ear and I start thinking about how many hours I put on my side projects versus the income I earn from it. Then I think about how much I would make if I would be working 50 hours/week on my side projects… If I apply blunt mathematic, it is more than my day job…. still not convinced for now 😉

Four Pillar explains the difference between our RRSP and the 401(K) from the United States. I always wondered what retirement investment accounts look like south of the border. It seems that we have a much more efficient and flexible retirement system in Canada 😀 At least one thing we did better than our neighbour! hahaha!

Inspiring post by Money Ning on Passive Income. In the upcoming years, I think that financial freedom will become accessible to many people; those who will have the guts to put their passion first and create a growing passive income machine with it!

Does anybody would argue against asset allocation? The Digerati Life offers us a complete post on why asset diversification is the key to make money. If you don’t have the time to read the article, simply skip to the charts, they say it all!

Fascinating guest post by Ed Rempel on Million Dollar Journey about the Oil Bubble VS The Peak Oil Theory. Is it going up? is it going down? It is getting so twisted we would believe that the Joker is playing with the market 😉

 

Carnivals:

Carnival of Money Stories

 

Money Hacks Carnival

 

Carnival of Personal Finance

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