We gotta go

I was 19 and I had been living with my girlfriend (who is my wife today) for 2 years in my parents basement. It’s never easy to have two couple living in the same house, especially when one of them is growing up as adults and start affirming themselves.

I have always had a good relationship with my parents and I still have a really good one. However, during that specific period, let just say that my parent’s basement wasn’t the best place to live for us anymore. So we decided to move in Montreal so we can have our own place called home.

We didn’t have much money and I remember my dad saying:” What are you going to do? Max out your credit card and eat Kraft Dinner?” He didn’t want me to leave so he tried to scare me. Even though I knew he was right, I had to leave for several reasons and I decided to look for an apartment.

Credit cards are not to be used as an emergency fund

The only way I could pay my bills and eat was to withdraw money from my credit card on a monthly basis. Back then, I had 5 credit cards and I was flipping balance from one card to another so I can save a few bucks in interest and charges here and there. This is where I learn that withdrawing money from your credit card at a ATM machine triggers interest charges on the very same day!

We were not making enough to pay for everything and each month, we had to take more money out of our credit cards. After a while, those pieces of plastic started to be quite heavy in my wallet. We had to find a solution.

Work harder and use the snowball effect

The only way I could get around this situation was by working more in order to earn extra money. I decided to work 35 hours a week while I was doing my bachelor degree. I used to wake up a 2AM, go work, sleep from noon till 3PM and go at school at night.

I used all my extra money to pay off my credit cards. I attacked that highest interest credit card first in order to wave as much fees as fast as possible. Once the first credit card was paid off, I took that payment and add it to the second one. This is why we call it the snowball effect; as you pay your debts, your payment on the next one is getting bigger and bigger.

As you can see, I didn’t do any magic or anything special. I concentrated my effort in order to pay my debts as soon as possible and within 12 months, I was debt free.

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Have I been frugal in my renovation? Let just say that I tried to minimize the expression of my dreams Once it’s done, I’ll do a full post on the cost of renovating my basement.

Here’s what caught my attention this week:

Intelligent Speculator is giving us his opinion on Value Click. Check out his first recommendation on Baidu and Yahoo at same the beginning of the same post; already making 27%!

ABC of Investing wrote an interesting post on the definition of “interest”.

Money Ning is telling us that we are showing 8 bad things to our kids. Those are simple things but it’s hard to avoid them when you don’t think about it!

Is it the Death of Index Investing? Find out at Four Pillars ;-).

Find out how a bank can’t refuse a personal loan to pay off your credit cards even though you are making your payment at The Credit Toolbox.

Dinks is giving us some investment ideas.

The Digerati Life is talking about the “mystic” Black Friday.

Master Your Card is giving us 6 ways to get gift cards for less!

Enjoy your weekend!

Carnivals:

Carnival of Personal Finance

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When I went downstairs, I saw that the hole for the door was done and it was opening exactly where I wanted to put my couch… Not very convenient! All right, another hole to be made tomorrow (and a few hours wasted doing it!).

Then, I look around and I don’t see much. There was the whole and the electricity that was done. Even though I know it requires time to set things up, most of his job has been done inside the walls so I couldn’t see anything. Quite disappointing.

Yipee! There was good news! He plugged my modem on the first floor so my desktop can have internet access again (you can imagine the fight when my wife wants to go on the internet and I need to “work” on my blog). Having 2 computers plugged on internet was a necessity. So I open my desktop and wait… no internet! I look at the modem and there was no signal. It was an old cable plug that I never used… and apparently it was not working! So I had to take my modem and rooter in the basement, covered by a piece of plastic.

So I learned that when you start renovations, there will always be uncontrollable stuff that will happen and that you must be very clear when you ask something to be done. Since I learned from my mistakes, I decided to draw plan of each room to be renovated. Since I am not home when the guy is working, this was the only ways for me to make sure he understands our needs and what I have in mind. Hopefully I won’t have any other disappointment in the upcoming weeks!!

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How To Save Money On Home Renovation?

Home improving is all about how much you want to put in your house. There is virtually no limit of what you can do in term of renovation. However, your wallet (or your wife ) will certainly tell you something different! This is why it is important to negotiate every single penny. Here are a few tricks to get the cheapest price on renovation materials:

Plan your renovation in advance

We have been thinking about this project for a few months before we started. Even before talking about a daycare at home, I was looking at pictures of bathroom and home theatre that I liked. When it was time to actually purchase our materials, we knew what we wanted and we were able to only shop for the best price. For example, we bought our toilet a month before we started the renovation. We got it at 50% off!

Once you know what you want, it is time to look for flyers. For the past 2 months, we have been so excited to receive our pamphlets at home, it was like Christmas in July! You get to know what is the price of a package of 50 3’ ½” screws or 100’ of electric cable (you know, the day to day stuff ).

Negotiate

You think that negotiation is not possible anymore since we have to deal with supermarket such as Home Depot? Well it is actually one of the best places to negotiate. The thing is that you have to do it differently. We needed 2X4” of 8 feet long. However, the only ones remaining were the 10 feet long and they were a buck more than the smaller one. We went to see the guy and order another bucket of the right size. He didn’t have them so we stared at him and started complaining about the fact that it is completely ridiculous and we didn’t want to go around and shop in another store…. 2 minutes later we had a note authorizing the price of the 8 feet for the 10 feet. Trust me, employees will find a way so you can get lost as fast as possible

Another trick is to deal with smaller places where you can talk directly from the owner. I spend 2 hours in a ceramic shop talking about tiles, flooring and how I will do my home renovation. At the end, I was able to save 14% off on the flooring (which I validated with a bigger store) and 10% on the ceramic. The funniest thing is that I didn’t have to negotiate with the guy. After the 2 hours, we got along and he just dropped his price. Since he manages his own business, he knows when its time to drop his price and for how much.

Avoid the “since we are at it”

This is probably the biggest money eater: “since we are doing a new bathroom, maybe we could put a marble counter”. It would be nicer ;-). Temptation is everywhere when it comes done to renovation. Stores will offer catalogues, renovation software and built demos. You need to make a budget before you go in the store and then, stick to it! My dad told me this golden rule:

“When you want to buy something worth more than a thousand dollars, you better talk to your wife first”.

I followed his advice and we are now ready to start our renovation as a happy couple

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Is it me or does it sound like every day more money is being given out by the US Government (as well as other main central banks) to try to buy themselves out of this big problem. A few years ago, now Fed chairman Ben Bernanke said in a speech one way to combat deflation would be to throw money out of helicopters. Metaphore? Yes of course. But it sure looks like what is happening right now.

Although deflation is not the main worry but rather a major worldwide recession, the banks are trying to use active measures in very aggressive ways to avoid the worst of the after effects of the subprime collapse as well as the US housing collapse.

The Fed had made major headlines asking for $700 billions a few weeks ago for the TARP fund in order to unfreeze borrowing nationwide. With over half of the funds still unused, the strategy is now questioned by all, even by the FED. So today, the Fed took additional measures, announcing a new plan that could use up to $800 billions!!

Of that amount, for the first time, a portion (25%) is geared towards the US consumer to support them as well as small businesses that are suffering from the liquidity squeeze.

Oh and if you missed this weekend’s latest rescue, the US government is going to “bail out” Citigroup, the flagship of the US banking sector as its share price went under 4$ and it was in major trouble as creditors started getting worried. Was it the right decision? Absolutely. If the failure of Lehman brothers is now being marked as a tipping point by some because of its effects on the stability of the entire system, it seems clear that letting Citi fail never could have been even considered possible.

But the problem is what’s next? GM, Ford and Chrysler are all asking for money and the problem is spreading throughout the economy. At what point does the government say no?

While there is no such situation right now, there are some specialists who have started to look at how far the Fed and the US government can go. As long as the market believes they can get their money back, the spending limits are very very high. But like everything else, there are limits and with the Obama administration now getting ready to take on, the situation has not been worse since probably the 1929 depression….

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The RRSP Loan Switchback technique

The technique is simple. If you are young, making a good income but didn’t have time to build up your cash down and you still want your mortgage right away; this is for you. Under the Home Buyer’s Plan (HBP), the Canadian government allow first time home buyers to withdraw money from their RRSP up to 20K per person in order to purchase their property. You have 15 years (plus 2 years of grace period without payments) to put your RRSP money back.

You don’t have enough RRSP investments yet? There is a solution! Let say that your marginal tax rate is 38% and you have 20K in RRSP unused contribution. If you plan on buying a property within the next six months, here is how you can do it: you take an RRSP loan for 20k with a differed payment option in 6 months (interest will still run since the date of the disbursement but your first payment will be in 6 months only).

Around May or June, you should receive a tax return of 7,6K (38% of 20K). Then, you use your tax return as cash down for your mortgage. If you are a couple, you will be able to put 15,2K as cash down for your mortgage. With the 5% cash down rule, you can go up to a property of 300K (if you qualify for such mortgage!).

You may use this money as extra cash down in addition to what you accumulated so far and put 20% cash down on your property. Therefore, you would avoid CMHC insurance premium.

What about the 40K RRSP loan? Are we not increasing our debts?

Not really. In fact, when you purchase your property, you are allowed to withdraw money from your RRSP (once withdrawn, you are not forced to use it as cash down). Then, you pay off your RRSP loans. The only cost of this technique will be the interest charged on the loan between the moment you contracted the loan and you pay it back.

The advantage of this technique:

- You get your property faster

- Since you buy your home now, you avoid the risk of seeing the same house value increasing by 10% by the time you accumulate your cash down.

- You will be forced to reimburse your RRSP contribution which is a good thing for retirement planning.

- May avoid CMHC insurance premium.

The disadvantage of this technique:

- You have to pay interest on a 40k loan for a few months

- Since you are forced to reimburse the 40k in your RRSP over 15 years, which makes additional payment of $2,700 a year ($225 a month) over the next 15 years.

- You better make sure you are qualified for a mortgage and that you want to buy a house. If not, you will be stuck with the payment of 2 20K RRSP loans.

Overall, this is not a bad technique, however, there are definitely pros and cons and it doesn’t suit everybody’s financial situation.

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Those small things were selling like crazy and they were so expensive, it was ridiculous (so the parents thought anyway!). After a while, we start selling them with a special price (2 for 1) and then, they were selling for almost nothing. Why was that? Everybody were selling them, kids had a handful of them and parents were getting pretty much pissed to spend $25 per week in pokemons When there is too many people engaged in something, it is often the beginning of the end…

This is what might happen with the Dogs of the Dow strategy. This passive investment strategy is based on buying the top 10 highest paying dividend stock of the Dow Jones. Every year, you do the same exercise and you sell those who didn’t make the cut to buy the new good dividend stocks.

The principle behind the Dogs of the Dow is to buy undervalued stocks (this is why they are paying such a high dividend yield) every year. On one side you are supposed to buy cheap stocks, on the other side, these same stocks are giving a really good dividend rate.

From 1975 to the year 2000, this strategy shows an investment return of 17.7% versus 15% for the Dow Jones index. This means that $10,000 invested following the dog of the Dow investment strategy in 1975 now worth 588K versus 329K if you have invested in the Dow Jones index. Quite a difference for a stupid rule, isn’t?

However, the problem is that the rule is so simple to follow that anybody can do it. Therefore, people started investing following the dogs of the Dow strategy and massive cash flow were invested. Do you know what happen to an investment trick when everybody follows it? The trick gets so popular that it doesn’t work anymore as everybody is buying and selling the same stock at the same time. This means that you have to pay a higher price when you buy and get less money back from your sell.

For example, at the beginning of 2008, while the Dow Jones was dropping by 15%, the Dogs of the Dow dropped by 25%. Does the strategy will keep working in the future? Let just say that what was obvious 10 years ago is not so simple today!

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I almost forget my contest I’ve been painting all day long (basement renovation… I’ll tell you more about it in a few weeks).

Thank you to everybody that participated to this contest. I have received several good comments and I will actually work on TFB design after the Hollidays.

So, the 2 lucky winners are….

TKO From Ontario (Poland, Italy, etc ).

and

Krys who submitted to my RSS feed ;-D

I’ll send you an email for the payment of $100 CASH

In addition to my blog, business is going great (I just won a GPS System since I was a top performer in October) and we just started another MBA session. I’ll write more about my MBA in the upcoming months, I have a few interesting story about it Besides, we are now under heavy renovation in our basement

Here’s what caught my attention this week:

Million Dollar Journey is giving us common job interview questions.

Here’s an interesting video about What’s ahead for Apple.

ABCs of Investing believes Timing the market is only a viable option if you know the risks!

Intelligent Speculator thinks it’s too little too late for the US banks. You know what, they get what they deserve. This is the price for greed

The Credit Toolbox explains how to deal with collection agencies.

Four Pillars is concerned by what will happen to Canadian Banks. Don’t worry FP, everything is cool with Canadian Banks, only people are freaking out

The Digerati Life is talking about when is the right time to start a business. Anytime, as long as you have money to back you up!

Canadian Capitalist is reweaving different types of TFSA accounts.

Timothy Sykes tell us how he made $70,000 last month with his blog (oh my god! This sounds like a retirement plan…. Early retirement plan!)

The Smart Spending Blog has an article about helping out your friends in “What if a friend were losing her home?”

Carnivals:

Carnival of Personal Finance

Carnival of Money Stories

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Maximize your RRSP / 401k/ IRA account

The very first thing to do with investment when you are looking to pay fewer taxes is to look for tax shelters. You need to find places where you can defer your tax payment as long as possible. Registered Savings Plans are perfect for this strategy since you will not be taxed until you withdraw from those accounts.

More aggressive and less aggressive

There are 3 different incomes when it comes to taxes in Canada: Interest income, dividend income and capital gains. As a rule of thumb I say that you are paying 50% tax on interest income, 33% on dividend income and 25% on capital gains. You obviously pay a smaller tax rate but it comes down to the same thing: interest incomes are highly taxable.

This is why you should determine only one investment profile but have different profile depending if you invest in a registered or non registered account. The most important part is that your global portfolio reflects your risk tolerance. By managing your investment according to their taxable properties, you will increase the amount of fixed income within your RRSP and put your more aggressive investment outside your RRSP (they should generate capital gains and dividend income).

One last point to consider is that capital losses can not be reported within registered account. Therefore, you can’t offset your gains.

Corporate Class Funds and TFSA

The corporate class funds and the Tax Free Savings Account are very similar except that you will defer taxes for a while with the CC funds and you will never pay taxes on your investment held in the TFSA. The thing is that you can only put 5K per year in the TFSA. So once your contribution is maxed, you should turn around and consider the CC funds. I suggest you read the following posts on the Corporate Class Funds in order to see if there are suitable investments for your situation:

Corporate Class Funds

Corporate Class Funds Part 2

Search for low turnover rate

If you go the mutual funds route, I suggest you look for fund managers preferring the buy and hold strategy. Capital gain taxes are triggered upon a sell transaction. If you hold your stocks for several years, you will defer taxes until you actually sell them. This will definitely help you pay fewer taxes on your overall portfolio.

As you can see, there is no magic to be made when it comes down to pay the government’s bill. However, there are still ways where you can postpone your tax payment and therefore enjoy a better investment return on your investments.

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