New Year Resolution: Stop Over-Thinking Your Money!

Happy New Year everyone.  

I have to admit I’m not a big one for large New Year’s resolutions since without the proper plan to achieve them, quite often, they are doomed to failure.   A plan to me would be made up of major goals and getting to them via evolutionary changes (e.g. small changes/targets).   This is a technique I use daily in my non-blogger job where I communicate a long term vision for a specific project to people and then get them focused on the short term.  A big part of this is determining what is important and continually adjusting priorities as circumstances change.

I just finished reading a personal finance book that fits perfectly into this type of thinking and has a lot of great information you can use for a personal finance plan for the coming year. 

The book is called “Stop Over-Thinking Your Money! The five simple rules of financial success” by Preet Banerjee.  You may remember I mentioned Preet in a previous posting “Buying cars on credit… what does it cost you?” after I saw him speak at the Financial Literacy Educators Summit put on by the Investor Education Fund.  He did a great presentation on that occasion and now has used some these skills in this book to explain some key financial planning principles in a very straight forward way.  Don’t let the title mislead you.  There is thinking involved.  The main aim of the book is get people to take immediate steps to improve their financial health and avoid getting overwhelmed by all the financial and investing information out there.  You may have heard some people refer this as avoiding “analysis paralysis”.  Preet equates our level of planning to school grades and assesses most of us as near a C- and suggests if you follow the rules in this book, you can get to an easy A.   After reading the book, I have to agree.

The book is roughly divided in half with the first talking about five key rules and the second half giving some more advanced information.  Let’s look at the five rules first:

Rule1: Disaster-proof your life.  Good information here about life/disability insurance, wills, power of attorneys and emergency funds.  I’m sure I’m like a lot of people in thinking talking about this is a bit of a snooze and not nearly as sexy as discussing investing.  Before you jump over this chapter though try answering the following questions.  If you can’t give specific enough answers to prevent “keeping yourself up at night” thinking about it, choke it down and read it through.  You won’t be sorry.

• If I was not able to work for the next 3-6 months, how would my family and I pay for our living expenses?

• If I died tomorrow, how would my family survive financially?

• If I’m too sick to make decisions or I die, who can legally make decisions on my behalf and will my money/assets be handled like I want?

Rule2: Spend less than you earn.  Great information on savings and budgeting and one of the pillars of all personal finance.  One of the key themes I like (rephrasing in my own words) is: If you have no savings, why are you wasting your time worrying about how your investments are doing?  I’ve met quite a few people who like to discuss how certain investments are doing but never mention their savings.  

Rule3: Aggressively pay down high-interest debt.  Some good strategies on lowering and eliminating credit card debt.  This is a major problem for many people and could be a priority in many people’s plan for this year.

Rule4: Read the fine print.  Some good advice here on knowing the details on what you are signing.  I’ll admit reading the fine print is always a painful one for me.  Sort of like taking Buckley’s cough syrup.  You know it’s good for you but want to avoid it.

Rule5: Delay consumption.   Many people suffer from “consumption-itis” and this rule talks about some of the underlying causes and strategies for improving your situation.  This is an ongoing teaching point with my children on waiting until you have the money to pay for something and differences between needs vs. wants.   

  The second half of the book has more advanced information on Investing, Financial Advisors and Insurance.  There are two parts I particularly liked here:

 

• Financial Advisors.  Many people would benefit from a financial advisor but end up with one not fitting their needs.  My first financial advisor seemed more interested in making money from me and not advising.  I was much more careful, years ago, when I found my second one and did use many of the techniques mentioned in this section.  I ended up interviewing him for an hour and a half using the similar questions mentioned in this chapter.  If you’re asking yourself why I would talk to him for so long and/or want to avoid other pitfalls, the section is for you.

• Insurance.  This section in particularly good at explaining the principles and types of insurance.  Makes it easy to understand for those without much background and a good refresher for others.

After reading these rules, you could end up with a large “to-do” list.  The big question is where to start?  I’d recommend making the list, putting priorities next to each and start from there.  There is lots of good information on helping you decide on priorities in the book.  Still overwhelmed because you have too many high priorities?  Break them up into smaller pieces and go through the same exercise as again.

After reading this book, here is what I have on my plan for the coming year:

 

• Review my life and disability insurance coverage.  I know I have some of both but it’s been years still my wife and I have looked at it and life is always changing so maybe this doesn’t fit any more. 

• Review my regular savings plan.   I do have regular automatic monthly saving with periodic top-ups during the year but again haven’t really looked hard at the amounts for a couple of years.  I suspect I’m not saving enough.

During a future posting, I'll discuss my review of my insurance coverage.  If have any questions or comments on any of the above or have ideas for a future topic, please feel free to post a comment (anonymously if you’d like).     

James Whelan, moneymatters4life.blogspot

Bad ways to earn money

What do lost bank accounts, pyramid schemes, lotteries and YouTube have in common?  All them are bad or low probability ways to earn money.

When you talk about “Ways to earn money”, there are good or high probability ways (e.g. Employment, Investments, Government Transfer) and bad or low probability ways (e.g. Marry Money, Win the Lottery, Inheritance).  I thought it would be interesting to expand on the list of low probability ways. 

Lost Bank Accounts.  I wouldn’t consider this a bad way to earn money but the chances are slim of finding large amounts.  Here’s how this works.  If someone has a deposit or financial instrument at a bank or trust company and they haven’t touched it for 10 years and can’t be located, the balance is given to the Bank of Canada.  These balances are then held for between 30 and 100 years, depending on the amount, waiting for someone to claim them.  All you have to do is go to the Unclaimed Balances web page of the  Bank of Canada website to see if you or a relative has a dormant account waiting to be claimed.  Most likely you won’t get instantly wealthy from the accounts here.  Over 93% of the balances are under $1000.  So of course I was curious and did a search of everyone with my last name.  No accounts with my name or any relatives so I was out of luck.  To give you an idea of the amounts, I looked at the first 30 results with my last name and the amounts ranged from $2.27 to $8,456.75 or an average of $780.21.  Not a lot but I wouldn’t turn it down.  Take a look and good luck!

Pyramid Schemes.  When I was a few years out of university, I was approached about a “business opportunity”.  I was invited to a meeting with others given the similar pitch and was told about the opportunity to join the sales force of a mutual fund dealer.  We would start at the entry level, learn the business and while learning, most of the commissions would go to our managers.  To make more money, we could recruit others to join the company, help train them and most of their commissions would go to us and so on.  It was only a few minutes into the “pitch” the word “Pyramid Scheme” popped into my head.  I looked around the room and seemed to be the only person not super excited about this opportunity.  Since the person recruiting me also gave me a drive to the meeting, I did a painful amount of smiling and nodding until I could get out of there. While researching this posting, I learnt this could have been multi-level marketing which depending on how it is run could be legal whereas pyramid schemes where people pay money to join and get paid from the money paid by others joining afterward are not.  All I know is I’d make very little money starting out until I recruited others making very little money to pay me.  Not much difference that I could see. If it looks like a duck, sounds like a duck and walks like a duck, it is a duck.  Check out the links below if you want to know more about what to look out for. 

Lotteries.  There are lots of people that religiously buy lottery tickets with the hope of winning big.  If you take a look at the odds of winning, Lotto 649, one of Canada’s biggest lotteries, at the time of this posting, there is a 1 in 14.0 million chance of winning the largest prize.  It makes for a good way to have some fun dreaming of winning big but not a great way to count as a source of income.  Rob Carrick in his article “Six tips to help you to help you build wealth in 2014” talked about this very idea by telling us to “Forget about the lottery win”.

YouTube.  Many people have made a lot of income from “monetizing” or allowing advertisers to post adds on their YouTube videos. Top earners are making millions of dollars.  But for every millionaire, there are thousands of people making a lot less.  My son is a perfect example.  He started a gameplay channel called TheJimmyJ57.     Let’s look at his stats.  He monetized his channel in March 2013 and by June had made his first $50.  During that time, he posted 188 videos, had 46,000 views and spent on average 1.5 hours to make each video.  If you do the math, he made 18 cents/hour.  Definitely not a lot.  I can only imagine the amount of work and luck needed to get to the top income level.  So if you like Black Ops 2 or GTA, take a look.

Want to read more about the above?  Check out the following:

• Pyramid Schemes: Wikipedia Article, Investment and Securities Fraud – RCMP, Multi-level Marketing and Pyramid Selling - Competition
• The 25 Highest Earning Youtube Stars

James Whelan, moneymatters4life.blogspot

Does the number of bank accounts affect your ability to save?

I came across an interesting article and research paper recently from the University of Kansas that concluded a person with a single account would save more than a person with multiple accounts.  The research suggests the reason is people have a strong desire to spend money for immediate gratification and having multiple bank accounts introduces enough fuzziness or vagueness in knowledge of their finances to allow them to more easily make purchases because of incomplete information.

I could be in trouble.

Between my wife and I, we have 3 bank accounts and that’s not including RESP, RRSP and other special accounts.   The research does suggest that some people are more comfortable with handling multiple accounts than others.  We are a perfect example of both groups.  My wife asks me fairly often which account she should use to pay for something or do we have enough money for X whereas I normally have a good idea on “how we are doing”.  I admit I’m the one paying all the bills so I have an advantage in having this knowledge but I think my wife and I just view money differently.

Multiple accounts definitely still do have a place in savings strategies (e.g. short term vs. longer term, taxable vs. non-taxable, regular expenses vs. discretionary) but what’s important is to have a consolidated view of your accounts and finances to eliminate this vagueness.  This idea is reflected in a lot of personal finance articles talking about calculating your net worth on a regular basis to understand your financial situation.  

Wealthy people understand this idea.  One of the key services demanded by them and offered by their financial advisors is a “consolidated” view of their accounts or finances and not just once a year but as part of their monthly statements or on-demand.  Many banks have already recognized this need by offering an summary view of your accounts when on-line or via paper statements.  There are also many good software packages available to help you determine your net worth or account aggregator software to help you combine your accounts from different institutions.  So lots of evidence this is a need.

Based on our discussion, we reach some of the same conclusions as research below:

• Minimize your number of accounts
• Maintain a frequent consolidated view of your accounts to eliminate any vagueness/fuzziness

Want to read more about this?  Check out the following:

• Influence of motivated reasoning on saving and spending decisions, University of Kansas, Promothesh Chatterjee
•  Trying to save more? Consolidate your bank accounts, researcher says, Lawrence

James Whelan

The Queen needs a budget so why shouldn't you?

Yes you heard right.  The Queen of England, one of the wealthiest people in the world, needs a budget.

Let's take a quick look at her current situation.

• She lives on fixed income provided by her employer and her expenses are bigger than her income.
• Her primary residence, Buckingham Palace, has the following problems:

• Furnace needs replacement
• Furniture is worn and needs replacement
• Some parts of the building are in serious need of repair (cracks in roof, some walls falling apart)
• Utility bills increased significantly last year due to unexpected cold weather

This sounds just like problems faced by everyone else but of course everything is on a much bigger scale. For example, we may pay $3000-5000 CAD for a new furnace whereas it will cost her $1.65M CAD.

So if we were to do one of those financial checkups on how she is doing it would look something like this:

The Queen needs to eliminate the gap between her expenses and income.  She has made a good start  by reducing her travelling expenses, not spending as much on people helping with household chores and adding to her income by renting out rooms in her home.  Unfortunately even after this, she has had to use a large part of her "rainy day" fund for years for everyday expenses not leaving anything to use for repairs to her house.  An option, available to most people, of downsizing her house and selling other property holdings may not be an option since they are not owned personally by her but by the people of England.  Making hard decisions to correct her situation can not be delayed any longer.  Here are some key items to immediately look at:

• Talk to her employer about a raise.  The royal family and their properties provided $418M CAD in profit to them last year.
• Talk to her employer about substantially reducing the property holdings they own either by selling or renting them
• Reduce non-essential expenses, especially ones not contributing in a significant way to her employer's profit. For example, the Royal Train costs $1.65M per year to operate.      

Want to read more about the Queen's finances?  Checkout the following:

• Globe & Mail, October 14, 2013
• National Audit Office, England - Royal Travel, Sovereign Grant, Crown Estate

James Whelan

Buying cars on credit... what does it cost you?

A couple of weeks ago, I had the privilege of attending the Financial Literacy Educators Summit put on by the Investor Education Fund.  This workshop was very well designed and provided inspiration and training to the elementary and high school teachers attending.

One of the speakers was Preet Banerjee, who did a great presentation called "Why 2.5 Billion Heartbeats Might Change The Way You Think About Money" and had some new ways of looking at some old topics that really got you thinking.  One of them started by taking the fact that people on average will own 9 cars in their lifetime and looking at the extra money you would pay over your lifetime by purchasing cars on credit (via car loans) compared to paying for them without borrowing.  In the example he used, if a person purchased without borrowing, they would be able to buy an additional 2 cars over their lifetime compared to the borrower.

This was a very powerful image and thought I'd try it out with my nephew.  He graduated from college recently and as soon as he got a full time job, bought a brand new truck on credit.  Perfect.  I'd ask him the particulars about his purchase, do some calculations and tell him how many additional cars he could buy.

Our talk started out well.  He told me the cost of his vehicle and the month payment and payment term.  So far so good.  It fizzled when he said it was zero percent financing.  No calculation could be done telling him about his additional vehicles.  We did have a good talk though about what that means.  Basically, he knew he had probably paid more for the vehicle than he could have without the zero percent financing.  He had lost some of his negotiation power by accepting the deal.

I decided to do a bit more research.  I found some of insightful reading. One article claimed buyers who receive zero percent financing frequently don't negotiate the price thinking they have the best deal possible and in some cases the zero percent financing costs more than if the person used a regular car loan.  Other articles talked about the limitations of these financing deals (e.g. shorter terms/higher payments than normal car loans, the requirement for near perfect credit scores to qualify, application to only limited car models).  More than a couple recommended negotiating the best price possible before talking about financing.

My nephew's experience definitely matched the observation about not negotiating.  The message in most of the articles was to evaluate the different options available.  Seems like sound advice because as the old adage goes "if it seems too good to be true, it probably is".

James Whelan 

Now and Then. How financial literacy has changed for our kids.

My wife was at a conference recently where one of the topics was how financial literacy needed for our kids has changed compared to what their parents and grandparents needed. An interesting topic. Here are some areas where I see this.

1) Payment methods. It wasn't too long ago "cash was king". Most people paid for things with cash or personal cheques and had a paper book to updated at their local bank branch. Now people rarely physically go into a bank branch but use ATMs or instore cash-back to get cash, use ATMs, online methods and sometimes cheques to pay bills and debit cards, credit cards, smart devices or cash to make instore purchases. What does this mean for our kids? First, they have a lot more options so need to know a lot more to make the right choices. Second, some things critical to financial literacy such as budgeting and cash management are a lot harder. When you just had cash and your bank book it was easier to find out how you were doing compared to your budget compared to now where you can easily spend money via your debit card, for example, and not know your account balance.

2) Investments. I remember my parents range of investments, when I was growing up, amounted to banks accounts, GICs, and Savings Bonds. Sure there were people investing in stocks, bonds and other investments but not generally the "masses". Then came new investment types (e.g. Mutual funds) and channels to access them ( e.g. Online access to self controlled accounts). This led to a huge shift in people investing in asset types they never did before and an increase in "do-it-yourselvers". For our kids, they need to know enough to understand their investment choices so they can invest on their own or at minimum have some basic background to understand what is being offered to them by investment professionals.

3) Outsourcing. Many people now will "outsource" some of their routine non-paying work to others compared to previous generations. People eat out more frequently (i.e. don't cook for themselves), hire others to clean their house, or cut their grass. For our kids, this has created an expectation, and with this, the need for the extra income to fund this and more thought on how to budget for these "nice to haves".

3) Supersize. The rise of consumerism has created the demand for the "supersize" whether for restaurant meal portions, cars, houses, TVs or other items. We have created a strong desire for these "nice to haves" and the feeling for our kids that it is okay to go into debt to get them.

This list could go on and on. So what does it all mean? For me, it has further reinforced the need for our kids to gain financial literacy knowledge prior to needing it rather than learning only through their own experiences or by accident.

James Whelan, www.moneymatters4life.ca

Where does the money come from or how businesses make money?

An interesting conversation you can have with kids or anyone for that matter is when you're talking about a company or business....where does their money comes from and how do they make money/profit?

A lot of times kids don't really understand this but talking about it with them is a great way to enhance their financial literacy and really just part of learning how the world works.  Kids using technology especially become isolated from a lot of this because a lot of things seem "free" to them.

I started thinking about this after having a conversation with my son about "monetizing" his youtube videos.  He has been quite active for a long time creating and posting youtube videos so this prompted us to talk about if he makes some money doing this, how does youtube make money.   Basically, he figured out that advertisers pay youtube fees to post their ads on videos and they share a slice of the money with him. Before I asked the question he hadn't really thought about it.

Here are some examples of companies/businesses you can talk about - Grocery stores, Car manufacturers, Car dealers, Cell Phone companies, Banks.  All of them have different business models and it is interesting how they make money.    For example, many car manufacturers don't make most of their money from making cars but from financing people buying cars.

Examples are all around us.  See if you can come up with any to discuss with your kids or students.

James Whelan, www.moneymatters4life.ca