Owner: wheredoesallmymoneygo.com URL:http://www.wheredoesallmymoneygo.com Join Date: Wed, 25 Jul 2007 20:37:01 -0500 Rating:0 Site Description: One of the premier personal finance blogs for Canadians. Written by a Bay Street professional. Site statistics:Click here
What is a Mutual Fund? A basic understanding... 2007-07-25 19:43:21 I suppose this should be one of the first posts seeing as how most people are invested in mutual funds (and have no idea what they are, what the differences are between them, and what kinds of mutual funds there are out there). It is also of note that many investors might be better off getting out of mutual funds at a certain point... but I'll get into that in another post!A mutual fund is a means for small investors to pool their money together (MUTUALLY) with other small investors so that they may hire a Mutual
Fund Manager to take the collective funds and create a diversified investment portfolio that is invested on behalf of all the small investors. If Investor A has $1000 of his/her money in the mutual fund and Investor B has $10,000 of his/her money in the mutual fund and the Mutual Fund Manager has guided the portfolio to a 10% return, then Investor A now has an $1,100 stake in the fund and Investor B as an $11,000 stake in the fund.So you might be wondering who
What is a Financial Plan? 2007-07-25 17:00:19 I've included this in the General section because it is a topic that applies to all knowledge levels. Why? Well, I've found that even the most sophisticated investors lack a financial plan. You can have the most properly diversified portfolio in the world, proper asset allocation and great returns but it doesn't mean squat if you are not achieving your goals. Why is that? Well, if this sophisticated investor was averaging 1% more per year in his portfolio than everyone else, but was saving $50 a month thinking that his investing prowess will make him/her retire early, but the person who is earning the average return (1% less than the sophisticate) but putting away $1000/month - who do you think is better off?Of course it's not quite as simple as that either, but I think it adds to my point.Think of a financial plan as similar to a business plan for a company. A business plan is going to include information on every aspect of that company, including projections for Read more:Financial
Your savings account choices could save you $100,000 over your working life! 2007-07-25 09:18:03 Let's take a look at how a relatively simple decision can make such a huge impact. Many traditional banks charge monthly account fees. My personal account with my previous bank charged $11/month and it paid 2% in interest. Some "virtual banks" like ING and President's Choice Financial have savings accounts that have no monthly fees. They typically pay a higher interest rate as well, for this example let's call it 4%. Let's examine what the real cost is: $11/month x 12 months = $132/yearBut let's take is a step further. Many banks offer a lower-fee or fee-free account to students or kids until they turn 18 - so let's assume that we have this $11 monthly account fee from age 18 to age 65 (again, many banks have a reduced monthly fee for seniors).Let us also assume that we are wise and decide to invest this saved money into an investment portfolio that averages 8% per year.$132/year @ 8% rate of return x 47 years = $59,783 that could've been in my pocket!So if Read more:choices
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How do banks make money on Savings Accounts? 2007-07-25 09:02:13 You've all seen the adds for the "no fee" savings accounts being offered at various institutions. Have you ever wondered how the banks
make money on those accounts? To really simplify it, it is basically as follows: When you deposit your money into a savings account, you agree to be paid interest from the bank, which for the purpose of this post we will say is 4%. Now the bank will take that money and turn around and give it to someone in the form of a mortgage so they can buy a house and charge them 6%. So the bank COLLECTS 6% from mortgage holders and PAYS 4% to savings account holders. The difference between the 6% and the 4% is known as "the spread".Of course it is not so cut and dry in that a bank can't take $1 million in savings accounts deposits and then just go out and give $1 million in mortgages. What happens when people need to access their savings? The banks have certain ratios they abide to with respect to how much they lend Read more:Savings
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The Richest Man in Babylon (The next book you should buy!) 2007-07-24 21:37:50 By far one of the greatest books ever written is Richard S. Clayson's "The Richest Man in Babylon
". While the book can be read over the course of one day by most people, it will give you the basic rules of creating wealth all in one place.Originally published in 1926 (!), it really is the precursor of all do-it-yourself financial planning books out there. I have given this book to well over 30 people ranging from students to families with estates already in the $10 million+ range - and everyone SINGS its praises - yes it's THAT good.It's so simply written and easy to follow and includes anecdotes that make you scratch your head and say, "Yeah, it really is just that simple - why does everyone make it so complicated?". The story starts with two characters who are struggling to pay their bills. They are talking to each other one day and wonder whey their friend, Arkad (the richest man in Babylon) came to be that since all three of them grew up tog
An iPod tax in Canada up to $75?!?! 2007-07-24 14:04:22 Yikes! It's actually a blanket tax on flash memory storage devices by the looks of it, and it will range based on the size of the memory - and for a 30GB iPod
it looks to be $75! You can read the full story here. I have to give credit to the BoyGeniusReport (which is Read more:Canada
What are you going to learn from this site? 2007-07-24 13:15:52 If you've read the "How to use this site" section you will have noticed that there are going to be various levels of information presented here with respect to knowledge levels. But since that in itself is quite vague, I though I would write a post describing some of the things I will be talking about (In addition to what you guys ask about!).
In addition to defining some of the terms I think everyone should know... Read more:learn
So how do you become wealthy? 2007-07-24 09:38:13 I suppose that's the ultimate question, isn't' it? If I had to boil it down into the shortest space possible it would be this: trade-offs. Specifically, you have to look at the trade-off within each financial decision you face.
Let's look at an example.
Inaugural Post! 2007-07-23 17:19:42 Welcome to wheredoesallmymoneygo.com! It took me most of the day to figure out how to set this up and I suspect it will be a few weeks before I get really proficient with it. In the meantime, if you want to learn more about my day job, please feel free to visit my work website: www.preetbanerjee.com
Once you visit it, you will see that it's not really a shameless plug as my client market is QUITE specific.
In the meantime, if anyone has any questions they would like answered please feel free to post away! I'll start updating the site tomorrow with some finance tips and definitions. Cheers!
Refinancing your home Part 2: An Example 2007-07-27 09:35:18 Okay let's show how an actual couple ended up freeing $915.80/month by refinancing their home. I've rounded the numbers, but they are from a real life scenario. We'll begin with a snapshot of what their financial situation was BEFORE:Home Value: $250,000Mortgage: $150,000 balance, 20 years left, 6% interest rate = $1,070 Monthly PaymentCredit Card Debt: $10,000 balance, 18.8% interest rate = $500 Monthly PaymentVehicle Loan: $26,000 balance, 8% interest rate = $500 Monthly PaymentDepartment Store Charge Cards: $5,000 balance, 28.8% interest rate = $250 Monthly PaymentIn this case, they have a total debt obligation of $191,000 and total monthly payments of $2,320.By refinancing, they were able to take out $41,000 of equity from their house to pay out the vehicle loan, the credit cards and the department store charge cards. This increases the mortgage from $150,000 to $191,000. Plus, let's add a $5,000 charge to break their existing mortgage for a total new mortgage b Read more:Refinancing
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Refinancing your home 2007-07-27 08:23:07 I'm going to offer up an example in a following post, but this post is to deal with the psychological aspect of refinancing your home to consolidate debt.First, let's just make sure we're on the same page and define "refinancing your home". This is basically when you have some equity built up in your house (after paying your mortgage payment for a few years or having put a large down payment on it) and you use that equity to pay off OTHER debts so that instead of having a mortgage payment, a credit card payment, a line of credit payment, a vehicle payment, etc you will only have one slightly larger mortgage payment and that's it. I say slightly because you have taken all the other debt payments and in effect turned them into debts with longer repayment time lines, thereby reducing how much you pay monthly. So why do people want to do this? Cash flow - plain and simple. People can free up $1000/month in some cases which can be used for building up an emergency reserve, lon Read more:Refinancing
Save money on your car insurance 2007-07-26 16:16:54 One quick and easy way to save some money on your car insurance
is to raise your deductible. But don't just go out and change anything before crunching some numbers first.First we should define what a deductibe is. A deductible is term that refers to how much money you are on the hook for if you make a claim (get into an accident). So for argument's sake, let's say your deductible is $500. If you get into an accident and the damage is $4,000 then you pay the first $500 and the insurance company pays the rest.(A side note: think twice about making a claim for a $600 accident if you deductible is $500. Is the chance your premiums increase for years worth saving the extra $100 at claim time?) If you raise your deductible to $1,000 you may save perhaps $100 per year. In this case you have to weigh the fact that this strategy works so long as you don't get into an accident more than once every 5 years and 1 day. Let me explain: If you have a $500 deduc
An Actual Financial Plan! 2007-07-26 13:46:21 I'm attaching that financial plan I was talking about earlier - so here it is in all it's glory! I have to make some disclaimers: Nothing you read in here should be regarded as advice for you to take - it is simply an example as to the quality and depth a financial plan should go into.Now you can compare your plan to a proper plan (well, at least in my eyes!)... and if you don't have a plan maybe you'll see what you should be looking for... Enjoy! :)Click Here to Download Sample Financial
Plan <-- This is a Microsoft Word Document and is 720KClick Here to Download in Adobe PDF Format <-- If you can't open Word files, use this, but it is 2MB
Risk: Systematic Risk vs Non-Systematic Risk 2007-07-26 11:16:08 This is an advanced level topic - you may want to skip this post if you are just finding your feet with respect to finances! It assumes a basic understanding of portfolio diversification...With respect to any given stock market there are two types of risk (which is another word for variance according to Modern Portfolio Theory): 1) Systematic Risk and 2) Non-Systematic Risk. Systematic risk is the general ebb and flow of the market - kind of like the tendency for all stocks to get dragged down or move up in tandem at the same time to a certain degree. For example, the 1987 market decline was a Systematic event in that it really didn't matter what you owned, it probably went down. Is it warranted? Yes and no, but a main thing to consider is that nothing probably happened to any one stock to make it lose value in and of itself that day, but rather there was a general expectation or fear of a downturn in the economy linked to the market that caused everything to mov
What is Life Insurance? A basic primer... 2007-07-26 09:04:15 I'm pretty sure most people have a basic understanding that a Life Insurance Policy pays money to a named beneficiary (the person who gets the money) when someone dies. You'll hear alot of people tell you that once you get married - it's time to get life insurance, or once you have kids - it's time to get life insurance. (and of course if you have a shotgun wedding then it's really time to get life insurance! :) )The reason they say that is because most people will want to provide for their loved ones (who may be financially dependent on them) if they die. For example, if you had a couple who are married with one young child and the wife is an investment banker and the husband is a stay-at-home parent (and the baby is just a food processor, really) perhaps they have a household income of $100,000 after tax. But if the wife dies, then that would cause a lot of problems. Most people would like to avoid the hassle of making huge life changes IN ADDITION to having to deal w Read more:primer
What is a Financial Plan? 2007-07-25 17:00:19 I've included this in the General section because it is a topic that applies to all knowledge levels. Why? Well, I've found that even the most sophisticated investors lack a financial plan. You can have the most properly diversified portfolio in the world, proper asset allocation and great returns but it doesn't mean squat if you are not achieving your goals. Why is that? Well, if this sophisticated investor was averaging 1% more per year in his portfolio than everyone else, but was saving $50 a month thinking that his investing prowess will make him/her retire early, but the person who is earning the average return (1% less than the sophisticate) but putting away $1000/month - who do you think is better off?Of course it's not quite as simple as that either, but I think it adds to my point.Think of a financial plan as similar to a business plan for a company. A business plan is going to include information on every aspect of that company, including projections for Read more:Financial
Interest: Think of it as "rent" 2007-07-30 20:14:25 I don't think many people explain it this way, but it is probably the best analogy I've heard. Rent is paying for the "use" of something: like renting a movie, an apartment or house or a car. You never own the item, but you get to enjoy the use of it for a specified period of time. Interest
in the financial world is exactly the same thing, except you are renting money!If you go back to the post that talks about how banks make money on your savings account, you'll remember that they give you interest, but take your money and give it out in the form of a mortgage at a higher rate of interest. So they are "renting" the use of your money and paying you "rent" in the form of interest. They are also turning that around and renting it out to the mortgagor who pays interest on their mortgage (rent TO the bank).To take the example even further, if you were a landlord and renting out a room, the rent you collect is taxable as income. It's
What is a "Line of Credit"? 2007-07-30 17:54:50 A Line of Credit is basically like a credit card in that you apply to have the ability to borrow money whenever you want and have a set limit that you are authorized to use (let's use $10,000 as an example). The Line of Credit remains open even when your balance is $0 - and you have no payments to make. If you were to use $5,000 then you would start to be charged interest. You could pay back the $5,000 right away or you could pay it back over time, the only thing you have to make certain is that you pay the interest monthly. So if your line of credit had a 10% interest rate you would owe a minimum of ($5,000 x 10% / 12) = $41.67 per month. You could take until eternity to pay it off in full if you wanted to so long as you made the interest payments.The interest rate on the line of credit is usually very good. It is usually at the prime rate (the interest rate offered to the bank's best customers) if it is secured, or "prime plus 1" or "prim
The Magic of Compound Interest 2007-07-30 16:52:48 Albert Einstein was a pretty smart guy - I think we can all agree on that. The man who gave us the Special Theory of Relativity and the General Theory of Relativity famously said that the most powerful force in the universe was....?Compound Interest
!Would you agree then, that this is something we should take a closer look at since it relates to investing and not atomic theory? :) Okay, if you are still reading I'll assume you are, in fact, in agreement. Now it is time to either excite you or depress you based on your age!First let's define compound interest. Compound interest means that the interest you earn on an investment is based on both the principal (the amount you started with) AND the accumulated interest as well. So the interest you earn is always being calculated on an ever growing amount, meaning the interest you earn is always more than in the previous year. This is different than "simple interest" in which the interest you earn is only based on the Read more:Magic
CRA: The Canada Revenue Agency 2007-07-30 15:41:51 The CanadaRevenue
Agency (CRA for short) can be thought of as Canada's collector of taxes for the government... because that's what it is. :) It is the equivalent of the IRS (The Internal Revenue Service) in the United States which is more famous. The CRA are the guys who send tax auditors to your door if they think you have made an error in your tax filing.Some of you may still hear others refer to it as the CCRA (Canada Customs and Revenue Agency) but that particular incarnation was split into two agencies back in 2003 - one for Customs and one for Tax Revenues. The CCRA no longer exists.
What is an RRSP? 2007-07-30 14:48:47 RRSP stands for "Registered Retirement Savings Plan". It is a type of savings or investment account which was designed for Canadians to facilitate retirement savings. It is "Registered" with the Canadian Revenue Agency.Many people think that they "buy" RRSP's every year - that the RRSP is the investment. NO - think of an RRSP as an "account". You can hold a wide variety of investments INSIDE this account so long as they meet the definition of a "qualifying investment" as listed by the CRA (The Canadian Revenue Agency). But don't worry, almost everything is a qualified investment.You can of course use non-RRSP accounts to save for retirement, but the reason most Canadians choose the RRSP option are for tax purposes. There are three main tax advantages that exist:1. Immediate Tax ReliefYou can get a refund at tax time if you put money into your RRSP. The government will basically allow you to deduct your RRSP contri
Myth: "I don't want a raise! It will move me into a higher tax bracket and my take home pay will be less!" 2007-07-30 08:16:50 I've heard this many times, even from my beautiful mother! This is not true! Let's bring up my SAMPLE tax table as a refresher:$0-$10,000 = 0% Tax Rate$10,000-$20,000 = 10% Tax Rate$20,000-$50,000 = 20% Tax Rate$50,000-$75,000 = 30% Tax Rate$75,000+ = 50% Tax RateYou will hear some people complain that they don't want their next raise
because it will move them into a higher tax bracket and reduce their takehome pay and they will have less money to spend. Okay, the Government does some interesting things but they've figured this one out a long time ago. Here's how it works: Let's take someone earning $49,000. Their marginal tax rate is 20% in our example tax system. That DOES NOT MEAN they pay 20% x $49,000 in tax. They pay 0% on their first $10,000, 10% tax on the next $10,000, and 20% on the next $29,000. Let's work that out:(0% x $10,000) + (10% x $10,000) + (2
What is a "Marginal Tax Rate?" 2007-07-30 08:03:58 This is a basic concept that should be understood as it is referred to on a regular basis. When you look it up, the definition almost always seems to include this: "The percentage of tax you pay on the last dollar you earned." I've always thought of this wording as a bit funny. While it is precise, it's a bit too lawyer-speak for my taste. So let's take a closer/better look...As a side note, unless a post is marked as an advanced level article, I'm going to use simple numbers and fictitious tax brackets for the purpose of educating without confusing. :)Our personal income tax system is designed to tax higher-income earners more than lower income earners. It does this by using "tax brackets". Let's look at an example:$0-$10,000 = 0% tax$10,000-$20,000 = 10% tax$20,000-$50,000 = 20% tax$50,000-$75,000 = 30% tax$75,000+ = 50% taxIn this case you c Read more:Marginal
What is a "tax write off"? 2007-07-29 21:40:31 One common misconception that people have is their understanding of a "tax write off". Often you will hear someone say "I can write that off...", in this case they are referring to the ability to write off an expense incurred from their income tax filing.So what is the misconception? I often hear that people assume it means that the expense becomes free as the person writing off the expense will get the money back at tax time. THIS IS FALSE! (How I wish it were true!)I think the best way to explain it is with a simplified example: Let's say Joe Smith is a self-employed salesman. His sales commissions per year are $100,000 and let us assume he pays 50% in tax (again, just to demonstrate the mechanics behind a write off - the tax system is a bit more complex than just a flat rate for everyone!). This means he has to pay $50,000 in tax and is left with $50,000 to spend. BUT the government allows Joe to deduct the COST OF DOING BUSINESS from his income through th
Picking investments based on past performance 2007-07-29 09:06:43 Invariably people will see a ranking of highest performance funds for the last year or so and ask "Are these good funds?" Others will just go and blindly buy them. In fact, there is a huge proportion of investors out there who base most of their decision on the past performance of an investment alone. They do not research any further than the performance report for the last year. This is no different than gambling in my eyes!To paraphrase a quote I once heard, if all that was involved in achieving the highest rate of return was looking at past performance - librarians would be the richest people on earth! Last time I checked, they were not (at least on average).In fact there have been numerous studies that have looked at mutual fund rankings year over year. What they all find is that the #1 performing mutual fund over the last year will be very close to the worst performing fund the next year. These studies are numerous and they all have the same resul Read more:Picking
Mutual Funds: Great for portfolios up to $100,000 2007-07-28 18:46:50 I suppose many financial advisors licensed to sell ONLY mutual funds will cringe at this information. First, I want to say that if you have more than $100,000 in your portfolio it does not automatically mean that it is time to get out of mutual funds. But certainly once you pass this threshold you will want to look at alternatives to mutual funds as your options open up (based primarily on the fact that buying in bulk reduces your trading costs). If you remember in my first post on MutualFunds
we defined mutual funds as being the ideal investment for SMALL investors because trying to build your own diversified portfolio would cost too much in trading commissions.So once you have built your portfolio past $100,000 it is time to compare costs of paying a mutual fund manager versus the costs of having a stockbroker build a custom portfolio (or yourself with a discount brokerage trading account if you have the knowledge).Let's look at the average Equity Mutual Fund. It has an Read more:Great
, Mutual Funds
Write off the Interest on your Student Loan 2007-08-02 09:52:24 The interest on your student loans are tax deductible in Canada (another way of saying "write off" is "deduct"). For more information on the definition of "writing off", please refer to my post - What is a tax write off?.
Let's take a look at an example... Read more:Write
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Reduce your Credit Card Interest Rate - Just ask! 2007-08-01 21:18:21 Did you know that you can call up your credit card company and ask to have your interest rate reduced? While they don't say yes every time, they may suggest what you need to do in order for them to reduce the interest rate in the future. This will usually involve... Read more:Interest
, Credit Card
Leverage Part 2: The Dark Side! 2007-08-01 14:28:17 So now that you are all hot and bothered about getting an investment loan (aka leverage), let me take you down a notch! (Trust me, it's for your own good...) :)
Okay, so let's now say that Greg, who if you remember had learned that he would be $2,000 ahead by getting a loan, decides to calculate a few "what-if" scenarios... Read more:Leverage
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