Do you know what a zero-based budgeting system is?  Basically it is a budget where you track every single dollar of income and each single expense down to the penny.  This is a great system for someone who is trying to get a good handle on their spending since they will be able to see where every dollar goes and act accordingly.  It also helps with spending decisions since it doesn’t let you spend money you don’t have.  I did a You Need a Budget review recently which is a great example of zero-based budgeting software.

I don’t use this kind of system, in fact I pretty much do the opposite.  I like to keep an extra couple thousand dollars in my checking for two reasons:

1. I avoid transaction fees if I keep the minimum balance over $1500.
2. I don’t have to track bills, ATM withdrawals etc since I always know that I have enough to cover them.

I do look at the balance fairly frequency to make sure it is more or less where I’m expecting.  But otherwise the only time I actually do any kind of “budget” is when I want to make a large purchase or debt repayment. In that case I’ll take my account balance, subtract any upcoming expenses, subtract my $2,500 “float” and that tells me how much extra money I have that I can put into my mortgage or continue my plan to buy a big screen tv for every room in my house.  (I’m still working on the first room).

But how do you avoid overspending?

This system might not work for some people because they need some sort of spending restraints in order to not buy things with money they don’t have.  I don’t seem to have this problem although I did in my younger days so it works great for me.

You could put that $2,500 into your mortgage and save 5.2% interest each year.

Yes, that’s true since 5.2% is my mortgage rate.  But 5.2% of $2,500 is $130.  I value my time quite highly and the idea of spending a lot of time and hassle tracking every penny just to save $130/year is not at all appealing to me.  For someone who has a tighter budget, more time and has high interest debt where they can put the $2,500, the payoff return might be different.

What kind of budgeting do you do?  Are you a strict budgeter?  Loose like me?  Somewhere in between?

Some time ago Mike and his wife exchanged comments about having tenants pay off your mortgage.  My mother takes the same position as Mrs. Pillars does:  tenants paying off your mortgage is a good thing.  With respect to both frighteningly intelligent women, I’m suspicious this is a poor way to think about the investment.

Say you buy a rental property in Pleasantville.  This is a delightful small town, where few people move to but few people leave (’cause it’s so pleasant).  Because of this property prices are very stable, increasing at the rate of inflation.  Say you buy a property for $100K with a 100% interest-only mortgage and you manage to rent it out for exactly the same rental fee as your mortgage payment (so every month you take the rent check, hand it to the bank and you’re even with them).  Is this a good investment?

I don’t think so.  First off, you aren’t making much (in cash flow or appreciation, beyond the increases due to inflation).  While your mortgage is being covered, you’ll still have to pay the maintenance, vacancies (maybe), utilities and taxes yourself. You’ll also have to put in time dealing with tenant complaints or problems. If appreciation equals inflation, this may (or may not) exceed your costs, making this a pretty volatile investment.

Say as an alternative, I invest in ultra-safe GICs and get the 3% rate being offered by PC Financial. This will probably work out to be a little bit above inflation. Is this better or worse than investing in Pleasantville? With an unknown future (and all my made up numbers), it’s impossible to say, but I find it pretty tough to view the real estate investment as the clear winner. There’s FAR more volatility, and the returns don’t seem to compensating for this.

Some might say “Don’t invest in Pleasantville, invest in the hot markets!”. The subprime fallout in Florida, Arizona and throughout California paints a bleak portrait of one possible outcome of that choice.

Richard Thaler coined the term “Mental Accounting” in 1980.  A Washington Post article illustrated this difference with the example “Would you rather lose a $10 ticket, and have to buy another one to replace it, or lose a $10 bill on your way to the event?” Surprisingly, in spite of these being virtually identical situations (from a purely monetary perspective), most people would prefer to lose the $10 bill. Similarly, there’s something irresistibly enticing about matching up a tenant’s rent check with the mortgage payment that I don’t think is entirely rational.

My point ISN’T to debunk real estate investing. I just think that it would be very easy to have tenants paying the mortgage and it being a TERRIBLE investment. Having tenants covering the mortgage may be a small part of the reasoning about whether a deal make sense or not, but that CERTAINLY shouldn’t be the end of the consideration (if that’s all the investor is getting out of it, I think she’d do much better in an couch potato style portfolio or a even a high interest savings account or GIC).

What are your feelings about having tenants pay the mortgage?

A few years ago when I was on a big asset allocation kick, I bought some REITs (real estate investment trusts) for my RRSP account.  The amount was only about 5% of the portfolio but according to the experts, having some real estate is a good diversifier.

While I accept the idea that REITs are good for your portfolio in theory, I never liked the whole investment trust structure of REITs and their huge payouts.  I had bought some RioCan (REI.UN.TO) which is a reasonable proxy for the Canadian REIT market but started to get nervous when there was some news reports about the unsustainability of their dividend.

The other problem I had with my REITs was that my original investment was now only about 3% so I needed to buy more to get back up to 5%.  But I didn’t really want to buy any more and even if I did,  5% is not that much.  This was the same sort of thinking I had with my former leveraged investment plan – either go big or go home.

So I decided just to sell it and not worry about it any more which is what I did for $18.60 per unit.  I’m just leaving the proceeds in cash for the moment until I can do a proper asset allocation analysis of our investments.  Once that is done I’ll rebalance according to my desired allocation (roughly 80% equity, 20% bonds).

The Canadian Capitalist site got a big makeover this week as a result of his new affiliation with MoneySense.ca which is a really good Canadian money magazine.  I’m very happy for Ram but I have to say I was extremely disappointed in some of the comments he received on the announcement.  Numerous commenters said he sold out and they were disappointed and blah, blah, blah, blah….

I think this is ridiculous - first of all, if you read Money Sense and the Canadian Capitalist then you know that they are a great fit.  They both have exactly the same approach to personal finance and investing so I don’t see how there would be any interference from MS.  Second of all – Money Sense doesn’t strike me as big business. I suspect that they need Ram a lot more than he needs them so I don’t think they will be trying to influence him at all.

Ramit from I will teach you to be rich has been promoting some self-made products over the last year or so and has gotten a bit of flack.  His answer is that people who read blogs and don’t want to pay for anything (including even looking at ads) are free loaders and he’s ok if they leave.  I couldn’t agree more – there is nothing wrong with “free” content but you get what you pay for.  I’ve been involved in blogland for about 3 years and I’ve seen a lot of blogs come and go.  One thing I’ve noticed is that the staying power of blogs has a lot to do with the ability of the blog to earn some money and make continuing the blog worthwhile.  Bloggers who aren’t able to monetize their site almost always end up fading away.  Readers who say they want Ram to “not sell out” and not make any money might not be so pushy if the result was a formerly great site that hasn’t been updated in ages like so many others.

The rest of the links

Financial Uproar rated the hottest personal finance blog chicks.  Sure, it’s sexist but I can’t say I disagree with his list.    Check out his blog too – it’s pretty good.

Canadian Dream had a great post about guilt from not being able to get everything done.  He also uses bad words which I liked. 

Krystal got laid off this week – sounds like she got a raw deal.

Million Dollar Journey (aka Kathryn) gave some tips to know when it is time to leave your job.

Squawkfox shows us how to make a budget.

Fiscal Geek asks if there is such a thing as good debt.

Preet has a 4 part series on going bankrupt in Canada.

Financial Blogger says that the media is full of sh*t.  Well duh!

Debt Free Adventure got a refinanced home loan and saved a bundle!

The Wisdom Journal says that Net Quote is a good place to look for home owner insurance quotes.

ABCs of Investing wrote about reasons for doing a Roth IRA conversion as well as explaining how to convert to a Roth IRA.

Carnivals

Carnival of Money Hacks

Festival of Frugality

Carnival of Personal Finance

I’ve seen almost every Michael Moore documentary.  I like his movies and I like his persona (he seems like he’d be a lively guest at a dinner party).  I certainly don’t agree with all his politics (but, then, I can’t think of anyone I *do* agree with all their politics).  Recently Preet did an interview with the man himself (which was quite exciting) and it reminded me to watch this.

I tend to assume that it’s easy to tell when I’m joking (although I realize, intellectually, that it’s not), and I think Michael Moore has an element of this.  Often he portrays himself as a dumb hick from Flint, Michigan who just wants someone to explain all this to him.  After he’s sucked them into a discussion, he punches them when they aren’t looking.  It’s an amusing way to get some reality TV footage, but it comes at the expense of the people who never signed up to look foolish.  Sacha Baron Cohen and Brian Flemming also use a similar style, and in many ways on the opposite side of the spectrum Glenn Beck and Bill O’Reilly use the same sort of tactics.  In each case it can be hard to tell when someone is being serious and when they’re being facetious (and trying to draw their victim into making a fool of themselves).  Regardless of who does it, it’s amusing but pretty intellectually dishonest.

Early in the move Michael Moore asks people to explain derivatives and collateralized debt obligations (CDOs), which leads to humming, hawing, and incoherent explanations.  The first paragraph of the Wikipedia entry on the history of future exchanges explains what a derivative is, Moore could have easily whipped up a cartoon (set in ancient Greece) that would have explained it, but it’s better for his narrative if it’s presented as an incoherent evil.

On the face of it the movie sets out to show how the subprime meltdown proves that capitalism doesn’t work.  At the end of the movie, Michael Moore presents his views as honestly as I think he ever has when he sums it up as “Capitalism is an evil.  And you cannot regulate evil.  You have to eliminate it and replace it with something that is good for all people.  And that something is called democracy.”

I guess if capitalism is evil, that makes the Canadian Capitalist Canadian Evil (which is kind of cool!).

This conclusion comes from one piece of anecdotal evidence after another through the film.  There’s the poor farm couple whose house has been foreclosed on, the union shop that fires all its employees and closes it’s doors without paying them their final pay check, a few priests talking about how capitalism is unchristian, and the awful corporate special interest groups who have bought the presidency since Regan, manipulate congress and are going to be exorcised by the great Obama.

I share a number of Moore’s concerns (part of why I enjoy his movies I guess).  I think the level of corporate involvement at all levels of government is very troubling, but it’s strange to me that his solution is bigger government (which seems to just pass more money and power into their control).  I feel bad for people losing their houses or jobs, but I’m not convinced capitalism is to blame.

I found the Catholic priests kind of bizarre.  One of them says:

“The system has built into it what we call propaganda.  I’m in awe of propaganda — the ability to convince people who are victimized by this very system to support the system and see it as good.”

He’s talking, of course, about capitalism (huh?).  His statements would make A LOT more sense to me if he was talking about organized religion.

An important part of every Michael Moore film is when he heads out and makes a dick of himself with some poor security guards (who are earning their pay that day, let me tell you).  In this one he tried to make a citizen’s arrest of the entire board of directors at a number of banks, and then he wraps “crime scene” tape around some corporate headquarters.  Moore has even admitted that he feels bad for the people doing their jobs that he harasses, but feels the points he makes are worth putting them through it (“I do feel bad for them on one level. On another level, they’re the good Germans.“).

If you’ve enjoyed previous Michael Moore movies, you’ll like this one as well!  He’s getting a bit more extreme in his politics, but the choir he preaches to will be saying “hallelujah” and his critics will be frothing at the mouth (which is always amusing too).

Have you seen many Michael Moore movies?  Did you like them? Do you find his rhetorical style persuasive?

We recently bought a Dynex portable dvd player for my son to use in the car on long trips.  This isn’t something that I really wanted to do since I grew up in the era of playing road kill identification games and making fun of people in other cars to help pass the time on long trips.  The idea of watching the “moving pictures” in the car still seems fairly alien to me.

The problem is that my son is often extremely loud in the car and it drives both my wife and I nuts.  We take a lengthy road trip several times a year to visit my parents so we have to deal with this fairly often.  It got so bad that my wife and I seriously considered drawing straws to see who got to ride the bus on the next trip.  My daughter doesn’t seem to be as loud in the car, although with a bit more training from her older brother – I’m sure that will change.

I bought a fairly cheap player from Best Buy which cost $70.  Even though this will only get used in the car, if it can create some peace and quiet then it would be worth paying $700!  You can pay quite a bit more for these kind of players but the main differences seem to be the screen size (ours is 7″) and battery life. Larger ones with better sound and picture (and more weight) can run $200 or more.  I can tell you and  that the screen and sound quality for our dvd player is quite adequate.

The unit itself is pretty small and light which is great since my son holds it in his lap.  It has an internal rechargeable battery which is supposed to last for a few hours.  It also has a cigarette lighter plugin so you can keep running it after the dvd internal battery has run out of juice.  I believe you can also get some sort of splitter in order to have 2 players plugged in at the same time.

We tried the dvd player out on our last big trip at Christmas and all I can say is wow!  It worked so well that I bought another one for my daughter.  The kids were surprisingly well behaved on that trip so we didn’t whip it out until the last hour of the return trip.  Next time we’ll bring it out a lot sooner!  I’m not a big fan of too much tv for little kids but on road trips things are different.  I don’t care if they watch movies and eat french fries the entire trip – whatever it takes to get them quiet!

What kind should I buy?

Portable dvd players come in all sorts of sizes and quality.  It really depends on your requirements.

Here are some considerations:

Screen size – Ideally it would be nice to have a larger screen size but the drawbacks are more weight, batteries won’t last as long and higher cost.

Battery/plugin – If you are using the player exclusively at home and in the car then the battery life isn’t that important.  On the other hand if you are using it in a plane or camping where you can’t recharge easily, then getting a longer life battery will be more important.

Weight – Obviously, the bigger the unit is and the bigger the battery then the more it will weigh.  A larger player isn’t necessarily ideal in an already crowded car.

Summary

I definitely recommend a portable dvd player for someone who wants to watch movies when they are on the go or don’t have access to a tv.  I can’t state enough how useful they are to get the kids to shut the f*** up in the car. 

The type you buy is really dependent on your usage and needs so think about what is important for what you want it for.  I would suggest that unless you have a specific need that requires a more expensive player then just buy a smaller cheap one.  They don’t cost much so you can always upgrade to a better unit later on.

Some time ago Preet, Mike (& Mrs Pillars) and I got together for some yummy Thai food and adult beverages.  At one point I was expressing skeptism about something, and Preet wryly responded “Skeptical?  You?  No, never!”  While I’ll leave my own personal skepticism as an issue between myself and the team of psychologists in Vienna focused on my therapy, I’ve since been developing a model of the spectrum of credulity and skepticism.

As much as I’m probably closer to one end of the scale than the other, I don’t want to claim any correlation between intelligence or the “proper” perspective.  It’s just different ways to view the world, the right blend of which is different for every person and situation.  I’m not suggesting that this model is of any inherent utility, it’s more something I’ve been thinking about and find interesting (and hoped some readers will as well).  A number of people I’ve discussed this with agree that there’s a spectrum between credulity and skepticism, but had never thought of it in terms of discrete levels.

Getting the right level of credulity / skepticism is VITAL for personal finance.  We’re constantly bombarded by more information then we can process, all of which may (or may not) impact investments.  Paying attention to the right information (and ignoring the wrong information) can be the determining factor in many investments.

There was an interesting psychological experiment (some details, and a video, were posted to boingboing) that contrasted human willingness to blindly emulate one another to chimps.  The original paper this is based on is available here for anyone who has access through a university (or is willing to pay).

Credulity Level 1

At credulity level 1 the general assumption is that all people always tell the truth and aren’t motivated by bias.  If someone asserts something, they’re taken at face value.  The Invention of Lying explores the idea of an entire world (except for one man) which operates on this principle.

One of the big advantages of this level is you don’t have to evaluate information:  you just believe it all.  This is probably reasonable when you’re in a totally foreign environment and are trying to figure out how to function.  I personally went through this when I’ve lived abroad in the past, if someone told me I should do something (or not do something), I’d just believe them and change my behaviour.  Sure, maybe they were tricking me but it was easier to just follow what natives suggested (since, hey, it’s their country, right?).

The big disadvantage of this is that you’re very easily deceived and exploited.  Sadly, there’s a whole class of scams that exploit recent immigrants (since they are more likely to be at this levels as detailed above).

Credulity Level 2

This includes the belief that something is true because it’s in a book or newspaper (implicit faith in the editorial control of the publisher) or because a trusted source (such as a friend or family member) said so.  On the face of it this might be a reasonable and effective filtering mechanism.

This level is required for education, where someone is designated the teacher and the other the student.  Yes, it’s possible to learn if you challenge every assertion made by a teacher, but there are precious few environments that would allow this sort of behaviour from a student.  For things like learning which foods are safe to eat or which are poisonous, children would starve (or die from poisoning) if they couldn’t accept this level with their parents.

The problem occurs when someone in the trusted group is tricked, the idea can then spread quickly through their social network as each contact unquestioningly believes what was told to them.

Credulity Level 3

At this level you trust your own experiences.  Once something has happened to you and you’ve learned about it, you make predictions about the future based on those experiences and trust them.

This can be much more powerful than blindly following a teacher once you gain a deeper understanding of a domain of knowledge, as you experiences can correct misunderstandings your teacher had (“It’s a poor student who doesn’t surpass his master”).  If your real estate mentor told you to always avoid properties with foundation problems, but you come up with a strategy, based on your own experiences, which allows you to lucratively flip properties with foundation problems you might be the only one operating in a lucrative sub-market.

Things change and it can be dangerous to trust what happened in the past.  Bubbles form because an investment keeps paying off, so more money keeps pouring into it (as everyone keeps expecting the future to be like the past), which causes it to keep increasing in value, until suddenly everyone in Holland looks around and asks why they’re all so crazy for tulip bulbs.

Credulity Level 4

At this level you trust what you can sense (or reason about).

This can be worthwhile when you incorporate your personal experiences with an understanding of different environment and determine when you’re in a familiar situation and when things have changed.  Andrew Lahde understood the credit crisis before most people in the financial industry saw where it was heading, and by understanding the financial principles at play (instead of just counting on “it’s been making money up until now, I guess it’ll keep making money!”) he achieved an astronomical return for his hedge fund.

Sometimes your senses (or the data) deceive you.  A friend of mine’s father (an engineer), wholeheartedly believes in ghosts because he remembers seeing one as a child.  Beyond just the vivid imaginations of children, sometimes we see things that simply aren’t there.  Richard Dawkins relates the anecdote in one of his books of seeing a demonic visage superimposed on a neighbour’s house, which, as he approached, broke down to be just light shining out from windows.

Credulity Level 5

At this level you doubt everything (and reject any avenue the provides concrete information as unreliable).  It’s possible the world is a simulation (think Neo from The Matrix) and that everything is a lie, but how could we ever know?  Even if you see cracks in reality, how can you reason about what is outside?  At this level of extreme skepticism, everything is questioned (and doubted).  You see some people at this level in specific areas of their lives (such as conspiracy theorists, holocaust deniers or tax protesters, who remain skeptical of events that obviously happened no mater what evidence or reasoning is offered to them).

This level of skeptism can sometimes lead to radical breakthroughs, such as Einstein believing there was more to physics than what Newton had outlined.

The downside is obviously when massive amounts of thought and effort are wasted on attempts to debunk something that is, actually, true.

Hi there, my name is Jay Harris.  I am a 21 year old guy living in Vancouver, B.C. I’ve been considering organizing my finances for a while now, but while I was a student I never felt that I was making/spending enough money to justify the effort of creating/maintaining a budget. However, having run out of money for school and being forced to find gainful employment – and with the hope that I will be able to save up enough money to return to school and finish my degree – I am today starting down the road of financial accountability, and I would like to invite you all to participate with me.

I will be penning a weekly article here on Four Pillars chronicling my exploration of this scary new world of financial accountability. Seeing as you may choose to read these articles from here on out, there are a few things that you should know.

1. I’m not writing as an expert; I doubt you will ever see me do an “answer the reader’s questions” article on budgeting here on Four Pillars.
2. I believe that budgeting my time to be at least equally as important as financial budgeting is, and I will be spending equal amounts of time covering the financial costs of things as well as the time cost/benefits of things.
3. I am young, and while it is true that sometimes I feel like I have all the answers, this is not one of those times. I would greatly appreciate feedback and advice in the comments section. I am – for all intents and purposes – Four Pillar’s very own sentient budget lab rat with access to the internet. Don’t be afraid to blast me if you think I’m wrong, but please offer a counterpoint when you do so.

Okay, that’s about all I’ve got to say for the moment.  Next week I will take an in-depth look at my financial situation, my immediate and long term goals, as well as what kind of budget system I’m using to reach those goals.

Again, I’m really excited to be doing this, and I hope you all can help me as I try to implement solid budgeting skills that will hopefully stick with me for the rest of my life

I can’t promise to make budgeting sexy, but I will try to make it fun.

Many thanks to Mike for allowing me to have this opportunity; I sincerely hope that I can become an excellent addition to Four Pillars.

One of the scarier parts of being a parent is worrying about safety hazards to your child. Parenting Squad has a list of food choking hazards and surprisingly (to me) is that hotdogs are by far and away the worst for your kid.
Brip Blap had an absolutely brilliant story about a smart couple that got the upper hand in a real estate negotiation by using FaceBook.

Canadian Capitalist discusses the stock option tax break in the recent budget.

Kathryn from Million Dollar Journey says to succeed financially you must know yourself first.

The Financial Bloggers asks what will the Canadian prime interest rate be at the end of 2010?

Thicken My Wallet has some ideas about why some small businesses fail.

Carnivals

Budgets are Sexy!

Festival of Frugality

Money Hackers Carnival

Carnival of Road to Financial Independence

Festival of Frugality

Festival of Stocks

Carnival of Financial Planning

Carnival of Taxes

Carnival of Twenty-Something Finances

The tax free savings account (TFSA) has been available to Canadians for over a year now.  One of the benefits of being a year older is that you now have another $5,000 of contribution room available to invest in your TFSA.  If you turn 18 in 2010 then you only have a maximum limit of $5,000 for your TFSA.  If you turned 18 in 2009 or earlier then you have a TFSA contribution room maximum of $10,000.

My wife and I have made full use of our TFSA room because we have a $20,000 emergency fund which fits our TFSA accounts like a glove.  There are many different potential uses for TFSA accounts, but keeping an emergency fund is a good one, since all interest earned in the account is tax free.  We keep the emergency fund TFSA at ING Direct – see my bonus offer here.

The basic rules haven’t changed since last year – the only difference for 2010 that I know of is a more punitive over-contribution penalty.  I’m not going to get into the exact penalty but suffice to say – don’t contribute more than the allowable amount to your TFSA!

Basic TFSA rules for 2010

• Contribution room increases by $5,000 per year starting in 2009.
• Unused contribution room carries over indefinitely.
• Any contributions made to the TFSA will result in a similar reduction to your available contribution room.
• Any withdrawals from your TFSA will result in a similar addition to your available contribution room but only effective Jan 1 of the following year.  See my “December strategy” for details on this.
• All income earned in the TFSA is not taxable.
• All withdrawals are not taxable.
• There is no “contribution receipt” issued for TFSA accounts.  Any money contributed to a TFSA has already been taxed (at your personal income level) and doesn’t get taxed again.  This is similar to the American Roth IRA account.  RRSP contributions on the other hand are considered pre-tax and you get a tax receipt for them.
• You can have multiple TFSA accounts at different financial institutions.  However it is up to YOU to keep track of your contributions.  The government knows if you go over the limit and will charge an over-contribution fee.  Don’t expect any kind of friendly phone call if you go over your limit – the government will just start charging the fee and it will be payable on your next tax return.