Retire Happy Blog

Best of Blogs – Pinterest

Jim Yih — Fri, 24 Feb 2012 08:18:25 +0000

Did this week fly by or what? I guess that’s what happens in a short week. I’ve got a few of interesting things to announce this week.

Firstly, I am excited to write for the Edmonton Journal again. It’s now been almost 3 years since writing a regular column for the paper. Thanks to Shelly for inviting me back to write a series on personal finance around the home.
I’m also excited to have sent a copy of my upcoming book to the editors for review. I hope to have this investment book published and in my hands by the end of March. I’ve got a few more projects to work on after that so I hope 2012 will be a year to complete some projects that have been on the go for a while.
Pinterest is one of the fastest growing social media sites. I’ve been on Pinterest for a while but I have not done much with it. With a lighter workshop schedule this week, I got to spend some time and add to my boards. Thanks to Tom Drake for some direction and help. Check out my Financial Funnies board.

This week I wrote a few articles

On Tuesday, I came up with the first of a 2 part series featuring another drawing on Financial Planning is a Road Map to Financial Freedom
On Wednesday, I published PART 2 – The tools of Financial Planning
On Thursday, I wrote about some last minute RRSP tips given the upcoming RRSP Deadline

Thanks to all those who included me in their weekly round ups

Rob Carrick was kinds enough to include my in his personal reader twice this week:

Rob Carrick’s Reader: Where renting beats buying

Rob Carrick’s Reader: Why Warren Buffett doesn’t get

Sustainable Personal Finance included me in the Carnival of Personal Finance.
What’s new around the Blogosphere at Boomer and Echo
Weekend Reading from My Own Advisor

Best of Blogs – Pinterest originally appeared on Retire Happy Blog on February 24, 2012.

RRSP Deadline is fast approaching

Jim Yih — Thu, 23 Feb 2012 08:08:05 +0000

Every year, Canadians go through a financial ritual – the RRSP season. In the first 60 days of the year, Canadians can make contributions to their RRSPs and use these contributions as tax deductions for their previous years tax return which has to be filed by April 30^th.

In most years the RRSP deadline falls on March 1^st. The exception happens every four years in a leap year where the RRSP deadline happens on February 29^th. Here are some leap years past and present – 2004, 2008, 2012, 2016, 2020, 2024.

Timeless RRSP tips for last minute contributors

As the RRSP deadline looms, here are few RRSP tips for the last minute contributors:

Don’t make rash investment decisions. If you are not sure what to invest in, don’t feel pressured to make a long-term investment decision in a rushed manner. Instead, put the money into a high interest savings RRSP account but be sure to get the RRSP invested once you’ve had more time to research your options. If you have an investment plan, strategy or Investment Policy Statement, you can just invest the contribution as per the plan. When you are ready, here’s an article with some of my top timeless investment tips for RRSPs
Should you make it a spousal contribution? If you have a spouse, your contribution can either go into your personal RRSP or a spousal RRSP. If the contribution goes to a spousal RRSP, you will still get the tax deduction but your spouse will pay the tax when they withdraw the money from the spousal RRSP. It’s important to be aware of the spousal attribution rules within the first three years of any spousal contribution. with new pension splitting rules introduced in 2007, some have questioned whether spousal RRSPs still make sense.
Watch your marginal tax bracket. One of the biggest benefits of contributing to a RRSP is the tax deduction equal to the contribution amount. If you want to truly understand the benefit of the tax deduction you need to know your marginal tax rate and how much of a contribution might bring you down to the next tax bracket. Making proper RRSP decisions is all about understanding my one formula approach to RRSPs.
Buy your losers. It’s human nature to love your winning investments and hate your losers. As a result, most people are inclined to sell low (losers) and buy high (more winners) which is to opposite strategy to logic – buy low, sell high. This strategy of keep your winners and sell your losers may be the wrong approach. Before you dump your losers, consider why they lost. Sometimes good quality investments go down which makes drops in value great buying opportunities.
You can defer the deduction. When you contribute to a RRSP, you do not have to use the deduction right away. In fact, if you think your income might be higher and potentially be in a higher tax bracket next year, you may want to use the deduction in the future year instead of this year. I have seen some people defer the contribution only to forget about it later or spend the money. Make the contribution and save the deduction for the future.
Should you borrow to buy RRSPs? RRSP loans have been around for a long time and I have nothing against them if they are paid back within a reasonable amount of time. The problem today is people are taking longer to pay these loans off and the interest on the loans (which is not tax deductible) is offsetting the benefit of the tax deduction in the first place.
Develop a RRSP contribution strategy. We live in a busy world where more and more things seem to be last minute. Instead of making RRSP contributions near or at the RRSP deadline, consider developing a RRSP contribution strategy. Make contibutions automatic. If you have a group RRSP plan through work, take advantage of the convenience, the employer matching and lower fees. If you don’t have a plan through work, set up an automatic deduction from your bank account. Pay yourself first will pay off over the long run!

Time is ticking away as we head towards the RRSP deadline so use these 7 timeless RRSP tips for the last minute RRSP contributors wisely.

For more information on RRSPs, check out my RRSP Online Guide. It’s packed full of information to make great RRSP decisions.

RRSP Deadline is fast approaching originally appeared on Retire Happy Blog on February 23, 2012.

Financial Planning is a road map to financial freedom

Jim Yih — Tue, 21 Feb 2012 07:33:09 +0000

Financial planning is a broad, generic term that can mean different things to different people. Too often, it is associated with financial products like mutual funds or life insurance. For others, it’s simply about getting ahead financially.

If you Google “financial planning,” you will find a lot of attempts at explaining what financial planning is. Despite the fact that there is no shortage of information about what financial planning is or should be, it is still confusing to many people. Even I have had struggles with explaining what financial planning means.

Financial planning is a road map

The word ‘planning’ means looking into the future to make the future as predictable as possible. That’s all plans are . . . a road map or game plan or framework for the future. Add the word ‘financial’ and a financial plan is simply a look into your financial future to ensure that you are implementing the right financial strategies to get ahead financially.

A road is a strong metaphor for a plan. Most roads have a starting point (where you are today) and a destination (where that road will take you). Often roads have intersections where you can get off the road you are on and get onto a different road. A road sets a direction, which is likely to change from time to time. All of these thoughts are also relevant to financial planning.

As you can see in the diagram, financial planning is a journey. It’s not just a destination but also a series of destinations through a journey . . . a financial journey. Along the way, there are a number of different issues or what I call priorities to take into consideration.

The 12 areas of financial planning

Financial Organization – How organized are you? Are you dealing with the basics of money management like using the net worth statement, cashflow statements, budgeting and paper management.
Debt management – Are you in control of your debt? Do you know how to reduce, manage and pay down your debts like mortgage, credit cards, lines of credit, etc?
Managing your spending – Do you live within your means? Are you and over spender? Do you need to learn about budgeting and expense tracking? Are you in control over your spending?
Saving money – Do you save money regularly? Do you know how much should you save? Do you know if you are using the right accounts like RRSPs or TFSAs? When do you have enough?
Career and Work – Are you happy with your work? Are you making enough income? Do you have a plan on how can you improve your work and income?
Risk management – Are you protected from financial disaster? Do you have enough life insurance? Do you have disability coverage? Do you have an emergency fund? Are you prepared for a rainy day?
Investing – Do you know what you are invested it? Do you participate in the management of your portfolio? How is your portfolio doing? Have you reviewed your portfolio lately?
Tax Planning – How much tax are you paying? How much do you keep after tax? Do you do tax planning? Are you taking advantage of tax savings strategies?
Retirement planning – Do you have a retirement plan? Do you know when you want to retire? Can you retire? Do you know how much money you will need or have at retirement?
Estate planning – Have you thought about an estate plan? Do you have a will, an enduring power of attorney and a personal directives? Have you thought about what will happen if you die or get disabled?
Saving for children’s education – If you have children, have you thought about who is going to pay for their education? Are you utilizing RESPs? Have you looked at other ways to save?
Working with advisors – Do you need help from a professional? Do you work with a financial advisor? How do you find a good advisor? How do you work with them? How do you pay them?

What are your priorities?

At different stages of life, you will have different financial priorities. The things that matter most when you are in your 20’s may not be the same as what matters most when you are 55 or 85.

Financial planning is really about assessing your priorities at different stages of your life and setting some goals and direction based on those priorities. Financial planning is about assessing where you are and where you want to be and then setting some priorities and goals along the way as you journey on the road to financial freedom (whatever that means to you)! If you want help assessing where you are today and setting some goals to start the journey, you can download this assessment I use with people.

DOWNLOAD Financial Goals and Priorities Worksheet (86)

Good planning also requires good tools (check out my follow up to this article on financial planning tools)

What do you think financial planning means? Do you have any insights to add?

Financial Planning is a road map to financial freedom originally appeared on Retire Happy Blog on February 21, 2012.

Best of Blogs – drawing and writing

Jim Yih — Fri, 17 Feb 2012 07:08:01 +0000

In my workshops, I often use a flip chart to draw concepts for people. Tom Drake suggested that I buy a Wacom Tablet and draw some of these concepts for my readers as illustrations in my posts. I’ve been having a lot of fun with this so I’ll keep these drawings coming but I’d love to hear what you think about them. Here’s my first two attempts:TFSA or paying down debt and Lower fees on your investments

This Week I wrote:

On Monday I took you back to the RRSP Basics: It’s RRSP Time Again.
On Tuesday I shared a guest post by Donna McCaw that asks, Is Retirement a Honeymoon?
On Wednesday I explained how Paying Lower Fees Directly Can Be Tough On Investors.

Paying lower fees directly can be tough on investors

Jim Yih — Wed, 15 Feb 2012 07:43:51 +0000

Psychology plays a big role when it comes to money and especially investing. Most of us know we are supposed to BUY LOW, SELL HIGH to make money so why is it that over and over again people do the opposite. When things go down, they panic and want to sell or want to make the portfolio more conservative. It’s because of psychology.

Fees can also influence psychology and investor behavior.

About 5 years ago, Mark moved from mutual funds with a 2.5% imbedded management fee (management expense ratio) to a discretionary account where he is paying 1.25% per year on a $175,000 account. At first glance, it appears that Mark saves about $2200 per year in fees or $11,000 over 5 years.

Unfortunately for Mark, he does not see this $2200 per year savings. Instead all he sees is a bill for $2200 per year.

Mutual fund fees are imbedded

When Mark was invested in mutual funds, he was paying 2.5% in fees per year but he never saw that directly. Even though he was paying a whopping $4375 per year in fees on his $175,000 it did not feel painful because he never saw the money go out.

When he got his statement, any returns he got were posted net of fees because the mutual fund company is regulated to do so.

If Mark looked at his statement 5 years ago and saw a 7.5% return, that means the actual return before fees was 10% but after the 2.5% fee was taken off, he was left with a 7.5% return.

Discretionary fees are paid directly

After 5 years of poor performance, he is tired of paying a $2200 fee per year to breakeven.

Even though paying a 1.25% fee is lower than an imbedded fee of 2.5%, it can be more painful because you can see the fee going out.

Mark asked me for my advice because another mutual fund sales person was now courting him to go back to the world mutual funds where he does not have to pay the fee directly. Even though he would pay more in fees, he was considering this suggestion.

Lower fees are better

Even though it may be more painful, the general rule of thumb is lower fees is better. If you pay less for a product or service, you will have more money in your pocket, right? Although this concept may appear to be pretty straightforward, it does not seem resonate with investors.

Just take a look at this simple view of fees

My two cents

Psychology plays a big role in investing and Mark’s conundrum is a perfect example of how emotion and psychology can win over logic. One of the easy solutions is for the mutual fund industry to start being more transparent when it comes to the fees. One of the bloggers I read regularly, Michael James on Money suggests that investment companies should move to disclose the impact of fees over the long term through an acronym he calls MERQ (as opposed to MER). Basically it shows how much of your portfolio would be consumed by fees over a 25 year period. He uses the example of an Investors Group Fund with a MER of 2.89% which would have a MERQ of 51.4% (Yes, that means a MER of 2.89% means 51%of the portfolio would be consumed by fees over a 25 year period). Would this help investors?

Credit card companies now must show how long it takes to pay off the credit card based on the minimum payments. Mutual fund companies should show the gross gain or loss in a year, the fees paid by the fund and the investors net gain or loss.

Investors deserve to know how much they are paying in fees and although one might argue they can find out the fees and do the calculations themselves, Mark’s situation is a perfect example of why we need more detailed disclosure on the statements.

What do you think needs to be done to help investors be more aware of the fees they are paying on their investments?

Paying lower fees directly can be tough on investors originally appeared on Retire Happy Blog on February 15, 2012.