I loved Bali because it is amazingly beautiful.  Beautiful glistening and reflective rice terraces, lush tropical greenery, floral and fragrant plumeria trees, and the humble and laid back Balinese were just some of my favourite memories about Bali.

I had the conception that Bali was very expensive to travel and stay in- probably because of all the high end resorts and hotels that have capitalized on Bali’s destination as a tropical vacation spot.

I didn’t spend very much in Bali and at the same time was able to do (and eat so much) so much.

Getting There

Many budget airways can take you to Bali.  One of the ones I took was Tiger Airways.  Sometimes Tiger Airways has deep discounts on their airfares and have seat sales to the tune of $1 per seat (plus fees of course).  It cost me only $180 USD return on Tiger Airways from Singapore.  You can save even more by not selecting a seat ahead of time and only using carry on luggage (for me this wasn’t possible).  Make sure you bring some snacks onto Tiger Airways because they don’t provide anything.  Not even peanuts.

Once you arrive in Bali, make sure you have $25USD (or better, Indonesian Rupiah) exactly for the Visa on Arrival.  Otherwise, you might be gouged on exchange rates and will get charged an extra 3% if you use your credit card.

When you leave Bali (at least until 2013 I would think), you will need to pay about $15 (150,000 Rp) in Airport Improvement fees, so make sure you have enough money leftover at the end of your Balinese adventure for this.

Accommodation

Accommodation in Bali can be expensive- think hundreds of dollars per night (staying a luxury villas or at world renowned 5-star-plus hotels) but it really doesn’t have to be.  Staying at home stays or guest houses can really cut the cost of your vacation in Bali.

I found the guest houses we stayed at on Tripadvisor and paid $25USD a night for this beautiful guest house that included a delicious breakfast each morning (fruit juice, scrambled eggs, fresh papaya and pineapple, and fresh croissants).  The garden was beautiful and I got to see what a Balinese family compound looks like.  They even picked us up from the airport.

In Ubud, I paid $15 a night for a home stay/ guest house that included breakfast each morning as well and was in the heart of Ubud on Monkey Forest Road.  I found Ubud a bit too touristy or “yuppie” (all the yoga centres and expensive looking boutique shops gave it away), and really liked Sanur.  If you like to part-ay, apparently Kuta is the place to do it.

Nasi Goreng (a fried rice dish) for $3.50

Getting Around

You can rent a bicycle for $3 USD/day at most places, you can rent a moped/ scooter to get around, or you can use a private driver for $45USD for 8 hours or so and they can take you to wherever you want to go- you just need to pay the entrance fees yourself.  The car rental includes gas, air conditioning etc. and works out to be a good deal especially if you have a few people in your traveling troubadour.

If you’re in touristy areas like Ubud, you’ll often hear “transport?” “taxi?” and you can barter for a lower price for taxi service.  To the airport from Ubud costs about 180,000 Rp (about $19USD) and it takes about an hour.

Sights and Attractions

I waited until we got into Bali before we started booking anything because I find that prices on the internet for sights and attractions are often inflated.  At the airport, there are a plethora (literally dozens and dozens) of tour agency brochures that include prices in USD for sights and attractions.  These include a private guide, a car, and often other bonuses, like set meals (like the famous Jambaran seafood dinner).  It might be a better deal to book a package instead of doing it “DIY” because many of these tour companies have contracts with these restaurants and attractions.

For example, we did the Mt Batur sunrise trekking tour which included a cute packaged breakfast (consisting of a hard boiled egg, and two pastries, water), a driver to and from our hotel, a guide for Mt Batur, and a 2 hour Balinese massage after our arduous ascent up the mountain.  The driver was able to help negotiate with the tour agency for $5 off since we basically spent three days of sightseeing with him.  So the total price only came up to $55 USD for a 12 hour day.  Although it looks like a long hike, it only took 2 hours up to the top and 2 hours to get down.

Mt Batur

We also went white water rafting (complete with helmets, life jackets, etc.) for $30 USD at Ayung river in Ubud.  The raft held about 5-6 people and it was a fantastic unforgettable experience.

Beautiful Bali on a Budget

Bali is absolutely beautiful because of its people.  I highly recommend visiting this country and I hope to visit it again in the future.  Bali would be a fantastic honeymoon location and I think that there’s plenty to do to satisfy any type of traveler, be it budget traveler, extravagant traveler, adventure traveler, or rest and relaxation traveler.

Slowly but surely, those who are preaching the low MER fees Gospel (and I will proudly number myself among the faithful) are winning the battle for the hearts and minds of Canadian investors. Despite the fact that we still pay the highest mutual fund fees in the world (2.1% on average), we are slowly becoming aware of the fact that fees and commissions on financial products can quickly eat away at the investment returns you need in order reap the full benefits of compounding. The evidence that this trend is starting to get noticed is the recent news that Investors Group Inc. (a subsidiary of the massive holding company Power Financial Corp) has recently slashed its MER fees on its line of mutual funds in a bid to stay competitive.

There is Plenty of Fat to Cut

Now no matter how much Investors Group cuts their fees, I’m fairly certain I will never recommend their line of mutual funds. I love these quotes by Investor Group’s CEO, Murray Taylor. “There has been greater consciousness around the fee questions,” as well as, “Our strategy is to get our fees more into the middle of the category as opposed to the edges.” So basically you still want to gouge your clients, just not so much that you stand out from the rest of your mutual fund-selling brethren? The arrogance of these people is unbelievable. They repeatedly send out their slick-talking salesman and take advantage of people who just, “want to buy RRSPs,” by throwing buzzwords like “diversification” and “professional money manager” at them.

Now Investors Group and other people in the mutual fund industry will tell you that when you buy a mutual fund, your MER fees pay for the advice and services you are receiving as well. Please do not listen to this garbage. Any information you need on personal finance and investment planning is readily available online these days, if not on this site than one of the ones that we feature on a weekly basis. For most people, a very simple plan that focuses on the long-term is all that is needed. What definitely IS NOT needed, is the latest mutual fund on the market that your “expert” financial advisor is pushing. Check out my eBook for a full run down on this debate, but to summarize, the vast majority of mutual funds do not beat the market average. In fact, after their fees are calculated in, less than 1% of mutual funds beat the market average that you can guarantee yourself through ETFs and/or index funds.

A Case Study: Fancy Mutual Fund vs Simple ETF

Let’s take a look at the massive ($13 billion in assets) Investors Dividend Fund for more an example on why the mutual fund industry is banking on us Canadians not waking up to reality. Here are the main holdings of the fund as of February, 2012 (the latest update on the Investors Group website):

1. Royal Bank of Canada
2. Bank of Nova Scotia
3. Bank of Montreal
4. TELUS Corp.
5. TransCanada Corp.
6. CI Financial
7. Power Financial Corp.
8. Husky Energy
9. Manulife Financial
10. Sun Life Financial Inc.

Now the “diversified” yield of this fund looks pretty decent at 3.7%. That is until we take a closer look at these claims of diversification and true investment yield. This fund is horribly unbalanced, with over 50% of the holdings in Canada’s financial sector. Obviously the banks are a great place to look for income-producing companies, but don’t preach diversification if you’re really a collection of financial companies with a few other Canadian blue chips thrown in. Now that 3.7% yield that the fund produces every year would be nice, if it wasn’t held back by an obscene MER fee of 2.7%! That effectively means that the overall yield (or money generated for you) is 1% + the meagre capital gains you will see as a result of buying mature companies. I sure hope you’re getting some great investment advice and handholding from IG if they’re going to charge you that much!

Let’s compare that fund with my favourite way to get exposure into Canadian equities – the iShares S&P TSX 60 ETF. Here are the main holdings (which are not as concentrated either):

1. ROYAL BANK OF CANADA
2. TORONTO-DOMINION BANK
3. BANK OF NOVA SCOTIA
4. SUNCOR ENERGY INC.
5. BARRICK GOLD CORP.
6. CANADIAN NATIONAL RAILWAY CO.
7. BANK OF MONTREAL
8. POTASH CORP. OF SASKATCHEWAN INC.
9. CANADIAN NATURAL RESOURCES LTD.
10. BCE INC.

This extremely basic ETF that allows you to track Canada’s main index has a decent dividend yield of 2.9%. While this may not stack up to the 3.7% figure above, when you calculate in the very reasonable .17% MER fee, you’re laughing! The bottom line is that this basic ETF will produce an overall yield that is more than 250% higher than that of a huge mutual fund that purports to be specialized in dividend stocks!

While it is encouraging to see IG scale back their fees, I still wouldn’t recommend any of their products. Young, has a more in-depth commentary on her personal experiences with the company here.

Rob Carrick, author of How to Pay Less and Keep More For Yourself and Rob Carrick’s Guide To What Is Good, Bad, and Downright Awful In Canadian Investments Today, has recently released his new book: How Not To Move Back In With Your Parents – The Young Person’s Guide To Financial Empowerment. As you can tell, Mr. Carrick is not a fan of short of book titles! He is also a columnist at the Globe and Mail, and has a strong Facebook following (that includes myself). His taste in recommending ETF eBooks is definitely one of his strong suits

I have to give Mr. Carrick a lot of credit, with this book and his recent online posts he has become the face of Generation Y’s and the Millennial’s current financial struggles. I have found his material to be interesting, not matter what the format – video, column, or book. He is often very original, and consistently takes the time to give credit to other financial authors out there. He has definitely made a fan out of me.

Don’t Listen To Your Parents – Listen To Rob Carrick Instead!

In his newest offering, the G&M columnist seeks to shed a little light on what sort of decisions and headwinds many 18-30 year olds face today. He specifically shows where the “common sense” solutions of yesteryear rarely apply to young people these days. If one gets the feeling that the author has some very personal insights into the material despite the fact that he appears to me just the slightest bit outside the demographic – it’s because Mr. Carrick is the father of an 18-year old child that is just entering this world of finances. This definitely gives him an added layer of credibility!

The book is organized in a very user-friendly fashion that reminds me a lot of my personal Holy Grail of Canadian personal finance writing – The Wealthy Barber. Mr. Carrick includes several recommendations for where to go for a more in-depth look at a specific topic, and ends each chapter with bullet point summaries, and actual case studies that vividly illustrate the focus of the chapter. This gives a readers a sense of context, and illustrates just how the information might be applied.

Here are a few of my favourite parts of How Not To Move Back In With Your Parents:

• A great introduction that specifically illustrates how and why things are different for young people today. This includes an explanation of why we are quickly becoming the “Boomerang Generation” that returns to the home nest after leaving (as if we didn’t have enough nicknames already?).
• A detailed look at how no matter what your parents tell you, we are paying quite a lot more for a post-secondary education than they did. This naturally leads to how to prepare for this quickly escalating cost.
• A look at the term “anti-dowry” and how it is affecting youth matchmaking today.
• A thorough look through RESPs, RRSPs, and TFSAs. I was pretty familiar with these savings vehicles already, but I highly recommend them for young people.
• Why the old school clichés about buying a house do not necessarily apply to us, and a step-by-step guide to eventual home ownership.
• Some common sense advice on weddings and kids that is definitely not amongst young Canadians at this time!

I highly advice you check out the book if you, or someone you know might benefit from the insights of one of the leaders on the Canadian financial scene. Here is a quick look at the Chapter headings from How Not to Move Back In With Your Parents:

1) Affording College or University
2) How to Handle Debt, Both In School and Afterwards
3) You and Your Bank
4) Saving, Budgeting, and What To Do If You Have To Move Back Home
5) Looking To The Future: RRSPs and TFSAs
6) Mobility: or Cars and You
7) Buying a Home
Weddings and Kids
9) Insurance and Wills

You can order from amazon by clicking the following link: How Not to Move Back In With Your Parents

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How Much is that Doggy Wedding In the Window?

Every PF blogger has been talking about weddings these days.  No surprise because it’s wedding season I suppose.  According to the Globe and Mail, the average cost of weddings these days in Canada is $23,000. Some weddings I know of have even surpassed $50,000 or $100,000  (I know the wonderful lady that does my eyebrows saved up for years and years to be able to fund her child’s wedding).

As someone who is not married and likely (I hope these seven years with my boyfriend amount to something!) getting married in the next few years, I have day dreamed about what my future wedding might look like.

A Society’s Obsession with Weddings

I used to be obsessed about weddings and would watch The Learning Channel’s (remember when you actually learned something from TLC?)  The Wedding Story many times over.  I would analyze the facial expression of the bride and groom as they got married and would check for signs of doubt or true love.  I even had a theory that if the groom cried when he saw the bride walk down the aisle, it meant that he was madly in love with her.  This theory hasn’t been proven of course, it’s just the aftermath of my zany thinking.  I know, I needed to get a life.

Weddings are about celebration.  They are about tradition.  They are about emotions, family, and friends.  I can see why $23,000 would be important to ensure that a great party is hosted and that your wedding guests have a great time.  I know that a beautiful wedding is every woman’s dream and that each bride would want their wedding to be absolutely perfect.

Is it really that important though?

Is a “dream wedding” so important that a couple would want to spend $23,000 on a wedding?

$23,000 can get you a lot of things.  It can get you a decent car (perhaps a minivan or station wagon for all the future kids that you’ll be having LOL).  It can get you a decent down payment on a condo or a house depending on where you live.  It can get one of you through school (again depending on where you live) for two years.  It amounts to a lot of mortgage and rent payments.

Considering that these days 37% of marriages end up in divorce (but this might be 50% nowadays- or at least that’s what I hear).  Is it that important to spend $23,000 on a wedding?  Are those memories of that one single day in your lives worth the price tag?

I personally don’t think so.  I guess I’m not much for entertaining anyways.  I would rather ensure that the $28,000 goes towards making our new life together, our marriage, less stressful.

Weddings Represent a Transition… But to What?

Marriages are vulnerable in the first two years after the wedding.  You’re learning to tolerate each other, learning each others pet peeves (and buttons), learning each others quirks and idiosyncracies.  Learning how to LIVE with each other (and learning not kill each other) is more important than that one day.  Starting a marriage in $23,000 debt (if the couple needs to go into debt for the wedding) is not my idea of romance.  It’s not my idea of a good start.

However, there might be an argument for bigger weddings.  I remember reading in one of my undergraduate text books that when couples have BIGGER weddings, they are less likely to divorce because the couple didn’t want to embarrass themselves by telling everyone they know and everyone that attended their happy wedding that their marriage didn’t work out.  I’m not sure if there’s any validity to this.  Kim Kardashian’s wedding is an examplethat refutes this claim entirely!

I used to want to have a glamorous wedding when I was a little girl.  Now, I would just be happy if my future husband to be, close family and friends that I care deeply about, and maybe my dog were there.  I would be happy if it were held in a back yard.  I don’t need all the pomp and circumstance because I know that a lavish wedding will not give you a good marriage.  Communication, respect, cooperation, trust, support, and understanding each other will give you a good marriage.

Readers, did you spend a lot for your wedding?  In hindsight were you happy you spent this much or do you think weddings are overrated?

As a high school teacher I get a real kick out of asking kids what they might want to do for a living in a couple years and then helping them build some skills with that goal in mind (approaching education this way seems to have a much higher success rate than telling students they have to learn information because someone else thought it was important for them to learn it). Inevitably many of them are not sure, and while this is a good thing, I’ve noticed that the default option for many young women is to say “cosmetology.” Now there is nothing wrong with pursuing a career in cosmetology, I just think there is a smart way to go about building a career in that field, and then there is the path that most young women take. In my area, physical labour is the default option for men that don’t know what to do, and fortunately because of the farming and energy sectors, there are still very high wages available for anyone willing to put in a hard day’s work. I do sympathize with some of these young ladies who are probably just saying that they want to cut hair for a living because that seems to be more socially acceptable than simply stating, “I’m not sure what I want to do yet, but I’m keeping my options open.” Unfortunately, when you say this enough times, it seems many people convince themselves that this is their future, and consequently all motivation to reach their academic potential goes out the window.

Reality vs Perception

When you’re in high school the job of beautifying people all day long must look pretty good. I mean makeup and hairstyles are a huge part of your life, and becoming an expert in applying those techniques is probably very alluring. After all, we now tell kids to pursue their own interests no matter what the cost, because you have to love what you do every day (ignoring the fact that many of us don’t have a lot of interests other than hormones and establishing our own identity in high school). While pursuing interests is a great thing, we should probably realize that kids need time to mature and realize what they really have a passion for, before committing to that career path.

What these ladies don’t realize is the incredibly low rate of pay they will likely receive and how hard they will have to work for it. After putting my renowned Google research skills to use, I found that the average wage for a cosmetologist in the USA was about $12.00 and most cosmetologists in both Canada and the USA earn less than $30,000 per year. In order to get this wage, these people must work a job where they are on their feet all day, hunched over (apparently back and neck problems are common in the field), talking to many people you don’t really like, and digging around in hair that may not be very clean. I personally think that if this reality was made more apparent, few girls would be so quick to jump into the field.

Run Your Own Show Instead!

Now that is not to say that no one is making money in the field of cosmetology. If you are into the whole hairstyling thing (I’m not going to lie, I’m a pretty low maintenance guy) you no doubt know that the price for someone to work on your look for an hour is a whole lot more than $12.00 plus the cost of product. There is money to be made – just not by being an employee. Instead, my advice to people that want to get into the cosmetology field is to run your own hair salon, or cosmetology business. Take advantage of outsourcing the work, and instead focus your education on running your own business. Whether that means going the college route or the university route, it doesn’t really matter, the reality of that business model makes a lot more sense than working full time to make $30K a year.

The Road Less Travelled

By going to university and taking a Bachelors of Business Administration, or a similar college course, you will cover the basics of how to run a business including basic economic theory, marketing, HR, taxes, payroll, and making a business plan. Not only this, but in your classes you could focus on making a bevy of very important connections that will be a great help to you as you go forward. The friends and contacts you make while going through a business-related education will give you a great pool of human capital and resources to draw upon when you need help or recommendations for the various aspects of business life.

There are many indirect benefits to pursuing this goal relative to the far more common one of going to a cosmetology training school. Instead of devaluing the education all around you in high school with an attitude of, “I won’t need to know this in life,” I believe that students would be more willing to strive to learn new things, especially in math and business courses. If your business eventually fails for one reason or another, you are now left with some very marketable skills, and a ton of valuable experience. This is a much more enviable position to be in than fighting for a spot in a salon with dozens of others who are just as qualified as you are. The smart move is not to default into doing something you’re not sure about, it’s to put yourself in a position to take advantage of the fact that there so many people out there who are willing to let the default position become the path they choose.

The Wealthy Cosmetologist?

The Wealthy Barber didn’t get wealthy because he was a better barber, he got wealthy because he was a better businessman. I’m fairly certain that as a future entrepreneur looking to get into the cosmetology industry, you could pick up the vast majority of what you need to know on the fly by talking to experienced people in the field. An alternative arrangement might be to cut in a very experienced cosmetologist who has a long client list as part of your ownership team. In exchange for her expertise you would get to learn from the best, and promote the fact your product is top-notch. If all else failed, there are plenty of 6-month courses out there being advertised if you felt you really needed training in the art of cosmetology. Trust me, your business skills will be in much higher demand than their hairdressing background. The supply of trained cosmetologists far exceeds the demand. Don’t end up on the wrong side of that equation, take advantage of it instead!

As my first time doing the rambling here at Y & T, I’m just trying to fill the shoes of a professional rambler and hopefully not tripping up too badly! Before we get to the meat and potatoes of the round up and throw out some link love to people that thoroughly deserve it, I thought I’d dedicate a little time to this whole Quebec student fiasco that has been dominating the Canadian news waves recently. Now I realize that this is a somewhat controversial topic, but I figure if we’re going to ramble, we might as well do so in as destructive a way as possible!

For those of you that aren’t familiar with everything, I wrote a more complete summary of the situation here. The most recent developments have seen Quebec’s Minster of Education resign, and the Premier move to enact tougher laws to put into play specifically against the violent student protestors. One interesting fact I saw reported was that the province may now actually lose as much to police costs as they will save by having the students pay a little more of their tuition.

As a graduate student myself, I really can sympathize with the average North American student. Students in the USA that pay over 20K a year to go to school have it rough, and there is little doubt that at that cost, you are limiting participation in higher education to an unfair degree. That being said – shame on you striking students. There is a huge difference between the vast majority of North American students, and the average Quebec student’s experience. With tuition rates around $2500, I know $4K might look large to you, but really, it isn’t that big a deal guys. Go take a summer job in an undesirable location, and you can easily make that in two weeks. The slight increase will not make education suddenly unattainable, so quit trying to blow that horn. Our generation has enough to worry about and poor energy into without crippling ourselves with this sort of public debauchery.

I could probably overlook the fact I disagree on logical grounds with the students if they were willing to exercise their democratic rights in a respectful law-abiding way. Smoke bombs on public transportation, harassing students just trying to get the education that they paid for, blocking people from going to work, and doing all of these things while hiding your identity is simply criminal. Nothing else needs to be said except to state the barest of facts that these actions are criminal and the perpetrators need to be held accountable as any other criminal would be. At the very least, all of the people that are caught doing illegal activities should have permanent marks on their transcripts and have their right to a publically subsidized education taken away. The blatant disregard for society at large these students have shown is appalling. There are so many more worthy causes to fight for ladies and gents, please put your tremendous will and drive into something productive and not destructive!

*TM gets off his soapbox*

Here is our best stab and doing something productive! On with the link parade:

No I am not trying to sell you an eBook on how to make the perfect podcast and I’m not looking to rent you my god-like podcast consulting services at an “ungodly” rate. I don’t care if you make a podcast, what I want to talk about today is how to use a podcast from a listener’s point of view. It seems that everyone out there these days is experimenting with podcasts (I may even jump on the bandwagon myself at some point), and apparently they are the much ballyhooed (there’s a throwback word) “next big thing” in the web world. Given my initial experiences with this relatively new medium of communication, I can definitely see that there is potential for a lot of people to tune out of podcasts and not see the benefits of them if you don’t know how to use them properly.

Isn’t Podcasting Basically Radio?

When I first seen this whole podcast idea, I was skeptical to say the least. I thought, “When do I have time to sit down and listen to someone talk for 45 minutes?” It turns out I was basically right. I tried to listen to a few podcasts concerning topics I was interested in, and I just didn’t find it all that stimulating, and for someone who is used to reading through blog posts and academic journal articles and full speed+, the information seemed to be delivered so slowly and with so much fluff (BTW, if you thought this was a post on how to make a great podcast, that experience should be a big hint – get rid of the fluff and condense your content).

There were two things that changed my view on podcasts and got me thinking about how to use a podcast to maximize entertainment value and efficiency. The first was doing dishes and the second was Bill Simmons. I’m probably the only person to ever say that. Doing dishes is my contribution to the food preparation process in our house. I’m not a terrible cook, but I have no patience for it, and I don’t particularly like to try new things, so my girlfriend generally dominates that part of the operation. When I’m doing dishes I found I liked to keep my mind busy with other things, and since I’m not a big music guy, I started listening to “The Sports Guy” Podcast by Bill Simmons. I have read his columns for years (big plug here, if you love sports and want to waste copious amounts of time at work then Bill Simmons is your boy) and thought I’d give his podcasts a shot. While I didn’t find them as hard-hitting as his columns, the podcasts were pretty cool in a talk radio/background noise kind of way. So it became kind of a ritual for me to do the dishes and tune in to some sports talk.

How To Use a Podcast – Tips and Advantages

I hadn’t really thought about other applications of podcasts at this point, until I started seeing them on “how to” sites. Whether it is talking about running a small business, or building a blog, I found some authors that were relevant to me, and they will often recommend each other. This little bit of research quickly allowed me to eliminate so much of the absolute garbage podcasts that are out there (probably a direct result of this whole “build a podcast and you will instantly be famous” movement that is going around). Now I am the first person to admit that I still much prefer reading columns to listening to podcasts on a certain topic, but learning how to use a podcast efficiently can make it worthwhile. As a guy who reads pretty quickly and is used to that means of communication, I still like how much information I can absorb at a quick pace that way. However, where the podcast can be a great supplemental tool to your reading flow.

Here are the keys in terms of using a podcast efficiently, and the advantages of doing so:

• Don’t think that a podcast has to replace reading, instead use your reading to make your podcast listening more targeted and vice versa
• Schedule podcasts into your routine in order to maximize time. If you like to go for a walk, or are washing dishes, or have a long drive to work, you can’t be reading anyway. So a podcast is a great way to max out activities and keep your mind active.
• Podcasts are great for providing a little personal context on situations, and this may give you a perspective you otherwise wouldn’t get purely through reading.
• Ignore the majority of podcasts out there, they still suck. Check out sources that you trust for information already and see what they recommend.

I know have 3-4 podcasts that I truly trust and will check out pretty regularly. Good podcasters will throw up a little summary about what topics the podcast covers, and this is a great filtering tool to make sure your time is only spent listening to exactly what you want (huge advantage over radio). Like many men out there, most people wouldn’t call me great at multitasking, but podcasts make it easy to get some decent entertainment or information in while you are accomplishing other mundane activities. That’s why I believe that if you learn how to use a podcast effectively, it can be a valuable tool in your time management toolbox.

For many young and middle-of-the-road families out there the RRSP vs RESP account debate is a very real one that usually creeps up right around tax time every year if not more often. It is often a confusing topic for some people because the financial industry spends a lot of money trying to convince parents that they need to max out RRSP and RESP accounts, and it is often extremely difficult to do both as people seek to balance mortgages, student debt, and life (that pesky life, always seems to get in the way of the raw numbers right?). There are obviously numerous aspects of each person’s financial situation that will come into play when looking at whether a RRSP or an RESP contribution is right for them.

A Hand Up Either Way

The first thing that parents need to compare when looking at the RRSP vs RESP account debate is that the government wants you to use both of these plans, and they are willing to help you out with each one. The difference lies in just how they help you out. Both plans are registered savings plans, and any income generated within those plans from interest, dividend income, or capital gains is tax deductible. Keeping those investment gains compounding away from the long arm of the tax man is absolutely essential to growing your money. Where RRSPs and RESPs differ is in how the government contribute to the plan. RRSP contributions are tax deductible. This basically means that the government will pay you back at your marginal tax rate (the highest rate you pay) on whatever money you put into your account, BUT the flip side of that is that it will also be taxable in your hands as a retiree when you take out. Although the majority of people have a lower income level when they retire, most Canadians that I know will still pay a combined federal/provincial marginal tax rate of at least 24-25%.

Tax Deduction vs CESG

RESP contributions, in contrast, are not tax deductible. The government does add a cool incentive to put money away for your child’s education in the form of the Canada Education Savings Grant or CESG. The CESG is an agreement by the government to chip in 20% of your contribution into the RESP account up to maximum of $500 every year. This means that if a parents puts in $2500 into their account, the government will contribute $500 into the RESP, bringing the total investment to $3000. The government’s money will now work for you and can be used to create investment gains just like your own money. In terms of taxation, money that is taken out of an RESP is taxed in the hands of the student receiving it. Most students do not earn enough income to pay taxes once their basic exemptions and tax deductions/tax credits are added in, so very little of the RESP money usually finds its way back into the government’s hands (well, unless students use it to pay for alcohol, which has incredibly high sin taxes attached… it’s not like anyone would do that though right?).

RRSP vs RESP Account Case Study

So before we look at some of the specifics of each plan, let’s examine a couple of case studies:

Mike and Mindy

Mike and Mindy are 40 years old and have a five year old child. They want to help out their little darling and they believe they should open a RESP. At the same time, they know that life is short, and they hope to retire, or at least severely cut down on their full-time work load at 55. Mike and Mindy are both professionals and each make 70-80K a year.

For the sake of our comparison, we’ll use fairly safe investment returns of 7% for both of the accounts. Admittedly this is slightly unfair to the RRSP, as one could argue you could take on a little more risk inside of an RRSP considering the investment time horizon is a little less rigid.

Mike and Mindy could contribute $2500 to an RRSP. Their marginal tax rate is 39.4% (taking Manitoba’s provincial rate), so they receive a nice little tax refund of $984. For the sake of argument, we’ll say that Mike and Mindy are dependable little savers and that they turn around and save the tax refund in a registered plan as well. This gives them a total investment of $3,484. In 15 years of 7% returns, their investment has compounded to a nice chunk of change at $9,612.47.

They could also contribute $2500 to an RESP. The government would kick in $500 as part of the CESG to bring their overall investment to $3,000. After 15 years, when little Suzy is on her way to a medical degree, they have $8,277.09 in the account.

At this point, it looks like the initial advantage of that tax deduction beat the CESG contribution, all other things being equal for this high-income family, but we have neglected to measure the tax impact upon withdrawal. Little Suzy will be allowed to have about 22K or so (or whatever the inflation equivalent is by then) before she has to pay any taxes, so we’ll call her RESP money tax-free. Mike and Mindy knew they wanted a fair degree of security in their retirement, so they have a decent income and a marginal tax rate of 27.75%. This means that their after-tax return on their original investment will be $6,945.01. While this is still pretty nice, it does illustrate how important tax considerations are in financial planning.

John and Jane

Just because I want to keep things simple, let’s say that John and Jane are very similar to Mike and Mindy. They have the same income levels, expect the same returns, both want to retire at 55, and have a 5-year old. The difference is that John and Jane are 30. Let’s check out what the increased compounding time (now 25 years) does for our RRSP numbers:

$3,484 ($2,500 contribution, plus reinvestment of tax refund) over 25 years of 7% returns is $18,909.18. After factoring in our 27.75% tax claw back when we withdraw the money, our investment has still generated $13,661.89. This illustrates just how powerful that extra compounding time is. This is also probably being too conservative, because with a 25 year investment window, more risk could easily be taken, and a higher corresponding return would be very normal to assume.

Variables in RRSP vs RESP

Now there are obviously a ton of variables that these case studies don’t take into consideration. A family with a more average income would get less of a tax deduction, and it’s possible that our cast studies would have less of an income in retirement as well. The CESG contributions from the government represent an automatic 20% Return on Income (ROI) and it appears because of this RESP contributions gain a short-term advantage. In the RRSP vs RESP account debate however, investment time horizons pay a key role, and the RRSP has a considerable edge there. One other little side note is that any tax credits that a child does not use while they are going to school can be kicked up to the parents if they so choose. The RESP money might negate some of these credits, but that is a lot of variables to plan for.

…and The Winner Is:

If you are even talking about the RRSP vs RESP account decision then you are further ahead than most. The RESP plan is a great boost to your child’s finances, and if it prevents them from going into debt, the savings become even greater because of the interest charges that were prevented on the hypothetical debt. On the other hand, the earlier you put money into your RRSP account (and reinvest the tax refund, instead of spending it like so many people do) the more security it will give you later in life. If a child does not use their RESP, it can be transferred into a sibling’s RESP account, or rolled into an RRSP account with the loss of the CESG and the investment returns the CESG has produced. In a perfect world, you should definitely consider paying into both plans, but the closer your child gets to post-secondary age, the more attractive that automatic 20% ROI looks when you invest through an RESP account.

Warren Buffett and his pal Charlie Munger always say that they are looking for companies that have a “durable competitive advantage” and have low debt levels. Well, if millions of people around the world are strongly addicted to your product, and you have no real debt to speak of, does that qualify (Buffett has in fact owned stock in a smokeless tobacco company, and the giant RJR Nabisco which sold tobacco products)? From a complete numbers point of view, it still pays to be with the tobacco companies instead of against them. Sure, popular culture in North America might be trending away from the old school Marlboro Man icon, but internationally cigarette sales have never been healthier (now there is an oxymoron) and the smokeless tobacco market seems to be taking off as well. The products created by tobacco giants such as Altria, Philip Morris, Reynolds America, and Lorillard are not going out of style any time soon. They have great profit margins, solid shareholder pay back histories, and will likely be nice little income-generators for your portfolio. For this reason, many investors who usually leave their emotions at the door when it comes to comes to distributing capital are left with a moral conflict.

Talk About a Controversial Investment

My mother is a classic “lifer” in the world of tobacco use. She started when she was young in order to look “cooler” and more grown up, and she has never been able to break the habit despite several tries at quitting over the years. To further illustrate the situation, she is a public health nurse who knows full well the dangers and risks she is taking, yet the need for nicotine and the various other chemical dependencies that go with cigarettes is stronger than that knowledge. My father-in-law is in much the same boat. He has been a pack-and-a-half-a-day smoker for decades despite being one of the smartest people I know, and a specialist in biology. There is no disputing that tobacco causes intense harm to individuals and their loved ones, the health system, and second-hand victims. It is also a fact that tobacco is addictive. So how do they tempt people into investing in them? I think it boils down to justifying our natural human greed.

Investing In Tobacco Dividends – Ethical?

“If I didn’t own the company someone else would. I don’t force anyone to buy the product, and if I wasn’t there to provide it someone else would be.”  This is either a justification for owning part of a tobacco company, or the justification for being a drug dealer. Interesting that it is equally logical, and equally compelling in either case. The only difference is that in the case of tobacco you could add, “It’s legal.” Really, if the government allows it, how bad could it be right? I think talking yourself into having a tobacco company as part of your portfolio is pretty easy if you really want to. I mean seriously, where do you turn these days if you are looking for a company the Boy Scouts would endorse? Apple employs slave labour in China (as do most technology companies), Wal-Mart has stores full of clothes made by kids in sweat houses, oil companies are purported to be killing our planet while at the same time killing our wallets at the pumps, and you can now even invest in medical marijuana if you so choose. Needless to say that this whole morals and values territory is getting pretty grey. When medical insurance companies such as Sun Life are investing billions of dollars with tobacco giants such as Philip Morris, it is tough to play the good guy card and keep your hand out of the steady stream of profits.

I Hate Smoking – But Love Nicotine-Fuelled Income

Tobacco stocks are a simple product to understand, and their balance sheets are almost always strong and inviting. Sure there are constant litigation cases in the courts, but these companies have the best lawyers in the world and this stuff has been going on for decades. I would say many are in far less danger than off-shore oil drilling companies. Developing countries around the world are increasing in population far faster than Europe and North America, and these countries have very lax regulations on tobacco use, and hardly any social taboo exists either. This means that tobacco companies have plenty of room to grow and expand going forward.

Investing in tobacco stocks has become quite popular in the last few years as they are one of the few industries that are resistant to recessions (addiction will do that for you), and they know for distributing solid dividends over a long period of time – music to the ears of a new generation of retirees looking for income-producing assets to park their money in. Here is a snap shot of some the current tobacco companies on the market today (all stats taken from the May 3 edition of the Globe and Mail):

Reynold’s America (RAI): Currently trading near its 52-week high of $42.81 (with a low of $31.82). It has a P/E ratio of 14.52, and a dividend yield of 5.50%.

Altria (MO): Currently trading near its 52-week high of $32.41 (with a low of $23.20). It has a P/E ratio of 15.56 and a dividend yield of 5.10%.

Philip Morris (PM): The granddaddy of big tobacco is trading near its 52-week high of $91.05 (with a low of $60.45). It has P/E ratio of $17.95 and a dividend yield of 3.40%.

Unethical Relative To What?

Notice a trend here? It seems like most advocates of dividend investing have decided that tobacco products are someone else’s problem and are deciding they want a piece of the profits generated by nicotine addiction all over the world. I figure since we already keep the developing world in sweat shops with the products we buy (and invest in), we may as well profit from their lungs’ demise as well right? If you’re not a fan of these companies, you could always invest in one with a pure past and product like Coca-Cola right? I hear Buffett knows something about that one…

Full Disclosure – I do not currently own any tobacco stocks in my portfolio, but have considered adding them in the past, and likely will in the immediate future as well.

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