I’ve been meaning to write a follow up to my recent blog about how to analyze your spending history to help you avoid your spending triggers when I came across this article on shopping habits by Charles Duhigg.  While the article primarily focuses on how your purchase patterns can really betray you;  providing the companies with data that allow them to better target market to you, what I found most useful was the discussion on “habit loops” (on page 8) and how with a little reflection and tracking you can fight your bad habits and foster good ones.

First I think it is important to admit that we all have triggers in our lives that cause us to spend when we shouldn’t.  It may be a sale, a particular store, some particular item i.e purse, shoes, gadget etc., but we all have them.  Triggers tells us that we really need it and we need it now.

A trigger could also be something small like the obligatory 2-3 cups of coffee, lunch everyday, or drink after work.

Regardless what our trigger is,  spending on these “needs” leads us to overspend.  Even if you are not overspending, knowing the details of your habits can help you find more areas for savings.

So how do you start?  First you need to figure out what are the things you are overspending on (reward in the habit loop)  and then what are the triggers (cue)  causing you to want to spend and what routines you can change to break the loop.

So the first step is to identify the bad habits that are causing you to overspend. To just balance your budget you don’t really need to know this information. However, knowing it will allow you to target some specific habits (and break the habit loop) that may be the cause of your overspending.  I like to give the following exercise to many of my clients and the results have always been enlightening:

  1. Draw up what you think you spend in various categories in a month.  You can be broad or very detailed, but your list should at a minimum contain the following:
    • Housing
    • Phone
    • Transportation – including transit, gas, maintenance, insurance
    • Travel
    • Gifts
    • Food – grocery
    • Food – eating out, including alcohol. It may be helpful to breakout lunches and dinners
    • Clothing
    • Child care
    • Household items (sometime grouped with grocery)
    • Pet care
  2. Find your credit card and bank statements from the past year – pick at least 3 consecutive months, I like to use September to November because it doesn’t have too many holidays or vacations which skew your spending pattern.  Based on the categories you have came up in 1, total what you spent in each of the categories and then divide it by 3 to get your average spending per month.  Some credit cards and bank statements now helpfully divide the categories up for you so it won’t be such a chore and should only take about an hour or two to calculate.I suggest using old statements rather than tracking your spending going forward as it gives a real picture of spending, and does not allow your knowledge that the spending will be scrutinized to alter your behavior.

Now look at the difference between what you thought you were spending and what you actually spent.  They are not the same are they?

If you are not currently overspending (i.e spending more than your take home pay) this exercise will highlight areas that may lead to further savings and help you pay down your debt sooner or save more each month.

If you are currently overspending then this exercise will highlight categories where you need to change your habits.  So dig a little deeper.

Digging  Deeper

Are you overspending on small items like coffee?  These items are insiginicant individually but can have large cumulative effects.  $2 spent each day on coffee for the year is $500.  Would you buy $500 of coffee? Can you buy one cup of coffee instead of 2 cups a day?   Why is that you are buying coffee?  Is it a social need, or an excuse to get out of the office?  Dehigg’s article describes a simple exercise you can try to determine if there is another cause for you habit that you may not be aware of.

What about developing a new habit of bringing coffee from home?  Are there things you can do to create a new cue?

In an upcoming post I will list some tricks that I have used and those that my clients have shared with me that may help you develop a new habit and reduce your overall spending.

Put simply, the trick is finding a way to give yourself the reward you actually want just without spending as much and not making yourself feel deprived.


My husband and I recently moved to the Corvallis, OR from Vancouver, BC. Everyone was happy for our new start and one of the things I constantly heard was that it would be cheaper for us.  All those thousands of cross border shoppers propping up Washington sales registers  can’t all be wrong, right?

Well, never a person to take common wisdom for fact, I thought I should run some numbers for our friends on both sides of the border.

First, we will assume a gross (before taxes) income of $50,000.  We will assume that the currency exchange rate is at par which is where it has hovered for most of the past few years.  This income is at a good average level, an easy even number and is nice because it doesn’t fall in either the lowest tax bracket or the highest.  For comparison, the median income for both the cities are:

  • Vancouver BC (2009) was $67550 data from Statistics Canada
  • Corvallis, OR (2011) was $74200 data from HUD

One reason that many Canadians assume that the US is cheaper is the often heard mantra that the US has lower taxes.  I don’t know how many times I’ve been told by our friends that Oregon has no sales tax and that it will save us a bundle. It seems to be the number one thing Canadians know about Oregon.  Of course, just because Oregon doesn’t have sales taxes doesn’t mean it doesn’t have taxes, there are state and federal income taxes and payroll taxes.

So here’s how $50,000 gets taxed on federal and state/provincial taxes.

To estimate the tax paid in BC I used the E&Y tax estimator which assumes no deductions. For an income of $50,000 in BC you end up with a tax payable of $8,847. That’s an average income tax rate of 17.69%. For the US taxes I use the take-home-pay calculator on calculator.net and tax payable for the year $8,981 assuming 2 deductions (I been told that’s average) or average rate of 17.96%.

Of course the actual tax rate could vary dramatically from the above given various deductions, but for simplicity’s sake and to make a fair comparison we assume that there are not any other deductions.

Then there are the social service payments – Canada Pension Plan/Social Security, Employment Insurance (as unemployment benefits are called in Canada) and Medicare etc.  After taking these into consideration this is how the two countries stack up for income taxes:

Canada US
Before tax income 50000 50000
tax payable 8847 8981.28
CPP/Social Security 2306.7 2094.12
EI 839.97
Medicare Tax 723
Worker’s Comp 29.16
After taxes and deductions 38,006.33 38,172.44

As you can see there isn’t actually that much difference difference and that it is actually a little bit more expensive to live in US.  In part II I will look at the fixed cost of living differences between these two cities and in part III the impact of the sales taxes.

As a financial planner I am often bemused by the thousands of financial self help books.  Like most self-help books, they simplify complex problems and provide an easy sounding and tempting solution which never quite works.  If any one of the books actually were able to help most people to save more and invest wisely then I hardly think that there will be so many books crowding the financial planning  section of the book store. But while they don’t actually provide the cure that they promise, most are harmless. So as I was recently flipping through “The Total Money Makeover: A Proven Plan” by Dave Ramsey, a few things caught my eye which I really felt I had to comment on. In the section “what this book is not” the author responds to previous challenges to his approach. In fact, if you search for  “Dave Ramsey bad advice” on Google you’ll get over 100,000 hits, so what I have to say may be treading some old ground. In a subsection entitled “This book is NOT going to mislead you on investment returns” he says:

“People seem to think that making a 12% return on your money in a long-term investment is impossible. And that if I state that there is a 12% return available then I have lied to you or misled you. I recommend good growth stock type mutual funds in this book as a long-term investment and dare to state that you should make 12% on your money over time.”

He then goes on to explain how the S&P 500 has averaged 11.67% in the last 80 years and how this indicates that you should therefore be able to get the same returns. Now, you can search for  funds that have averaged 10 year returns over 12% on Morningstar (I found 19).

Morningstar search result where mutual fund's 10 year average return is > 12%

But none of the above funds had the tenure that Ramsey had indicated in the book where he’s citing data from the 1930’s. Ramsey did give return data but slyly did not tell you what funds he’s invested in, rather referring to you to speak to one of the “approved” advisors (I would assume that they pay a fee to be approved by Mr Ramsey who must share his secrets with them).

So a little more digging led me to this list which does seem to be the funds that Mr. Ramsey is talking about in his book.

Hey if there are magical funds out there that are giving you S&P returns over the long term then sign me up (keep in mind this means they have to be beating the returns of the S&P since there are fees involved).  But why aren’t any of the funds that’s recommended by him on my morning star list?

So I dig a little deeper.

I looked at American Funds Invmt Co of America fund. The fund was created on March 31, 1934 just as the country was coming out of The Depression.  Up to Dec 31, 2011 it had an average return of approximately 11.79% annually. Even accounting for inflation which was 3.37% over that time, the returns are still above 8% annually.  So Mr. Ramsey seems to be telling the truth.

But again I ask, why isn’t on my morning star list? It didn’t make it on to my little search list because it’s return for the last 10 years is only 4.42% although it has been out performing S&P by 0.42%.

And that’s the problem that Mr. Ramsey’s critics and myself included have with his assumption of 12% return.  Just because a fund has returned on average 12%,  doesn’t mean that your return will be 12%.  When you invest matters a lot.  If you were smart and got into these funds 3 years ago at the depth of the current downturn, your return on this fund would be over 20% annually.  However if you started to invest 5 years ago (at the top of the market) your return would only be 1% annually.

Mr. Ramsey will of course say that for you to gain the average return, you need to invest in the long term.  As you can see, the 10 year results aren’t 12% but what if we look at 20 years?  The answer is 5.99%.  Only when you go back 30 years – a very long investment horizon for most people – do your numbers start to look better at 11.88%.  The question is will you able to hold the investment for 30 years and ride through all of the 50+% corrections? What if that correction came as you are just about to retire?  These are the questions that many who are nearing retirement are grappling with.

So what’s the solution?

Well I don’t really have one.  I’m no better at driving forward on an unmarked road while looking in the rearview mirror than you.  But I have a general approach that you can try to help you to get to your goals:

  • Work out what kind of returns you need to retire – be reasonable in your assumptions about your life style and government program’s availability. Likely the return won’t need to be 12%.
  • Create a portfolio that can give you a good shot at that return.  If you only need 5% to retire, then a more conservative portfolio will work.  If you need 6-7% a 60/40 portfolio will work.
  • Make your portfolio more conservative over time so that corrections have less impact on you as you near your goals, but keep your return assumptions the same.
  • Track where your investment funds should be annually/every 5 years and see if your portfolio (including money you may still be adding to to it) is meeting your objective.
  • If it isn’t, then you need to put away a bit more to guarantee the returns.
This way by the time you retire, hopefully you will guarantee you have the amount of funds you will need through both investment returns and putting enough away.

In January 2011 I wrote about a little experiment on stock market.  Well it has been one year and so here’s the result of the experiment.  In Dec 2010, I selected 5 stocks on the Toronto Stock Exchange (S&P/TSX) using nothing but darts to see how the performance of the stocks would stack up against the index in one year’s time. I made no changes to the stocks during the year even as the stock market experienced a “correction.”  So here’s the data from Dec 21, 2011.

Security Shares Opening Price Opening Cost Ending Price Ending Value Return
Encana Corp 35 28.7800 1007.3000 18.8900 661.1500 -34.36%
Fairfax Fiancial Holdings Ltd Subordinate Voting Shares 2 407.9400 815.8800 437.0100 874.0200 7.13%
Minefinders Corp Ltd 95 10.6900 1015.5500 10.8300 1028.8500 1.31%
Royal Bank of Canada 19 51.6900 982.1100 51.9800 987.6200 0.56%
Silver Standard Resources Inc 46 24.7400 1138.0400 14.1000 648.6000 -43.01%
Dividend 87.1500
Total 4958.8800 4287.3900 -13.54%
total before Dividend 4958.8800 4200.2400 -15.30%
TSX Index 13443 11955 -11.07%
TD Dividend Growth -0.30%

So the dart test did not beat the index in my test.  Including dividends, my annual return is -13.54% while the TSX returned  -11.07%.  Considering I didn’t include the trading costs of $99.95 to buy the shares my overall return on the investment is more like -15.30% , 4.23% less than the index.

The main contributor of my negative return were my heavy weighting in Encana during a year where oversupply for natural gas depressed all stocks related to the industry and the fact that Silver Standard lost 23% of its share price in one day after announcing reduction in reserve (how much silver is available to mine) and increases in production costs.

I have also included one of my favorite Canadian mutual funds in the table to illustrate how a different weighting (heavy in financials) would have impacted your returns. In 2011, while still negative this fund did significantly better than both my darts or the index.

So what conclusion can you draw from this experiment?  As anyone knows one year’s data isn’t worth much in the grand scheme of things.  Had the darts outperformed the index in 2011, I would have to reach the same conclusion.  I think what’s illustrative in this little demonstration is that by overweighing in specific stocks, you can skew the results significantly.  However, as you add stocks in your drive to diversify you will also drive your returns to match the index which means that if you are aiming to beat the index you won’t succeed (remember that there are always fees  even with ETFs).

So what to do?

“Don’t play the stock market” has always been my conclusion.  You don’t have enough time to be looking at the stocks, doing the research that’s required to “beat the market.”  If something like that exists then why are there so many advisors and analysts around?

Go back to your financial plan and see what return you need to grant you the goals you have set for yourself.  Create a portfolio that matches your risk profile and monitor it.  If need be, add more money into the pot, because savings are the best way to reach your goals.

Now if there is only a mutual fund out there that can give me 12% return….

It is March, when many of us realize once again that we have failed in our new years resolution made in the heady, early days of Jan 2012. For many, that would be sticking to a budget.  As a financial planner I often hear “I can’t (save, pay off debt insert as appropriate).  I never have any money left over.”  Next I get the inevitable question “what’s the secret?” Of course there isn’t any secret.  You just have to spend less than you make.

If you can’t do that naturally, then you have to trick yourself.  For budgeting the trick is to make yourself feel poorer than you really are and track how much you spend.

Now how do you make yourself feel poorer you ask?

You are not richer than you think  – How much do you make?  It is not the number on your job contract.   It is actually the amount you take home, the amount that shows up in your bank account every paycheck.

Now take it a step further,  subtract from the net paycheck the costs in your life that are non-negotiable such as rent/mortgage, utilities, insurance (health, home and car), debt payments.  Now how much do you have left?  That is all that you can spend each month- your living allowance.  Your 50K a year job has now just become a 25k a year job.  You are not as rich as you thought.

Now go around shopping with that number in your head and you’ll find that you make choices differently. It sounds obvious but try it, the difference it will have on your choices will be profound.

Track, Track, Track – Now that you know how much your are actually worth (feel poorer yet?) you need to track your spending. Just like any good diet program you need to enter your daily calories.  There are lots of budget tools out there that will help you such as mint. com.

However, I prefer something much simpler … an old fashioned spreadsheet.  On a weekly basis subtract how much money you spent from your living allowance. You don’t have to keep receipts; you don’t even have to track daily, because that would be a chore and you won’t do it.  Spend 15 minutes weekly (Mondays?) and update your totals from your credit and bank accounts and subtract them from your living allowance.  For credit cards you should use your new balances.  For your bank account use your total cash out flows (called debit), usually your bank have a handy summary at the top or bottom of your account details page.  This way you will always know how much you have left to spend for the remainder of the month.

Now before someone says “what about setting your budget and the different pots of money…. ” I say it doesn’t matter.  While detailed categorization of your spending will help you understand your spending patterns, this level of detail doesn’t help if your goal is to avoid overspending.  All that matters is that your spending never exceed your living allowance.  Whether you spent $400 on groceries or on a pair of shoes is irrelevant if you don’t have $400 to spend.

If you do these two things and make them a habit, you’ll find that you will be able to keep your spending under control.  I have been doing this for years and have managed to do well on this system.  However, once in a while I stop tracking for a month to see what happens.  What happens is that I spend way too much.  Last time I experimented, I spent twice my living allowance.  So back I go to tracking.

And that leads to my third trick.

Don’t give up – we all know it takes multiple attempts to quite a bad habit before succeeding and living within a buget is the same. You need to keep trying. Just because you overspent one month doesn’t mean you can’t stay on track the next month.  Just think of each month as a fresh new start.

So now that it’s March and you haven’t been sticking to your budget … it doesn’t mean you have failed for 2012, it just means you get to try again for March.

Good Luck.

I have been pretty skeptical of the abilities of stock pickers for decades now.  I remember when I was still in business school, the Toronto Star used to run this stock picking exercise where they pick 5 stocks by darts on Jan 1 and also have a bunch of portfolio analysts make their own picks. At the end of the year they would review the results.  Over the few years they ran this experiment the darts seemed to always do pretty well. They weren’t always number one but they were always in the top five.  Unfortunately, the paper no longer does this experiment. I think it’s because no analyst wants to lose to a bunch of randomly tossed darts :).

I have finance degree. But nothing I have learned in business school’s finance courses gave me any better feelings about the abilities of technical analysis to pick the right stocks.

This year, after talking about this dart experiment for many years, I have decided to put some real money behind my belief and run my own dart experiment.  I have done this once before as part of a virtual stock game with some friends, and it went incredibly well (but that’s a whole different post).

So tonight I picked the five stocks, well, the darts did actually.  I printed the TSX charts by sectors onto one sheet of paper, but due to a lack of access to dart boards (they seem to have disappeared from pubs) I improvised by dropping a pen onto the sheet of paper on the floor.  The board was turned,  by my husband, my eyes were closed, after each drop to enhance randomness.

So what did the ‘darts’ choose? My stocks are:

  • Fairfax Financial Co
  • EnCana Corp
  • Minefinders Corp
  • Silver Standard Reso
  • Royal Bank of Canada

Tomorrow I will purchase $1000 each (minus fees) of stocks and see how my little dart portfolio do by the end of the year.

It should be interesting.  Nothing like putting real money down.

What’s your return

I just read another article about returns.  I don’t understand why everyone out there is constantly summarizing  different ways to calculate returns when there is only one way that matters to you as an investor.  While it is important to understand how other returns are calculated the average investor really only cares about their own returns.

To summarize, there are basically 3 ways to calculate returns:

  1. Regular rates of return – this should be used for quick summaries usually. It is computed as (End Value – Total Contributions) / Total Contributions.  Can be annualized to calculate actual returns if no additional contribution is made after the initial contribution.
  2. Time Weighted Returns – Used by mutual fund companies to remove the effects of  individual investors moving their money in and out.  Calculates the ‘pure’ performance benefit that advisors bring.
  3. Dollar Weighted Returns (you should use this one!) – Internal rate of return (IRR)  calculates returns taking out the effect of when contributions were made.

This info sheet (pdf) has the clearest explanation I have found  of how these calculations can provide very different results. And it doesn’t require wading through overwhelming math like most explanations.

Because IRR is the only way to take out the effect of when funds arrive in the account, it is the preferred way to calculate your individual returns. This is especially true for those of us who use dollar cost average.  Since the only way to compute the IRR is to track when you put the money in, you will need a spreadsheet to help you and you will need to input numbers often.  I’m not too concerned about getting the returns down to the day so I use my quarterly statements to calculate how much I contributed for the quarter and annualize that value (note in Excel you need to calculate -IRR not IRR or you will be getting the negative of your return).

Since I’m tracking my returns quarterly, I also use it to tell me how much my portfolio should be worth if I were getting the return I want on my portfolio  (you just do compounding on the contribution and add them up) this way I can see in one shot if I’m meeting my expected return or not and if not, how far am I off.  I use this to adjust how much I need to top up my contribution to my investments.

In the end it is the final dollar figure that I really care about.  All of the talk about math is inconsequential.

Comment if anyone is really interested in how the excel spreadsheet works.

I was just reading this article today about how to turn your rsp into your mortgage.  It’s not the first time I have heard about this, but the article made it seem it is so very easy that I thought I should check the numbers out.  My calculations show that if your investment rate is very low (2% below the standard mortgage rates) using your RSP for your mortgage would make sense but otherwise you are not better off using your RSP for your mortgage.

Now the article started off saying that you can guarantee yourself 5% return which I think is completely wrong.  While you will be making payments as if you are paying back a mortgage at 5%, your investment will still only be reinvested at the current market rate.  Therefore, if the market is offering 3% you will still only be reinvesting your mortgage payments into your RSP at 3%.  I suspected that the numbers cited in the article seemed better because no one is taking into consideration that the difference in payments between conventional mortgage at 4% and your RSP mortgage at 5% should be reinvested.  What if you did that?  As always, please check my math in case I missed something.

First assumptions

  1. Mortgage amount of $100,000 (I know who has mortgage of $100,000? Just for simplicity sake)
  2. Mortgage insurance premium of 1.76% as if you had 20% down payment.  Therefore standard mortgage amount would be only $100,000 but going w/ what I’m going to call RSP mortgage will have principle of $101,767
  3. Standard mortgage rate of 4.19% – current rate sale no other discounts, standard you should be able to get 1.5% on average off of posted rates.
  4. RSP mortgage rate of 5.19% – current posted 5 year rate no discount
  5. Reinvestment average return of 4%

This is the process of my calculation and results:

  1. I calculated what the monthly mtg payment would be for either convention mortgage or RSP mortgage amortized over 25 years  – $536/month for conventional mtg (principle = $100,000 rate = 4.19%) and $602/mon for RSP mtg (principle = $101,767 rate =5.19%). I will assume that $66/mon difference is re-invested
  2. I calculated what my normal RSP (not used for mtg) future value will be at the end of 25 years if I reinvested the $66/mon difference in mortgage payments. (PV = -100,000, PMT = -66, rate = 4%/12, N = 300 (25*12)) = $305,309
  3. I then calculated what my RSP would be is it were to get the regular payments (PV = $0, PMT = -602, rate = 4%/12, N = 300) = $309,989

At this stage it seems that using my RSP for mortgage is marginally better, but if you consider the extra legal cost and annual maintenance fee ($250/yr over 25 years if reinvested at 4% is $10,411) then a conventional mortgage now looks slightly better.

I ran the numbers assuming the reinvestment rate is 3% and in this case the RSP mortgage is $10K better. But if the reinvestment rate is 5% then conventional mortgage options at 40K better.  Therefore it would seem only if reinvestment rate is quite low then would it make finacial sense to do it.

Now if you don’t reinvest the difference between the two types of mortgage then the RSP mortgage will seem better even if the reinvestment rate is at 5%.  This makes sense since you are simply making yourself pay more mortage through a larger contribution back into your RSP account.  The key seems to be making you reinvest the difference in the mortgage payments – it’s a forced saving plan.

Let me know if I missed something logically and think before you act.

Why do we do it?

I walked past an ATM machine the other day and noticed that someone did not take their receipt out.  Out of habit, I took it out to threw it away.  Of course, I looked at the information on it.  The person had just used this non-bank ATM to take out $20.00. His (assuming it is a he) balance at that moment was $1.10.  He got charged a non-bank ATM fee of $1.50 and of course his bank will charge him another $1.50 so now he is in overdraft, which will charge him a fee of $5.00. So for $20.00 he will pay $8.00 in fees.  That’s a negative 40% return.  If he works minimum wage, he will have to work an entire hour for the pleasure and convenience of using this ATM machine at the grocery store.  I wonder if he thinks it is worth it.

So why do people do this?  Why do people sabotage themselves like this financially?  At some point you can’t use the argument that you didn’t know since there have been more than sufficient amounts of education that’s been in the public about not using non-bank ATMs.  Yet there are more and more of them.  So why did he take the money out?  Could he not waited until he was in his neighborhood to take the money from his bank account?  Can’t he just use debit to pay for the item?

One of the keys ways of avoiding getting into debt is to not get into debt in the first place.  This means that the mind has to be engaged and not on auto pilot.

Sometimes a new thought that’s been spinning around you mind seems to spiral outwards and you suddenly realize that there are others who have been thinking about too. While it makes you feel less lonely, it also makes you feel not so original.  Well I came across this article about living with less recently and was intrigued.  While I’ll never want to live with just 100 items I think we can all live with much less.  I especially like the discussions about experience vs things.

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