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.

I recently sat down and re-looked at all the reward credit cards on the market, so I thought I might as well share the information.  First, I did not take into consideration the bonus that’s offered for any card since that won’t last, nor did I try to calculate all of the double points and rewards process as it is just too hard to try to figure out what counts and doesn’t count, so I’ll go with the basic reward levels.  This way the cards are playing on a level field.  I compared a couple of different things – travel, which is why I get these cards and for those that have products I also compared an ipod.  The number listed is the percent of reward you get back per dollar spent on the card.  Each of the travel cards are compared based on same date and destination.  RBC is based on maximum benefit.  If any one out there is a RBC reward client and want to run actual numbers, please email me and I’ll give you the dates I used.

Card Flight from Vancouver to Toronto (Saved $466 – seat sale of one way $233 without taxes and fees) Flight from Canada to London(Saved $1372 – not a seat sale ticket) Flight from Vancouver to Hawaii(Saved $658 – traveling in February 2011) Ipod Touch (32 Gb and 8 Gb for Royal as 32 Gb is not an option) Cash/ gift card vouchers
CIBC Aerogold VISA INFINITE (what I have)

  • annual fee of $120, $50 for secondary card
  • 1 Aeroplan point (air Canada loyalty program) per $ spent
  • 1.5 Aeroplan for purchases at grocery, gas and drug stores

Travel Health Insurance 15 days

Rental Car Collision

Travel Cancellation

Travel Interruption

Best options redeem 25,000 miles equals $0.01864 reward per dollar spentOne Way 17,000 miles equals $0.01370 reward per dollar spentWorst case (when they don’t have seats at the lower end, the will provide seats with more miles redeemed) 77,000 miles equals $0.00579 reward per dollar spent 60,000 miles equals $0.022883 reward per dollar spent 80,000 miles equals $0.008225 reward per dollar spent 44,000 miles for 32 Gb equals $0.00747 reward per dollar spent30500 miles for 8 Gb equals $0.00718 reward per dollar spent Approx 6,000 miles to 7,500 for $50 gift card equals $0.0083 to $0.0066 reward per dollar spent
Scotia Momentum Card

  • $39 annual fee
  • $1 cash back for purchases and $2 cash back for purchases in grocery, gas, drug stores and recurring payments

Purchase protection and extended warranty

All equals $0.01 reward per dollar spent
Scotia Gold passport.

  • $110 annual fee
  • 1 reward pt per dollar spent

Travel Health Insurance 31 days

Rental Car Collision

Purchase protection and extended warranty

Travel Cancellation

Travel Interruption

$0.01reward per dollar spent 32 Gb 48900 points equals $0.0067 reward per dollar spent 12000 points for $100 cash for investment at Scotia equals $0.00833 reward per dollar spent
RBC Infinite Avion

  • $120 annual fee $50 additional card
  • 1 reward pt per dollar spent

Travel Health Insurance 15 days

Rental Car Collision

Purchase protection and extended warranty

Travel Cancellation

Travel Interruption

Maximum reward 35000 points for $750 of flight credit equals $0.0214 reward per dollar spentIn this case 35000 points equals $0.0133 reward per dollar spent Maximum reward 65000 points for $1300 of credit equals $0.02 reward per dollar spentIn this case will redeem 72200 points equals $0.0190 reward per dollar spent Maximum reward 45000 points for $900 flight credit equals $0.02 reward per dollar spentIn this case 45000 points equals $0.0144 reward per dollar spent 8 Gb for 30500 points equals $0.00718 reward per dollar spent 6000 pts for $50 equals $0.00833 reward per dollar spent

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