Should You Give Your Kids An Allowance?

Kid’s Allowance Teaches Money Management

First Published Date : April 13, 2011 ADawnJournal.com

Prelude

An allowance is an amount of money you give to your kids on a regular basis to cover their expenses. Experts have always debated over whether kids should get an allowance or not. One group says giving an allowance teaches kids nothing and it might even ruin their finances in the future. Another group says an allowance teaches children money management skills (through responsibility and discipline) and prepares them to better handle their finances in the future. I believe in allowances and if used properly, it can be a great tool to teach your kids finances at an early age. Today, I will present my perspective and will provide you some tips on this debated topic.

Why Kids Should Get An Allowance?

Responsible parents look after the family and meet its members’ needs. An allowance helps to meets family members’ needs. An allowance is an example of parents’ responsibility. A lesson kids are practically observing right here – responsibility.

An allowance nurtures the children’s ability to think and act independently. Don’t expect them to always spend their allowance properly. The objective here is to make mistakes and teach them to correct themselves as they go along.

Once kids have their allowance in their hands, it tells them something very important – money is not unlimited. This reinforces the idea that they have to spend it wisely (i.e., it teaches how to best make choices between many things) once they know that each time they spend on something, they will have less than they did before. You will see a significant reduction in their “I want this” items. This is how kids learn the concept of “discipline” and “money is limited.”

At What Age Should Kids Get An Allowance?

Kids start showing coin recognition and interest in basic money concepts as early as four. Depending on your kids’ interest and your comfort level, parents can start giving an allowance as early as age three to five.

How Much Allowance Should Kids Get?

There is a common approach on deciding an allowance – a weekly allowance representing a total amount equal to $1 for every year for age. For example, a four year old would get $4 every week.

However, I think this basic approach will not work in most situations as there are many other allowance deciding factors coming into play. You should consider the following factors when deciding on an allowance:

·    Your Income – Only you know what you can afford to give and what you can’t.

·    Your Kid’s Age – As they grow bigger, the allowance amount should increase as well to cover additional cost kids need to handle every year.

·    What The Allowance Should Cover – Be clear on what it should cover and what not, and then add all expenditures to check if this allowance amount is realistic enough. A good way to do this is to make a list of all items you think their allowance should cover and discuss it with your kids; this ensures that no important items are missing and that your children are kept involved in the process.

·    Where Do You Live? – You may want to consider the neighbourhood you live in when deciding an allowance amount. Do you think a kid living in Red Lake should get the same allowance as a kid living in Toronto? I would keep this is mind while making a decision.

Allowances and Chores Should Not Be Tied

It is not recommended to link allowances and regular household chores. Chores are regular family responsibilities and should not be tied with allowances. However, kids can get paid for special projects for which you would normally seek outside help such as cleaning the backyard, painting jobs, etc.

Keep Clothing Allowance Separate

You may find some type of allowances, such as clothing allowances or book allowances, are not easy to blend into regular allowances. An easy way to handle this is to keep these separate. For example, give your children a clothing allowance in the winter for winter clothing, give them money to buy books when the needs arise, and so on.

Do Not Give an Allowance without Proper Guidelines

The basic purpose of giving an allowance is to teach kids money management skills. If you just throw some money at your kids without proper guidelines, instead of teaching them money management skills, it will teach them indiscipline and bad money management skills. Always give the allowance with proper guidance – show them how to spend it and break it down into small pieces, such as 10% should go to the piggy bank, 10% for a science magazine, 10% for charity, and so on.

Last Word

Money skills are not taught in school. Giving an allowance in a responsible way can open up endless possibilities to teach kids money skills and financial responsibility, and the lifetime results are immeasurable.

Canadian Dividend ETFs

Canadian Income ETFs

First Published Date : June 19, 2011 ADawnJournal.com

Who does not like to sit back, relax, and collect dividends on a regular basis without worrying too much about picking individual stocks or giving hefty fees (MER) to mutual funds? ETFS allow you to do just that, and for income hungry investors the choices to pick income or dividend EFTs are getting noticeably wider in Canada. Today, I am going to discuss my top eight ETFs I like for generating income. ETFs trade on stock exchanges just like stocks and you can buy them through your discount brokerage account or through a licensed financial advisor. For more information on ETFs, please visit A Dawn Journal ETF Section and TMX Money ETF Section.

BMO Covered Call Canadian Banks ETF (TSX: ZWB) – This ETF invests in Canadian banks and writes out of the money covered call options, thus earning premiums on call options. As of this writing, it has a staggering portfolio yield of 9.56 per cent and MER is 0.65 per cent. Before considering this ETF, do understand how the covered call option strategy works and the risks associated with it.

BMO monthly Income ETF (TSX: ZMI) – This ETF, actually, is an ETF of ETFs. It maintains a 50/50 balance of equities and fixed income, investing 50/50 in high yielding equity and fixed income ETFs. Portfolio yield is 5.35 per cent and MER is 0.55 per cent.

Claymore 1 – 5 YR Laddered Corporate Bond ETF (TSX: CBO) – This ETF tracks the DEX 1-5 Yr Laddered Corporate Bond Index. It tries to main a continuous maturity laddered portfolio of securities maturing in a proportional, annual sequential pattern. Portfolio yield is 4.63 per cent and MER is 0.27 per cent.

Claymore S&P/TSX Preferred Share ETF (TSX: CPD) – Simply enough, this ETF tries to match the performance of the S&P/TSX Preferred Share index. Portfolio yield is 4.80 per cent and MER is 0.48 per cent.

Claymore 1 – 5 YR Laddered Government Bond ETF (TSX: CBO) – Similar concept like CBO mentioned above, but this ETF tracks the DEX 1-5 Year Laddered Government Bond index instead of the DEX 1-5 Yr Laddered Corporate Bond Index. Portfolio yield is 4.52 per cent and MER is 0.16 per cent. Notice the MER; it’s really a bargain.

Claymore Canadian Financial Monthly Income ETF (TSX: FIE) – Name says it all. This ETF tries to provide monthly cash distribution of $0.04 per units. Portfolio yield is 6.70 per cent and MER is 1.24 per cent. MER is quiet high.

iShares Diversified Monthly Income (TSX: XTR) – Similar concept like ZMI mentioned above, XTR is an ETF of ETFs and provides consistent monthly cash distribution. Portfolio yield is 5.78 per cent and MER is 0.55 per cent.

iShares S&P/TSX Capped REIT Index ET (TSX: XRE) – This ETF tries to match the performance of the S&P/TSX Capped REIT Index. Portfolio yield is 4.88 per cent and MER is 0.59 per cent.

Disclosure – This article is for information purposes only and No information is intended as investment, tax, accounting or legal advice, or as an offer to sell or buy or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security, ETF, or fund. The author assumes no liability for any inaccurate, delayed or incomplete information, nor for any actions taken in reliance thereon. You bear responsibility for your own investment research and decisions, and should seek the advice of a qualified financial professional before making any investment decision. I own some of the ETFs mentioned here.

Canada ETFs Begin Charging HST

ETFs, HST, and Canada

First Published Date : November 21, 2010 ADawnJournal.com

In Ontario and British Columbia, the Harmonized-Sales Tax (HST) is something that is not very popular. As well, it is beginning to chance how things are priced with exchange-traded funds (ETF). In the past, iShares, which was launched by Carclays Global Investors in the late 1990s, has never charged the Goods and Services Tax (GST) on its ETFs. The tax was paid out by the company itself, making ETFs more affordable and more desirable from the perspective investors.

Sadly, that changed this past year when BlackRock Inc, which recently purchased iShares in 2009, decided to begin charging HST.

HST is the combination of the provincial sales tax of Ontario, and the GST of the federal government. When put together, the HST comes to 13 per cent. On July 1, it took effect in Ontario, combining the eight per cent provincial sales tax and the five per cent GST.

In a notice to investors, BlackRock stated that it will no longer pay for GST on behalf of the family of iShare funds.

Many investors are now asking why this has become the state of affairs for the iShares ETF. The main reason is that globally, most ETF companies do not absorb the taxes and BlackRock wants to make sure there is an industry standard across the globe to make investing easier for countries around the world.

While they say that, most likely the reason is that the cost of paying 13 per cent of the tax for investors will simply amount to more than BlackRock can afford. While many investors are just told that the policy is to get everything under the same umbrella as the industry practice, it is not hard to figure out that BlackRock wants to make money, paying the HST costs them money, so they are no longer paying the HST.

Currently, iShares has three main rivals which is Claymore Investments, Bank of Montreal and BetaPro Management.

At this time, iShares controls 80 per cent of the ETF market within Canada, more than what smaller ETF companies hold in the market and those smaller companies have often not paid for the GST. Therefore, it can be seen that iShares is getting in line with companies that are much smaller than them, an odd thing to do when you are an industry leader.

Regardless, the days of iShares being GST, PST and HST free are now gone. From now on, when you are buying ETFs in Canada through iShares, you are going to be paying for the HST on top of your purchase meaning The HST will be a part of the management expense ratio. While it is the norm in the industry, that does not mean investors have to be happy about it and you may see a backlash in the coming months and years as investors decide whether or not the new higher cost of the ETF is worth it.

What is Islamic Finance?

Islamic Finance and Banking 101

First Published Date : November 24, 2010 ADawnJournal.com

When we think of banking, we think of the United States, Europe and Japan, along with China, as examples of what banking is. However, in the Islamic world, there is a term called Islamic finance, or Islamic banking, which is very important to understand, especially to anyone doing banking work with the Middle East.

Islamic banking, or finance, refers to banking that works on the principles of Islamic law, while developing Islamic economies. Under the Sharia, which is Islamic law, the payment or even the acceptance of interest fees for loans is completely forbidden. In the 20th century, several Islamic banks have applied the principles to private and semi-private institutions within the Muslim world.

The concept of Islamic finance came about during the Islamic Golden Age, when early forms of free markets were present and a market economy was just beginning during the 8th to 12th centuries. A monetary economy was created on the expanding levels of the currency, which was very stable and highly valued.

Several concepts and techniques were applied to Islamic finance, including partnerships, limited partnerships, capital, cheques, promissory notes and bills of exchange, all of which would become commonplace in future centuries.

One concept created in Islamic finance was Riba, which means excess. This was applied to prevent excess compensation without due consideration, which we would know as high interest rates. Therefore, applying interest under Islamic finance law was not something commonly done, but there were cases where it was.

Currencies that were based on guarantees by government, or based on materials such as base metals, were allowed to have interest applied ot them.

Interest-free banking, the most common trait of Islamic finance, continued into the 20th century, however several Islamic banks saw interest as a necessary evil that could be used in a banking system based on profit and loss sharing. In the early 1970s, several Islamic institutions got involved in the concept of Islamic finance. The Conference of the Finance Ministers of Islamic Countries in 1970, a study done in Egypt in 1972, the First International Conference on Islamic Economics in 1976, the International Economic Conference in London in 1977 and more helped to determine if Islamic finance could work in the 20th century. Through all of this, the Islamic Development Bank, which is a bank that covers many Islamic governments, was created in 1975.

In the past 20 years, interest free banking has gained a lot of praise and attention, especially in Pakistan where several young Muslim economists praised it.

Egypt attempted to use Islamic banking, beginning in 1963 by forming a savings bank that was based on profit-sharing. This experiment lasted until 1967, at which point nine banks were created within Egypt.

Over the years, more and more banks opened up that worked on the concept of Islamic finance. One such bank was the Dubai Islamic Bank, which opened in 1975.

Currently, Islamic banking, or Islamic finance, is growing at roughly 10 to 15 per cent per year, and there is no sign that it is going to be slowing down. Currently, Islamic banks have more than 300 banks spread across 51 countries, including the United States. They also have an addition 250 mutual funds that work on Islamic finance concepts. Roughly $822 billion in assets are managed by Islamic finance concepts. This is about .5 per cent of the world’s total assets. Islamic finance is also the fastest growing segment of global finance in the world, and sales of Islamic bonds have risen by 24 per cent, to $25 billion, by this year alone.

According to Standard & Poor’s Rating Services, the potential market of $4 trillion existed for Islamic financing and banking.

The countries of Iran, Saudi Arabia and Malaysia are the biggest Islamic bank compliant countries on Earth, with Iranian banks accounting for 40 per cent of the total assets of the world’s top 100 Islamic banks. The Bank Melli Iran had the most assets with $45.5 billion, followed by Al Rajhi in Saudi Arabia with $39.7 billion. Iran also has the most Islamic finance assets valued at roughy $235.3 billion.

So, how does Islamic banking work if there is no interest? Since that is where many banks make most of their money. In an Islamic mortgage, instead of loaning money to the homebuyer to buy the house, a bank will buy the item itself from the home seller, and then re-sell it to the buyer at a profit. The buyer can pay in installments, however the bank cannot make profit explicitly, otherwise it will face fines, so it cannot have penalties for late payment. In order to make sure that the buyer does not default on the transaction, a Murabaha arrangement is made, which is similar to real estate leasing.

Some banks will use a Musharaka al-Mutanaqisa approach, which involves a floating rate which works like a rental. The bank and individual borrowing will form a partnership, with both putting in capital and agreeing on a percentage for buying the property. The partnership rents out the property to the borrower, and the borrower is charged rent. While this is happening, the borrower slowly buys the bank’s portion of the property from them over agreed payments over a set period of time until the partnership ends.

As would be expected, Islamic banking does not just forbid the use of interest, but also works on other principles of Islam. Islamic banking restricts transactions that involve pork, gambling and alcohol as well. This makes it a form of ethical investing, which makes it very popular with some Western World investors. Islamic finance and banking is sometimes called a full-reserve banking method, where banks have a 100 per cent reserve ratio, at least in theory.

Islamic finance is a unique concept that is very popular in the Muslim world, and could become popular here as more banks use the methods of Islamic banking to help people get loans that are easier to repay, meaning the risk of default is less.

What Happens To Your Stocks When Company Goes Bankrupt?

Your Shares and Bankruptcy

First Published Date : January 10, 2011

Before buying stocks, you should consider the various risk factors. A company going bankrupt or going through debt restructuring presents serious risk, for example. Today, I will briefly discuss what can happen to your shares should the above happen and how to minimize your risks.

Bankruptcy or Restructuring

Here are some scenarios that may happen in case of bankruptcy or restructuring:

– When bankruptcy happens, creditors have priorities before shareholders when it comes to getting their money back. Preferred shareholders are in a more advantageous position than common shareholders to get back their money. Preferred shareholders may get little (or none); however, it is unlikely that common shareholders will get anything at all. If the company is liquidated (totally out of business), both shareholders are prone to not get anything.

– If the company continues to operate under bankruptcy protection to restructure itself (meaning getting out of debt), most of the time it issues new shares when it emerges as a restructured company. Old shares often get cancelled or delisted in this situation. Investors are likely to lose everything.

How To Protect Yourself

Any type of investment involves risks. Though it may not be possible to eliminate your risks completely, you may be able to lessen your risks to certain degrees by doing the following:

– Know what you are getting into before buying anything.

– If you do not understand the company, or if it seems to be too complicated business model, most likely it is not your cup of tea.

– If you do not have the financial expertise to pick stocks or buy investment products, seek advice from a qualified and trustworthy financial professional.

Becoming a successful investor is an ongoing learning process. Always keep learning and broadening your financial horizon.