How To Avoid Extra Costs On Your Mortgage

Extra Costs Can Drain Your Funds

First Published: ADawnJournal.com May 18, 2010

The number one priority expenditure for most families in Canada and further afield is a place to live. There are other things that need to be addressed as a matter of importance, too, and it is not limited to the family home. But without the family home, nothing else really matters. If you don’t have a home to keep you warm, safe and comfortable, then you can have as many cars as you like – none of them will be as satisfactory and as central to your life as your home. Taking your mortgage seriously is therefore an essential matter. As much as you may want to cut loose a little bit when the monthly pay check comes in, it is important to remember that some figures need subtracting before the fun can begin.

The monthly mortgage payment is the first number most people will subtract from their paycheque they are making their month ahead calculations. It is one payment that cannot be missed and should not be compromised. If the situation you find yourself in precludes making a full payment to the mortgage, it is essential to call the lender and seeing if you can work out a payment holiday or, if necessary, a restructuring of the loan. Not bothering to keep the bank aware of how the situation is progressing will only see you receiving angry letters, late payment fees and, eventually, being at risk of losing your house. If you have any way of avoiding it, you should make sure that you do not miss payments – even if it means making reduced payments on other lines of credit. This loan is secured on your home.

Avoiding extra costs on your mortgage is partly a matter of common sense and partly a matter of being able to see where problems will occur before they really begin to cause concern. Seeing a debt advisor to talk through your options and make out a financial management plan is one way in which you may even be able to avoid making reduced payments to the highest of all high priority debts.

Strangely, though, there are some loans (mortgages included) that add on extra fees not only for the late payment or partial payment (or even non-payment) of the monthly debt repayment, but will charge you an early payment surcharge if you pay the loan off in full ahead of time. If this is something you can see yourself doing, then it is worth asking the bank if they have such a policy. Look through the terms and conditions on your loan agreement as well, to see if there are any strange circumstances in which they will add fees to the balance of your mortgage. The less you have to pay on a mortgage, the more money you will have to truly enjoy. For this reason it makes sense to avoid any unnecessary and stupid expense and to find ways of cutting off problems before they can cost you money.

RRSP or Registered Retirement Savings Plan

Understanding Your RRSP

First Published: ADawnJournal.com May 22, 2010

Retirement is approaching for the Baby Boomers and that has many thinking about their RRSPs. Many Baby Boomers have been contributing to their RRSP for many years now, but how many actually know what is going on with their RRSP? Do you know about contribution limits? Do you know when you need to start taking money out of it, or what RRSP even stands for? Well, now that you are approaching the age of retirement, its time to learn more about the world of the RRSP.

RRSP, or Registered Retirement Savings Plan, is an account that provides you with tax benefits for saving for your retirement. Only available in Canada, it was created as part of the Income Tax Act that was created to give you the ability to shelter your financial property from income taxes. The ways that you can reduce your taxes with an RRSP come down to three options:

1.   RRSP contributions are deducted from your income before your income tax calculation is due.

2.   Income that you earn with your RRSP is not taxed until you withdraw money from the plan, which gives your account the ability to grow faster than if you were making contributions outside the plan that are subject to taxation.

3.   You can withdraw from an RRSP in tax years when you are in a lower-income tax bracket due to unemployment or other circumstances.

You can hold a variety of financial properties within an RRSP, in many more options than other retirement plans of other countries. Some of the financial properties include a savings account, guaranteed investment certificates, bonds, mortgage loans, mutual funds, shares, labor-sponsored funds and income trusts.

The Types of RRSP

There are three main types of RRSPs that you can choose from depending on your life circumstances.

1.   Individual RRSP: This is an RRSP that is meant only for one person, who is the account holder of that RRSP. Only the account holder can contribute money towards the RRSP.

2.   Spousal RRSP: With this type of RRSP, the higher earner, who is the spousal contributor, can contribute in the name of their spouse. The spouse is the account holder and the spousal RRSP is the way that an RRSP is turned into split income for retirement. When investment properties are divided between the spouses, each spouse gets half of the income. This creates a lower tax rate than if one spouse earned all of the income. If there is $300,000 in the RRSP and one person has it, the tax rate is higher than if two spouses have $150,000 each from it.

3.   Group RRSP: With this RRSP, an employer has employees making contributions through deductions from their pay checks. The employee can then decide the size of the contribution each year and the employer will deduct a certain amount accordingly for them. This is then deposited into the individual account and invested as the employee wants.

While the Group RRSP is held in only one account structure, Individual RRSP and Spousal RRSP accounts can be held in one of three account structures.

1.   Client-Hold Accounts: This is when the account holder uses their RRSP to purchase an investment with a certain investment company. Each time an individual uses money from the RRSP to purchase an investment from a different company, a separate client-held account is then opened. For example, if you buy investments from Fund Company 1 as well as Fund Company 2, you will have two separate RRSP accounts held with those two companies. You do not generally have annual fees with this type of account but it is harder to keep track of your RRSP in this structure.

2.   Nominee Accounts: These accounts have the individual account holder nominating a nominee for their account and this is typically one of the major banks in Canada. This nominee will hold the different investments in a single account for the account holder. So, if you have investments with Fund Company 1 and Fund Company 2, it will be held within a single RRSP account with the nominee. The benefit here is that it is easier to keep track of your RRSP investments, but you do incur annual fees.

3.   Intermediary Accounts: These accounts serve the same function as nominee accounts and the reason someone would choose this over a nominee account depends mostly on the investment advisor the person deals with. If the investment advisor is not aligned with a major investment company or bank, they may not have the logistical ability to offer you nominee account options. The advisor will therefore approach a company to offer the investor identical benefits as those that come from a nominee account. The main benefit and disadvantage to this is the same as you would find with nominee account.

Contributing To RRSP

As with most investment retirement plans, there is a maximum amount of money that you can contribute in any given year. This amount is how much you can contribute without being taxed, as in the amount is completely tax deductable. Typically, it comes to 18 percent of your earned-income from the previous year minus a pension adjustment up to a certain maximum. That maximum does change over time.

Here is a brief rundown of just how much the maximum has changed over the past six years:

·   2004: $14,500

·   2005: $16,500

·   2006: $18,000

·   2007: $19,000

·   2008: $20,000

·   2009: $21,000

·   2010: $22,000

When you file a tax return, you will receive a Notice of Re-Assessment from the Canada Revenue Agency that indicates just what your new RRSP deduction limit is going to be.

This is where we come to the biggest advantage of the RRSP. With your RRSP, your contributions are completely deductable from your income. That deduction is based totally on your tax bracket and the amount of tax paid on the last dollar of earned income. So, if you are in a marginal tax bracket of 40 percent, then if you contribute $1,000, you will receive $400 back in your taxes.

You can contribute to your RRSP until the age of 71. At this point you must cash it out or mature it into a Registered Retirement Income Fund.

A last point on RRSP contributions is that if you contribute within the first 60 days of the tax year, you must report those contributions on the previous year’s tax return, but you may also deduct those contributions fro the previous year.

Withdrawing RRSPs

You can cash out any amount from your RRSP at any age, but when you withdraw money from your RRSP, that is counted as taxable income and you will pay taxes on it. As was already mentioned, once you hit the age of 71 you must cash out your RRSP or transfer it to a Registered Retirement Income Fund. Before 2007, the age was 69 but the rising number of Baby Boomers still working resulted in the RRSP age limit to change by two years.

RRSP Myths

Many RRSP investors say that if you want to retire in a nice style you need to start contributing to your RRSP when you are young. For example, if you begin to contribute to your RRSP when you are 22, and you put in $4,000 every year, with an eight percent annual rate of return, you will have $1.3 million when you retire. So, naturally the longer you have the better it seems for your retirement savings. However, there are some common problems with this concept, the first being that there are not too many 22-year-olds who are going to be able to afford to put $4,000 away, or want to, for something that is 43 years away. Most people do not start contributing into their RRSPs until they are in their 30s. The older you get, usually the more you can contribute. If you contribute $4,000 a year from the age of 22, you can reach $1.3 million, but you can also contribute an extra $4,000 fro the age of 42 to 65 to make up the same difference. Not to mention, the earlier you invest, the more you pay in commission and fees. If you do not start putting money into your RRSP until you are 42, you save on 20 years of annual fees that you would have paid into if you started at the age of 22.

Another common myth is that you should borrow if you do not have the funds to contribute to your RRSP. This is not a good thing to do. Borrowing to invest only makes sense if the annual rate of return is higher than the amount you will be paying in interest on the loan. If you are paying an interest rate of six percent and only getting an annual rate of return of four percent, then you are losing money, not making money.

The Equal-Weight ETFs from BMO

Market-Cap Weighted or Equal-Weighted ETFs?

First Published: ADawnJournal.com May 30, 2010

Buying exchange-traded funds in Canada got much easier thanks to BMO Financial Group and the release of eight different ETFs that are equal-weighted and three that are currency-hedged. These two different types of ETFs are part of a key strategy by the Bank of Montreal to help set itself apart from ETFs that are put out by iShares and Vanguard, which currently dominate the market.

The currency strategy uses hedging to hedge foreign funds back into the Canadian dollar and this has actually been used quite a bit by iShares and Criterion Investments, which focuses only on currency hedging. However, that is not what is putting the Bank of Montreal in the papers these days; equal-weighting is.

Critics of ETFs say that market-cap weighted funds created high concentrations of large-cap stocks that are often over-valued. When the large-cap stocks get more and more overvalued, there is a greater weighting on them in the fund and that creates a higher risk for investors who put their money into the ETF. However, according to BMO, equal-weighting prevents this and therefore makes investing safer for ETF investors. How it works is if the top 10 stocks on the TSX represent 40 percent of the market cap of the index, equal-weighting puts every stock at the same weight no matter how large or small the market cap. That means that if there are 50 stocks on an ETF, each stock has a two percent weight within the stock.

However, BMO is not the only ones who offer the equal-weighted ETFs. Claymore Investments also offer them and the company states that it helps investors avoid overweighting overvalued stocks and underweighting undervalued stocks. Critics of the ETF state that often happens, as we have said, with ETFs that are not equal-weighted.

Exchange-traded funds are often looked at as a safe investment for many investors because with these you are not trying to beat the market, but instead just mirror the index. Too many times investors want to beat the stock market and that leads many of them down a road to ruin. With exchange-traded funds, even those that are not equal-weighted, there is a much safer path to go down. No, you do not make as much with these funds but if you can diversify your portfolio with them you help the hedge your bets in case the market takes a downturn.

It is very important that you do not put all your eggs in one basket. Now, with the equal-weighted ETF from banks and companies like Bank of Montreal and Claymore Investments, it is possible to make the safe investment of an ETF even safer for investors. You can expect that in the coming years, many investors will be putting their money into the equal-weighted ETFs instead of risking it in mad-cap investments that could cost the investor everything they have

What Are Mutual Funds? Advantages and Disadvantages of Mutual Funds

Mutual Funds 101: Part 1

First Published: ADawnJournal.com May 30, 2010

The following is an Excerpt from my first book Invest Now. Invest Now is jam-packed with timely information and timeless advice for the beginning Canadian investor. Invest Now covers a broad range of topics including Internet Scams. To purchase a copy, visit Chapters Indigo or click here to buy online – Invest Now: A Canadian’s Guide to Investing

Mutual Funds: The First-Time Investor’s Friend

If you had a friend who was very knowledgeable in the stock market, you would definitely want him to manage your stock investments. What if this friend agreed to do everything for a small fee? Wouldn’t you hire him? A mutual fund is just like this hypothetical friend. A mutual fund is a collection of investment products, such as stocks, bonds, T-bills, and so on. Mutual fund companies collect money from investors and hire professionals to manage your money. These professionals are called fund managers. When you buy a mutual fund, you buy a portion of the fund (or a portion of what the funds hold altogether).

Why Are Mutual Funds Suitable for First-Time Investors?

You need years of experience, lots of money, intensive knowledge, and various tools to pick an individual stock. A mutual fund does all that for you while keeping risk to a minimum. It’s no wonder that mutual funds’ assets are skyrocketing with the speed of a space shuttle.

To pick the most suitable funds for you, you need to know a few things. Let me start with the advantages of mutual funds; you can use these advantages to overcome obstacles you will face as a first-time investor.

Advantages of Mutual Funds

Low Minimums and PAC

Low minimums are the best feature mutual funds offer. Have you heard your friends saying they don’t have enough money to invest, and that’s why they never save? If you are using same excuse, put it aside. Most mutual funds will let you start with as little as $500, and some will let you start with just $100. If you agree to let fund companies take money out of your bank account systematically—either monthly, weekly, biweekly, quarterly, semi-annually or annually, you can start with as little as $25. This convenient option is a good one for those who can’t put in one lump-sum payment to start with. You will not find this type of convenience investing in stocks and bonds. The above-mentioned feature is called PAC (pre-authorized checking), AIP (automatic investment plan) or SIP (systematic investment plan). I will use PAC in this book, because PAC is widely used and recognized.

PAC is nothing but systematically investing your money with a financial institution. One great advantage of having PAC is that it gives you the power of dollar-cost averaging.

Dollar-cost average simply refers to the averaging of your cost per share or per unit. Suppose you are running a PAC for $25 monthly on the 15th of each month. Your mutual fund unit price will not be the same on the 15th of each month. But you will be adding the same $25 each month. If unit price goes up, you will be buying fewer units. If unit price goes down, you will be buying more units. Running a PAC year after year and calculating your average cost per share after a few years will prompt gains. Research has shown that if you do dollar-cost averaging, you end up buying more units rather than spending one set lump sum.

Dollar-cost averaging on stocks or bonds will cost you a lot of money, with transaction fees every time you buy. But you can do a dollar-cost average on mutual funds without additional cost or transaction fees. Just run a PAC, and you are good to go. This feature is very suitable for first-time investors.

Professional Management

Choosing an individual stock or bond can be an enormous task for new investors. All the research and decision-making can be daunting. Everyday investors don’t have the tools or resources to make a prudent decision. When you buy mutual funds, you are buying the expertise and service of the group of professionals who manage those funds. Each group consists of a fund manager and a few analysts. This group is responsible for doing all the research and for deciding when and what to buy and sell. Basically, everything is done by the fund manager and his team. You don’t have to spend days and nights analyzing stocks and monitoring your portfolio. Remember, these professionals cost you money, but I will discuss how to keep your costs minimal.

Diversification and Convenience

Whether you are a stock or a mutual-fund investor, it is very important to diversify. The old saying “Don’t put all your eggs in one basket” still applies. Diversification reduces your risk by spreading your money across different companies, countries and types of assets. A mutual fund is lot more diversified than a stock or a bond, because a typical fund holds 20 to 50 stocks or a mixture of stocks, bonds, T-bills and so on. I will share my own simple diversification strategy a little later.

Diversification can be a headache if you invest in stocks or bonds. You need to do lots of trading, and you have to keep track all of your portfolios constantly. If you don’t mind the complex task of managing your own portfolio and enjoy doing it, that’s fine. But such an endeavour would require a lot of effort for first-time investors as they pick different types of investment products and attempt to manage them. A mutual fund gives you exposure throughout the world with diversification and convenience—nothing needed from your side.

Regulation

When I first started investing, a junior mining company’s stock was going through the roof. This ten-cent stock was trading at close to two dollars, and rumour was it would reach five dollars soon. I started dreaming of becoming a millionaire in couple of weeks and had already made some plans to retire in the Bahamas the next month.

My emotions ran high; I did not hesitate to invest a few thousand dollars. My investment went up for one day. Starting the second day, my investment started to fall, and after one week my investment was down to four hundred dollars. Basically, I lost all my money. In a mutual fund, it is unlikely that you will lose your money overnight. In the financial world, nothing is guaranteed, but a mutual fund offers a better degree of protection than stocks due to stringent rules and regulations. Mutual funds are highly regulated, ensuring how funds are managed and how investors are informed.

A few points on mutual funds are worth mentioning

A mutual-fund company does not physically hold its assets. A third party, called the custodian, holds securities on behalf of the fund company. If the fund company is in trouble, your money is protected. Fund managers can’t just walk out with your money. The custodian can be either a bank or a trust company.

Fund companies need approval from unit holders to make any significant change. Also, any change in the fund’s investment objective has to be approved by unit holders.

Fund companies have to disclose the fund’s holdings on a regular basis.

Fund companies have to disclose the fund’s unit value regularly.

Fund companies need to publish procedures for the purchase and sale of funds.

Remember, these rules are in place to provide you some degree of safety. No investment is guaranteed, and any investment can decline in value.

Liquidity

Mutual funds are very easy to sell and buy. Your money is not tied up for any specified terms or years. Keep in mind that, except for money-market funds, you will incur an early redemption fee if you redeem your fund within the first sixty days of purchase. Consult your mutual-fund prospectus to find out more.

Transaction Cost

Mutual funds offer another convenient feature. Suppose you want to buy a few Canadian stocks and a couple of international stocks to start your investment. You will be spending the following if you are buying stocks:

(Assume trading cost per transaction is $29)

Three Canadian stocks trading on TSX = 3 × $29 = $87 CAD

Two American stocks trading on NYSE = 2 × $29 = $58 US

Imagine your cost in buying on the European and Asian exchanges. Selling would be equally expensive. You can avoid all these costs if you buy mutual funds. However, you do pay on mutual funds, and I will explain how in a moment.

Disadvantages of Mutual Funds

Nothing in life comes without disadvantages. Now that we have discussed the pros of mutual funds, let’s go over the cons.

Fees and Expenses

When you buy mutual funds, you pay fees to compensate companies for doing all the work. These fees are called management-expense ratios (MERs). Depending on what type of load (front load, back load or low load) you buy, you might pay commission and redemption fees. I will discuss MERs and load a little later in order to show you how to keep your cost minimal.

No Insurance

The Canadian Deposit Insurance Corporation (CDIC) does not insure mutual funds the way it insures bank accounts, loans and so on. Keep in mind that other investments, such as stocks or bonds, are not insured by the CDIC either.

Loss of Controls

Fund managers, not mutual fund holders, make the decisions on a fund’s portfolio. When you buy mutual funds, you give up your authority and abide by the fund company’s decisions.

Trading Limitations

Stocks can be traded as many times as you want throughout the day (North American markets are open from 9:30 a.m. to 4:00 p.m., Monday through Friday). Mutual funds are priced only once a day, after the markets close. Regardless of how many times you buy or sell in a day, you will get only one price for that day. It does not change every second, like stocks.

Cash Holding

Mutual funds need to hold large amounts of cash to pay for redemptions (when someone is selling). Had this cash been invested, you would have made money on this cash. In other words, investors lose growth potential on that cash portion.

Mutual funds carry some other disadvantages, but these are the most important ones.

Next, let’s discuss the fees and expenses you pay when you buy mutual funds. Fees and expenses are very important to know, as such information allows you to cut costs by investing carefully. You need to do that to become a successful investor.

Malaysia Travel Blog: Taking AirAsia For The First Time

Kuala Lumpur Travel Blog: Part 1

AirAsia SYD to KUL

For the Sydney to Kuala Lumpur segment of my journey, I decided to try low-cost budget airline AirAsia, instead of flying business class.

At the Sydney airport AirAsia check-in counter, the staff made me move some of my stuff from my carry-on bag to my personal item bag. This is because, she said, I was close to the limit, but personal item bags didn’t have to follow any limit. I always travel with only a carry-on and it was no big deal. So I transferred some stuff very fast and was on my way through security.

I upgraded my economy seat to have one of the Hot Seats for $70 on the Airbus A330. My seat was in the front row bulkhead seat; I had no one sitting in front of me and I literally had infinite leg stretch space. Also, I had express boarding to enter first.

I ordered food online months before. It was Kung Pao Chicken with Rice for only $6.00, coffee included. The food was not in a great quantity, but was good enough for the 8 hour-35 minute flight.

I was in a position to look out two windows and spent the whole flight doing nothing but looking out them. Although I had my Chromebook, I didn’t feel like watching any movies.

This flight from Sydney to Kuala Lumpur was full. I remember my other low-cost flight from Singapore to Melbourne was half empty.

I heard lots of things about AirAsia. So naturally, I was expecting there would be something I could find to complain about.  However, my trip was pleasant and I couldn’t find anything to complain about.

Based on this specific experience, I wouldn’t mind flying AirAsia again.