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Investing

Millionaire Teacher: Second Edition Review

From electric cars to re-usable rockets, new innovations and unanticipated breakthroughs can completely alter how we think about the future. With the exception a fine wine or smelly cheese, there aren’t many things that age well over time.

The same can be said about financial advice. The Fintech revolution, along with tools made available in recent years, has shifted the financial landscape. The new rules are slowly starting to change the way we think about money. Advice that made sense a few years ago also needs to evolve to keep up with the times.

Enter Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, by Andrew Hallam. Hallam- a high school English teacher working overseas – retired a millionaire in his 30s without the help of a defined benefit pension. Originally published in 2011, Millionaire Teacher demonstrated how average individuals like himself could build wealth in the stock market while avoiding the damage inflicted by the self-serving financial industry.

What’s changed?

The first edition of Millionaire Teacher, explained how the stock and bond markets work, how to build a portfolio of low cost index funds, and how to avoid the psychological behaviors that plague investors. Hallam takes everything that was good about the first and modernizes it with the improvements we’ve seen over the last several years.

In the second edition, Hallam takes great care in updating the evidence backing the advantages of index investing, including a shout out to a favorite- William Bernstein’s If You Can: How Millennials Can Get Rich Slowly.

Hallam highlights new cheaper products that can be used to build diversified portfolios, provides step by step instructions on how to buy ETFs and breaks down the benefits of robo-advisors for new and curious investors alike. Arguably the most valuable tidbits peppered throughout the book are the real life examples of how people in all walks of life practically apply the index investing approach.

Millionaire Teacher: Second Edition Review

Here are the nine rules that you should have learned in school.

9781119356295.pdfRule #1: Spend Like You Want to Grow Rich – Spend like an actual rich person, not just a person that appears to be rich. While it might seem counterintuitive, rich people spend less on cars and homes. The more you save on unnecessary expenses, the more you can invest in wealth-building assets.

“Many have jeopardized their own pursuit of wealth or financial independence for the allusion of looking wealthy instead of being wealthy.”

Rule #2: Use the Greatest Investment Ally You Have – Start early, save often and invest to take advantage of the magic of compound interest– except if you have credit card debt.

“You can invest half of what your neighbors invest over your lifetime and still end up with twice as much money-if you start early enough.”

Rule #3: Small Fees Pack Big Punches – Financial advisors make money in fees and commissions at your expense when you buy actively managed mutual funds. Mutual fund returns are impacted by these fees and rarely stack up to index fund returns. Says who? Five Nobel Prize winners in Economics. That’s who.

“Index fund investing will provide the highest statistical chance of success, compared with actively managed mutual fund investing.”

Rule #4: Conquer the Enemy in the Mirror – The market is unpredictable. Trying to time investments is gambling. Invest regularly regardless of market conditions. If you have a long investment horizon, the best time to invest is when the market is falling.

“Most young people want their investments to rise right away…Instead, they should hope for stocks to sag or limp…They get less for their money when prices rise quickly.”

Rule #5: Build Mountains of Money with a Respectable Portfolio – A balanced portfolio is built from a combination of stocks and bonds. Known as asset allocation, the right combination of both provides stability by reducing the impact of sharp declines in the market.

“Only an irresponsible portfolio would fall 50% if the stock market value were cut in half. That’s because bonds become parachutes when stock markets fall.”

Rule #6: Sample a “Round-the-World” Ticket to Indexing – Investing in indexes isn’t has hard as it sounds. With practical examples on how to get started, this guide breaks down indexing in the United States, Canada, Great Britain, Australia and Singapore.

“Going solo is the cheapest (and potentially most profitable) way to invest in index funds.”

Rule #7: No, You Don’t Have to Invest on Your Own – While the plan is to invest across stock and bond indexes, ignore financial news and rebalance once a year might sound simple, it can be more difficult in practice. If you don’t trust yourself to stick to the plan, take yourself out of the equation. Intelligent investment firms (aka robo-advisers) can build and manage index fund portfolios for a low fee.

“Traditional investment firms…are like horse-drawn buggies. Intelligent investment firms…are Teslas. No matter how you slice it, they perform much better and they cost a lot less.”

Rule #8: Peek Inside a Pilferer’s Playbook – Financial advisers do not want you to invest in index funds- they don’t make any money off fees when you do. They’ve devised strategies to talk you into staying invested in actively managed mutual funds. If you know what they’re going to say, you have a better chance of removing the tick.

“Many financial advisers have mental playbooks…designed to deter would be-index investors. Many of their clients are forced to keep climbing mountains with 100-pound backpacks.”

Rule #9: Avoid Seduction – Crafty marketers will try to seduce you with get rich quick schemes. Whether they’re trying to sell investment advice or offer a once in a lifetime opportunity, the easy money is probably too good to be true. Steer clear of alternative investments to keep more of your hard-earned savings.

“At some point in your life, someone is going to make you a lucrative promise. Give it a miss. In all likelihood, it’s going to cause nothing but headaches.

The Last Word

While market conditions and investment tools have evolved, Hallam’s second pass at Millionaire Teacher reveals that the principles and application of low cost, diversified index fund portfolios remain steadfast.

The second edition of Millionaire Teacher is an excellent crash course in personal finance and investing. If you’re looking for a place to start and are curious of how regular people can become millionaires, look no further. The lessons you learn from this millionaire teacher will be sure to keep you aging well into the golden years.

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Lifestyle

Not buying second hand? You should be.

Who still buys second hand?

When my family first moved to Canada, my parents couldn’t afford many new purchases. I remember visiting New to You, a program for gently used second hand clothing, at the local community center. As my family became more financially established, we progressed from trips to the community center to afternoons perusing through Value Village.

From community programs to garage sales and thrift stores, the second hand economy no longer serves only to support struggling families. According to Kijiji’s latest Second-Hand Economy Index, nearly 70% of Canadians have bought or sold second-hand goods.

The report identifies the highest intensity users or “heavy” second-hand consumer represented by households with an income of more than $160,000 and those with a considerable amount of money to save each month. They have a secret they’re not telling you- buying second perpetuates a higher standard of living.

If you’re not already taking advantage of the second-hand economy, here’s why you should be.

The Price is Right

There’s a clear cost advantage to buying second hand over buying new. The study found that Canadians saved an average of $480 annually when buying used. The deals are just waiting to be found in this second-hand economy.

We had been eyeing the Stokke Tripp Trapp for our little one to join us at the dinner table but couldn’t justify an insane MSRP of $329+tax. With a little patience, we ended up picking one up on Kijiji for $150. It was in such good shape that it was indistinguishable from one brand new. At over 50% off (don’t forget the taxes), it was a no brainer.

Simplify your life.

One man’s “trash” is another man’s treasure- as the saying goes. The study found that Canadians earn an average of $883 from personal items sold, with 70% motivated by the practical aspiration to get rid of things no longer in use. Last year, I made $730 off stuff we didn’t need. In the last week alone, I sold an old board game and a PS3 title from 2013 for a cool $50. Treasure, indeed.

When you have to buy new

Beyond the saving and earning potential, selling used can help to subsidize the cost of new purchases. I sold our entry level DSLR for an upgraded model with HD video when older brother was born. When little sister came along, we sold the zoom lens and replaced it with one capable of better low light performance. Leveraging existing items will serve to reduce the cost of upgrading.

Why we buy second hand

A substantial portion of our purchases are made second hand but not because we can’t afford to buy new. We simply can’t justify the paying the full Manufacturer Suggested Retail Price. We weigh the underlying value of new products against their contribution to improving our livelihood. If the value of a new product falls short of its impact on our well-being, we’ll look around and buy used instead.

Our children grow like weeds. We often find ourselves dressing them in ¾ length shirts and capris. At the rate they outgrow their clothes, it doesn’t make much sense to keep buying them new – especially when a new pair of jeans can run upwards of $40. Mud, stains and an afternoon at the park can make short work of any outfit. Buying used at a cost of anywhere between $2-5 per item, borrowing or taking advantage of hand-me-downs keeps more money in our pocket.

The Last Word

It seems a little counter-intuitive, but the Kijiji’s Second Hand Economy index shows buying second hand perpetuates a better standard of living. An average $480 saved paired with $883 sold, adds up to over $1200 in accumulated wealth that can be used either to soften the burden of new purchases or be put to better use elsewhere. Buying used no longer carries the same low income stigma it might have once provoked. Second hand purchases are a fundamental stepping stone towards building lasting wealth and stability.

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Home Ownership

10 Things You Need to Know about Mortgages

Mortgages are a tricky business. Nobody looks into them until they’re needed and it can take some time to fully understand the ins and outs. If you’re considering on buying a home, here’s a primer on 10 things you need to know about mortgages.

1. The minimum down payment rules have increased

As of February 2016, the minimum down payment needed to buy property has changed and is now dictated by the following:

  • If the property less than $500,000, the minimum down payment is 5%
  • If the property is between $500,000 and $999,999, the minimum down payment is 5% on the first $500K plus 10% on the next $500K.
  • If the property is $1,000,000+, the minimum down payment is 20%.

2. High ratio mortgages need mortgage insurance

There are two types of mortgages: conventional and high-ratio. Conventional mortgages are ones where home buyers put down a down payment of 20% or more. A down payment of less than 20%, is referred to as a high-ratio mortgage because the amount borrowed accounts for more than 80% of the purchase price. High-ratio mortgages are inherently riskier and require home buyers to purchase mortgage insurance. The higher the down payment, the lower the mortgage insurance premium.

Contrary to conventional wisdom, we chose to go with a high-ratio mortgage and put down around 12% when we purchased our condo. This decision was carefully considered after we did the math. In our case, we would have needed to wait five more months to reach 20%, whereas the premium we needed to pay was approximately a month’s worth of rent.

3. The amortization period affects the amount of interest paid

The amortization period is the total length of time it takes to pay off the mortgage. For high-ratio mortgages,the maximum amortization period is 25 years. Amortization periods over 25 years are available to borrowers with down payments in excess of 20%.

A longer amortization can seem appealing as it can reduce payments, but keep in mind that more interest will be paid over the life of the mortgage. Choosing a shorter amortization period will result in higher payments but reduces the total interest paid over the life of the mortgage.

4. The duration of your interest rate is called the mortgage term

The interest rate you agree on with the mortgage lender does not necessarily extend until the mortgage balance is paid off. Lenders will specify the length of time the interest rates is in effect.

Terms typically run from as low as 6 months up to 10 years, with a 5 year term the most common. At the end of the term, borrowers can renew and renegotiate the terms of the mortgage or look for another lender.

5. Interest rates can be either fixed, variable or convertible

As the name suggests, a fixed interest rate does not fluctuate throughout length of the mortgage term. A fixed rate with consistent payments over the set number of years can provide borrowers with peace of mind.

A variable interest rate can change depending on economic conditions. As the interest rate increase or decrease over the course of the term, borrowers are required to adjust their payments accordingly. While variable interest rates are typically lower than fixed rates, there is always the possibility that rates can increase over time.

A convertible mortgage is simply a mortgage with a variable rate with which the lender provides the an option to fix the rate for the remainder of the term.

6. Mortgages are either Open or Closed

With open mortgages, home buyers have the flexibility to make additional contributions towards the mortgage on top of regular payments. This gives borrowers the opportunity to make large lump sum payments to pay down the balance quickly.

On the other hand, closed mortgages have restrictions on the prepayment terms. Borrowers can incur penalties if they opt to pay above and beyond the terms of the mortgage. In exchange for less flexibility, closed mortgages come with lower interest rates.

7. How much you can borrow depends on how well you can handle the new stress test

As of October 17,  2016, the Canadian government now requires “all insured homebuyers to qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate.” In short, the new rule is a stress test the government put in place to keep household debt levels from increasing.

Rather than qualifying for a mortgage at the record lows interest rates, prospective homeowners will need to be able to sustain payments at the BoC’s current five-year rate of 4.64%. While this means you can expect a decrease in the amount you are qualified to borrow, the change protects against an increase in interest rates.

8. There are a few different ways to make payments

Borrowers can choose to make regular monthly, semi-monthly, biweekly or weekly payments to repay the mortgage. If your goal is to pay off the mortgage as quickly as possible, there are some additional options that will affect the repayment schedule.

Accelerated bi-weekly and accelerated weekly payments allow borrowers to make extra payments against the principal. These options result in slightly higher payment amounts but will save on interest and reduce the amortization period of the mortgage.

If the terms of the mortgage allow it, borrowers can also make monthly prepayments or lump sum payments directly towards the principal owing to further reduce the amortization.

9. A mortgage broker can compare mortgages for you

While banks and credit unions might be a traditional starting point for mortgage rates, consider letting a mortgage broker do all the research for you. Mortgage brokers will search different lenders for a mortgage in line with your specific set of circumstances. They will not cost anything as they are paid a finder’s fee by the lender for bringing them the business. In addition to finding the best rate, they can explain the details of the different options and help guide you through the process.

10. Negotiate your mortgage interest rate

Don’t assume mortgage lenders willingly offer the best interest rate. Never accept the first offer. Take some time to compare mortgage rates from other banks, credit unions, specialty lenders and even mortgage brokers and use the information to negotiate a better rate. With that information, lenders are more likely to match competing offers to win your business.

If you’re not convinced the extra effort is worth it, consider that saving even half a percentage point on a mortgage rate can save tens of thousands of dollars over a 25 year amortization.

The Last Word

According to TREB, the average condo in the GTA is priced at $415,643. Assuming an interest rate of 2.24% with a 25 year amortization and a minimum 5% down payment, the balance owing of $394,861 would be subject to $296,050 in interest over the life of the mortgage – if interest rates did not change. The final cost of the home could rise to $690,911.

While mortgages can seem complicated, the time spent to review the basics can go along way. Choosing the right combination of mortgage type, interest rate and payment options will maximize savings in interest and reduce the amount of time it takes to pay off the mortgage.

Home Ownership Lifestyle

The Millennial Guide to Buying a Home

The journey of every first-time home buyer starts with the underlying desire to establish roots, build a home and maybe even start a family. It’s challenging to navigate the obstacles in the home buying process; saving for a down payment and securing a mortgage take patience and determination.

It’s not every day that you’d commit to take on hundreds of thousands of dollars in debt and the emotional roller coaster is enough to drive anyone crazy. In the spirit of Financial Literacy Month, here are a few things to consider if you’re in the market for a new home purchase.

To Buy or not to Buy?

That is the question. Whether you’re living at home or renting, there’s no escaping it. Acquaintances will ask and parents will prod. One by one, friends will hop on the real estate train until it seems like you’re the only one left standing at the station. Some will argue that rent is throwing away money and others may try to convince you property is a good investment.

Hard as it may be, ignore the commentary. Taking on a mortgage should be approached cautiously and deliberately.

The Trade Off

So you’ve saved diligently and have made the decision to buy. A lender will decide the maximum amount that can be borrowed based on a formula that calculates the home buyer’s ability to pay back the loan. That number may seem very generous but be wary of borrowing the maximum amount. It’s to the lenders benefit for homebuyers to take out a large mortgage- after all, profits come from the interest on the loan.

According to the latest from the Toronto Real Estate Board, the average price of a condo is $415,643 while a house is expected to fetch an average of $764,872. Assuming an interest rate of 2.24% with 25 years to pay it off, a minimum 5% down payment ($20,782) on the average condo would result in monthly payments of $1,780. The remaining $394,861 would be subject to $296,050 in interest over the amortisation period, pushing the cost of the home to $690,911 – that’s assuming interest rates stay put.

As of 2016, new rules specify that homes between $500K and $1M require a minimum down payment of 5% on the first $500K plus 10% on the remaining balance. That works out to a minimum 6.7% down payment ($51,487) on an average house with monthly payments of $3,216. Over 25 years at an interest rate of 2.24%, the $713,385 mortgage would accumulate $534,866 in interest, resulting in net cost of over $1.2 million. Home, sweet home indeed.

Before you decide on how much to borrow, take some time to think about how the cost of a mortgage will affect your lifestyle and savings goals. A higher monthly payment can lower your standard of living and limit the capacity to deal with unexpected circumstances. A rise in interest rates, property taxes, maintenance and utilities can stretch finances thin. Reduced income from job loss or unplanned leave could also put repayment obligations in question. The stress of it all can push saving to an afterthought.

A smaller mortgage with affordable payments, even if that involves a smaller property, leaves more room for fun, flexibility and a financially secure future. It means enough cash on hand for splurges, a reserve to deal with any surprises and long term child education and retirement investments.

The Resources

If you’re in the market for a new home and have some questions about the mortgage process, the Financial Services Commission of Ontario (FSCO) has put together a comprehensive set of resources to help understand mortgages and demystify the home buying experience.

The material includes a breakdown of the Different Types of Mortgages, explains the Risks of Getting a Mortgage and outlines the Mortgage Application Process. Becoming familiarised will ensure you are comfortable with, and prepared for the home buying process.

In Practice

As prospective home owners years ago, Emily and I were approved for a small fortune sufficient for a decent sized detached in the GTA. But rather than take on a debt of well over half a million dollars, we opted instead for a much smaller mortgage and thus, a smaller space. At the bewilderment of our families, we settled on a condo in the city: a 2 bed/2 bath with a total of 850 square feet.

8 years in and 2 kids later, the decision has worked out well for us. Sure, we’ve made some changes to adapt with evolving life situations; we’ve swapped bedrooms and the kids now play and sleep in the master. On the other hand, we’re debating the merits of paying off the remaining mortgage in 3 years.

The flexibility to use our funds, which would be otherwise tied up in servicing our housing costs, allows us the breathing room to live a little. We live comfortably, splurge on travel, save for our children’s education and invest in our future wellbeing.

That said, we could “afford” to move out now if we wanted to. Likelihood is that we’ll decide to upgrade to a larger space one day. That day, however, is still many years away. In the meantime, we’ll continue to enjoy the accoutrements of city living and the adventure of our jet setting ways.

urbandepartures_jokulsarlon

Skipping rocks at the glacier lagoon – Jökulsárlón, Iceland.

The Last Word

The lure of home ownership is undeniably tempting. Before you drink the Kool-Aid and go bottoms up on a new home buy, take some time to read up on mortgages and the home buying process with the resources provided by the Financial Services Commission of Ontario.

The decision to buy is deeply personal and depends on a whole host of factors. At the risk of becoming house rich and cash poor, take a minute to think about the full purchase price after the interest has been factored in. Also consider how taking on a smaller mortgage can free up cash for use as you see fit.

Weigh the implications of a sizeable mortgage against the values and lifestyle that you want to maintain to help in determine the type of home you want to buy.

If your money wasn’t tied up in mortgage and interest payments, what would you do with it?

This sponsored post was written in partnership with the Financial Services Commission of Ontario for Financial Literacy Month. All thoughts and opinions are my own.

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Investing

JustWealth: The new Robo-Advisor in town

The Fintech scene in Canada just got a little bit more interesting. Financial innovation brought on by advancements in technology have opened up new investment options that disrupt traditional institutions; the trend is starting to pick up steam.

Robo-advisers have been steadily growing in popularity with players like Nest Wealth, Wealthsimple, and Wealth Bar relying on computer algorithms to manage investments and reduce costs. New competitors will continue to shift the landscape away from high investment fees and benefit investors.

Ladies and gentlemen, the latest online portfolio manager in Canada: JustWealth.

JustWealth, Who?

JustWealth Financial Inc. is a Toronto based company co-founded by Andrew Kirkland and James Gauthier. Kirkland, formerly a VP at Invesco Canada, specializes in client service while Gauthier brings asset management expertise from years with Scotia, TD and RBC.

According to Kirkland, “Trust in the financial services industry is decidedly low, which isn’t all that surprising given all of the conflicts of interest that exist.” The pair believe that transparent, honest advice combined with a focus in portfolio construction will allow them to stand out from their competitors.

All assets are held with Virtual Brokers, a division of BBS Securities Inc. who is a member of the Canadian Investors Protection Fund (CIPF). Investors are covered for up to $1 million for each type of account held.

UrbanDepartures_JustWealth1

Low-cost, personalized portfolio management

Justwealth offers 61 different portfolio options built from 29 ETFs from seven providers meant to “grow your wealth, generate income, or preserve your wealth.” Upon sign up, clients work with Personal Portfolio Managers and a support team to access services that include ongoing portfolio rebalancing and optional financial planning. Similar to other robo-advisors, clients can take advantage of advanced strategies such as tax loss harvesting.

Clients who opt for a Registered Education Savings Plan (RESP) account can benefit from specially structured Target Date portfolios. The portfolio’s asset allocation moves away from equity funds over time, and fixed-income funds are introduced as a child moves closer to enrolling for postsecondary education. This can help to reduce market risk.

The fees charged by JustWealth are in line with the competition: 0.50% for accounts under $500,000 and 0.40% for accounts with more than $500,000. Accounts with less than $25,000 are subject to a fee of $10 per month. While fees associated with trading are included in the annual fee, clients are responsible for the MER fees charged by ETF providers. They cost, on average, 0.25%, are automatically deducted and bring the fee up to a blended rate of 0.75%.

The minimum account size is $5,000, with the exception of RESP accounts where no minimum is required. Clients with over $1 million under management are able to build a customized ETF portfolio.

The Last Word

Canadians increasingly shop online, bank online and search for advice online. It’s only a matter of time before the general public take their investing online- if not for the convenience, certainly for the cost.

Are you ready to trust your investments to a robot?

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