We wrote previously about the benefits of using credit cards when traveling abroad. The main drawback of that strategy were the fees associated with foreign transactions. In Canada most banks charge a hefty (usually around 2.5%) foreign exchange fee on all transactions that are not denominated in Canadian dollars (and sometimes on CAD-denominated transactions originated from outside of Canada). On top of that, if you draw foreign exchange from any ATM, locally or abroad, you will be charged a Cash Advance fee, which is usually at percentage of the amount (usually around 1%) with a min ($5) and/or maximum ($10).
To better evaluate the benefits of the cards we devised a simple scenario, where a cardholder spends $1,000 in foreign exchange and draws an equivalent of $500 from an ATM in two transactions.
Moneysense publishes an annual ranking of credit cards. Unfortunately all of the top 8 travel cards carry standard foreign exchange fees coupled with cash advance fees. Our scenario will result in total cost of somewhere between $47.50 and $52.88 (and that’s on top of their already high annual fees).
Luckily, Chase has a small portfolio of cards that carry no foreign exchange fees. They still charge cash advance fees, so the total cost of our scenario would be $10. You get to choose from:
no-fee Amazon.ca Visa, which offers 2% return at Amazon and 1% everywhere else
no-fee Sears Financial MasterCard with 2 points at Sears and 1 point for $1 elsewhere
$39 Sears Financial Voyage MasterCard with 3 points at Sears Travel, 2 points at Sears, 1.5 points for gas, groceries and travel and 1 points elsewhere
$120 Marriott Rewards Premier Visa Card with 5 points at Marriott, 2 points for flights and 1 points for $1 everywhere else
Unless you are getting 3% or more points return on your spend, the “top” travel cards are no bargain. To us, Amazon is the clear winner, if used only for travel and cross-border shopping – it’s hard to argue with no fee and 1% back is plain icing.
As always, be careful with cash advance, as the interest fees start as soon as your transaction posts. The only way to beat this is to pre-pay the expected amount prior to the trip / shopping spree.
This post came to be as a response to the recent discussion on Get Rich Slowly of benefits of either 15 or 30 years mortgage. Obviously, the prevailing wisdom is not to have mortgage at all, and if one is required pay it off as quickly as possible making a strong case for a shorter mortgage.
First of all, do you really need a mortgage? Before jumping into a house purchase one should seriously weigh all factors of rent vs. buy decision, but that’s a perfect topic for another time.
Before we get to the topic at hand, it is important to articulate two important concepts that are intertwined within a mortgage – they are long and short term liabilities. The definition of short and long is usually pretty arbitrary, so here, we’ll choose a threshold of three years. In other words, any payments you’d need to make in the next three years is a short term liability; and any payments from there on – is a long term liability.
Keeping that in mind, the decision about mortgage’s length is more of a balance shift between long and short term, or so it may appear at first. Let’s say, your intent is to pay off the mortgage as soon as possible, and you are not planning of sitting out the entire 30 or even 15 year term. Great! This means that your decision will have no bearing on the long term side of the equation – at the end of the day, your long term liability will always be the principal (house purchase price less downpayment) plus whatever the interest has accumulated. On the short term side, things change quite dramatically. Let’s take a look at the following example:
On a $500,000 house with a 5% mortgage and monthly repayment plan a 15 year mortgage will translate into $3,954 payment, whereas a 30 year only $2,684. What that means is that every month you will need to come up with $1,270 or 32% less under 30 year plan.
And that is exactly what I mean by short term liabilities. Having this extra $1,200 every month will provide a significant cushion for your financial situation. If we were to expand the discussion, I would recommend an all-interest mortgage altogether. Even though, the days of zero-depreciation mortgages are mostly over, under that scenario you’d be looking at $2,083 required payment, further improving your financial situation.
Before you proclaim me crazy, let me address some of the more obvious and likely concerns:
Why in the world, would you need a half-million house? Great point, you should only buy as much of a house you need and can afford. Half a million in this case is just an example.
Sometimes interest rates vary based on the term. True – get the rate/term combination that results in the lowest required payment
More frequent than monthly payments allow you to pay off your mortgage faster. Not true! You are just making the same payment in smaller steps.
If my payment is lower, I can afford a bigger house. Technically true, but this post is about trying to save you money not inflate your lifestyle.
I don’t plan on sitting the mortgage out for 30 years. Then don’t – very few mortgages see their full term, most of them are closed due to sale or refinance, so few folks ever sit them out
Finally, what do I do with all this extra cash, should I spend it? Unfortunately, this is the trickiest part of all…
…You definitely should not be spending this money! Instead you should place it in one of the safer long term investments available to you. If you are planning to pay off the mortgage in 10 or 15 years – check out some government bonds, either directly or by means of a mutual fund. Stay away from equity or corporate bonds, this money is earmarked to ensure your security, do not gamble with it. Bank CDs or GICs are another viable alternative. Keep putting this money away until you are ready to move, refinance, renew, or have enough money to get out altogether. Every once in a while, when you are feeling particularly brave, you can throw in an additional payment or two.
Some things to be aware of under this plan is the bank penalties. Banks may not like early pre-payment, so you’d need to figure out the best balance between penalties and benefits of early debt-free living.
Hope this was helpful. In terms of disclosure, this is a method that we have personally used, so I welcome any kind of questions or comments. I would leave you with one final thought: when choosing among financial products, always ask yourself a question, who benefits from either choice most. Funny enough, banks win with shorter term mortgages and hate pre-payments. Short term mortgages provide them with less credit exposure, faster equity appreciation (in case they’d need to repossess the property), and less interest rate risk (they are less likely to be stuck with too low a rate for a long time).
If you ever travelled abroad you have undoubtedly faced the very unfair exchange rates at the local exchange bureaus – some rates can be as high as 10% off from the wholesale currency market. Fortunately, there is an existing alternative to this injustice.
There are some people who are seriously averse to using credit cards, but they could be quite a convenient solution in this particular case. First of all, credit cards are accepted virtually everywhere and there are cash machines all over the world to easily obtain foreign currency. Secondly, it is much safer and more convenient to carry cards than wads of domestic and foreign cash when you travel. Finally, the rate you get is much closer to the wholesale rate than you get by any other means.
The biggest concern with using credit cards is cost. Most credit cards charge foreign transaction fees when foreign currency is being used. They range anywhere between 0 and 3%. There are opportunities to find the lowest fee card possible (you need to check the fine print of your credit card agreement).
If you plan to withdraw foreign cash from an ATM, keep in mind that some ATMs do charge a hefty commission for the transaction. These fees are usually posted at the machine itself. At the same time, most banks in Europe do not charge any fees on getting cash from your credit card. However, this transaction will be considered a cash transaction by your credit card with all related complications. Most cards charge fees to obtain cash regardless of the currency, which could be as high as 5% and may have a fixed minimum like $5. Credit cards also start charging interest as soon as transaction is processed. To manage these issues, you should find the card with the lowest fees and cash advance interest charges. Also, prior to the trip you should pay off the entire balance (and may be some extra), and pay the new balance off immediately at your arrival back home. This will help you to keep average balance at the minimum and avoid interest charges altogether.
Finally, not all cards are accepted everywhere. Visa, just as they claim, is the most widely accepted, closely followed by MasterCard. American Express is slightly less popular. Such cards as Discover, Diners Club and JCB are virtually unheard of in most countries outside of major hotels and airlines. There are other acceptability issues as well. For example, credit cards issued by American banks (Citi, Amex, Capital One) are not accepted in Cuba due to embargo. Some other countries are also suspicious of foreign cards, especially when used for online purchases.
So, you need a card that is accepted at your destination and carries the lowest combined fee for foreign transactions and cash advances, if you plan to withdraw cash, or just foreign transactions fore regular purchases. At the end of the day, even with all the fees, it could be much cheaper and safer to use your card abroad instead of carrying cash or travellers cheques (with their own fees and acceptance issues).
Domestic Amount = (1 + Cash Advance Fee %) x (1 + Foreign Transaction %) x (1 + ATM fee %) x Foreign Amount Or (Min Cash Advance Fee) + (1 + Foreign Transaction %) x (1 + ATM fee %) x Foreign Amount
In the past we whole-heartedly endorsed leveraged ETFs. (FD: we are heavily invested in two leveraged products - UYG and HOU.to) For those who are not familiar with the product, these ETFs attempt to replicate performance of an underlying index improved by a certain factor. There are two main categories of ETFs out there: Accelerated or Bull (2x, 3x and now even 100x) and Inverse or Bear(-1x or -2x).
We are no longer fans of the product and looking to off-load all of our holdings. And we definitely do not recommend it to anyone with longer than daily investment horizon. The reason for that turned out to be in the small print of their prospectuses. You see, the funds attempt to enhance only daily movements of the index. And that does not translate into any kind of predicatble long-term impact. For that matter, the impact is not correlated with the underlying index. ProShares' website (one of the purveyors of the product) and prospectus now bear a warning that “in the periods of high volatility the results will tend to exaggerate negative trends” (but not positive).
Our original logic behind recommendation was the obvious benefit of leveraging: if, over the long term, major broad indices return around 10%, the leveraged position should return 20%, as long as the investor is comfortable with temporary set backs.
It is now obvious that the aforementioned funds do not serve that purpose. It is interesting to compare performances of two funds that were meant to be mirror images of each other – ProShares’ Bull and Bear Dow Financials (UYG and SKF). Over almost any somewhat long-term period (12 months and up) both of them had negative returns. Counterintuitive? It still is to us. Furthermore, if you were to invest into its non-leveraged cousin iShares’ IYG, your returns would have been much more superior to either one of them.
However, we are still very much on board with ETF investing in general (for its ability to deliver diversity at a low cost) and leveraging (for its ability to enhance the results). Leveraged ETF however deliver none of the above.
New York Post has published an interesting article a couple of month ago on the actual value of a college degree. The authors argue that there is really not much value in college education. They also throw in a couple of calculations to make there case.
Now, college is fun. Life-long friendships and many families are formed on campus. It also gives you an opportunity to postpone real life. If that all there is, we should definitely consider it along the same lines as camp, but not necessarily a way to get ahead in life.
While we agree with the main premise of the aforementioned article, some numbers did not quite make sense for us, so we put together our own simulation.
Our base assumptions are: our college-bound friend will get a tuition bill of $25,000 (somewhat conservative) for the first four years of his adult life, after graduation he will get a job paying $50,000 per annum (aggressive), he will receive 10% pay increase ever year (very aggressive), he will save 20% of his before tax pay (very aggressive) to pay down his college debt and save for the future, his net worth will grow by 10% (both net positive and negative - fairway); our out-of-high-school fellow will get a job paying $10 an hour (conservative), will work full time and save 20% of his before-tax earnings, he will get only 5% increase every year (fairway) and his net worth will grow at the same 10%. By this measure after Year 1, our subject A’s net worth will be negative $25,000, subject B’s will be positive $4,000. After Year 5, subject A will make his first $50,000, make his first $10,000 payment toward his college debt, bringing the total net worth to negative $117,628; Our subject B will be making only $12.16 an hour and contributing $4,862 bringing his net worth to positive $26,738. Our two fellows will only converge in terms of net worth after 25 years of hard work, at which point A will be making over $336,000 (unrealistically high), and B will $32.25 an hour (very realistic).
As you can see from this example based on very skewed assumptions, no-college is a pretty viable existing alternative (from the financial benefits standpoint).
Canadian government figure out a brand new Alternative to tax its subjects. As of September 2009, all cable and satellite TV customers will have to pay an extra 1.5% of their bill. Guess where they promise for the money to go to? To subsidize local TV stations in markets of less than 1 million people. There are at least 3 things that a wrong with that, besides being a way to grab more money from already cash-strapped taxpayers:
How do you define a “market”?
There are only 30 million people live in Canada, how many markets can there possibly be?
So, if I decide to live in a smaller community, does it mean everyone else should pay for my entertainment?
Of course, there are Existing Alternatives to resist this new invention:
You can stop watching TV
Switch back to antenna and watch whatever channels are still available in analogue
It is no news that Canadian investors have been being screwed by their investment industry: average MER for a mutual fund in Canada is 2.5% and don’t even get me started on the $29.99 brokerage fees. Somehow Canadians are quite content and even a little suspicious of some of the fees we see south of the border. One of the extreme examples would be Vanguard family of mutual funds with most funds charging under 0.1%. If my math is correct that would be 25 times less.
Luckily, in today’s world of global finance Canadians too have access to these low-cost beauties by the means of ETFs. There had been a lot of discussion out there about ETFs, so we’ll limit ourselves to stating that these are mostly index mutual funds that are traded on the exchanges. Do you want to invest in total US market? Just buy Vanguard’s VTI fund (which carries 0.07%) through any Canadian brokerage (beware of the exorbitant brokerage fees we mentioned)!
Unfortunately, the story does not end here. If you have a Canadian source of funds and intend to eventually use the proceeds of your investment in Canada, you would have to exchange the funds twice from CAD to USD prior to purchase and from USD to CAD upon liquidation. Each of those transactions will chip off at least 1.5-2% of the total amount. On the other hand, compared with an average Canadian mutual fund, the investor will break even just after two years of paying lower MERs.
There are some Existing Alternatives to this situation. iShares has a number of Canadian denominated ETFs, which are traded on TSX. What they do is buy units of the same iShares US-based funds and sell them in Canada. For example, IVV tracks S&P 500 in USD and is replicated by XSP in CAD. Beyond simply buying the units, iShares offers a currency hedge against the fluctuations in the exchange rates. That could be very useful for the short term investors. For the longer term kind (exchange rate fluctuations usually cancel each other out), it does eliminate the need to pay the piper twice. This feature comes at a price though: IVV’s MER is only 0.09%, whereas XSP 0.24% (I know, almost 3X). But the benefit of trading in home currency remains for over 25 years.
Check this math:
Assume constant exchange rate of 1:1
Initial investment in IVV right away will be at 2% disadvantage
This disadvantage will diminish every year as XSP MER will chip away bigger pieces
Better performance, in this case, will benefit XSP, as it will have more funds invested to begin with
At the point of redemption IVV will be further reduced by an extra 2% exchange fee
Keep in mind that for some funds this type of “couple pricing” may carry greater spread and, at some point, the balance will tip toward the US-based fund. At the same time, not all funds are present in Canada, in case of iShares, only very few funds are actually replicated. Canadian markets are significantly shallower in terms of liquidity, which could partially explain higher fees in general, and may carry some pricing premium. Also, they are more regulated, in terms of transaction types, etc. rendering some trading schemes impossible.
As always, do your own math and keep an eye out for existing alternatives!
There are a couple of things in life that I think I do well: saving money and decreasing my household’s waste. Obtaining a great value or helping out the environment are both excellent things to do separately, but I often try to combine them for maximum benefit.
Used or new? Before I make almost any purchase, I first consider options other than just going to a store and buying it new. I begin by asking myself a couple of simple questions:
Is it worth my time to search for a not-new item? (For me, the answer is usually “yes” when the item in question costs more than a few dollars and the situation is not an emergency.)
Are there compelling reasons that I should purchase the item new? (This one depends on a number of factors, including your preferences, ability to fix things, quality you are looking for, etc.)
If the answers to these questions are “yes” and “no”, respectively, then I begin my search, which basically assumes the following:
Buying used is almost always cheaper.
Renting is cheaper in the short-term, and possibly in the long-term.
Borrowing or accepting for free is certainly cheaper than either of the above.
Reducing waste by taking something off someone’s hands that might otherwise end up in a landfill is a good thing.
The next question I ask myself is, “Do I need to own this item?” Of course, you’ll want to own your kitchen cabinets, but do you really need to own that table saw that you might use once and then never touch again?
I weigh my options carefully here, because I’ve burned myself in the past by purchasing something that I could have rented or found a workaround for. (Yep, I used that table saw once and never touched it again.)
This process might seem a little time-consuming, but after using it for a while, it becomes second-nature. For instance, if I see a book I’d like to read or a movie I’d like to see, my first instinct isn’t to purchase it, but to see if my local library has it in stock. I’ve trained myself in this manner for a number of products, so I no longer have to think very much about if I should buy something that is new.
Alternatives to buying new Here are some resources I use for finding alternatives to buying new:
Local rental centers. Home improvement stores will rent tools, catering places will rent extra chairs for parties, etc.
Craigslist can be somewhat onerous to navigate, but here you can find people willing to barter, sell, or give you the stuff you want.
eBay is perhaps the web’s most convenient place to buy used items.
Go to Freecycle to find your town’s group and see if what you’re looking for is about to become someone else’s trash.
Libraries and community centers. Of course, you can borrow from a library, but many I’ve seen also have “bookswap” areas.
Your workplace. Where I work, we have a table where we drop off small items we no longer want, such as books, food, etc. Larger unwanted items are documented on a sheet of paper for people to peruse. (If you’re more high-tech, an intranet would be great for this.)
All of the above, with the exception of rental centers, also work the opposite way: when you no longer need an item that you own, you can sell or offer it free to someone else. I also have used the following to offer up my goods:
Gazelle, which will purchase nearly all of your electronic items.
Various charities. Who I give to depends on the item. I give old clothes to the local SPCA’s thrift shop, books to the library, etc.
On a couple of occasions, I’ve used these services to give items to people that are so grateful to have them, it really gave me happiness. That’s just another added bonus of learning to extend the usefulness of an item.
Ebay has been great at creating a global marketplace for all kinds of products. Buyer and sellers from all over the world come together to find or sell what they need or have at the prices that both prices agree on – global capitalism at its finest.
Now the same principles are applied in the financial marketplace. We are talking about peer-to-peer financing. It exists under many different models from VirginMoney model, where relatives and friends lend each other small amounts and process paperwork online, to Zopa model, where lenders are bidding on pools of loans grouped by credit scores. There are tonnes of models in between.
While no comprehensive industry information is readily available, we are finding that Zopa has been the most successful so far. Mind you, it appears they have been around the longest. They now operate in UK, US, Japan and Italy.
At the same time different models has been tried State-side as well. You have your Prosper, where lenders bid on actual requests for loans, Lending club, which looks very much like on-line credit union, and even student loans only service Fynanz.
P2P lending services are mushrooming all over the globe, some of them have been spotted even in China, others focus exclusively on microfinance. Strangely enough, the idea hit the roughest patches in Canada, where the first site IOU Central (same model as Prosper) was shut down within weeks of launch.
P2P lending is a definite Existing Alternativeto current financial systems. We will be watching it closely, hoping for development of global P2P conglomerates the likes of eBay in the near future.
It is no news that financial sector has been in a steep decline for a couple of months now. Some would argue this is the best time to start buying up some of the depressed quality financials. While it is probably a good exercise to examine a couple of big banks, there is a much easier Existing Alternative - simply buy in into the whole segment. There is a way to do that and accelerate one’s returns as well.
Good people at ProShares have a whole family of different ETFs that do just that. In the example of the financial sector fund, UYG, it is structured in such a way that it doubles daily return of the underlying index (when the index go up 1%, the fund is up 2%, etc.) Now, if you think the financials are undervalued, this thing would be twice as undervalued, how is that for value shopping!
There are funds for all tastes, including wider market indices and even the reversals (index goes up, the fund goes down, by the same %). It is definitely worth checking out. For all this excitement the expense ratios are fairly low – roughly at 1%.
A Canadian company Horizons BetaPro, not to be left behind launched its own family of funds with similar aspirations. These are designed for a Canadian investor, with the more Canadian level of fees at around 1.5%.
Now imagine if you buy any of these on margin… If the S&P goes up by 10%, the fund is up by 20%, your equity is up 40%, especially with today’s low margin rates…
Today we are proud to announce the first installment in our Existing Alternatives Awards series. The winner in the category "Financial Advice" goes to Get Rich Slowly! This site is full of great original personal finance information in all possible areas. Every article sparks extensive discussions bringing in wide arrays of opinions. Most of the articles go a couple of steps further and deliver lifestyle advice as well. It usually could be summarized by
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