A bump in the social lending road?

A few weeks ago, Canada's first person-to-person lending platform community opened its doors with the launch of IOU Central. At the time, there was some discussion about which regulatory bodies would oversee this industry in Canada. The position taken by IOU Central was that there were essentially no watchdogs, and they based their operation on the Prosper model.

Well, it seems that Canadian P2P lending may have some watchdogs after all. According to IOU Central's website, they are currently operating with "limited functionality" while they "resolve a regulatory matter". During this downtime, users can not post new loans, nor can they place bids on loans. The only activity is the repayment and servicing of funded loans under the borrower and lender agreements.

This is an interesting turn of events, as IOU Central seemed to come out of nowhere, while the CommunityLend project has been working on regulatory and technical requirements for ages. The difference, of course, is that CommunityLend seems to be aiming to have its ducks in a row before launch, rather than going off half-cocked. It's possible that IOU Central's "regulatory matter" is actually very minor, and they'll be up and running again soon, but it looks to me as if they rushed to market, and are now paying the price for their lack of preparation.

The clouds part

I've written before that Ms. Loonie does not have taxes withheld from her paycheque. Instead, she uses an ING Direct account to save up her tax payment. This will be the first tax season to test this system (until this past year, she's always had taxes withheld), so I was crunching some numbers yesterday to determine where the ING balance stands relative to her estimated taxes owing.

Ms. Loonie is a post-doctoral researcher, and as such is paid under a fellowship grant. Other than the first $500, this grant income is not tax-free, because she doesn't qualify for the educational amount (she's no longer a student). Because the income is taxed, I've been treating it as regular employment income in my calculations, with the associated CPP and EI contribution requirements.

It occurred to me yesterday, however, while looking over her T4A forms (the official CRA form to document pension, annuity and other income), that CPP and EI do not apply to her income. This effectively reduces her taxes owing by more than $2,500!

After making the appropriate adjustments, it looks like she will have more than enough saved up to cover her tax bill. That's great news, but the even better news is that she started late last year with her ING savings (she made her first contribution in late August, giving her only eight months to save up for her April 30 payment), so with a full year to save up for her 2008 bill, she can actually adjust her contribution amount, diverting 25% to build up her own cushion of savings.

I've been dreading tax season this year, worried about whether we'd have enough to cover her bill, so with this sudden realization, a huge weight seems to have lifted.

This is a good day.

Happy Bissextile Day!

Now, before you all jump on me, saying that Bissextile Day is in June, I'm talking about the extra day that gets added in a Leap Year. Apparently, in the Julian Calendar, this extra day was initially an extension of the "sixth day before the calends of March", resulting in a "sixth day" that was twice as long as usual, thus the "bissextile", or "twice sixth" day. Phew. That's a lot of quotes and calendrical conventions.

Anyway, if you haven't done so already, today is your last chance to make a 2007 RRSP contribution (you can make a contribution tomorrow, but it can't be counted as a deduction on your 2007 tax return). If you're planning to make an in-branch contribution today, then expect some line-ups: today is the RRSP deadline and a Friday and the last day of the month, so banks will be just a bit busy.

Enjoy...

Managing your finances: pretend you're a corporation

I work in the marketing department of a large Canadian corporation. In my day-to-day job, I'm constantly dealing with different departments and business units and their individual business objectives and budgetary constraints. However, the scale of it all makes the actual dollars and cents seem very abstract; it's often hard to look at a multi-million dollar advertising budget and see it in terms of real money.

A couple of weeks ago, Ms. Loonie and I attended our condominium corporation's annual general meeting. We live in a building with about 100 units, and approximately 30 units were represented at the meeting. This was my first time attending such an event, and it was very interesting. Somehow, the smaller scale of this corporation's financial picture made it much more tangible, and I was really geeked out to go over the financial report. There are a lot of things from the way a small corporation like a condominium operates, that you can apply to your own finances:

• Reserve Fund - A big part of our common element assessment every month goes toward building the condominium reserve fund. This is the fund that is used to cover any "out-of-budget" expenses. Need to replace your boiler? Use the reserve fund. Need to fix leaks in the parking structure? Use the reserve fund. It's essentially the corporation's Emergency Fund, just on a much larger scale. I was interested to learn that the Condominium Act requires that a reserve fund be held in an interest-bearing savings account, just like your personal Emergency Fund should be.


• Operating Budget - Much of the rest of the common element fees help to cover things like keeping the lights on, paying the maintenance staff, and heating the building. These are all planned expenses, and the corporation takes pains to stick to this budget in order to maintain a positive cash flow. It sounds simple, but corporations need to do this just as much as individuals need to stick to their own budgets.


• Reserve Fund Study - This was the item I found most fascinating. The condominium commissions a study on a periodic basis to determine the general status of its assets and infrastructure. A team of engineers conducts a very thorough review of the building, and determines the amount that the corporation should set aside to pay to fix or replace elements when they eventually fail. This really makes the reserve fund a combination of the Emergency Fund and Freedom Account concepts; it's where we keep our "rainy day" emergency cushion, but it's also where we save up for periodic major expenses, like re-paving the driveway every 10 years, or replacing the heating system every 20 years.

It's not exactly a new idea to think of yourself as a corporation; lots of bloggers have written about how we're all essentially self-employed (even if you work "for the man", you're essentially a service provider, and your employer is your only client). It helps, however, to shake up your way of thinking about your finances. I know this meeting was an eye-opener for me, and I think I learned a lot.

Early RRSP withdrawals

I seem to have savings and taxes on the brain. I'm not sure whether this is because of yesterday's budget announcement, or Friday's RRSP contribution deadline. Either way, if you've been conscious at any point this month, you've probably been urged by someone to throw those piles of extra cash you have lying around into your RRSP.

While everyone's talking about getting money into RRSPs, I thought I'd look at the ways it's possible to take out your RRSP savings before retirement. Specifically, the HBP and LLP offer a way to do this when buying your first home, or pursuing post-secondary education, respectively.

Home Buyer's Plan

If you are a first-time home buyer, you can withdraw up to $20,000 from your RRSP, with no tax penalty, provided this money goes toward the purchase of a home within a specified time frame. You then have fifteen years to pay this money back in annual instalments into your RRSP. If you miss a year of catch-up contributions, then the amount of missed contributions is added to your taxable income, and taxed at your marginal rate.

Example

Suppose you withdraw $15,000 for a down payment under the HBP. You will then be required to pay back $1,000 per year to make up for the withdrawal over the next 15 years. If you miss a year, then $1,000 will be added to that year's taxable income.

You can look at this withdrawal as a loan you make to yourself from your retirement savings. There is no interest on this loan, except for the lost compounding on the funds you withdrew. If you withdraw $20,000 and pay it back over 15 years, then the value of those funds will be less than $20,000 in today's dollars. Hopefully you will make up the difference in home equity, but this is far from guaranteed.

Read more details on the HBP here.

Lifelong Learning Plan

If you are (or your spouse is) enrolled in (or planning to enrol in) post-secondary education, then you can withdraw up to $10,000 per year (up to a plan limit of $20,000) from your RRSP to cover educational expenses. You then have 10 years to pay this money back into your RRSP. As with the HBP, any missed catch-up contributions will be added to your taxable income.

Read more details on the LLP here.

Repayment

To pay back a withdrawal under either of these plans, you must complete Schedule 7, and include this with your tax return. The Schedule 7 designates a portion of your annual RRSP contributions as repayments to the HBP or LLP. These designated contributions will then not be included as deductions on your tax return.

Example

Suppose you have withdrawn $15,000 under the HBP, and make two RRSP contributions, one for $1,000 and one for $5,000. You would use Schedule 7 to designate $1,000 as an HBP repayment, and only the $5,000 would be included as a deduction on your tax return, even though you technically contributed $6,000 to your RRSP.

Note that the net tax consequence of making the $1,000 repayment and another $5,000 in RRSP contributions is to reduce your taxable income for the year by $5,000. This could also be accomplished by claiming the entire $6,000 as a deduction, and "missing" the $1,000 repayment: you would reduce taxable income by $6,000 for the contribution, and then increase it by $1,000 for the missed repayment.

Unless it bothers you to be "in arrears" on your repayments (to yourself), there doesn't seem to be much reason to claim a formal repayment on your tax return. The key is to ensure that your total RRSP contributions each year of your repayment period are greater than your required repayment amount.

Tax Free Savings Account: a Roth account for Canadians?

Wow, a lot can change when you spend a week on the couch. The federal government released the 2008 budget yesterday, and the news on everyone's lips (well, maybe not everyone, but at least on most Canadian PF bloggers' lips) is the creation of a new tax-advantaged savings plan, the TFSA. I hate to be a day late and a dollar short, but I can't go without commenting on this.

I've written before about the savings plans available in Canada and the US, and where the RRSP has a close cousin in the IRA, and the RESP is analogous to the 529 plan, the one savings vehicle unique to the United States is the Roth IRA. While the IRA (like the RRSP) is funded with pre-tax dollars, and withdrawals at retirement are fully taxed at the marginal rate, the Roth IRA is funded with after-tax dollars, and withdrawals at retirement are not taxed.

Well, the Roth account seems to have a new cousin (by marriage) in the proposed TFSA. Although not designated as a retirement account, the workings of the TFSA seem comparable to those of the Roth IRA: you can contribute up to $5,000 per year to a TFSA, and the income you earn in the account is not taxed. You can withdraw from the account at any time without penalty, and doing so actually frees up your contribution room again, so you can "re-fill" the account.

I'm finding it very difficult to find a downside here. The TFSA seems to be the ideal place for Canadians to keep their Emergency Funds. There's obviously a lot to be worked out here. I'm not sure what investments can be held in a TFSA, and what sort of interest rates will be paid on "cash" investments, but it sounds like a fantastic idea.

And it's nice to tie up a loose end by finding a dancing partner for the Roth account.

Weekly Wednesday weigh-in: Flu edition

Hi, all.

Sorry for the lack of posts lately. Since last Thursday afternoon, I've been down with the flu, lying pretty much comatose under a pile of blankets and nursing a fever of 38-39°C (100-102°F). I've barely been able to feed myself, let alone compose a coherent blog post. For those of you asking how that's different from any other week, I say "way to kick a guy when he's down."

At any rate, I'm back at work today, and have just finished wading through a sea of unread e-mail and composing my to-do list for the foreseeable future. Funny how some time away from the office can help to crystallize what you actually need to get done.

One of the "benefits" of spending several days in a sneezing, coughing, fevered haze is the loss of appetite. My reduced caloric intake nicely complemented my lack of activity, keeping my weight steady at 214lbs. Granted, this still means no forward progress, but at least I didn't backslide.

At this point, I think the message on the fitness front is clear: this isn't going to happen unconsciously. I need to make some serious commitments to stay active and eat well if I want to make a dent in this goal.

Let's make March a month of changes.

Payday update

Today was payday in the Loonie household, so I've updated my progress bars and NCN Network chart. Some highlights of my progress so far:

• Reduce my revolving debt to $22,300 - This will be a stretch. The last couple of weeks have seen a lot of dining out, so I've had to dig into the Freedom Account to cover some of these expenses. We'll see how the next week goes; I might fall short of this goal by about $50 or $60.


• Grow my Emergency Fund to $1,250 - As of today, my Emergency Fund sits at exactly $1,250, so unless I actually need the funds between now and next Friday, this goal is checked off.


• Obtain copies of my credit report from each of the three Canadian reporting agencies - I've received my reports from Equifax and Experian, and am still waiting for my TransUnion report. TransUnion is the only request of the three that I had to mail, so it makes sense that it would take longer. As for the two I've received, the only error I've found is that Equifax has my postal code wrong.

Wednesday weigh-in

Sorry for the lack of posts in the past few days. Ms. Loonie and I spent the better part of the weekend driving around visiting friends, and my return to work was a bit hectic, so I haven't had much of a chance to compose my thoughts.

One thing that came out of missing my Tuesday weight update, though, is that it now falls on a Wednesday (barely), making it my Wednesday weekly weigh-in. Alliteration is good, as far as I'm concerned, so let's make that the new standard.

As much as I may be excited about the new name of my fitness status report, I'm not so thrilled about the actual results I have to give. I've actually gained two pounds in the past week, for a total of 214. I know exactly why this is; my exercise outside of my daily commute consisted of a single squash game, and the past week has been a ridiculous feast of rich foods. This is largely due to the parties we attended this weekend, but some better planning certainly would have helped. My wallet has also felt the pinch in the last couple of weeks, and I'll have more on that with my payday update.

At any rate, my weight loss progress bar will remain at 0% until I actually break the 212 mark. Until then, perhaps I should rename the blog Loonies And Excuses? :p

Monday is "Family Day"

In Ontario, the third Monday in February is now known as Family Day, a new statutory holiday instituted last fall. It was one of the first changes announced by the Ontario Liberals upon their 2007 re-election, and on the one hand, it seems like a shallow, "touchy-feely" gesture. However, I have to admit that a February long weekend is more than welcome.

Ms. Loonie and I are visiting friends in western Ontario this weekend, so having Monday off will let us enjoy our Saturday and Sunday travels without the pressure of getting back to the grind as soon as we get home. It's not glamourous to spend the holiday getting caught up with regular Sunday chores, but it'll be nice not to have this stuff hanging over our heads on the weekend proper.

Does your employer recognize Family Day? If so, how are you planning to spend your day off?

Person-To-Person Lending: not just for Americans anymore...

I've read a fair bit online about Prosper, the popular American person-to-person lending community, and I've been wondering when we would see this sort of thing in Canada. For months, I've been checking in on the CommunityLend project, which looks promising, but has yet to provide any concrete launch plans.

This week, Canada got its first person-to-person lending platform, with the launch of IOU Central. Like Prosper, IOU Central allows users to lend or borrow funds. Users can request a loan of $1,000-$25,000, or bid on loans in increments of $25-$25,000. As I understand it, 40 users could bid $50 each to fund a $2,000 loan, or a single user could fund the entire loan. The ability to diversify across multiple loans provides a nice protection against default.

An interesting point is that, although IOU Central is not insured by CDIC, they keep member deposits at a CDIC-insured bank, effectively providing "CDIC pass through insurance". This is similar to the indirect FDIC insurance enjoyed by PayPal members. My first thought on reading this was, "Holy smoke, they insure the loans!" However, I soon realized that it's only your unlent deposits that are insured; once you've funded a loan, you're at the mercy of the borrower.

This service is brand new, so I'm a long way from actually trying it out. However, I'll be very interested to see what kind of reaction this gets, and what happens when CommunityLend finally comes on the scene.

Happy Valentine's Day

Happy February 14^th to all of you.

Ms. Loonie and I aren't big on celebrating Valentine's Day, beyond exchanging cards and spending some time together, but here's some Valentine's reading for you:

• Nine tactics for a frugal Valentine's Day (courtesy of The Simple Dollar)


• My Frugal Valentine: Cheap ways to say "I love you" (courtesy of Get Rich Slowly)


• Five ways to save money on Valentine's Day (courtesy of Sound Money Matters)


• Frugal tips for Valentine's Day (courtesy of Million Dollar Journey)


• Understand the five love languages (courtesy of Blueprint for Financial Prosperity)

Trent makes the big time

A little-known personal finance blogger named Trent Hamm runs a site called The Simple Dollar. Well, this blog finally received some attention today. As I was getting ready for work this morning, with Breakfast Television playing in the background, I suddenly heard a list of frugality tips being read out. These sounded familiar, and I realized they were reading Trent's post Can You Devote Fifteen Minutes A Day To Frugality? It's great to see this blog finally come into its own.

I'm kidding, of course, about the "little-known" stuff. Trent's one of the most prolific and well-known PF bloggers I know of, but it was still a kick to catch a mention of one of my favourite websites. Good work, Trent!

Weekly weigh-in

Last Tuesday I took my inaugural weight measurement in preparation for the 25 pounds I plan to lose this year. I came in at 212lbs, as indicated in the progress bar in the right-hand column. The goal is to drop to 187lbs by December 31, which will bring my BMI down to a healthy 24.7.

In order to keep on top of my weight loss, I'll be posting my progress every Tuesday. This will be based on a Tuesday morning measurement using our bathroom scale, taken before breakfast.

To kick things off, this morning's reading showed no progress from last week. This doesn't surprise me, as we had a bit of an indulgent weekend on the food side. I've been keeping up my streak of walking to and from work every day (30 minutes each way), and I played squash three times last week, but I'll need to add a little more strenuous activity to my routine to get the ball rolling.

Checking in on my February goals

Being on a bi-weekly pay schedule means that, in terms of progress toward financial goals, not a whole lot changes between paycheques. Once the money has come in, there's very little, beyond sticking to my budget, that I can do to hinder or help my financial progress. As a result, I only update my financial progress bars on payday.

My non-financial goals, however, are another story altogether. I can generally act on these at any time, as they do not consume financial resources. I often fall into the trap of scurrying around at the last minute trying to wrap these up, but this month I've actually been more or less on top of these goals:

• Obtain copies of my credit report from each of the three Canadian reporting agencies - I faxed and mailed my requests to the bureaus last Thursday. Given that I already know (or at least strongly suspect) that Equifax and TransUnion have outdated address information on my file, I'll be very interested to see how smoothly this transaction goes.


• Set up an automatic monthly charitable donation - This afternoon, I set up a monthly $20 donation to Jazz.FM91, a listener-supported Toronto radio station. I've been listening to this station for a long time, and I figure it's about time I contribute. Later in the year, I'll be looking into sending some money to my alma mater, as well as some humanitarian causes. Meeting my 2008 goal of $2,000 in donations is important to me.


• Walk to and from work every day, and work out at least three times a week - I've walked to and from work every day in February, and I played squash three times in the past week. I'll have a weekly weigh-in tomorrow.


• Blog 30 times in February - I crossed the half-way mark today, so I seem to be on-track.

More than two weeks remain in February, but so far it looks like I'm positioned to hit my targets.

RRSPs and tax withholding

As we near the February 29 RRSP deadline, lots of posts are popping up regarding RRSP contribution strategies. Million Dollar Journey has an interesting post that derives a formula for calculating an appropriate RRSP loan amount. He recommends a target loan amount that is equal to (or less than) the total tax refund that would result. This means that, once you receive your tax refund, you can immediately pay off your loan in full.

The nice thing about this approach is that it essentially allows you, if you have the contribution room, to use your 2007 tax refund as a 2007 RRSP contribution. In his example, where you already have $5,000 in 2007 contributions, with a 40% marginal rate, you will be expecting a $2,000 tax refund. By taking out a $3,333 loan, and using it to make a $3,333 contribution before February 29, your total tax refund will increase to $3,333 (the amount of the loan). You therefore have no new debt (since the refund and the loan cancel each other out), and you have $2,000 in new retirement savings (from contributing your original 2007 refund) plus an additional $1,333 that basically came out of "thin air". Best of all, this is a trick that you can repeat year after year. Leveraged investing at its best.

My employer has a less-than-intuitive approach to income tax withholding, mostly with respect to our year-end bonus. Any bonus for which we qualify is included in the first pay of the new year, rather than the last pay of the year. We have the option to defer up to 85% of the bonus into a group RRSP, and I've taken advantage of this option each of the past three years. This has an unexpected (at least to me) impact on tax withholding.

Take this year, for example. I deferred my bonus with a $6,000 RRSP contribution on January 10. This will be claimed as a deduction on my 2007 tax return, but my employer adjusts my tax withholding as if it were a 2008 deduction. Therefore, every year I need to match my previous year's contribution in order to avoid paying taxes (failing to do this last year landed me with a $1,400 tax bill).

It took me a while to wrap my head around this one, but now that I'm aware of it, it forms a crucial part of my RRSP contribution planning.

What are your RRSP or other tax planning tricks?

Interesting study of Canadians' spending habits

I received an e-mail yesterday regarding a recent study by Mackenzie Investments into the spending habits of Canadians. Not surprisingly, the study found trends of overspending, particulary among younger Canadians. The study used a "Burn Rate" questionnaire to determine the respondents' level of overspending. The questionnaire consists of ten questions, each of which is in the form "have you [INSERT IRRESPONSIBLE SPENDING HABIT]?"

I took the test myself, and came up as an "Overspender". The main reason for this, however, is the "have you..." form of the questions. It would be nice if there were some questions along the lines of "how long has it been since you..." or "how many times in the past six months have you..." to gauge your current behaviour. I took the test again, this time interpreting each question in a "do you..." context, and came up as a "Controlled Spender". That's a big difference. I understand that past behaviour can be indicative of underlying attitudes and personality, but the questionnaire seems a bit simplistic.

Still, the results of the study do show an alarming prevalence of irresponsible spending among Canadians.

You can read the press release or take the test yourself.

Taking the high road?

When I got home last night, I checked my auto insurance renewal letter to confirm the new premium. As I expected, the premium specified on the letter was $0.01 lower than what was charged to my chequing account.

At first, I felt I had an iron-clad case: they had charged me more than they said they would, and I should not have to pay my NSF fee. However, it then occurred to me that if I had kept even a $5 cushion in my chequing account, I would have avoided the fee anyway.

This kind of minor variation in income/expenses should be the sort of thing that I can manage through regular cash flow. An unexpected $0.01 should not put my account into overdraft. Although I'm technically in the right here, even the slightest bit of contingency planning would have saved me this hassle.

I can't quite bring myself to take my insurer to task over a $0.01 overcharge. I suspect that this is a rounding error on their part, and I'll keep tabs on my future charges to see whether the premium reverts to the "lower" amount.

The NSF fee is simply the price I have to pay for not planning for the unexpected. From here on, I will not let the balance in my primary chequing account fall below $5.

Looking into RESPs

The Loonie clan has seen a number of new additions recently, with births and pregnancies abounding. As a result, I've been thinking about RESP options, and decided to learn a little more about the workings of this plan. I've written briefly about RESPs in my Loonies And Savings Plans post, and other Canadian bloggers have posted great guides to RESPs, so I won't be delving too deeply into the intricate workings of these accounts. Instead, I'll look at a few of the rules, and lay down my decision on participating in the plan.

The Basics

When you set up an RESP, you register two individuals under the plan:

• The contributor (you) is the subscriber


• The future student is the beneficiary

The subscriber can contribute after-tax money to the plan, up to a lifetime limit of $50,000 per beneficiary. In contrast with RRSP contributions, the subscriber does not receive a tax deductions for any RESP contributions. However, the plan does have a couple of tax advantages:

• Provided that the beneficiary attends a university or college, withdrawals from the plan are taxed at the marginal rate of the beneficiary, not the subscriber. Since the beneficiary, as a student, should be in a low tax bracket, they will pay very little tax on these withdrawals


• The subscriber has already paid tax on the contributions, so only the growth in the investments is taxable. Combined with the first point, this means that RESPs can provide over 20 years of nearly tax-free growth

In addition to being a fairly tax-efficient way to save for a child's post-secondary education, there is the additional benefit of the CESG, which matches 20% of subscriber contributions, up to an annual maximum of $500 and a lifetime limit of $7,200. The CESG matching contributions count as investment growth, and are not taxed when withdrawn by the beneficiary. This represents an immediate tax-free 20% return on the first $2,500 in annual contributions.

The Big "If"

The big question with RESPs is, what happens if the child doesn't pursue post-secondary education? In this case, you "collapse" the plan, meaning that you, as the subscriber, close the account and withdraw the funds. Since you can have over 20 years of investment growth in the plan, there will clearly be some taxes to be paid. Here's the rundown:

• Your contributions are not taxed, since you made them with after-tax dollars


• You must refund any CESG that you received, immediately knocking up to $7,200 off your investment growth


• You must pay a 20% penalty on your investment growth (excluding CESG)


• You must pay taxes on your investment growth (excluding CESG) at your marginal rate

That's a pretty big tax hit to look at, but there are many factors to consider.

An Example

Suppose you contribute the $50,000 maximum, receiving the $7,200 CESG maximum, and over the years your investments grow to a total of $100,000. If the beneficiary attends university or college, then they have access to $57,200 in tax-free money, plus $42,800 in investment returns that, if used for education, will be taxed at their (low) marginal tax rate.

If the beneficiary does not pursue post-secondary education, then the plan must be collapsed, and the funds revert to the subscriber. If the subscriber's marginal tax rate is 40%, then they will have to pay the following:

• 0% tax on $50,000 contributions = $0


• $7,200 in refunded CESG


• 20% penalty on $42,800 investment growth = $8,560


• 40% taxes on $42,800 investment growth = $17,120


• Total paid = $32,880

This leaves the subscriber with $67,120 ($50,000 contributions plus $17,120 growth) out of the $100,000 that was built up in the plan. The 20% penalty, combined with the loss of favourable tax treatment of investment income, result in a huge tax hit to the subscriber in the event of a collapsed plan. However, there is some rationale behind these penalties:

• The 20% penalty is meant to offset any investment growth that you realized based on the CESG matching. Since your contributions were topped up by 20% each year, 20% of your investment growth is essentially due to this grant. So, having to pay back the CESG plus 20% of your returns makes sense


• The RESP can be looked at as a sort of "education insurance", where you pay an annual premium so that you have "coverage" in the event that the beneficiary pursues post-secondary education. Unlike most insurance policies, however, you get back all of your contributions at the end, with interest, if the plan is collapsed


• The $17,120 in net investment returns in the example given above should still be better than inflation, so even though you paid a big chunk to taxes, your contributions have still more than kept their value over time


• You were essentially willing to "gift" all of your contributions to the beneficiary anyway, so getting back your nominal contributions is a pretty nice consolation prize

The Verdict

For me, it really comes down to this: an RESP is a way of saying to a child, "I'm willing to help you out if you decide to pursue post-secondary education." If the child takes you up on the offer, then they have a great resource to help them through their education. If not, you've passed up some potential investment opportunities, but you more than recoup your contributions, and you know that you were there to support the child. There's nothing to stop you from giving them some of this money anyway, if that's what you want to do.

I'll be looking into setting up RESPs for some of my young relatives over the next couple of years.

Payday update

Today was payday, so I've updated my progress bars and NCN Network chart.

It's still early in the month, and there's not a whole lot to say, but I seem to be on track with my goals so far. I'm planning to request my credit reports and set up my charitable contributions this week, and I've been keeping up with the exercise goals so far. The financial targets are in reach, so I'm feeling pretty good.

Going from "Yeah, right" to "All right!"

A couple of posts yesterday really got me thinking about where I am in my "financial recovery". Trent wrote that a very inspirational post detailing the bad place he found himself in a couple of years ago, and the steps he took to get to where he is today. JD wrote about the experience of developing positive cash flow. Both of these really hit home for me, as they underscore the changes in behaviour and outlook that have helped me improve my financial picture over the last several months.

I've been in debt for a long time. Maybe not as long as some, but long enough that I had more or less forgotten what it felt like to be debt-free. Over the past five years, I've searched for advice and motivation on getting myself in better financial shape, but never really found any traction. The advice I read then was the same as what I read today:

• Spend less than you earn


• Pay yourself first


• Have an Emergency Fund


• Pay off high-interest debt


• Save for retirement

When I used to read these tips, however, I would tend to scoff at the suggestions. "Sure," I would say, "it would be great to have an Emergency Fund of 6 months' expenses, but how am I supposed to get there when I'm barely making minimum payments on my credit cards?" I would then dismiss the advice, and more often than not, go out and buy myself something to make myself feel better.

As my income (and thus the denominator in my debt ratios) grew over the years, I was able to get an unsecured line of credit to help with my cash flow. By using my line of credit to "pay off" my credit cards, I stopped paying interest on my credit cards. As a result, I no longer looked at my credit card spending as revolving debt, and didn't realize that I was still digging a hole, just with a different shovel. My total revolving debt continued to grow.

Finally, last April, I found myself with a $1,500 tax bill, a car needing a $900 timing belt, a line of credit rapidly closing in on its credit limit, and no savings. At this point, I finally realized that something needed to change.

Fortunately, I had been reading a few personal finance blogs, particularly The Simple Dollar, and had some ideas for where to start. I opened an online savings account at ING Direct, and started throwing money into it. My goal was to build this up to a $1,000 Emergency Fund, as a starting point for something bigger. At the same time, I drew a line in the sand, saying that all my existing revolving debt was "old debt" to be paid off, and that I would budget to avoid taking on "new debt". Basically, I accepted that my current situation pretty much sucked, and decided that any improvement had to be better than the way I was living.

Over the next few months, I started to see these improvements. Suddenly I had money in a savings account that was still there at the end of the month. My revolving debt started to go down consistently every month. Within six months, I had built my $1,000 Emergency Fund, and knocked down my debt by 10%.

For the first time in years, my cash flow each month was positive. Granted, most of this "positive" flow reduces my debts rather than growing my savings, but the net effect is the same.

I still have a long way to go before I say a final goodbye to my revolving debt, but I know how I'm going to get there, and I'm starting to get a sense for what a debt-free life will be like.

It looks good, and it's all because I took that first small step.

Paying the stupidity tax

My father used to work as an accountant at a car dealership, and would joke about the various fees that get worked into the bill of sale on a car purchase. He would rattle off "fuel delivery charge, administration fee, not-paying-attention tax..." and this has always stuck with me. I try to avoid these sneaky fees wherever possible.

Of course, I'm also human. In December, I accidentally made more than my share of free withdrawals, and incurred a transaction fee on my otherwise free savings account. Fortunately, I was later able to get the fee waived, so I breathed a sigh of relief, having learned my lesson to be more vigilant with my accounts.

Or so I thought.

Yesterday I went $0.01 into the red on my primary chequing account. My car insurance policy just renewed, and there was a $5.76 increase in my monthly premium. I left the "exact" amount of the premium in chequing, so that my insurer could debit it directly from the account. Unfortunately, the amount actually drawn from the account was $0.01 more than what I had left in there.

I don't have my insurance documents with me, so I can't double-check the monthly premium. I honestly thought I had left the correct amount in chequing, and if this turns out to be the case, then I'll dispute the overdraft. However, there's a very good chance that I simply mis-read the premium, and that this is entirely my fault. If that's the case, then I'll pay my NSF fee and finally learn my lesson.

This is a strong argument for keeping at at least some degree of cushion in my chequing account.

This month has 29 days

In addition to being an Olympic year, 2008 is a Leap Year. That means your savings accounts will earn an extra day's interest, but your debts will also accrue an extra day's interest. Most significantly, this year February has 29 days.

For those of you here in the Great White North, a Leap Year has a specific impact on tax planning. The deadline for RRSP contributions in a Leap Year is February 29, not March 1. This means that, if you make a contribution after February 29, it will be counted toward your 2008 (or later) taxes.

February 29 is a Friday, and will therefore be a very busy time in most bank branches you might choose to visit. Therefore, it's probably a good idea to set things in motion for any last-minute RRSP contributions before the 29^th, so that you don't find yourself late to the party.

HSBC Direct rate promotion

I've written before about my decision to move my Emergency Fund to HSBC Direct. Their rates have been quite competitive in the past, and they have very flexible access methods, including bank-to-bank transfers, ABM withdrawals and online bill payment. Granted, their rates have been slipping lately, but they still offer a very convenient place for your savings to keep up with inflation.

Well, I have received two e-mails in the past week, drawing my attention to a promotion going on at HSBC. The first message (to my personal address) was from HSBC proper, telling me to "tune in on February 4" for an exciting interest rate promotion. The second (to this blog's address) seems to be from their PR firm, inviting me personally to check out the rate. The second, more spammy e-mail kind of irks me, but I already deal with HSBC, and I've been happy with my experience, so OK, I'll bite.

Here's the deal: any new deposits into an HSBC Direct savings account between now and May 2 will be subject to a 4.75% APR until May 2. Whether you already have an HSBC account or not, any net-new money you deposit will earn 4.75% interest. This interest is compounded daily and paid monthly, just like the regular interest (currently at 3.70%). You don't need any promo codes or anything; this automatically applies to any new deposits.

If you're interested, then you should open an account or transfer your balance now, so that you can start earning the higher rate as soon as possible. The account opening process at HSBC can be a bit slow, but the account is easy and convenient once you've jumped through the appropriate hoops.

Remember that the promotional rate expires at the beginning of May, so if you're a rate chaser, plan to look for greener pastures at that point.

Weighing in

One of my goals for 2008 is to lose 25 pounds. I put this out there as what I thought would be a realistic, yet significant, level of weight loss for the year. Since setting that goal, I've been doing some thinking about exactly how to go about this.

Obviously, the first step in achieving (and tracking) my weight loss is to determine where I'm starting from. So, this morning, I approached my old nemesis, the bathroom scale. I know these aren't exactly known for their accuracy, but as long as I use the same scale to track myself over time, I should at least know I'm going in the right direction.

The result: 212lbs. At a height of 6'1", this gives me a BMI of 28.0, which puts me in the "overweight" camp. So, based on my 25-pound goal for the year, I'm shooting for 187lbs by December 31, which will give me a BMI of 24.7, putting me smack in the "normal weight" range.

25 pounds was just a good-sounding number I kind of pulled out of the air, but it turns out it's actually a great goal.

Who knew?

Costco carnage

Last week, the Loonie household ran out of several household staples simultaneously. We suddenly found ourselves with no sandwich bags, coffee filters, facial tissues, or toothpaste. So yesterday morning, with a short list in hand, we braved the crowds at Costco to do some bulk buying.

As always happens when we go to Costco, several "extra" items somehow found their way into our cart. We always find ourselves drawn in by the fantastic price of their salmon filets ($20 for ten servings' worth), and their pharmacy has a great discount on our allergy medicine.

Overall, our bill came to $172.71, which, although money well spent, kind of takes a bite out of our grocery budget. I think I need to take Jaimie's advice to think long-term about my grocery spending.

When I put $172.71 in terms of getting a few months' worth of staples, I feel good about planning ahead and buying in bulk.

When I put it in terms of riding out the days until Thursday's paycheque... ouch.

Perhaps my Freedom Account should acquire a "bulk" category...

Fitness on the brain

JD at Get Rich Slowly has a great post on the shady marketing practices of athletic clubs. This post resonated with me, as Ms. Loonie and I recently checked out a local gym based on a promotional flyer we had received. The flyer basically claimed to offer "$15 per month" to the first 50 new customers, but when we went over the details after taking a tour of the club (which was, admittedly, a very nice facility), we found out that only the $15 applies only to the first two months, after which you are subject to their regular rates. The cheapest option was for us to use the corporate discounts available to our respective employers, and even that would come out to more than $50 per month per person.

Needless to say, we left without signing anything. There just isn't $100 extra in the budget at this point, especially when we already have some basic fitness facilities available to us through our condo.

We've since looked at the flyer that initially piqued our curiosity, and there is some minuscule type that lays out the "first two months" terms, but the advertising still seems quite disingenuous.

We were probably hopelessly naïve to expect a gym membership for $15 per month, but those were the only terms under which we were ready to commit to an ongoing membership. At the very least, we want to make sure that we're able to commit to using our current facilities before making a significant financial commitment.

Credit where credit is due

Looking at my January progress, I just realized that my $510.08 in revolving debt reduction is actually a little more impressive than I thought. The reason for this: I incurred a $148 balance transfer fee from MBNA this month, so I've actually made $658.08 in payments against my debt.

$510 isn't a huge amount, but it's certainly in line with my rate of debt reduction over the past several months. If nothing else, it's nice to know that the 0% balance transfer is "bought and paid for", as the transfer fee is already built into my revolving debt. Any progress made from here on out will only be encumbered by the accrued interest on my remaining line of credit balance.

That's good to know.

Goals for February 2008

On the first business day of every month, I post my update for the previous month's progress, and set goals for the month to come.

Here are my goals for February:

• Reduce my revolving debt to $22,300 (currently at $22,887.63) - This is a bit of a stretch, so let's see if I can make it happen.


• Grow my Emergency Fund to $1,250 (currently at $1,229.59) - All I'm looking for here is to keep up my bi-weekly $10 contributions.


• Obtain copies of my credit report from each of the three Canadian reporting agencies - Pretty straightforward. I identified one inaccuracy yesterday, so it's about time I did a full check of my credit history.


• Set up an automatic monthly charitable donation - I already contribute $45 out of every paycheque to medical charities, so to get me toward my $2,000 goal for the year, I'd like to contribute to the arts, among other causes.


• Walk to and from work every day, and work out at least three times a week - This is pretty self-explanatory; I want to blow my 25-pound weight loss goal out of the water this year.


• Blog 30 times in February - Keep up the one-per-day average, with a bonus.


• Finish my review of Getting Things Done - Apologies to anyone who's already tired of this one; I'm not ready to give up yet.

That should make for a productive month.

January update

Welcome to February. Here in Toronto, at least, we're celebrating the new month with a full day of slippery, blowing snow. Most schools are closed, and the roads are far less busy than usual. Look forward to a winter wonderland for the next few days.

Let's start off with how I did with my January goals:

• Reduce my revolving debt to $22,900 - Nailed it, with $22,887.63 in revolving debt (including accrued interest). I started the year without a financial hangover from the holidays, and this helped me come out swinging with my debt reduction for 2008. Let's keep this up.


• Grow my Emergency Fund to $1,220 - I met this goal even before the end of the month. Once interest had posted to all my accounts, my Emergency Fund stood at $1,229.59. It wasn't a particularly ambitious goal, but I reached it nonetheless.


• Blog 31 times in January - Yesterday's flurry of posts put me over the top. I ended up with 32 posts for the month.


• Finish my review of Getting Things Done - Less rosy here. I did manage to squeak a tiny bit of progress under the wire with last night's review of chapter 3, but I didn't even come close to finishing my review of the book (for those paying attention, there are 11 chapters left). I don't know why this one is causing me so much grief. It's probably the topic I feel least confident writing about, and that may be getting in my way a bit, but ultimately I think I just haven't been setting much of a framework to get this review written.

Now, on to my month-end update:

Assets:
Online Savings - $1,751.04
Self-Directed RSP - $37,193.41
Employer Group RSP - $8,992.44

Debts:
Credit Cards - $18,322.33
Line of Credit - $4,565.30
Student Loans - $29,557.08

Net Investable Assets: ($4,507.82)
Net Liquid Assets: ($50,693.67)

My liquid savings dropped a bit, due to some new-year subscription fees and car maintenance, all of which were "in-budget", and managed through my Freedom Account. The biggest change this month is my retirement savings, which jumped by $4,192.18 since December 31. Don't mistake this for any kind of market wizardry on my part; this is the net change after pumping $6,418.94 into my retirement accounts, mostly due to a $6,000 year-end bonus that I diverted directly into my RRSP. This really illustrates the dismal month we had in the markets, which eroded over $2,200 in forward progress in my retirement savings.

The other big change this month is that my debts moved around quite a bit, with a re-distribution of my line of credit onto a 0% MBNA card for 15 months. Overall, my net investable and net liquid assets increased by $4,993.27 and $801.09, respectively. My NetworthIQ profile has also been updated (including loose cash, home, car and mortgage).