Good timing, for once

I've bragged in the past about my market timing acumen, which tends to favour the party sitting opposite me in any transaction. I tend to dwell on my past decisions, but only to the point of nodding sadly in lament of my knack for choosing the wrong time to pull the trigger. These decisions don't consume me, but I can easily count them off for you on a moment's notice.

Not this time, however.

The Loonie household mortgage was up for renewal last month, so Ms. Loonie and I checked out the rates available to us. We were able to renew with our current lender for a 3-year fixed rate of 2.65%, more than 2% lower than our previous rate. The day after we signed the papers, rates jumped by 50 basis points, so we literally slid in just under the wire, and guaranteed ourselves three years of low-rate home ownership. I'm sure a strong negotiator with excellent credit could still have secured a lower rate, but given the ease of the transaction, I'm pretty confident in saying that we locked in "at the bottom".

But that's not all. Since I was at the branch anyway, I decided I would talk to the bank about managing our own property tax payments. Since our mortgage is high-ratio (more than 80% loan-to-value), the bank has been collecting property tax payments from us, and paying the city on our behalf. Now that we've mastered the art of partitioning our savings, we decided that we'd rather pay the city directly, and have more control over the balance in this account (and hey, why not earn some interest on it while we're at it?). This change turned out to be very straightforward as well. The tax portion of our bi-weekly mortgage payment has been eliminated, and I've set up a bi-weekly transfer of the appropriate amount to a dedicated savings account.

We're now making much faster progress on the mortgage, and we're in control of our property tax payments. Easy as pie, right?

Until I realize that, as a side-effect of the CUPE strike currently underway in the GTA, there's nobody manning the phones in the city revenue office to take our lender off the tax account.

Great timing.

HSBC has stupid account dormancy rules

Back when I first started testing the waters of online savings accounts, HSBC had one of the better rates out there. That, combined with their numerous access methods (including online bill payment and no-fee ATM access at BMO/HSBC machines) made them a strong choice for parking the lion's share of my Emergency Fund. For over a year now, I've basically kept just over $1,000 of my savings in my HSBC account, on the basis of a decent (though far from stellar) interest rate and easy access to the cash.

Fast-forward to today, and HSBC is offering a whopping 1.05% rate on their Direct Savings account, and I decide that maybe I'll move a chunk of that cash over to Canadian Tire, where I can earn twice as much interest. So, I login to my HSBC account (as I have at least once a month for as long as I've had the account), enter the details to transfer money to my primary chequing account, and am met with an error message that they can not complete the transaction at this time.

Wait, what?

This account currently has a balance just over $1,040, and I'm able to login and view the account details to my heart's content. Why are they barring me from making a withdrawal?

A quick call to customer service brings to light that, if you have no debits on the account over a 12-month period, they flag the account as dormant, and you have to re-activate it by faxing them your signature and waiting 24 hours before you can complete a transaction.

Looks like HSBC will no longer be my Emergency Fund container of choice.

I'll keep $150 with them, and set up recurring transactions to churn $15 in and out once every six months to keep the account "active", but I'll be looking to put the bulk of my balance elsewhere.

I realize that $1,000 isn't exactly big potatoes, but my Emergency Fund is growing, and they had been my preferred savings institution. I was willing to overlook their low rate in favour of their access methods, but now they've driven me out the door.

Maybe CTFS will be happier to have me as a customer.

The price of micro-managing

Back in 2007, I opened online savings accounts with ING Direct, HSBC Direct, Canadian Tire Financial Services and ICICI. I wrote a series of posts detailing the process of opening and using an account with each of the four institutions, including the transfer and hold times involved with moving funds to or from the savings account.

At the time, Canadian Tire was the only institution to credit the savings account immediately after initiating a transfer in. The other three banks credited the account on the following business day. This is the assumption I've since been using in planning my fund transfers between institutions.

This past Monday, I was working through my beginning-of-month financial shuffle, and I mistakenly requested a transfer of $600 from my chequing account into my ING Freedom Account. I quickly recognized my error, and tried to cancel the transaction. With the one-business-day turnaround time, I should have been able to do this, as the transaction would still have been pending. However, ING had immediately credited my account, so there was nothing for me to do but ensure that the $600 in question was in my chequing account to keep the account from NSF when the transaction went through.

Now I find myself in the slightly annoying position of having $600 that should not have been in my ING account in the first place, which is now on hold for five business days before I can move it back to where it belongs.

I've made my share of money mistakes in the past, and although this one hasn't really cost me anything, it's an annoying "open loop" that I have to keep in mind until it's resolved, and it illustrates the value of automating your finances to prevent errors that come from this kind of financial micro-managing.

The ETF dilemma

One of my goals for this month was to decide whether to switch my retirement investments from the index funds I currently hold to an ETF-based portfolio. For the uninitiated, here's a quick rundown of the two types of funds:

• Index Funds - These are mutual funds that track a specified stock index. You can purchase these funds either directly from the company that manages the fund, or through a broker, and the price of the fund is updated at the end of each day. Since these funds have fairly low turnover, their management expense ratio (MER) is lower than for actively managed funds. Index funds are not usually subject to loads or trading commissions, although they often have a minimum purchase amount. Because there are no transactional costs to purchase these funds, they are popular for dollar-cost-averaging.


• Exchange Traded Funds - Like index funds, ETFs track a stock index, but the funds are traded directly on the stock exchange, and must be purchased through a broker. The price of an ETF fluctuates with its associated index throughout the trading day. These funds have even lower MERs than index funds, but they are subject to the broker's trading commissions, so there is a cost to buy or sell the funds. As a result, ETFs are more popular for lump sum investing, since they save money when transactions are less frequent.

It's taken me a while to get my head around the index fund vs. ETF debate, and I've got a few factors to consider:

• Cost - This really gets to the heart of the difference between the two investment vehicles. The index funds I currently hold are reasonably low-cost, with a blended MER of 0.39% for my whole portfolio. However, if I were to switch into the ETF equivalents of these funds, I could reduce this further to 0.19%. On a portfolio of $50,000, that difference translates to a savings of $100 per year. In order to switch over to ETFs, however, I will have to pay the commission for each fund that I buy. At the current size of my portfolio, it will take 1-2 years for the reduced MER to offset the trading commissions.


• Tracking - The price of my current index funds remains fixed throughout the trading day, but ETFs have intra-day fluctuations as they track changes in their associated index. This means that ETFs would facilitate a more real-time tracking of my portfolio's value. While this appeals to me from a dataholic perspective, it scares me a bit to be able to track to-the-minute variations in my long-term investment value.


• Timing - Although I use the innocuous word "switching" to describe what I'm contemplating here, what I'm really considering is cashing in all my investments, and then immediately buying back into the market. This exposes me to market fluctuations between when I sell and when I buy. I know that the difference is not likely to be significant, and you can never guarantee that your timing will be perfect, but I'm uneasy with the prospect of performing this switch on my entire portfolio, especially in our current market conditions.


• Choice - The decision of whether to switch aside, I also need to decide which ETFs I'll buy if I make this change. Fortunately, there's lots of discussion on this topic, and a handful of Vanguard and iShares (for Canadian indices) funds should work just fine.

My portfolio is right on the verge of making this change worthwhile from a cost perspective. With the MER savings paying back my commissions within 2 years, it seems like the right time to make the switch. However, I just rebalanced my portfolio a few months ago, and given the volatility in the market at the moment, I really don't want to "cash out" with this much uncertainty.

I think the best thing to do is to hold off until early 2009, and make the switch then. This will put me on an annual rebalancing schedule, and will also allow me to incorporate my year-end bonus (if any) into the transaction. Of course, I'm making the assumption that I'll be more confident about my decision six months from now, but by committing to this plan today, I have time to research my choices, and a deadline to complete the transaction.

So, in the interest of checking off another goal this month, my decision is to switch my retirement investments to an ETF-based portfolio by February 28, 2009.

On an unrelated note, I'd like to apologise in advance to the author of next February's Loonies And Sense posts for any stress he may feel over the next several months.

Knowing your limits

I recently received a piece of unaddressed mail from a new BMO branch that just opened in our neighbourhood. The gist of the piece was a welcome bonus of $100 for new chequing customers who open an account at this branch, upon completion of their first payroll deposit or pre-authorized debit.

I looked into the accounts offered by BMO, and was strongly considering taking them up on the offer. My plan was to open the account, and set up our bi-monthly hydro bill as a pre-authorized debit. Then, after the next hydro bill gets processed in September, I would switch the debit back to my primary bank account. The deal requires the account to stay open for six months, so at the end of January I would close down the account. At the lowest level banking plan of $4/month, I would be out $24, for a net income of $76. Not bad for an hour's effort.

I started thinking hard about this, however, and realized that the whole idea of starting a new banking relationship (with a monthly fee) just for the purpose of gaming the company out of $76 feels like a bit of a stretch. This feels to me like the idea of running credit card arbitrage on a low-rate offer rather than a 0% offer: true, you come out ahead, but the margin is pretty slim, and with the possibility of something going wrong, not exactly a no-risk proposition.

I'm going to pass on this offer. I don't want or need a new chequing account, and that's really a showstopper for me. If I were in the market for a new account, this would probably sway me to BMO, but I'm not going to let this offer create the need for a new banking product.

This might very well be worthwhile for someone else, but it falls outside my own comfort zone, and doesn't seem worth the effort or the risk.

Where do you draw the line when it comes to bonus offers and arbitrage strategies?

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?

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.

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.

Finally checking my credit reports

Well, I've written before about the options for Canadians to obtain a copy of their credit report, and I decided to put my money where my mouth is, and request my own report.

Some quick research online revealed that both Equifax and TransUnion offer the option to request the report by phone. Here are the numbers to call:

• Equifax: 1-800-465-7166


• TransUnion: 1-800-663-9980

I've called each of these numbers, and as of today, they do indeed allow you to request your report by phone.

Here's the catch (at least for me): neither of these agencies has my current address on file, so I need to send the old-school paper request to obtain my report. Equifax at least lets you fax the request (514-355-8502), but TransUnion only accepts paper requests by mail. It looks like Northern Credit Bureaus allows you to fax your request as well (1-800-646-5876).

I'm glad that I decided to check my report, because now at least I know my address is out-of-date. The fact that any of my information is inaccurate has been an eye-opener to be more vigilant with checking my credit. I think I'll start doing a review once per year.

Let's see how the rest of the report stacks up.

Not paying attention can cost you.

Many credit cards offer Extended Warrenty and Purchase Protection as "built-in" features of the card. I've known about these features for years, but I've never really taken the time to investigate the details. Here's what I've found:

Extended Warranty

This protection extends any manufacturer's warranty by up to one year, for most purchases made using the card. If you use your card to buy a product that has a one-year manufacturer's warranty, then the card automatically provides an extra year's warranty after the original coverage expires. This is handy if, for example, you buy a laptop with a one-year warranty, and a manufacturing defect manifests fifteen months after the purchase. It's not covered under the manufacturer's warranty, but your credit card comes to the rescue. In most cases, you don't even have to do anything to register for this extended coverage; just call your card provider when the problem develops, and they'll send you the appropriate claim forms.

Purchase Protection

This protection covers most purchases made using the card against theft or damage within 90 days of purchase. If you drop and break your iPod one month after buying it, the card provider will pay to have it repaired or replaced. The interesting thing about this coverage is that, while Extended Warranty protects you against issues that are the manufacturer's fault, Purchase Protection can protect you against things that are your own fault. There are exclusions and limitations, but basically this coverage ensures that you can enjoy your purchases for at least three months.

About a year ago, I bought myself a 19" widescreen LCD monitor to replace an aging 17" CRT, and sat back to enjoy my newfound desk space. Six weeks after my purchase, however, a cabinet installed above my desk pulled free of its wall anchors, and collapsed on top of the monitor. After the dust settled, I determined that the monitor was still in fine working order, despite significant scratches and scuffs on the screen. I grumbled and cursed, installed stronger wall anchors to re-hang the cabinet, and resigned myself to the fact that, until I could afford a replacement, I would make do with my battle-scarred monitor.

Looking through my MasterCard's terms and conditions today, it occurred to me that this incident likely would have qualified for a Purchase Protection claim. I can't be entirely sure, without having gone through the claim process, but it seems that this kind of accident is exactly what the insurance is meant to cover. If I had been more aware of my rights when this happened, I might have spent the last several months enjoying a brand new monitor.

It's to my credit that I have continued to use the banged-up monitor, rather than running out and throwing a replacement on credit, but it would have been nice to have an immediate "sorry-for-your-luck" payout to allow me to correct my mistake. You can bet that, the next time something breaks so early in its lifespan, I'll be all over the Purchase Protection folks.

Know your rights, and the coverage options that are available to you. You never know when you might need them.

Did I call it, or what?

Behold the awesome foresight of Loonies And Sense! Four days ago, I predicted that other Canadian online savings accounts would follow HSBC's lead and lower their rates. As of today, ING Direct and ICICI Bank offer rates of 3.65% and 4.10%, respectively. That's a 0.10% drop for ING, and 0.15% for ICICI. Canadian Tire is still hanging in at 4%, but I don't know how long that will last.

OK, so it's not exactly rocket science to predict that banks will lower their savings account rates in response to a rate cut by the BOC, but it's interesting to see how the various institutions respond. Since November 2007, here is the trend in Canadian interest rates:

• BOC down 0.50% from 4.50% to 4.00%


• Bank prime down 0.50% from 6.25% to 5.75%


• HSBC down 0.50% from 4.25% to 3.75%


• ICICI down 0.40% from 4.50% to 4.10%


• ING down 0.10% from 3.75% to 3.65%


• Canadian Tire steady at 4.00%

Aside from HSBC, the online Canadian banks seem to be trying to avoid cutting rates as much as possible. I wonder how this will play out?

Holding pattern

I get paid every second Thursday, and my employer posts our pay advices online two days before our actual payday. This means that, on the Tuesday of every payweek, I can login to our HR site and check the amount of that week's pay. This is usually constant from one pay to the next, but as I mentioned in this morning's post, the first pay of the year is a bit of a question mark, because I don't know exactly what the CRA deductions will be.

I've already checked this week's pay advice online, so I have a pretty good idea of what to expect for the first half of the year. It's great to be able to check this in advance, because it helps to plan my cash flow over the next two weeks. I've set up my ING transfers, and worked out how much to allocate to debt payments, etc. I know how much is coming in, and I know how much is going out.

I just don't have the cash yet.

It's funny how knowing exactly what to expect can actually erode your patience. I really want to make the year's first update to my goal bars, and it's driving me nuts that I have to wait until tomorrow morning.

Apparently I'm a five year-old on Christmas morning.

I'd like to buy a piece of mind...

When it comes to language and grammar, the Internet is the ultimate "snobs vs. slobs" battlefield. If you're lucky enough to have a decent vocabulary and a basic understanding of how to use language, then it's hard not to cringe at the atrocities committed online against the written word. By the same token, if you tend to misuse or misspell words, then you can always count on a self-appointed watchdog to jump on your every error.

One of the nice things about reading blogs on a subject like personal finance is that the bloggers take great care with (and pride in) their writing, and their readers are more interested in the actual topic being discussed than in correcting the author's occasional spelling and grammar gaffes.

I admit to having high standards when I read; it pains me to find spelling errors in my favourite writers' work (I love this entrance exam to the Internet, elitist though it may be). However, I also make more than my fair share of mistakes myself, so there's no way I can point to my own writing as a "safe haven" for erudite travelers.

I don't want to be the whiny jerk leaving "I think you mean..." comments (although feel free to leave these comments here when you spot an error), but I really want to comment on a few of the more frequent misuses I've seen. What's a guy to do?

I'll let this sentence sum it up:

"I'm loath to admit that it's the misuse of words that takes its toll on my peace of mind, but I loathe the idea of giving my respected peers a piece of my mind."

Any favourite (or favorite) mistakes you've spotted here at Loonies And Sense? Let me have it!

More exchange rate news

Well, it's finally happened. A purchase I made online from a US vendor has posted to my credit card for less than the purchase amount in US dollars. The net exchange rate on the transaction (including the credit card provider's foreign exchange markup) was $0.9977 per US dollar. Compare this to the card rates of $1.0043 and $1.0008 that I experienced on our trip to Michigan.

Again, as I mentioned in my earlier post, the difference is minimal, but paying less than par is paying less than par, no matter how small the spread is.

Exchange rate roulette

Since our trip to Michigan this past weekend, I've converted my leftover US cash back to Canadian dollars, and I'm watching the weekend's transactions post to my credit card account. The various exchange rates we've encountered have been very interesting. Here's a rundown:

• US cash purchased on Thursday: $1.00 US = $0.9911 Canadian


• US cash sold on Monday: $1.00 US = $0.9605 Canadian


• US-dollar transactions on credit card: $1.00 US = $1.0043 Canadian

It's really amazing just how quickly we grow accustomed to favourable circumstances. Even though the last five years have seen the exchange rate drop from a 60% markup to parity and beyond, I still find myself quibbling over a few percentage points. Never has the bank's spread on exchange rates been so obvious: $1.58 and $1.61 feel practically the same, but $0.96 and $0.99 seem much farther apart.

I have to keep reminding myself that these are the best exchange rates I've ever seen, and worry less about small fluctuations in the short term.