Personal finance bloggers can be pretty predictable sometimes.
We all tend to have similar thoughts on investing for retirement (great!), emergency funds (also great!), frugality (ditto!), minimalism (ZOMG!), dividends (!!!!!), side hustles (literally dies!), and so on.
There’s some logic to this, of course. More money is better than less money, and all of those things tend to lead to more money. That’s the whole point of this. We all want to end up a little richer than yesterday.
One other thing it seems most personal finance bloggers agree on is financial literacy. If only we taught personal finance in school, the refrain goes, then we’d have a generation of savers instead of spenders. Credit card debt would go down. Savings would go up. Cute puppies would be saved from an inevitable death, somehow. Yes, it would truly be a better world.
These folks all say the same thing. High school kids need to learn this. They manage to grasp calculus, creative writing, and obscure facts about World War I. There’s no reason they can’t master the basics of personal finance too.
There people are right. The average high school kid is very capable of learning the basics of personal finance. He’s just not that good at remembering them.
Newsflash: it is taught
I can actually remember the basics of personal finance being taught in my math class in the late 1990s. We touched on the debilitating impact of interest, various types of asset classes, the magic of compound interest, and so on.
I am apparently the only one who remembers this. Everyone else had their memories wiped, Men in Black style.
We also learned about it during a course called Career and Life Management (CALM), a required prerequisite for anyone in Alberta to graduate high school. The only thing I remember from CALM is the graphic pictures of various sexually transmitted diseases, to be honest.
So I did a little research (read: 14 seconds on Google), and came up with the curriculum for CALM. It hasn’t changed a bit since 2002. Guess what? Personal finance education makes up much of the lesson time.
CALM teaches the following:
- Fundamentals of getting and using money
- Basic information on income, deductions, and taxes
- Using financial plans
- Examine the negative impact of gambling, lotteries, etc.
- Identify the benefits of proactive personal financial planning
- Develop a personal budget
- Develop strategies for finding a roommate
- Describe the rights and responsibilities of a tenant
- Describe the influences on personal consumer choices
- Demonstrate informed consumer actions regarding health issues, products and services
- Identify types of financial institutions
- Develop basic banking skills, such as ETFs, ATMs, online banking,
- Analyze the use of other cheque cashing services and their benefits and limitations
- Generate strategies for using credit wisely
- Describe the continuum of saving and investing, various common investments and the pyramid of risk
- Identify and analyze a variety of types of insurance
And so on. Trust me, there’s more there. It starts on page nine and goes to page 11.
Remember, this course has been in place since 2002, and even before then, I can assure you such a course existed.
So this is great, right? If Alberta has comprehensive financial literacy education, then we must be collectively be doing pretty good, right? Go ahead internet, confirm my already held belief.
OH GOD DAMMIT.
That was a few months ago, though. Maybe things have gotten better.
Nice work, Alberta.
Even though Alberta has financial education, it clearly doesn’t work. Collectively we put very little away when times were good, leaving us with the highest per capita debt in Canada while dealing with a crummy economy. I can’t think of any better proof than that.
The problems with financial literacy education
It really grinds my gears that us personal finance folks think the only thing keeping the average person from true financial literacy is a high school course.
First, it’s a tremendous insult to our educators.Do you really think teachers haven’t already tried teaching financial literacy? Are you suggesting to me that a group of people who think education is the answer to LITERALLY EVERYTHING haven’t already tried their default solution?
When was the last time you heard a teacher recommend less education? It was never. A teacher has never said that. I guarantee you this group of people have already figured out teaching this stuff is a solution. Hell, they’re already doing it. Don’t think that Alberta is the only place trying this.
Secondly, we already teach kids many things they end up not doing as adults. We teach kids safe sex, but we all know a pregnancy or two that was a total accident. There are still lineups at McDonald’s and Wendy’s, yet kids are taught to eat well. And as anyone in the finance business knows, the average person is terrible at math. Not hard math like trigonometry, either. Easy math like fractions and percentages.
We’re all personal finance nerds, so of course we’re going to talk our book. Health nuts are probably in their corner of the internet saying the same thing we are. “If only they taught eating better and physical education in schools! Then we’d all be less fat!”
The average high school kid barely has a job. Their parents take care of all their needs; all they need to save for are wants. Is this the kind of person who is really going to absorb financial literacy? They’re just not prepared to receive the message.
The internet is filled with all you could ever want to read about personal finance. The basics are a Google search away. And since we can all agree they’re pretty simple tips, they should be easy to grasp.
The system we have works pretty well. There needs to be a certain amount of personal responsibility. We can’t just bitch and moan it’s all the government’s fault. If the information is freely available–and it most certainly is–then your lack of financial literacy can only be blamed on one person.
Personal finance blogs are uniquely positioned to benefit from this. Previous financial literacy pushes have come from the banks, mutual fund companies, and other dubious sources. If we’re truly unbiased (which is a problem since we all want to make money), there will be plenty of potential for teaching this stuff to the masses.
Personal finance bloggers should want the world to remain financially stupid. Nobody with a positive net worth Googles “how to get out of debt.”
Let’s talk a little bit about choosing a bank. What should you look for when picking the best place to park your cash?
The following factors will probably weigh into your decision making process, at least a little:
- Proximity to physical branches
- Ability to get a loan at an attractive rate
- Overall fees
- Interest paid on savings accounts
- Attractiveness of front-line employees
That last point is especially important, and I just want y’all to know my bank has SEVERELY DROPPED THE BALL ON THIS. All the attractive ladies have been promoted to office duties. The ones that remain up front are still pleasant and effective, but they’re just not hot enough.
As we all know, Canada’s banking system is dominated by the so-called “big five”, five banks we’ve all heard of. Most of you reading this will have at least one account with them, and if you’re anything like me, you’ll have a credit card with one, a bank account with another, and a former mortgage with a third. There’s no escaping these guys.
Nor should there be. Despite the thousands of stories out there how some bank ABSOLUTELY SCREWED YOU, they all give about the same caliber of service. They’re all big enough the law of large numbers comes into play. They all revert to the mean because they’re just too big. There just aren’t enough outliers out there.
How to choose the best bank?
Okay, so if bank service, products, and fees fall to the lowest common denominator, how’s a guy supposed to choose the best bank?
There’s a simple answer. You don’t.
For the sake of our discussion, let’s separate Canada’s banks into two different categories. The first is full-service, and it includes all of the traditional banks, credit unions, and hybrid government owned FREAKS like Alberta’s ATB Financial. The other category is the online-only banks, like Tangerine, PC Financial, EQ Bank, and so on.
What’s the difference between any of the full-service banks? They offer similar bank accounts charging similar fees. They offer GICs with pretty anemic interest rates and credit cards with the same kind of bonuses. It’s all pretty much the same.
It’s the same thing with online-only banks. They all offer big interest rates to people who first sign up, dropping the rate to something much less exciting after the grace period. They all offer free cheques and transfers and whatnot too.
Sure, there are subtle differences between them. They just don’t really matter all that much. In short, they’re all pretty much the same. The difference between them isn’t worth analyzing.
Nelson’s choosing a bank strategy
So if banks are all interchangeable, how do you go about choosing one?
Well, there are a few different strategies, each with their own pros and cons.
The first is to chase promotions. If a bank is giving away a free toaster (or the 21st century equivalent, an iPad), you show up and get an account long enough to get some of that free scratch, baby. As soon as it’s possible, you hit the road and find the next offer.
There are a couple of downfalls to this strategy. The first is it’s kind of annoying to get new accounts all the time. You have to re-input all of your online bills and direct deposit info and all that other stuff every time you do the switch.
The second is you’ll need to live in a big place to really take advantage of it. My small town has about six banks if you count the credit union. I’d run out of sign-up bonuses in about a year.
The second strategy is to pick an online-only bank and stick with it. You’ll enjoy a decent rate on your savings and basically no bank fees.
But even though I have an account at Tangerine, I’ll still never switch to it for all my banking. About once every couple of months I need U.S. cash or a bank draft or something like that. An online-only bank can’t do these things very well, and often time is of the essence, especially when you’re a procrastinator like me.
Or, you can choose the Nelson ultimate lazy solution.
The Nelson ultimate lazy solution
I just said that. Who edits this thing, anyway?
Oh, right. Nobody.
So here’s the deal. Despite all the guides out there that explain which Canadian bank is the best, I don’t even try to hack my bank experience. I’m still with the same credit union I’ve been for the last 20 years. I even pay bank fees, which come to an average of $4 or $5 per month.
Here’s the deal. I don’t believe I’m getting a better deal by hopping from bank to bank. I don’t like the lack of features offered by the online-only banks. And I’m sure as hell not to bother jumping over to some bank just to get an iPad. I already have an iPad I barely use.
Once you believe banks are interchangeable, only one solution remains. You just don’t bother trying to game them. You pick one that meets your needs and just go with it. And since they’re all pretty much the same, I’d recommend not putting much thought into it at all.
You might not need a branch, since you never bother with drafts or foreign currency. Cool. Pick an online-only bank and go to town.
Another person might be heavy into real estate and want a close relationship with their banker. Okay, fine. Start finding some loan officer to kiss up.
And so on. It’s not that hard.
Look, no bank is going to make you rich. Avoiding bank fees as much as possible is a good thing, but ultimately, the difference between banks isn’t going to make a lick of difference for 99% of you. Remember that the next time you’re stressing between a 1.25% and 1.4% introductory offer, or between the $5 per month plan offered by bank A and the $4.99 plan offered by bank B.
This should go without saying, but I’m going to say it anyway. After all, this post does need an intro.
If you’re not investing in TFSAs, you’re missing out. My TFSA is more maxed than Carrie Bradshaw’s credit card, and yours should be too. TFSAs offer advantages like the ability to withdraw money whenever you want without taking a tax hit, and the flexibility to add cash back into them after you take it out.
Even though I’m still a huge fan of RRSPs, and think if given the choice, most people should contribute to them first, there’s still plenty of room for someone to invest in their TFSA too.
When somebody asks me whether they should invest in their TFSA or RRSP first, I like to say it doesn’t really matter. Just pick one and save.
Many diligent savers have one big goal–to end up as a TFSA millionaire. This might seem like a pretty lofty goal. Interest rates are lower than my IQ. Stocks (at least here in Canada, anyway) have gone basically nowhere in the last decade. Bonds have done relatively well, but there’s no way that bull market is continuing for the next decade. And so on.
This uncertain environment has caused many savers to just throw up their hands and keep their cash parked at the bank, collecting a measly 1% yield. That’s not so bad for an emergency fund, but it’s a terrible return for a TFSA. At that rate, the only way you’ll be rich is if you get frozen for 1,000 years.
A Futurama joke? Don’t mind if I do.
Bank Teller: Okay, you had a balance of $0.93.
Fry: All right…
Teller: And at an average of 2.25% interest over a period of 1,000 years, that comes to 4.3 billion dollars.
Anyhoo, let’s figure out how you can become a TFSA millionaire.
It turns out it isn’t that hard to the TFSA to seven figures. Let’s run some hypotheticals, bitches.
That never gets old.
- Borrower is 25 years old
- Has $5,000 to put towards this year’s contribution
- Has $5,000 annually to invest for the next 30 years
- How much money will they end up with at 55 earning 6%, 8%, and 10% annually?
Look at that, kids. You’re already halfway to being a TFSA millionaire, and all it took was an investment of $155,000. Not bad.
An extra 2% really makes a difference. That’s the beauty of compound interest. Just 2% more annually gets you like 33% more at the end of a lifetime of investing.
Would you look at that? We’re basically there, and all it took was investing five large a year for 31 years and earning 10%.
Look. It takes a lot of work to consistently invest over the course of a few decades. And you have to make sure you don’t do anything stupid like raid the cash for a nose job or glitter or whatever it is you kids buy these days. Consistency is the key, as well as getting decent returns.
Best case scenario
Next, we’ll build a slightly more aggressive scenario.
- Borrower is 25 years old
- Puts away $5,500 for the next 40 years, until traditional retirement age
- Has already saved $41,000, the maximum contribution room
- Same return scenarios, 6%, 8%, 10%
Well, that was easy. It turns out giving the investment an extra ten years to grow really does wonders.
Hey rich old guy! Can I have a loan?
So it turns out it’s really not that hard to become a TFSA millionaire. All you need to do is max the thing out day one, continue to max it out, wait for a while, don’t do anything stupid, and you’re golden. I guess all that is easier said than done, but it just goes to show it’s certainly achievable.
What to invest in
You already know what to invest in. Just put your cash in a few ETFs with low fees, hold on to them for a while, and you’re in business.
I don’t think it’s going to be that easy going forward.
It’s not so much that passive investing sucks. It sure beats mutual funds (except maybe these kick-ass ones), and with the average person not knowing the difference between an income and a victim impact statement, most have no business investing in individual stocks.
But at the same time, we’ve still got to be smart about what we invest in. Both Canadian and U.S. stock markets are expensive, and it’s likely both will barely keep pace with inflation over the next decade.
So what’s a wannabe millionaire to do? There are plenty of options. You could put your money to work in Poland, Turkey, or other cheap European stock markets. Energy is still a very inexpensive sector. Canada’s REIT sector is still relatively attractive. Or you could buy Aimia shares like I have in my TFSA.
Even if you max out your TFSA going forward, you’re still going to need a decent return to get that bad boy to $1 million. It’s certainly possible to do so investing in the way that’s become standard. I just don’t think that’s going to be the ideal solution over the medium-term. Local stocks are just too overvalued.
It turns out it’s not going to be that hard to become a TFSA millionaire, especially if you save a lot. It’ll take patience, a halfways decent return, and making sure you don’t take out money at an inopportune time, but it’s very possible. The only issue is inflation might make that windfall look less impressive when the time comes.
We’re all renters for LYFE, right guys?
I know I sure am. I hate home ownership more than the taxi drivers hate honesty. Buying a house is a terrible use of capital. That money could be put to work in more productive ways. Owning also restricts your ability to move for a better job, which the average millennial does four times a year. And we all know Canada’s in a massive housing bubble.
GOD. Nobody even likes you, italics man.
Don’t you own a house?
Well, yeah. But I like being part of the crowd.
One thing I’ve stressed over the years is living where it’s cheap. If you’re making a salary that’s pretty consistent throughout Canada, it’s silly to live in Vancouver, Toronto, or anywhere else super expensive. It’s better to live in cheaper markets.
That got me thinking. Just how much bang can you get for your buck across Canada? So I decided to look. Here’s what $1,500 per month gets you across Canada.
Here’s what I was looking for:
- Apartments only
- Has to be located relatively near downtown. No suburb crap for us.
- Preference will be given to Kijiji ads with more pictures
- Limiting the search to Canada’s 10 largest metros
- Exactly $1,500 per month will be hard to find, so I just wanted to get close
Without further adieu, let’s get started, going from west to east.
One in and we’ve already blown our budget out of the water. Now watch me justify it. Financial Uproar: it’s just like the other PF blogs.
Basically, it goes something like this. It’s hard to find an actual apartment in Vancouver that’s worth living in for less than $1,500 per month. Most of the ones in my range were bachelor’s suites, which really should be called suites at all if you think about it. Blew your mind there, didn’t I?
Anyhoo, let’s talk a little bit about this place. It’s 600 square feet with a decent balcony. It has one bedroom, one bath, and has been recently renovated. It’s by a park and golf courses and has a bunch of stores a close walk away, which I guess is important to y’all.
Overall a pretty crummy value. But it’s Vancouver. We probably should have saw that coming.
I lived in Calgary a few years ago, and let me tell you, things have changed. A ton. Yowza.
This place is located close to downtown, with two beds, two baths, a big balcony, and within spitting distance of a grocery store. It’s new, has high-end finishing, a washer/dryer set inside the unit, an exercise room, and even an underground parking lot. In short, it’s pretty damn nice. A much better value than Vancouver, anyway.
Ah, Edmonton. All of Canada is pretty close to the Arctic Circle. Edmonton is actually inside of it.
At least you’ll stay warm inside this two bedroom, two bath 1,227 square foot condo. It’s within walking distance of all sorts of amenities, and includes a game/fitness room, as well as a basketball court and tennis court. I hereby challenge all of you to a game. (Loses 52-0) Best two out of three?
I used up my cold weather joke before getting to Winterpeg. This was a mistake.
The picture isn’t so impressive, but the place sounds pretty nice. It’s got three bedrooms, two baths, a pool and a dishwasher. It’s located right downtown too, just a few minutes walk away from the Manitoba Legislature. Also, rent of $1.492 is an oddly specific number.
Justin Trudeau will be your neighbor. 100% guaranteed.
The pictures on this ad suck too, but it seems like a pretty neat place to live. It’s got two bedrooms, 1.5 baths, and you’re all the way up on the 18th floor. Now you can literally look down on people instead of just figuratively looking down at them. Progress!
I used to think the stories of Hamilton being a dump were exaggerated. Then I visited. Now I know better. My “tour” of Hamilton included a bar “that used to be a Hell’s Angels bar”.
OOH, TRENDY. This condo has two bedrooms, one bath, and all sorts of exposed pipe and brick like you see in those HOLLYWOOD MOVIES. It doesn’t have as much in building amenities as some of the newer buildings featured, but it does have in-suite laundry and is located very close to downtown. It’s also exactly $1,500 per month, the only one in this list to match our arbitrary price point.
I have to admit, Toronto did a little better than I expected. I actually found an apartment close to downtown for $1,500 I’d actually live in.
I mean yeah, it’s not great. It looks older, and certainly doesn’t have much in terms of amenities. Included in the features are things like “various rent payment options” and “recycling program in places”. OH BOY. But it’s not such a bad place. I’ve certainly been to worse. Hell, I’ve probably lived in worse.
Insert your own BlackBerry joke here. I’m lazy.
This place looks a little older, but it’s big, has lots of in-building amenities, has a nice location in downtown Kitchener, and has a bunch of stores and whatnot around it. It seems to be a pretty well maintained building too. I’d certainly squat there illegally while the normal renters are out of the country, but I expected a little more.
J’utilise un programme de traduction pour sonner tout de fantaisie. Ne soyez pas Hatin ‘, haineux.
This place is located right beside McGill, which will impress the one of you reading this who actually went there (Justin Trudeau and I are tight). The unit has two bedrooms, two baths, a nice view, a rooftop lounge, high end finishings, and so on. It’s a nice unit, but the location is the real plus. You could easily exist without a car.
Quebec City was a little harder to find, since most of the Kijiji listings are in French only. Frenchie bastards.
This is a three bedroom place in a good neighborhood (but a little far from downtown), with the kinds of amenities you get when you pay $1,500 per month in places that aren’t Toronto or Vancouver. Parking is extra, but it’s okay. Ballers like you can afford it.
And that’s about it. If you stay away from Toronto or Vancouver, you can live in a pretty sweet place for $1,500 per month. The best bang for your buck is probably in both Quebec cities, but Alberta has also become surprisingly affordable. Special mention to Winnipeg and Quebec City, which were able to offer three bedroom places. Nelly needs a room for his cat, yo.
The point is you’re living like a baller on $1,500 per month in most places across the country. If you can live in a really nice place for $1,500 per month, then it shouldn’t be that hard to find something reasonable for $1,000 or even less each month. Assuming you have equal employment opportunities everywhere, the lesson is simple. Live where you can get the biggest bang for your buck.
This was fun. I think I’ll do a part two sometime, looking at smaller communities.
Let’s talk a little bit about investing in GICs.
There are all sorts of reasons why you might put your cash to work in a GIC. Maybe you’re saving for a house, car, or hush money for the mob. Or perhaps you’re using GICs as a substitute for the fixed income part of your portfolio. Hell, maybe you just couldn’t say no to the nice lady at the bank who offered you a whopping 1.2% to keep your savings there for the next five years. That adds up to 6%(!) over the life of the investment. Oh boy!
Or you might be the average millennial who wets their pants at the thought of investing in anything more risky than a guaranteed vehicle.
I really hope it’s not that last thing, but hey. Like any of us have high hopes for any millennials.
(sighs) What’s up, italics man?
I’ve been informed you were born in 1983. That makes you a millennial.
Are you disputing your birth year?
I am no millennial.
Just embrace it, man.
How dare you. I hate them so much.
Are we going to keep doing this?
I dunno. What’s our word count?
Investing in GICs
There are plenty of reasons for putting your cash away in GICs. But are you really investing when you do so?
GICs are probably the most secure investment you can make. They’re guaranteed by the federal government up to $100,000. I don’t think anyone has lost any money in a GIC since banks failed in the 1930s.
GICs are locked in, but not really. All you need to do is pay a relatively small penalty if you want your cash out. If you’re earning a percent and a half on your principal, paying a penalty of a couple of months interest isn’t a big deal.
GICs are guaranteed, offer liquidity, and a return that barely hits inflation. Are those the characteristics of an investment? Or is it more of a capital allocation technique?
As I’ve touched on before, I think we pay altogether too much attention to the interest rate offered on our savings. The difference between even 1% and 2% is nothing, especially on the amount of cash most of us have on hand anyway.
Say you have $5,000 in an emergency fund, blatantly disobeying my ironclad rule of only leaving $1,000 in your rainy day fund. Invested at 0.8%, you’re earning a whole $40 per year. If you stick it in a GIC earning 1.5%, you’re earning $75.
If that extra $35 per year makes a difference, you’re doing personal finance wrong.
Even if you throw the money in a one-year Oaken Financial GIC (which won’t let you out unless you actually die), you’re still only increasing your earnings from $40 to $100. $60 is still $60, but big whoop. Especially when Oaken has a savings account that already pays 1.75%.
Get your money out of GICs
I don’t care if the market gives you bad dreams and you’re more scared of it than I am of bathing. You need to stop investing in GICs and get your money to work in something better.
Luckily, you’re here at Financial Uproar, which has suggested all sorts of alternatives over the years. I have some of my cash invested in private mortgages. You can either start a business or buy an existing one. You can buy real estate, or trailer parks, or a million other things. There’s no shortage of investment options out there.
Investing in GICs isn’t investing. Leave your cash in high-yield savings accounts, and invest the rest. Opportunity costs are very real. Don’t lose out by keeping your cash with a bank. Think bigger.