Economic Overhaul – Election 2021

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Economic Overhaul – Election 2021

 

Three weeks to go until an election, and we have another contraction in the economy. What do all the parties say they are going to do about it? Let’s see, we will borrow money and increase government spending. We will increase subsidies to businesses, we will lower corporate/personal taxes, and increase various pitiful tax credits to families. Do any of these ideas sound new to you? Have any of them seriously changed the course of our economy before? No? Then why do they keep parroting them?

 

Because we keep voting for them.

 

Canada Votes

 

I personally believe we need an Economic Overhaul where we revamp the way our system works with some major changes, rather than small tweaks.

 

I’m going to outline four different approaches that I think can be used either individually or combined that could seriously alter the way our economy works for the better.

 

  1. The rules we have surrounding free trade agreements.
  2. Altering and prioritizing different tax methods.
  3. LEM- Labour Expense Multiplier.
  4. Variable sales taxes based on company size.

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Has Inflation Gone Crazy?

Blog header inflation gone crazy

No, you aren’t going crazy.

Everything is getting more expensive. Houses, stocks, cars, food, you name it.

Except one thing isn’t keeping up…

 

Inflation showing assets increasing

 

Wages.

 

Generally speaking, the goal of a country or society is to raise the standard of living of all participants. What this means is over time you should be able to achieve more, have more, or do more than you would have been able to in the past.

 

So what happens when the price of everything goes up, but our ability to afford it doesn’t go up at the same rate? Well it basically means we can afford less than we used to. In other words, our standard of living has decreased.

 

You see, inflation and standards of living are generally controlled, or at least attempted to be controlled through what is known as fiscal policy and monetary policy.

 

Fiscal policy is the result of actions of members of parliament. In other words, its what all of the people you vote for end up voting for. You would hope that the people you vote for try to increase your standard of living, though let’s be real. That is very clearly not the case no matter which side of the political aisle you sit on.

 

 

Monetary policy is the result of the actions of the central bank. This is often the boogeyman in a lot of conspiracy theories. Basically the central bank regulates banks, and sets interest rates. This drives the demand and supply of money in the economy. Which is generally one of the best tools we have to manage inflation expectations.

 

The problem right now is twofold. First, the central bank only has a mandate to try to target inflation. The problem with this is that the version of inflation both the central bank and politicians refer to only has a roughly 30% weighting to the cost of housing. Why does that matter? Well recent data shows the average Canadian is spending 52% of their income to buy a house. I know this doesn’t factor in rent, but lets be realistic. If someone is spending 52% of their income to buy a house and rent it to you, you can bet they are jacking those rental prices up. In other words, our current inflation metric fails drastically to appropriately measure the impact house prices have on the ordinary Canadian.

 

 

The second problem is politicians are aware of this. However, it is easier for them to point to the standard inflation numbers and insist there is nothing wrong. Housing is a cash cow – and any attempts to tinker with it or bring down the prices will highly likely result in a recession. If they bring prices down too much too fast, it could easily spiral into a replica of the 2008/2009 housing crash the USA faced. For now, every politician who has held power in the last 20 years has preferred to kick the can down the road.

 

 

Headline inflation is running at 3.7% in July 2021. Economists and central bankers are quick to point out that this is likely transitory – in other words they expect that it is a short blip due to held back demand and supply chain bottlenecks created by the still ongoing pandemic. Only time will tell if they are correct.

 

When your wages are only going up 2% per year, or even decreasing due to layoffs, it sure feels like you are falling behind. When the true cost of living in this country continues to grossly outpace the rate of wage increases, Canadians end up falling further and further behind.

 

Now I’m not one to tell you how to vote. Well publicly that is. However, in this election, I strongly suggest you consider a candidate who makes tackling the rising cost of living and stagnant wages in this country one of their main priorities. Unfortunately, I can tell you from experience as someone who has voted across the spectrum, when it comes to politicians, none of them will have the spine to do a thing about it until it’s way too late and we’ll continue to vote for them anyways.

 

 

 

 

There is No Secret Sauce

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I’m going to let you in on a not so well-kept secret from the financial services industry. There is no secret sauce. There is no specific investment, decisions, technique, or strategy that is going to make you rich. There is no one thing you can do that is going to make you successful.

a picture of a special sauce

 

In fact, I’d be that if you gave up and stopped trying to find an easy one thing you can do to be successful, you would have a much higher chance of getting there.

 

You see, when it comes to money, building wealth is not a matter of making 1 or 2 correct decisions. Building real wealth is a series of small decisions that over time add up to generate enormous value.

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Don’t Chase Performance

 

I really shouldn’t have to write this article. If you look online there are thousands of similar articles all trying to tell people the same thing. In fact, nearly every single investment presentation in Canada contains some form of the same “Past performance is not indicative of future results”.

 

Why is it that we have to keep being told over and over again, and yet we still don’t learn our lesson?

First, let’s look directly at what I’m talking about.

 

You are offered the choice of two investments. Investment A has been declining in value for the past 10 years and is currently worth 70% of what it was worth in 2011. Investment B has been screaming higher over the past 10 years and is currently quadruple the value it was in 2011.

 

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Why Do Asset Prices Keep Climbing?

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One of the strangest phenomenon for many people was watching various asset prices break new records while the world grappled with a global pandemic. How on earth could these assets be worth more now, than they were in 2019, given the economic carnage we suffered in 2020?

 

While there are many different reasons for this, and I do not claim this is the only reason, interest rates are surely to blame.

 

You see, when the economy stalls, governments around the world slash their interest rates in an attempt to get their citizens and businesses to borrow more money to either invest or spend. Let’s look at an example:

If you owned a local restaurant and you were looking to purchase new tables and chairs for your restaurant, maybe you could only get a loan at 9% to finance this. When you sit down and do the math, borrowing the money at 9% doesn’t end up being a profitable option for you as the expected increase in customer spending doesn’t offset the 9% interest rate. Now, if the government comes along and slashes interest rates to stimulate the economy, maybe now you can borrow at 4%. For some people, this shift in interest rates means that what was once a risky or non profitable option, has become less risky and more profitable.

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Successful Investing Vs Getting Lucky

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Record low interest rates, rich asset valuations, low inflation, and solid economic growth expected. The result? Speculative trading.

I’ve been getting more phone calls, emails, text messages and video calls from clients, friends, family and everyone else about purchasing speculative investments than I ever have before.

Now, the usual mantra is that by the time the retail investor gets involved, it becomes the pain trade. In other words if main street is finally rushing to plow their money into these investments as they soar in value, it means that there is likely nobody left to buy. It can be seen as a signal of a bubble or a market top.

 

stock chart falling

 

Now I’m not going to say whether this is or isn’t a bubble, because that is beyond the scope of this article. Also I don’t feel like people using this later and claiming I was wrong.

However, we do need to go over how to spot the difference between making a successful investment, and simply getting lucky.

This first method. If you are investing in something purely because you have seen it go up in value and are afraid of missing out, you have to acknowledge that you are in no way shape or form investing. You are purely speculating. Now this doesn’t mean you can’t make money speculating, but it does mean you are effectively gambling and have to time your entry and exit points in order to make a profit, before greed gets in the way.

 

gambling greed scrounging for money

 

The second method is to calculate your odds of success and compare that to your payout odds. I like to use a simple dice game when explaining this. Your job as an investor is to find an investment whose odds are in your favour. If you wanted to bet me $10 that you could guess the number to come up on a dice roll, you would have a 1/6 chance of being correct. To be fair, you would want a 6/1 payday. If we rolled it 6 times, you would pay me $10 X 6 = $60. If you were right 1 out of 6 times you would get paid 6/1 6*$10 = $60. Which means if we did this over and over again, statistically neither of us would have made or lost any money as these are balanced odds.

 

Dice and dice odds

 

If your investment has a 1/100 chance of working, but only pays out 20/1 those are terrible odds, even if you do successfully get paid 20x your money. If you can find an investment that has a 1/20 chance of working with a 100/1 pay out, then those are great odds and a very good investment.

You see, the reason people get lucky on speculative investments is that in the realm of statistics, anything that is possible to happen will eventually happen. For example, statistically speaking there is a chance of a racoon falling through your ceiling and landing on you in the next 5 seconds. Did it happen? No probably not, but here is the thing, it has happened, and it will happen again to somebody.

 

Raccoon falling on desk

 

What this means is that with millions of people buying and selling random speculative investments all the time, their will always be someone who hits it out of the park even though the odds of it happening were absolutely abysmal. The reason you hear about it, is people like to talk about when it happens, or that they heard of it happening. Do you ever hear people brag that their 10-year return on their balanced portfolio was 7%? No? Because it’s not exciting. You’ll hear about how someone turned $1,000 in penny stocks into $1,000,000. Even though it only happened to 1 in 1,000,000 people who tried.

 

Remember, just because you have heard of someone making lots of money on a speculative investment does not mean you should rush out and buy it. If you are comfortable with a small percentage going into speculative investments, then make that decision. However, don’t let the emotional fear of missing out dictate your investment strategy.

 

 

 

 

Is Rising Real Estate Working Against You?

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When it comes to real estate, there are generally two types of people. There are those already in the market who are praying the market will continue to rise, and there are those outside the market hoping it will crash so they can afford to get in.

 

The interesting thing about rising real estate prices is it actually works against the majority of people until they are at the point of downsizing.

 

What do I mean by this?

 

Well let’s take a look at your standard millennial family, husband, wife, two dogs and a cat.

 

A picture of a family depicting the average milennial family

The vast majority of our generation start out by purchasing a home they can afford, but it’s not going to be there forever home. It’s a stepping stone to their bigger house.

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GST – Does your business need to register?

GST Blog title - Does your business need to register?

 

If you’ve just started a business, or your side business has been taking off, you may be required to register and charge GST/HST on your sales. In general, your business will be required to charge GST/HST on the sale of most taxable goods, services, and leases, where revenue from these activities exceeds $30,000 over four consecutive calendar quarters.

 

GST calendar showing 4 calendars of 30000 in revenue means its GST time

 

Note that this requirement for GST/HST is based on consecutive calendar quarters, as opposed to a complete fiscal year. For example, if your business earned $25k in revenue in both fiscal 2019 and fiscal 2020, it might not seem like you will be required to register. However, if $20k of your 2019 revenue was earned in the last two quarters of the 2019 fiscal year, and $10k of your 2020 revenue was earned in the first two quarters of the 2020 fiscal year, then you will have met the requirement of $30k revenue over four consecutive quarters. In this situation, your business would be required to register, despite never hitting $30k in sales in a single fiscal year. (more…)

How to Escape Credit Card Debt

Blog featured image how to escape credit card debt

 

Let’s start by being completely honest. This isn’t going to be easy. It’s going to take hard work, on your part, and dedication to following a strategy.

 

Credit card debt is pretty much the worst kind of debt you can have. This is due to the exorbitant interest rates, and the ease of continuing to add to the burden.

 

A lady holding a credit card downing in debt

 

With that said, how can you actually go about addressing credit card debt?

 

First Step

 

Stop spending money you don’t have. If you are trying to pay down this debt, adding more to the card is only putting you in a worse and worse situation.

 

Second Step

 

Apply for a balance transfer credit card. What is a balance transfer credit card? Well it’s another credit card that will often charge you 0% interest or at least a much lower interest than your current card for a promotional period. This period is often six months to one year. The benefit of this is it allows you to focus on paying down the principal, without accruing additional interest.

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Introducing the RRSP Snowball Technique

Hey everyone my name is Greg Tomkins from Simplemoneycanada.com. Today I’m going to show you a strategy that I like to call the RRSP Snowballing technique.

 

This technique works to increase the amount you can deposit into your RRSP year after year, without increasing the amount you personally need to save.

 

Usually what people do is they take their $1,000 a month, save it to their RRSP, then come tax time they spend the tax refund. This is not how an RRSP should be used.

 

What we are going to do instead, is invest that $1,000 a month, and also reinvest the tax refund back into the RRSP.

 

Right let’s take a look at how that looks for someone who makes $150,000 a year, saves $1,000 per month and invests their tax refund into the RRSP as well. I’ll assume a conservative 5% rate of return inside the RRSP.

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