Category Archives: Book Reviews

Book Review: STOP OVER-THINKING YOUR MONEY

By Sheryl Smolkin

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In his new book “Stop Over-thinking Your Money,” Globe and Mail personal finance columnist and television personality Preet Banerjee says personal finance is a lot like physical fitness. In order to be in better shape, everyone knows they have to work out and eat well. A personal trainer delivers results, not by showing clients a new way to perform sit-ups, but rather by simply making sure the sit-ups get done.

Similarly, in this book Banerjee discusses in five simple rules how to think about money and focus on the 20% of what you really need to know in order to be in top financial shape.

Rule 1: Disaster- proof your life 
Investing is only one of many factors that affect your personal finances. If you are going to retire well at age 65 you have to put away money for a long time. But if you die, lose your job or become disabled before then, your long-term plans could go up in smoke. That’s why he says disability insurance, life insurance and an emergency fund should be the foundation of your financial plan. Wills and powers of attorney must also be taken care of early on. 

Rule 2: Spend less than you earn 
Spending less than you earn is the cornerstone of financial stability. It allows you to eliminate money stress and begin creating wealth. Here’s where you learn how to budget. Banerjee highly recommends Kerry K. Taylor’s electronic spreadsheets on Squawkfox.com. By starting with your old or current budget, the many undesirable things you spend money on like take-out coffee, fast food breakfasts and debt repayments will jump out at you. Then you can create a new budget and start tracking your spending more diligently. Surplus can be allocated to savings. 

Rule 3: Aggressively pay down high interest debt 
Thou shalt not carry credit card balances! When you have high interest debt, the amount of cash flow it ties up on a monthly basis is painful to calculate. Banerjee shows how you can transfer high-interest balances to low interest balances using a line of credit. Then he recommends developing a plan of attack for paying down your debt. While he acknowledges that changing spending patterns to alleviate debt is easier said than done, he says the only way to keep your finances on an even keel is to save more before you spend. 

Rule 4: Read the fine print 
From today forward, he instructs readers to read every word on any document they put their signature on. Gym memberships, cellphone contracts, loan documents. You name it. He gives the example of a friend whose wife could not collect on his mortgage insurance because the policy was underwritten at the time of death. The policy said it was invalid if he had any alcohol in his bloodstream while operating a motorized vehicle (a snowmobile in this case) when he died. In contrast, a life insurance policy underwritten at the time of purchase paid out within two weeks. 

Rule 5: Delay consumption
The fifth rule is simply an extension of the first. Stop worrying about keeping up with the Joneses. As you earn more money or get a bonus don’t get caught up in lifestyle inflation. And avoid the monthly payment trap. Think seriously about whether house renovation is actually an investment and if the personal gain from expensive hobbies is really worth the cost.

Throughout the book Banerjee keeps returning to the message that if you wait to make a perfect plan you may never start. And in the beginning, building up lots of money depends more on putting money away than making money grow because of smart investment decisions. You can control how much you save but you have almost no control over market performance, he says.

This book is an accessible, quick read but like any guide, it is up to you to buy into Banerjee’s five financial rules and implement them. He calls them the roadmap to an easy “A” in personal finance.

But when you are ready for a more sophisticated “A+” strategy he would be happy to provide additional guidance along the way. Who knows? That could be his next book, But until then, you can find him on twitter @preetbanerjee. He is looking forward to hearing from you!

You can buy a hard copy of Stop Over-thinking Your Money online at Chapters/Indigo for $13.68. An ebook from Kobo can also be purchased and downloaded.

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Book Review: RRSPS THE ULTIMATE WEALTH BUILDER

By Sheryl Smolkin

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If an alien parachuted into Canada in the first two months of the year and needed to quickly understand the what, when, why and how of registered retirement savings plans (RRSPs), there is no better source of information than Gordon Pape’s new book RRSPs The Ultimate Wealth Builder.

The prolific writer has authored and co-authored over 20 books with down-to-earth investment advice, many of which have become best sellers. And this one is definitely another winner.

RRSPs were created by Louis St. Laurent’s Liberal government and have been around since 1959. Of course as Pape explains, there have been many important tweaks along the way.

  • Contribution levels have jumped from 10% of earned income (maximum of $2,500) to 18% of the previous year’s earned income (maximum of $24,270 in 2014.)*
  • Since 1996, unlimited carry-forwards of unused contribution room have been permitted.
  • Contributions can be made until age 71. The maximum age was reduced to age 69 as part of the government’s austerity program in 1997, but raised back to 71 in the 2007 budget. Now there is growing demand to bump it up further to age 73.
  • Registered retirement income funds (RRIFs) were added to the program in the 1970s, allowing taxpayers to further tax-shelter funds after retirement subject to mandatory minimum withdrawals.

Early chapters of the book set the scene with an extensive RRSP vocabulary (Chapter 2) and the rules relating to contribution levels, deadlines, carry-forwards and spousal plans (Chapter 3).

In Chapter 4 Pape says the most common mistake people make is to walk into their bank and say, “I want to buy an RRSP.” “You invest in an RRSP so the type of RRSP you select will have a huge impact on how your money will grow over the year,” he says.

If you are a regular RRSP contributor, you may think you have little to learn about the subject. But here are a few interesting tidbits I picked up that you may not be aware of:

  • You can contribute in one year and defer your tax deduction to a later year when your earnings are higher and the deduction is worth more.
  • If you don’t have sufficient cash but you have a self-directed RRSP, you can make a contribution “in kind” of another qualified investment at its fair market value. For example you can contribute a $5,000 GIC maturing in three years.
  • If you receive a retiring allowance or severance pay it can be transferred directly to your RRSP without withholding tax even if you do not have contribution room. You can transfer in $2,000 times the number of years or part years you were with the employer up to and including 1995 without withholding tax. You can also make an additional tax-free contribution of $1,500 for each year or part year prior to 1989 in which no money was vested for you in a pension plan or deferred profit sharing plan.

Pape also shares important details about making RRSP withdrawals for buying a home or returning to school and the complex RRSP mortgage and repayment rules.

For example, did you know that if your RRSP funds are used to invest in a mortgage for you or your children, interest payments have to be made at market rates?

In addition, non-arm’s length RRSP mortgages must be administered by an approved lender under the National Housing Act and insured either through Canada Mortgage and Housing or a private company like Genworth MI Canada.

Chapters 12, 13 and 14 thoughtfully address the perennial questions: RRSP or mortgage pay down? RRSP or debt pay down? RRSPs or Tax-free savings accounts.

The one area where I disagree with Pape is on the merits of an employer-sponsored Group RRSP. He says they are often not a great deal because employers can’t contribute to them directly; Group RRSP contributions reduce your total contribution level for the year; and Group RRSPs frequently offer a limited number of investment options.

In my experience working as Canadian Director of Research for a global actuarial consulting firm, smart employers view their Group RRSP as an important attraction and retention tool. They generally incent employee participation by grossing up salary to match or partially match employee contribution levels.

In addition, fees are often lower than individual RRSPs opened with retail financial institutions and there is a large (but not too large) selection of diversified investment funds for employees to choose from. Interactive websites plus in person and online education are also frequent valuable group RRSP add-ons.

What I do not disagree with is that RRSPs can be a powerful machine for creating wealth that you ignore at your peril! RRSPs The Ultimate Wealth Builder can be purchased online from Indigo books for $13. An e-reader version is also available for $13.99 from the Kobo bookstore.

*Contributions to the Saskatchewan Pension Plan of up to $2500/year form part of your RRSP contribution limits. You can also transfer $10,000 from your RRSP to SPP each year until you are 71 without tax consequences. In 2013 the SPP balanced fund earned 15.77%.

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Book Review: How to Eat an Elephant

By Sheryl Smolkin

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If one of your New Year’s resolutions is to finally get serious about your family finances, How to Eat an Elephant by financial planner Frank Wiginton is a book you may want to take a look at.

For many years when Wiginton’s clients have approached him to make a financial plan he has asked them to bring in a series of documents. Clients often said that the amount of work they had to do and the quantity of information they needed to pull together was overwhelming.

To help them overcome this fear and stress, he began breaking down the required information into smaller, much more manageable bite-sized pieces – i.e., “small bites of the elephant.”

This was the genesis of the “twelve step program” in his book covering topics ranging from goal setting, debt management, and insurance to retirement savings, estate and tax planning. Wiginton suggests that by using this guide and doing about four hours a month of “homework” readers can develop a realistic financial roadmap.

Each chapter includes a breezy discussion of the topic, “Frank thoughts” from the author and anecdotes about how using these techniques have benefitted certain individuals. At the end of each brief chapter summary you are directed to easy-to-use web tools that help you to collect the information and use the strategies described in the previous section.

I particularly like that Chapter 1 asks readers to “blue sky,” prioritize and price a list of 50 things they want to do right now. Then by identifying the major things that must happen to accomplish each goal, reviewing the list regularly and sharing goals with others they have a better chance of making their goals a reality.

Chapter 2 teaches you how to create a net worth statement and by Chapter Three, Wiginton finally  deals with the dreaded “b” word – budgeting. That’s where he gets into “needs vs. wants” and ways to break “the spending habit.” Ideas like using cash only, saving 10% and re-negotiating mortgages and telecommunications bills are not new, but seeing them in one comprehensive list is helpful.

When it comes to retirement planning, Wiginton says the first step is to determine what you want to do in retirement and what it will cost. Then he presents various retirement savings options and the tax implications of each one.

Wiginton notes that you may actually need less money than you think to retire because:

  1. You will pay lower taxes when you no longer are employed.
  2. For many people, expenses are lower once the mortgage is paid off and the kids have left home.
  3. People tend to spend less with age.

For example, when people are 60 to 70 years old they tend to be a lot more active than when they are 70 to 80 and the trend grows more pronounced with age.

As a result, in calculating what clients need, he usually reduces the amount of spending required by 15 or 20% around age 75 and by another 15 to 20% at age 85. However, he says that increasing costs of long-term care for seniors do have to be factored into the equation.

This is an engaging and clearly written book that runs to 274 pages of smallish print. There are no quick fixes but if you are prepared to work through it “one bite at a time,” by the end you will have a much better understanding of your finances and a plan that will help you achieve your personal financial goals.

The book is available in paperback or for Kobo and can be ordered for about $16.00 from the Chapters/Indigo website.

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