Give Your Greatest Gift

We had a deluge of snow in Toronto today. Estimates range from 20-30 cm before drifting. Since it's Sunday, there are no closures of schools or offices. Monday looks like a normal day. At least I got to use our snowblower. Twice.

I also helped shovel a retired neighbour's driveway. This was much more useful than giving him a shovel or a cup of hot cocoa. Often, we take the easy way out, giving a material gift.

"Thanks for the ball, dad, come on let's play. Can you teach me to throw?"
I said, "Not today, I got a lot to do."
He said, "That's ok."
--- Harry Chapin, Cats In The Cradle

Give Yourself
You are the best gift you can give. Granted, this is tough to explain to a kid dreaming of a Wii or iPod.

When I give, I give myself. --- Walt Whitman

The greatest gift is a portion of thyself. --- Ralph Waldo Emerson

The greatest gift you can give another is the purity of your attention. --- Richard Moss

The first great gift we can bestow on others is a good example. --- Thomas Morell

No one can outspend us when we give time and attention. Not even a billionaire.

Get Yourself
When giving, don't forget to give yourself to yourself too.

The greatest gift that you can give yourself is a little bit of your own attention. --- Anthony J. D'Angelo

This is my final post of the year. Thank you, dear readers, for giving me your precious attention, week after week.

All the best to you and yours during the holidays.
May your 2008 be really great!

Photo by room929

Protecting Against Identity Theft

What I did in my youth is hundreds of times easier today. Technology breeds crime. --- Frank Abagnale

In Stealing Your Life, Frank Abagnale discusses identity theft. His autobiography, Catch Me If You Can, became a Steven Spielberg movie starring Leonardo DiCaprio. Abagnale also wrote The Art Of The Steal about protecting yourself against fraud.

Cheery topics indeed. Stealing Your Life is less entertaining than the earlier books because it's closer to our lives. Also, we've heard the messages before. The content has an American slant and there's more "product placement" (a particular pen for writing cheques) and endorsements (e.g., a particular paper shredder).

Don't Leave Home With Them
For identity theft, our two most important pieces of identification are our

1. Social Insurance Number
2. birth certificate.

Fortunately, there's no reason to carry either around with us. Very few places legitimately need to know. Unfortunately, too many of us carry such vital identification with us and share it too easily.

Don't Use Your Debit Card
Use a credit card rather than a debit card. Once money's been taken out of your bank account, it's tough to convince your bank that you weren't negligent. After all, the debit card is supposed to be in your physical possession and only you have the PIN. Right?

Precautions
The Federal Trade Commission estimates that fixing your credit costs $1,200 US and 175 hours of your time.

If you make it easy for people to steal from you, they will. ---Frank Abagnale

I'm now reluctant to use my credit card in restaurants and other places where my card leaves my sight. There's not much choice unless you want to carry extra cash. As a precaution, I use my backup credit card.

Earlier, I wrote about your credit report. Abagnale recommends a regular review to make sure nothing's amiss. He points out that credit agencies are businesses. They do not take responsibility for ensuring the accuracy of the records they hold. Different agencies can have different information about you.

You can get your credit report by mail for free or pay to see it online.

Who Can You Trust?
Abagnale gives examples of unexpected identity theft

• by payroll staff (have access to your SIN, address, banking information, etc)
  
• by parents (taking out credit cards in the names of their kids)

It's too really sad when you can't even trust family. Thieves are getting younger too. Abagnale gives an example of a child charging prescriptions to a parent's card. Age? Less than a month old ;)

Links

• 14 Tips To Avoid Identity Theft (Frank Abagnale)
• Your Credit Report (posted here)
• Free credit report from Equifax and TransUnion
  

The Ideal Investments for Tax-Free Growth

Arrange your investments so that the ones which would attract the most tax are held inside your RRSP. --- TaxTips.ca

The advice above comes from a retired husband/wife team that owned and operated a small business. One is a retired professional accountant. With taxtips.ca, their goal is to be "a reference site for easy to understand tax, financial, and related information." That's commendable.

They say: "Interest income (t-bills, GICs, bonds, etc.) and dividends from foreign corporations attract the most income tax, because the total amount is included in taxable income. Thus, if you want to hold this type of investment, it should be held inside the RRSP."

You've probably heard this advice before. Even so, you may have mutual funds inside your RRSP and GICs outside. Maybe you want liquidity. Maybe you want the maximum growth in your RRSP. Maybe you want short term investments outside. People have different reasons. This post isn't about the psychology of investing.

An Overlooked Place For Tax-free Growth
You can also put your most taxed investments into universal life insurance, an option you lose if you "buy term and invest the difference". As with an RRSP, the growth is tax-free until withdrawn. Like a Guaranteed Interest Certificate (GIC), you have a choice of terms --- often 1-5 years or longer. These investment choices are usually called Guaranteed Interest Accounts (GIAs), to distinguish them from GICs.

I couldn't find a nice online comparison for you. There are plans that guarantee minimum interest rates of 4%. How's that for tax-free growth?

Links

• Which investments should be held inside vs outside the RRSP? (taxtips.ca)
• The Overlooked Advantages of Universal Life

Three Tips for Holiday Spending

If your outgo is more than your income, your upkeep will be your downfall. --- Unknown

It's the time of year when many spend on others ... and themselves. Without self-restraint, the January bills can be a downer.

Through The Years
Since the days when you could say "Merry Christmas" without offending anyone, we've celebrated the special, joyous holiday season. Good will towards all. We had a tree and presents.

In the early 1980s, I started celebrated Boxing Day instead. At Sam The Record Man where everything was on sale. And stereo equipment stores. Remember these were the days before VCRs, computers and even audio CDs.

Nowadays, even Boxing Day has lost its charm. Retailers like Best Buy and Future Shop start their sales online on December 25th. Boxing Day sales start at crazy times like 7am --- with lineups!

Lessons Learned
Here are three tips to deal with overspending:

1. Know your prices
2. Know your limits
3. Delay opening impulse buys

Know Your Prices
Big ads and long lines don't mean big savings. If you don't know the regular selling prices, you could overpay for an item on "sale". Last year, I indulged in a GPS navigation system. I started researching in the fall and monitoring prices. Prices dipped lowest in late November/early December. That's when I bought. On Boxing Day and beyond, discounts off the normal prices were smaller. On Boxing Day, I saw brands I'd never seen before or since. Retailers must bring in items they didn't normally stock just to mark them down for unwary customers.

Know Your Limits
Naturally, buying is easier than paying. It helps to know how much you can afford before you go shopping. Some items decrease in price or improve in quality. Computers, for example. You can benefit by waiting.

Impulse Byes
If you bought an item on impulse, wait 48 hours before opening the package (assuming it won't go bad, you have self-control, and it's returnable). You can pretend you bought online and are waiting for delivery. If you lose interest, return the item. This works very well for me. Right now, here's what's going back unopened: car DC-to-AC converter, aluminum computer case and a backpack. They may soon be joined by a LED flashlight you can recharge by winding up. The following passed the wait: nonstick cookware, vacuum cleaner. They were worth the wait.

Other Tips
Read other posts on holiday spending from the Canadian Tour of Personal Finance Blogs.

Life on the Road: The Canadian Tour of Personal Finance Blogs Returns

When you're riding sixteen hours
and there's nothing much to do
And you don't feel much like riding,
you just wish the trip was through.
--- Bob Seger, Turn The Page

Life's tough on the road even when you're a big rock star with an entourage. Imagine the plight of a personal finance blogger --- in Canada. No personal jet. Not even a tour bus. Instead, we travel in cyberspace. Here's the good news for you: admission is free. You simply visit one of the sites on the tour and follow the links to the other "performers".

The organizer, Monty Loree of Canadian-Money-Advisor.ca has suggested a timely theme: views on holiday spending as it relates to personal finance. Drop by on Tuesday November 27 and see the results.

And these towns all look the same.
We just pass the time in our hotel rooms
And wander 'round backstage.
Till those lights come up and we hear that crowd
And we remember why we came
--- Jackson Browne, The Load Out/Stay

Attention Bloggers
Do you write about Canadian personal finances? How about joining the joining the tour, here's the registration page.

The Car Mechanic: Paying for Effort or Results?

Oh no! Your car broke down. You've got no idea what's wrong. The problem could simple or major.

Effort
You're told that repairs will take three days but they take four and cost you $1,000. Getting around is inconvenient but you manage. You pay, feeling the bill is reasonable for the amount of time and effort.

You don't realize that the mechanic was average. Most of the time went to finding the problem.

Advice is judged by results, not by intentions. --- Marcus Tullius Cicero

Results
Suppose you go to an exceptional mechanic instead. This mechanic fixes your car in 10 minutes. How would you feel about paying $1,000?

Chances are you'd balk. A $1,000 for 10 minutes of work? Ridiculous! But is it? You got your car fixed in less time than a pizza delivery and you saved four days of aggravation.

Wisdom

One that would have the fruit must climb the tree. --- Thomas Fuller

Wisdom takes years to acquire and has a cost. We can't easily measure wisdom and don't have two identical cars to take to the two mechanics. Our usual solution? Pay for the time expended. So we pay accountants, lawyers and others by the hour. We pay for effort rather than results.

Real Life
When we looking for our first home, we met a real estate agent at an open house. We described our needs and wants: close to public transit, quiet, large, within our budget. The first place our agent showed us was ideal. So we did the obvious --- kept looking.

After a few more days of visiting other places, we bought the first place. We now accepted that our agent was excellent. We didn't know before. The result? Wasted time. Ours and our agent's.

The Rationale for Irrational Behaviour

When I get logical, and I don't trust my instincts — that's when I get in trouble.
— Angelina Jolie

By studying investor behavior, Professor Meir Statman has insights into why we're not rational. Investments and many other items have two components

1. utilitarian: practical, tangible, measurable
   
2. expressive: emotional, intangible
   

Using a car as an example, the utilitarian elements are gas mileage, reliability and safety. The expressive elements are style, status and social responsibility. Our purchases are based on both.



In the US, the 2007 Hyundai Sonata surpasses the BMW 525i

• 19 more horsepower
• superior acceleration
  
• more interior room
• same number of airbags
• half the price ($20K vs $40K)

That's according to a commercial. So it must be true ;)

No, no, you're not thinking; you're just being logical. — Niels Bohr

Buying the Sonata looks the logical choice. Let's look at 2007 car sales to Oct 31st from The Wall Street Journal. Hyundai sales dropped 12.1% to 250,885 cars. In contrast, BMW sales increased 9.2% to 188,845 cars. In October, why did Hyundai sell only 19,214 cars vs 19,084 for BMW, a difference of only 130 cars? There must be plenty of expressive drivers.

The same goes for investors. Statman would like a hedge fund, for example, listed as follows: 6% expected returns, 2% hope, 2% cachet.

Oddities
The same article is published on Nov 7, 2007 with two different titles:

• Why Stocks Are Like Socks ... and Cars, and Wine ... on Yahoo Finance and in Fortune (Nov 12, 2007 issue)
  
• Why you're not a rational investor on CNN Money
  

Strange. Different titles must grab different readers. Whatever the title, the article's worth a read.

The Overlooked Advantages of Universal Life

Universal Life (UL) insurance has three key advantages

1. Tax-deferred growth, potentially permanently
2. Tax-free retirement income through leveraging
3. Tax-free death benefit

Unfortunately, most Canadians are unaware or skeptical. There's a widespread belief that it’s better to buy-term-and-invest-the-difference. So affluent Canadians take advantage of UL with the endorsement of their accountants.

Buy Term and Invest The Difference
This seems like a great idea. Term insurance is cheaper than permanent insurance. So there’s more money to invest outside. Yet astute investors like Warren Buffett buy permanent insurance, especially UL.

Why is term insurance cheaper? Because it’s worth less. Coverage expires before most people do. So term insurance is well-suited for folks with young families and debts like mortgages. Term insurance is used for estate creation by people with little money. They buy term but don’t have money to “invest the difference”. They probably have unused contribution room in their RRSPs.

Life insurance was created to be an instant estate in the event of the premature death of the breadwinner. --- Herb Perone

In contrast, permanent insurance is used for estate preservation and tax planning by people with money.

The Math of Compounding

“The most powerful force in the universe is compound interest.” --- Albert Einstein

Tax cripples investment growth. Conventional investments earn

• interest (taxed at 46.41% in Ontario)
• dividends (taxed at 24.64% or 31.34%) or
• capital gains (taxed at 23.20%)

(For other provinces, see 2007 Tax Facts and Figures from PriceWaterhouseCoopers).

As with an RRSP, the tax rate on growth inside UL is 0% until withdrawals are made (then taxed your marginal tax rate). Tax deferred is tax saved --- a huge benefit.

Here’s a simple example that shows the consequences of tax: What does $1 growing at 100% per year become after 20 years? $1,048,576. Suppose growth is taxed at 35%. The after-tax accumulation shrinks to a minuscule $22,371. With sheltering, tax is applied to the ending accumulated value, giving $681,574. For the math, see the table in $1,000,000 After Taxes on Investment Growth. For another example, read Do You Understand Compound Interest?, which has a live calculator

Tax-deferred Growth
You saw the power of tax-deferred growth above.

UL lets you make deposits well above the RRSP contribution limits (the maximum is limited by the death benefit, which you select). Because withdrawals are not mandated, the savings can be paid out as part of the tax-free death benefit.

Tax-deferred growth has another advantage. Insurance charges are partially paid by investment growth that was never taxed --- the government helps pay your premiums. This can't happen with term insurance because there's no tax-favoured savings element

Tax-free Retirement Income
If you need retirement income, you have the option of getting tax-free income by using the savings as collateral for a bank loan. You can skip the loan payments and have the loan repaid with the tax-free death benefit.

Bonus
If you’re accumulating large sums, do you want to risk losing it to creditors? When properly-structured, life insurance can be creditor-protected.

The advantages of universal life insurance lead to many creative strategies.

Does Warren Buffett "Buy Term and Invest The Difference"?

“At bottom, any insurance policy is simply a promise, and as everyone knows, promises vary enormously in their quality.” — Warren Buffett, Berkshire Hathaway 2004 Annual Report

Free Promises
Some insurance is free

• Travel insurance with your credit card
• Extended warranties with your credit card
• Ontario Place rain-free guarantee
• 30 minutes or your pizza’s free guarantee

This is possible because the benefits are limited and claims are infrequent.

Term or Permanent?
With life insurance, term coverage costs less than permanent coverage for the same reasons as above. Term life is a gamble because death is unlikely during the period of coverage and because the steep premium increases at renewal encourage you to cancel coverage.

With permanent insurance, the tax-free death benefit will be paid as long as the coverage remains in force for life. Naturally, this stronger promise costs more. As long as you keep paying the premiums, the insurance company must provide coverage even if your health deteriorates.

Your chances of dying increase as you get older. Suppose you bought term coverage with rates that increased each year as you age. Do you see the problem? The insurance becomes increasingly expensive as life expectancy approaches. So you can’t afford insurance when it’s most likely to pay out. What good is that?

How The Government Helps
What’s the solution? Prefunding. To encourage Canadians to save for retirement, the government allows savings to grow tax deferred until withdrawals are made. Permanent life insurance gets the same advantage of tax deferred growth.

You maximize the benefits of compound growth by making large contributions as quickly as possible. This means that when insurance charges are deducted, part of the money comes from investment growth that was never taxed. In effect, the government is subsidizing the cost of your insurance.

The government isn’t crazy. As with RRSPs, there are limits on how much money you can invest. There’s much more flexibility, though. The maximum premium varies by age, gender and the face amount.

Surrender Values
If you decide you no longer need your permanent insurance, you can cancel your coverage and get a taxable cash surrender value. According to Warren Buffett, you’re probably giving up an excellent investment:

“Berkshire purchases life insurance policies from individuals and corporations who would otherwise surrender them for cash. As the new holder of the policies, we pay any premiums that become due and ultimately – when the original holder dies – collect the face value of the policies. The original policyholder is usually in good health when we purchase the policy. Still, the price we pay for it is always well above its cash surrender value.”
— Warren Buffett, Berkshire Hathaway 2004 Annual Report

Why Doesn't Everyone Know
If permanent insurance is so good, why would anyone “buy term and invest the difference”?

Universal life insurance, the predominant form of permanent insurance, combines term insurance with the tax deferred growth.

Online, most anyone can publish most anything without verification of facts. Wouldn’t you want to get other opinions? If you search using keywords like “buy term and invest the difference” you’ll find many articles on that alternative to permanent insurance. A good starting point is wikipedia. You won’t find consensus, though.

Using life insurance for tax planning requires specialized knowledge that few have. So teams are used (see The Financial TRAIL To Taming Your Financial Risks) with experts in risk (insurance), accounting, investments and law.


That’s why you won’t find many articles from external credible sources. Insiders know but they

• are perceived as biased
• guard their knowledge or lack ways to communicate them

As a result, the tax advantages disproportionately go to the wealthy and the general public doesn’t even know.

What's Right For You?
The answer depends on your age, health, gender, risk tolerance, time horizon and goals. A competent insurance specialist will fairly compare universal life against a conventional investment reflecting taxation and all other costs. You’ll want to compare investment growth and also estate values. The results may surprise you.

Links

• The perils of whole life insurance (new) 

The Financial TRAIL To Taming Your Financial Risks

Alone we can do so little; together we can do so much. --- Helen Keller

Accountants are the most trusted financial advisors. Unfortunately, they are rarely experts in how the tax advantages of life insurance can help their clients. That's fine because they were at least asking. That got me thinking, about the roles of different advisors in today's specialized world.

As time passes we all get better at blazing a trail through the thicket of advice. ---
Margot Bennett

Why The Weird Capitalization?
Your Financial TRAIL starts with Trust and relies on specialists in four areas:

1. Risk: measures and reduces financial risks (e.g., insurance advisor)
   
2. Accounting: tax planning, tax filing (e.g., accountant)
   
3. Investments: selects and manages investments (e.g., stock broker, mutual fund advisor)
   
4. Law: prepares and reviews documents (e.g., lawyer)
   
   
   

The Trusted Financial Advisor
One of these four --- typically your accountant --- is the trusted financial advisor, the one you consult before making an important decision. This happens most often in small businesses.

Many sports are based on teams. However, your specialists probably work separately, depriving you of the advantages of a true team.

The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don't play together, the club won't be worth a dime. --- Babe Ruth

Thoughts on The Dip by Seth Godin

A woodpecker can tap 20 times on 1,000 trees and get nowhere but stay busy. Or he can tap 20,000 times on one tree and get dinner. --- Seth Godin

Seth Godin stole my ideas. Rather, we share ideas in common. His book is The Dip: A little book that teaches you when to quit and when to stick.

The Best In The World
Seth says that to succeed, be the best in the world.

But how?

The solution is to pick a small enough world. That's not cheating because your clients define "world" and "best". For example, we got food poisoning after visiting the Corvette factory in Bowling Green, Kentucky. So we looked for the best medical care that was nearby, available and affordable.

(The paperwork took longer than the treatment. Have you ever been treated by a doctor wearing a paid shirt, jeans and open-toed sandals? That's a story for another time.)

So we picked the best choice available to us there, not scanning the entire planet.

When To Stick

Just about everything you learned in school about life is wrong, but the wrongest thing might very well be this: Being well rounded is the secret to success. --- Seth Godin

The dip creates scarcity and scarcity creates value. So barriers-to-entry are your friend once you get through them. Too many people compromise and fail. When the going gets tough, they start something new. Rather than specialize, they diversify. They become "well-rounded". They become average.

Average people are in the majority, but they're not in demand. --- Seth Godin

Because we have too many choices and too little time, we want the best. So We want to deal with specialists. Any other choice is risky. We don't care if our accountant is a good gardener and a decent golfer. Ditto for our car mechanic, dentist and violin teacher.

Thanks to markets getting smaller and smaller, it's getting easier to be the best at something
worthwhile.

When To Quit
There are times when quitting is the best option. Did you study French in school? I did well because language is like mathematics: obscure rules to memorize and apply. In 2005, I got a tutor to help me relearn the language. After a dozen lessons, I was still far from proficient. So I quit. Better to get better at something I was already good at.

Sometimes we stick to the wrong things because we're too lazy to quit. You see people working on getting a degree or designation but failing. Again and again.

Winners Win Big
The dip is the gap between starting and mastery. Most quit in the dip or stick in a dead end. Instead, we need to stick through the dip and quit the dead ends. Winners get disproportionate rewards. Success goes to those who obsess.

Links

• Official Blog (Seth Godin); including charts
  
• Review (Kinky Solutions)
• Seth Godin In The Desert (Stealthmode Partners)
• The Big Dip: 10 Questions With Seth Godin (Guy Kawasaki)
  
• Seth Godin Is A Quitter (Scrollin' On Dubs)
  

Fitness Club Options

I would not join any club that would have someone like me for a member. --- Groucho Marx

Please accept my resignation. I don't care to belong to any club that will have me as a member. --- Groucho Marx

Health is wealth. My dad passed this message along --- fittingly --- during childhood walks. But do you really want to exercise outside in the rain, on a frigid day or in the scorching sun? Maybe you'd like to use exercise equipment too. A fitness club can help.

Better to hunt in fields for health unbought than fee the doctor for a nauseous draught. The wise for cure on exercise depend. --- John Dryden

The Cost
A reader of my earlier post Fitness Clubs Exercise Your Wallet suggested a cheaper way to join a fitness club: a corporate membership. You or your spouse may qualify. You may even have a facility where you work, but family members may not be allowed.

If you're the type to join a club and stop going, pick the cheapest place :)

Rule of thumb: Eat for what you're going to be doing, and not for what you have done. Don't take in more than you're willing to burn off. --- Lee Haney, former Mr. Olympia

Links
(Here are links I found while researching nearby clubs we were thinking of joining.)

• Fitness Club Sales Leave Members Out of Breath (Toronto Star, Sept 1, 2007)
  
• What Is It With Fitness Clubs? (Ellen Roseman, Sept 14, 2007)
• The Premier Fitness Empire (Hamilton Spectator, Nov 13, 2004)
• Premier Fitness Mississauga (RipOff Report, Jan 2007)
  
• Competition Bureau reaches settlement with Goodlife Fitness Clubs in advertising case (federal government, Feb 9, 2005)
  
• GoodLife Membership Deal (Is this good?) (RedFlagDeals.com)
• Fitness Clubs (RedFlagDeals.com)
  

Your Credit Rating

The surest way to establish your credit is to work yourself into the position of not needing any. --- Maurice Switzer


Credit is a system whereby a person who can't pay gets another person who can't pay to guarantee that he can pay. --- Charles Dickens

As thanks for being a valued client, my bank keeps inviting to spend more money on them. I keep saying no to their offers but they keep calling. The latest is "an invaluable service that helps you manage your credit rating and protects you against credit fraud and identity theft". Who wouldn't want protection against that? Unfortunately, the price is $15 per month. I'm guessing that tax also applies. That's $180 a year. Maybe that's a reasonable price for peace of mind?

Because I'm so special, I was offered a free report on my credit and 30 days to cancel without penalty. I've never seen a credit report. So I said yes.

Good, Not Excellent
My credit score is Good. The categories are Weak, Fair, Good and Excellent. This is puzzling, because my score is over 90%, but that's only enough to put me into the top 50%-75% of the Canadian population. However, I am "very likely to get approved for new credit, get the best rates and be charged a lower amount of deposit in situations where deposits are often required".

Information Contained
The range of information is scary

• year/month of birth
• court records
  
• legal items
• collection items
• accounts: credit cards, mortgage, car lease, line of credit
• addresses: current and two prior
• employer: current and two prior
• inquiries made by others (most recently from my phone company 11 months ago and my bank 20 months ago)
  

The Depth
Here's an example of how much detail there is. I opened a line of credit in Feb 1993 and closed it in Mar 2007. It says "pays account as agreed" and that "account paid closed closed at consumer's request". The credit limit is shown.

Going Forward
Luckily, there were no surprises in my credit history. The precautions I'm taking to prevent identity theft seem to be working too. So this service isn't worth the ongoing cost. I phoned, got through right away and spoke to a pleasant person who quickly cancelled the service. There was no pressure or need to explain. So the overall experience was positive.

We get concerned about our privacy. A credit report shows that lots is available easily. It's interesting to see the contents. No need to worry ... yet.

Links

• Credit Alert (includes free financial calculators)
• Equifax (credit reporting agency)
  

Fitness Clubs Exercise Your Wallet

Whenever I feel like exercise I lie down until the feeling passes --- Robert Maynard Hutchins


Those who think they have no time for bodily exercise will sooner or later have to find time for illness --- Edward Stanley

Joining a fitness club has risks. There's pressure to join. The club can go out of business, taking your money with you. We experienced both with Holiday Fitness in Ottawa years ago.

We've been members of Bally Matrix/Total Fitness since 1992. Apart from the initiation fees, we've been very pleased. Our location, West Metro Toronto, occupied three floors of a modern office building with plenty of parking. Great equipment. Great staff. Great members. Great atmosphere.

The Problem
The big problem was our son. The minimum age for members is 13. So one of us would stay home to look after him. This reduced our visits considerably. We wanted fitness to be a shared event. A family that sweats together ...

Last Christmas, we gave our son, then 12, sessions with an excellent personal trainer (Pino). This was terrific. We all went together and benefited. Then we waited until this month for Jeevan to turn 13.

With excitement, we went to Bally's to get our son a membership. Guess what? The club was sold to Goodlife Fitness a few months ago.

New Owners
The new owners have not made improvements. Some of our favourite equipment is gone. There are fewer staff. Normally, you'd find half a dozen on the main floor alone (mainly to sign up new members). We visited on Saturday afternoon and only found two staff in the whole building --- both at the reception desk. The exercise floors were nearly deserted too. No one was swimming in the award-winning pool. (Disclaimer: we did not check the locker rooms.)

The atmosphere had changed. The energy level had dropped. When life gives you lemons ...

We were not deterred. We had two simple questions

1. Can a 13 year old join?
2. If so, what's the price?
   

The sales rep went to check the minimum age requirements. Upon his return, he started talking to a woman who arrived after us. She was in a rush. So he started attending to her, which would only take five minutes we were told. The five minutes extended to a club tour, extraneous questions, filling out forms. Probably 30 minutes in all. We started leaving but were implored to stay since we'd be served in a minute. We waited.

Sticker Shock
Goodlife does accept children but they need to take 12 sessions with a personal trainer. Since a personal trainer had already worked with our son, this requirement was reduced to six. We figured this could be negotiated down further.

The price? This was a shock. At Bally's, my wife and I each paid $200/yr for a total of $400. So we figured that adding our son would increase the price to $500-600. Wrong.

Here's the pricing for each two weeks (not monthly):

• one person: $29.50 ($767/yr)
  
• 2nd person: $23.50 ($611/yr)
  
• 3rd person: $15.00 ($390/yr)
  

That's a grand total of $68 payable 26 times per year for a total of $1,768 per year. We were not offered any discounts for being Bally's members for 15 years. However some miscellaneous setup fees would be waived, but that was true for any new member.

What Now?
Our excitement vanished. Have prices skyrocketed? Are there other clubs for the whole family? We're investigating. We'll then exercise our options.

What To Do When Your Car Lease Ends

"So many options, so little time."

That's how a letter from the dealership where I lease my car starts. I'm invited to start thinking about my options as there are new models and "many new attractive leasing options". I've still got 12 months left in my 39 month lease. The dealership is certainly being proactive. They did get me thinking.

Five Options
Five options are

1. lease another car now (paying a penalty of thousands); forget that
   
2. lease another new car at the end of the lease (the dealer's preference)
   
3. buy the car at the end of the lease for the residual value for resale or to keep
   
4. import a car from the US where prices are much lower (see at CanadianCapitalist.com)
5. takeover an existing lease (e.g., at LeaseBusters)

Each choice includes the worst step: negotiation. How do you know you're paying a fair price? There are tips at sites like Insider Car Secrets.

What Millionaires Do
In The Millionaire Mind, author Thomas J Stanley reports that millionaires buy (not lease) quality used (not new) cars. Since cars depreciate rapidly, the savings from buying "pre-owned" outweigh the additional maintenance costs. Owing to poor reliability, German imports like Audi, BMW, Mercedes and Porsche make lousy choices. Buying domestic or Japanese is more cost effective.

The most reliable used car, a 1998 Lexus LS400 had fewer problems than a 2006 Mercedes-Benz ML500, according to Consumer Reports. For new vehicles, the owner of the Mercedes M-class is likely to experience 10 times as many problems than with a Toyota Highlander Hybrid. Sadly, the more reliable cars are less enjoyable to drive.

Naturally, there are pros and cons to each option. Luckily, there's plenty of time to decide. Too much time.

SHOULD YOU SWITCH TO AN ACTUARIAL CAREER?

The greener grass on the other side is probably artificial turf.
--- Anonymous

PayScale Blogs recently interviewed a prominent actuary (hint: me!), which lead two readers to ask whether they should change their careers. Here are the emails (edited to preserve privacy) and some thoughts.

Email 1
"I am really interested in a career as an actuary. I was very good in math in high school and university. Unfortunately I chose the wrong field when I was 18 and graduated with a bachelor's degree in electronic engineering. I am 35 now and haven't been successful in my field and have totally lost my interest in it.

I want to know with all the passion and talent that I have for math, could I start an actuarial career without going through another undergraduate program by passing the few first actuarial exams and finding an entry level job? Is there a good future in the field or are the chances very limited in Ontario?"

Email 2

During my research about the actuaries, I landed on your website, and whatever you wrote there made me comfortable enough to ask you for advise. So, this is what I am doing.

I work as an Office/Accounting Manager for over 10 years and I got to this point in my life where I want to do something that I really like (and this is not what I am doing right now). I've always liked math (I have a bachelor degree in electrical engineering), so after considering different options I decided to try to become an actuary.

On your website you wrote "coaches or mentors see us the way we can't … objectively", and this is what I want from you: to let me know if my goal is realistic, if I can do it without going through an university in day-time, if it's not too late, what should I do first, etc. I have a lots of questions, and I would like an objective assessment of my plans.

I don't know if you would help me, but your website gave me the feeling that I might have a chance ...

The Reply
As you can imagine, it's difficult to comment on another person's life --- especially when the decision is as major as a career change. It's too unfortunate when a career choice has not been satisfying. Here are some thoughts that may help you.

You can certainly write actuarial exams without taking courses. However, you will be at a disadvantage compared to students who are taking courses. Here's the real problem: age. You'll likely find that employers prefer to hire

• young graduates (easy to train) or
• actuarial students working at other firms (already experienced).

This may seem like age discrimination, but it's more a case of finding the best candidate. You'd need to have a compelling competitive advantage to be hired over others --- especially for an entry level position. Also, the actuarial exams are rather difficult. They are designed to weed out students. You might want to try an exam to see what they are like.

I hope I don't seem harsh. Actuarial science can be an excellent career choice. However, before you make a major commitment to a new field, do investigate the job opportunities further.

Your Thoughts
What do you think about changing careers, something which The Money Diva is also considering?

Links

• interview with a "renowned" actuary (PayScale.com)
  
• More About My New Plans ... (The Money Diva)
  
• Information for career changers (BeAnActuary.com)
  
• Me an actuary? Seven questions from a student

Do You Understand Compound Interest?

The most powerful force in the universe is compound interest.
--- Albert Einstein

Would you rather get $10,000 today or a penny which doubles in value every day for 30 days?

Phil Harriman, former senator for Maine, asked this question earlier today in Banff.

Most of us would take the $10,000 today but after 30 days, the penny would grow to an astounding $5.4 million. We have trouble estimating exponential growth.

What about the effect of tax on the investment growth? With a tax rate of 35% (US federal and state), the $5.4 million drops to a miniscule $20,300. We have trouble estimating the effect of tax.

"What If"
Static examples are interesting, but what happens if the assumptions change? We can't easily estimate the outcome. Rather than guess, find out using the calculator I created with InstaCalc (a very nifty tool for bloggers and websites).



Deja Vu?
Avid readers with excellent memories may recall my earlier post on compounding, which gave more explanation of the calculations.

Links

• $1,000,000 after taxes on investment growth

Rewarding Bad Customers

How strange. A customer returning an item is treated better than a customer buying.

As children grow up, they become more particular about clothing. In this case shoes. The preferred brand was Nike and now Adidas.

The US offers more selection and better prices than Canada. So during our recent trip, shoe shopping was on the agenda. Our son needed a new pair of running shoes. The same style in a larger size. Alas, we could not find what Jeevan wanted. We visit store after store, encouraging him to try different brands and styles. No luck. He could tell what would be comfortable by just looking. Try on the shoes, we implored. He would but would repeat his initial observation. The power of preconceived ideas.

On our way back to Canada, we stop at a multibrand shoe store (MSS). No success. So we head to a Nike store a few doors away and leave with a pair of shoes. Once we're out of the store, our son says he prefers the shoes we saw in the MSS. Choking a child is probably a criminal offense and there are potential witnesses. So we go back to the MSS and there our son finally finds a pair that he likes --- a pair that looks similar to his old shoes. So I head back to Nike to return the shoes bought minutes earlier. Guess what happened?

The Surprise
When you buy shoes, the cashier checks that you have a matching pair. Since our left and right feet are different sizes, we'd be better served if each shoe was a different size but stores don't sell them that way.

The return line was shorter than the two lines for buyers. The rep didn't open the shoe box to see what was inside. I got an instant refund and --- here's the surprise --- a 20% discount on another purchase within the next two hours. This is called ReturnRewards. How strange.

Truth and Customs

Your black cards can bring you money
so you hide them when you're able.
In the land of milk and honey
you must put them on the table.
--- Steely Dan, Do It Again

It's the first morning of a long weekend and we've spent 40 minutes stuck in traffic waiting for our turn with US Customs.

"Have you got any food?", we're asked.

We were in the midst of listening to Animal, Vegetable Miracle: A Year of Food Life by Barbara Kingsolver, which makes the point that what much of what we eat isn't worthy of being called food. "No", I answered, not thinking of our snacks and lunch as worthy of mention.

Border guard: "Is that an ice chest?"

Me: "Yes"

BG: "What's in it?"

I describe the contents which are then briefly inspected. Busted. Our passports are held and we're sent for a further inspection. Many other vehicles with Canadian plates were already there.

Detailed Inspection

He walks up to me and the sun begins to shine
Then he walks right past and I know that I've got to get back in the line
--- The Kinks, Get Back In Line

The inspector asks us to get out of our minivan and stand in a designated area. I'm asked to describe what we had and he inspects to confirm. He holds a plastic bag with two tomatoes with the care reserved for stinky diapers. The whole vehicle isn't inspected --- only the ice chest and snack box. Nothing is confiscated. We're spared a $300 fine --- this time.

The inspector eventually returns with our passports and asks: "Why didn't you say you had food when you were asked?"

Me: "I didn't think what we had was worth mentioning." The items were for our consumption en route. As vegetarians, we're particular about what we eat. Quoting Kingsolver hardly seemed wise.

Inspector: "We ask the questions. You answer them." Fair enough. We were not asked to interpret.

He lets us go. The whole process took 20 minutes.

Back To Canada
When we return to Canada a few days later, we're asked the usual questions

• how long were you gone?
  
• what's the value of what you're bringing back?
  
• do you have any alcohol or tobacco?

No questions about food.

Lessons for next time
Leave your vittles behind when entering the fast food nation.

I don't think America will have really made it until we have our own salad dressing. Until then we're stuck behind the French, Italians, Russians and Caesarians." — Pat McNelis

Feedback in Unexpected Places

And he sang from his heart
and he sang from his soul.
He did not know how well he sang;
It just made him whole.
--- Harry Chapin, Mr. Tanner

Whether your hobby is singing/dancing/writing, there's value to creating in solitude. But there's not much joy without interaction. To my surprise, I've been getting more feedback by email than from comments to posts. I didn't know.

I generally post once a week, which makes visiting Riscario Insider daily of little value. So you're best served by subscribing for updates by email from Zookoda. If you reply, your response comes back to my sending email account. Who knew? To my surprise, I've been getting emails. I didn't know because I wasn't checking those accounts ... until today.

How Many Email Accounts?
How many email accounts do you have? To organize and reduce spam, I use the following email accounts

1. work-related (2 accounts linked to my Blackberry)
2. personal (Gmail)
3. blogging (one per blog, using a commercial provider since Gmail only allows 500 outgoing emails per day --- think big!)
   
4. junk (Gmail)
   

Gmail's great because of the space, permanence, spam filtering and ease of finding messages. There's one problem: you can only sign into one account at a time and I have three. So I was only checking my personal account. My blog email addresses are now forwarded to one Gmail account, which I'll check regularly.

So I'm catching up with belated replies. You may also have emails waiting for you unexpected places.

Live Comments
By the way, your comments now go live without moderation.

Hidden Costs of Air Travel

I bought some batteries, but they weren't included - so I had to buy them again --- Stephen Wright

Hidden costs are annoying. The "nickeling and diming" can really add up. We know that most prices in Canada are subject to Goods & Services Tax (GST) and Provincial Sales Tax (PST). We're used to that.

Airline Tickets
Some prices have unexpected add-ons. Take airline tickets. I normally use a travel agent when travelling on business or internationally on vacation. So I focus on the total price, not the components. Next month, we're vacationing in Banff. So we decided to book online through aircanada.com. The process is simple and easy --- almost enjoyable.

The surprise came at the end. Each ticket had the following unexpected charges

• $46.00 for Navcan and Surcharges (no further breakdown)
  
• $40.00 for an Airport Improvement Fee
• $9.34 for a Security Charge

That's $95.34. Add $32 for GST and the total is $127.34 per ticket. The disclosure is good, except for "Surcharges", but the total was unexpected.

My wife says "That's not right" and my son asks "What're you gonna do about it?"

Be thankful there's no PST ;)

Did you know ...
Life insurance premiums already include provincial premium tax (which varies from 2% in most provinces to 4% in Newfoundland). There's no GST or regular PST.

WHO CAN YOU TRUST?

Love all, trust a few, do wrong to none.
--- William Shakespeare

In financial services, trust is essential and there are many advisors are trustworthy. How do you find them? According to The Money Diva, "screening the monkeys for a good one would be more work than learning how to invest better". That suggests having no advisor or sticking with one who doesn't satisfy. As Thicken My Wallet says "the financial industry preys on inertia".

Ouch!

The bigger issue is trust in society. Who can we trust anymore? Politicians? Religious organizations? Police? The stench from the few "bad apples" fills our nostrils, taints our perceptions. It's pretty sad when spinach, pet food and tooth paste aren't safe.

You may have missed

• debunking of Rich Dad, Poor Dad by Robert Kiyosaki (found by Mr Cheap)
• the billionaire who isn't (see comments to my post Secrets to Billionaire Success)
• Xbox 360 Failure Rate High as 33 Percent and Xbox 360 Exec Sold Stock Before Revealing Console Flaw

There are many trustworthy accountants, advisors, car mechanics, doctors, lawyers, etc. The problem is the effort of finding them. You can't simply do a web search. Referrals from someone you trust can be an option. They may not know or they may not be able to say (e.g., try asking a police officer for a burglar alarm company).

Our distrust is very expensive.
--- Ralph Waldo Emerson

Links

• The foolproof measure of trust (new)

Huh? Fraud Protection And Your Bank Card

Don't tell me it's not worth fightin' for
I can't help it - there's nothin' I want more
Ya know it's true
Everything I do - I do it for you
--- Bryan Adams

My bank is doing "everything possible" to protect me from fraudulent activities. That's reassuring. They're up to date with "new fraud protection and detection technologies". I'd expect nothing less.

I'm happy. I don't want self-appointed Robin Hoods stealing from me. I bet there's great news. Let's read on. They are "proposing to take the further step of adjusting the daily limits" on my bank card. Downward. Huh?

Maximum cash withdrawals are being slashed by 50% from $1,000 to $500. Debit card purchases drop from $3,000 to $1,000. That's 67% less!

I don't mind these changes. Making spending harder = Making saving easier. I just need to freeze my credit card in a tin can full of water (see Three Practical Ways To Increase Your Net Worth). I'm worried by the subtext: the war against fraud is being lost.

Everything Possible
Wouldn't doing everything possible include

• photo ID on the bank card
• embedded security better than a magnetic strip
• text messages to your cell phone whenever a transaction takes place

Those measures would be reassuring. Chopping usage limits sends the opposite message.

Thoughts on Sicko

I cannot believe, nor even pretend
That the thunder I hear, will just disappear
And the nightmare will end.
--- David Gilmour, Out Of The Blue

Sicko is not a balanced documentary. So what? Michael Moore has things to say. We can benefit by watching, even if we don't agree with all his points.

45 million Americans don't have health care. The 200 million who do, may not be getting good enough health care because of the profit motivations of the private suppliers. The United States is alone (among comparable countries) in not providing public healthcare.

Major Points
The film shows that the average person can get better health care in other countries such as Canada, Britain, France and Cuba. How can a country without healthy citizens excel? The American for-profit healthcare industry is not shown in a good light. The poor perceptions can add to anxiety in other countries regarding the likelihood of getting claims paid for disability, critical illness and long-term care.

Observations
Life often looks rosier in other places. France in particular looked like a country where life is much more balanced than it is here in Canada and the United States. Naturally, there are costs to providing the government services the French seem to enjoy.

I felt sad --- very sad --- to see that 9/11 rescue workers have not been getting proper medical care. Their actions were so selfless.

Sicko is well worth watching. You're sure to leave the theatre disturbed about the health care that Americans receive. Overall, I'm glad to be living in Canada with universal health care.

Happy Canada Day!

Links

• 'Sicko" numbers mostly accurate (CNN, June 30, 2007): "... surprisingly few inaccuracies in the film..."

Prescription for Canada's Ailing Pension System

Today, the Canadian Institute of Actuaries (CIA) unveiled a prescription for the country's ailing pension system at the non-profit Economic Club of Toronto. The 6 page report is quite readable and part of the Institute's desire to help guide public policy in Canada.

The prescription only addresses defined benefit pension plans.

Defined Benefit or Defined Contribution?
Fulltime employees in large companies usually get a pension through their employer. There are two common ways to convert savings into retirement income.

• defined benefit: employer bears the financial risk of providing the benefits (e.g., 2% of your final average earnings per year of service)
  
• defined contribution: employees bear the financial risks (the employer makes a contribution as you would with an RRSP and your pension depends on the growth of the savings)
  

Guess which type employers favour? Statscan reports that the portion of private sector workers covered by defined benefit plans has dropped from 29% in 1992 to 21% in 2003.

The Disadvantages
Defined benefit plans are not perfect. Employer funding requirements fluctuate, which makes corporate financial results more volatile. As a plan member, what happens if you change employers or are self-employed? Portability is a problem. If you leave employers during the first two years, your pension benefits for that period are lost (don't vest). Plans can still fail. Plan assets can be used for purposes you don't support, such as offering incentives to others for early retirement.

Asymmetry of Risks and Rewards
With defined benefit plans, the employer bears the risks and the employees get the rewards. If investment returns are poor, the employer must increase contributions. So if returns are favourable, shouldn't the employer be entitled to withdraw some of the surplus? If an employer tries, there's often an outcry. Hardly fair. Hardly an incentive for employers.

Where's the Outcry for Defined Benefit Plans?
There isn't one. Employees don't understand how much they lose. With defined contribution,

• plan members bear the risk of poor investment returns
  
• employers reduce their costs by 2% of payroll (which means costs have been shifted to plan members)
  
• returns drop because of higher administration costs, less investment expertise and higher management fees than institutional investors
  

At retirement, plan members find that their retirement savings buy less of an indexed annuity than they expected. At this point, what can they do?

What's Next?
It wasn't clear what happens next. How will business owners react? Will politicians see a need to do anything? Do Canadians care? Are there other prescriptions that could help improve the defined contribution plans which predominate?

Links

• press release from the Canadian Institute of Actuaries
• official report (6 pages, PDF)
• article from advisor.ca (June 27)
  
• Are Canadian's Saving Enough for Retirement, Part 2 (from Canadian Capitalist)
  

Further Down The Path We're Already On

I suggest that the only books that influence us are those for which we are ready, and which have gone a little further down our particular path than we have gone ourselves.
--- E.M. Forster

The quote above has had me thinking for days. It's so true. When I started reading personal finance blogs a few months ago, I tried many different ones because they were novel. Now, I'm finding there are only a few I revisit. Time is scarce, after all. My preferred sites feel more comfortable, perhaps because I'm on a similar path already. Do you find the same yourself?

For exposure to new ideas, we might read publications we'd otherwise skip or talk to folks we'd otherwise avoid. Even so, when it comes to being influenced, we're more likely to follow someone on our own path.

Two roads diverged in a wood, and I -- I took the one less traveled by, and that has made all the difference. --- Robert Frost

So rather than taking the road less travelled, we follow a tad further down a path we've already selected. Followers, not pathfinders. Maybe you feel the same?

Huh? The Risk Of Using a 407 ETR Transponder In A Rental

Q: What do you get when you cross a lawyer with the Godfather?

A: An offer you can't understand.

Huh?!? Sometimes a well-meaning message raises more questions than it answers. Here's an example.

The 407 Express Toll Route in the Toronto area can be a fast(er) way to get around ... for a price. I got a transponder to avoid the $7.10 video toll charges added to each round trip plus a monthly fee of $2.35 (see charges). The insert with this month's bill has an importance notice to help car renters save money.

"We do not recommend using your transponder in rental vehicles as tolls, video toll charges and administrative fees will be billed to the rental company if your transponder is not read.

If you choose to use your transponder in a rental vehicle, any tolls, video toll charges and administrative fees charged by the rental company as the responsibility of the renter."

What Does It Mean?
This well intentioned message is creating anxiety. Why wouldn't the transponder work in any vehicle? We have two vehicles and one transponder. I thought we could move the transponder between them, if required.

Here's the unanswered question: What should you do when renting a vehicle?

Without a transponder, won't you face the surcharges for for video toll and administration? Is there a special arrangement for rental companies? Maybe rental cars come with transponders already? Won't the rental company warn you if there's a better solution? Maybe they'll rent you a transponder?

I'm sure there are answers somewhere, but why not in the important notice itself?

The overall result is increased anxiety. Messages from other companies have the same unfortunate effect.

I hope I don't need to rent a car anytime soon.

The Unexpected Costs of Home Ownership

"I care. But not t-h-a-t much."
-- Herb Cohen, negotiator

There's an interesting post about Managing the Cost of Home Maintenance and Repair on A Canadian and her Money. The idea is to setup a reserve fund for predictable and unpredictable expenses. This works well for condominiums because predicting is easier when there are many units. For one home, the statistical approach is less meaningful.

Let's consider a simple example: death from an injury. The chances are 1 in 1,755 in a year and 1 in 23 during a lifetime, according to US statistics. How does knowing that help us as individuals? We're digital. Dead or alive.

Similarly, our fridge works or it doesn't. Our roof leaks or it doesn't. The furnace breaks down or it doesn't. Each of these items has an expected lifetime, but how long they last for us can be much longer or shorter. So how to we plan? If the furnace is expected to last 15 years, and it's still working well, do we still replace it? Chances are we'll wait and perhaps get many more trouble-free years of service.

Some expenses can be scheduled. If the roof needs replacing, you might be able to wait another year to free up money for "squeakier wheels".

Budgeting Is Boring
Saving is important, but budgeting is boring. Much like dieting. Many of us start, quickly lose motivation, quit and feel guilty. Worse off than when we started.

It's clearly a budget. It's got a lot of numbers in it.
--- George W Bush

An Easier Approach
An easier approach is to save money automatically by "paying yourself first" through automatic transfers from your bank account. This money can be used for savings and emergencies. In essence, we're self-insuring. So we're prepared for emergencies.

If we're faced with unexpected expenses and don't like borrowing to spend, we'll feel out of our financial comfort zone. So we'll likely reduce other discretionary expenses until we're comfortable again. So even if we dip into our savings, we'll work to restore them.

Does this make sense? Or should I leave the psychology of human behavior to others :)