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Weekend Reading – March 7, 2008

Time again to show some recognition for great articles written around the blogosphere this week.

  • Big news for variable rate mortgage/loan holders!  The Bank of Canada has decided to drop interest rates by 0.50%!  What does this mean for you?  If your loan is at prime, your interest rate has dropped from 5.75% to 5.25%.  If you have a discounted variable rate mortgage, say prime – 0.85%, then your mortgage rate just dropped from 4.9% to 4.4%!
  • Canadian Capitalist answers a few questions regarding the TFSA as to where to invest your money. Is the TFSA better than a RESP or RRSP?
  • Four Pillars writes about if the RRSP is still worthwhile.  Again, this article will look at the effectiveness of the RRSP compared to a TFSA account.
  • Thicken My Wallet has a great article on the art of negotiating and how to do it properly.
  • Canadian Dream does a book review of Rich Dad Poor Dad.  Speaking of which, I will be doing a book review of Kiyosaki's latest book on "Financial IQ" in the coming weeks.
  • A private bill has passed commons that could potentially give parents a tax break on their RESP contributions on top of the current RESP benefits!  The tax benefits would work similarly to the way that RRSP's work.  That is, contributions (up to $5000/child/year) would be tax deductible against the parents income.  The amount taken from the account for future education would be taxed in the hands of the student.  If this bill actually passes, it would be the ultimate way to save for your child's education

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 22 comments… add one }
  • The Financial Blogger March 7, 2008, 7:11 am

    thx for the mention FT!!

  • Four Pillars March 7, 2008, 8:34 am

    Thanks a lot for the mention!

    I have a guest post up on Blueprint this morning so while you are there – check it out!

    Mike

  • Traciatim March 7, 2008, 9:41 am

    Wouldn’t changing from the CESG 20% match to a tax deduction make it so that the poor will not be able to use the funds in any beneficial way anyway? Right now anyone that can put away 50 bucks a month gets a guaranteed return of 20%. Soon the rich will get a return of 40% and the poor will get a return of near nothing.

    • FrugalTrader March 7, 2008, 9:55 am

      Traciatim, I didnt’ read anywhere in the article that they are thinking about taking away CESG? My impression was that the bill would enable the parent to get both. The tax return and the CESG. Maybe it’s wishful thinking?

  • Traciatim March 7, 2008, 10:08 am

    Interesting, but the argument still stands. A dual income family makeing 32K (16K each) pays near no tax, so their contribution (though I don’t have time to do the actual math) would get a 20% CESG return and almost no tax refund. A dual income family making 96K (43K each) pays a good chunk of tax, and would get a far greater benefit from that plan (20% + 30% refund).

    In either case that would skew the benefits rather than their current fair distribution. I think the RESPs are pretty fair the way they are. If the governemnt instead would ban the group plans that sucker parents in to paying something like 2 grand in fees that get ‘reimbursed’ at the end so that no growth can happen on the earliest deposits then parents would be in far better shape accross the board. And no, I’m not bitter for being suckered in to CST. ;)

  • Nate March 7, 2008, 10:09 am

    Hey Frugal,

    Any opinions on the upcoming Visa IPO?

  • FourPillars March 7, 2008, 10:36 am

    I agree with Traciatim – the current RESP system is mostly used by middle class and higher income people. Even though there are more grants available to lower income people, they aren’t able to save for contributions.

    Making the contribution tax deductible will certainly favour higher income people rather than lower.

    I don’t mean to sound like a socialist but one of the primary goals of the RESP program was to enable low to middle class families save for education – with an emphasis on the “low income” portion.

    The current system works great for me but it doesn’t fulfill the original goal.

  • ThickenMyWallet March 7, 2008, 12:16 pm

    Thanks for the mention!

  • nobleea March 7, 2008, 1:09 pm

    RE: Variable rate mortgages.
    As I understand it, when rates go up or down on a variable, your mortgage payment doesn’t change, just the amount that gets put against the principle. How does it work with the semi-annual compounding (or whatever it is)? Does it take a while for the interest rate cut (or increase) to affect the interest/principle payment break down? What if there are several cuts in that period, or a cut and an increase?

    Or do I have it wrong and with a variable, the change is made immediately?

    Also, what happens when the interest rate rises substantially, such that your payment doesnt cover interest alone? Does the bank increase your payment? Or do you go into a negative ammort. situation??

    • FrugalTrader March 7, 2008, 3:02 pm

      Nob,

      Yes, you are right. With variable rate mortgage, the payment stays the same regardless of if the interest rate goes up or down. However, if the rates up enough so that the payment doesn’t cover the interest, the payment will increase.

  • Bay Street Rookie March 7, 2008, 1:37 pm

    Nate,

    Regarding the VISA IPO, there are a lot of mixed feelings on this offering. For starters, the obvious includes VISA’s tremendous success globally and a pretty sound business model. It’s pretty tough to NOT find either a Mastercard or VISA card in anyone’s wallet these days. Heck, I have one from each company (well one is a free card that I got when I was a student which I intend to cancel soon).

    Something a lot of people cite is the Mastercard success and how well its performed since its IPO in May of 2006. This is exactly where the problem lies. Mastercard’s sheer success might push the bankers working on this deal to set this offering’s price higher, banking on the public jumping in on the back of Mastercard’s success.

    There is no doubt VISA is a good business and has a good model. There is doubt on whether it will thrive in this environment and whether or not the hype will send this stock soaring to oblivion. Remember, Mastercard was trading flat until August of 2006. For many of us who aren’t in the actual IPO and will be purchasing shares on the secondary market post offering, we will probably be catching this thing when it’s already soared.

    These are troubling times in the credit markets. Credit card companies won’t be immune.

    Best regards,

    BSR

  • The Reverend March 8, 2008, 2:24 pm

    Are you guys sure about the variable rate payments staying the same after rate increases/decreases?

    I don’t have a standard variable rate mortgage so I can’t say from experience, but I always understood that they would recalculate your payment based on your current amortization schedule. Its wouldn’t be instant, I think a lag of 2 or 3 months maybe since the number of mortgages that would be affected.

    Again, this is not from experience, but that was they way I thought it worked. It seems really strange that they wouldn’t adjust your payments in situations where there was a relatively large rate increase, even if it wasn’t to the point of interest being greater than principle.

    • FrugalTrader March 8, 2008, 2:42 pm

      Reverend,

      I just got a variable mortgage with BMO and that’s how the mortgage broker explained it to me.

  • DAvid March 8, 2008, 4:52 pm

    I won’t assess all banks, however here’s what’s on the RBC site:

    “With an RBC Royal Bank variable rate mortgage, your payment amount stays fixed for the term; however, the interest rate will fluctuate with any changes in our prime interest rate. This means that your monthly payments will remain the same, but if our prime rate goes down, more of your payment will go towards principal and if our prime rate goes up, more of the payment will go towards interest.”

    And no, I do not work for RBC!

    DAvid

  • The Reverend March 8, 2008, 6:10 pm

    Thanks David and FT. Guess I’m out to lunch on this one. My mistake. That practice makes interest rate cuts even better for variable mortgage owners (and even worse for interest rate increases).

  • DAvid March 8, 2008, 9:09 pm

    “How does it work with the semi-annual compounding (or whatever it is)? ”

    I believe if you dig around, you’ll learn that mortgage payments are a blend, and compounded monthly at a rate to equal the semi-annual compounding required by law. That, at least is how I interpreted this document:

    http://www.yorku.ca/amarshal/mortgage.htm

    DAvid

  • Hannah - The Penny Mine March 11, 2008, 4:23 pm

    I so strongly believe RESPs should be tax deductible, just like RRSPs, and am extremely glad to see that it’s becoming a potential reality.

    Making it tax-deductible would definitely increase contributions which would have a great effect on Canada in the long run.

  • Traciatim March 11, 2008, 6:22 pm

    I agree Hannah, having RESPs tax deductible will be great [for the rich] and should be done. However, the way the liberals pulled this stunt should not be allowed to happen. It should be introduced in a budget like anything that costs a billion dollars.

    What would you do if you made a household budget around your paycheck and then your paycheck changed because your work ‘voted on it’ and thought you wanted to put money away to buy a new car. Even if you didn’t plan on doing it. That’s what the Liberals did.

    Jeez, if I ever vote it won’t be for Liberals [I’ve never voted].

  • Hannah - The Penny Mine March 12, 2008, 9:43 am

    Tax deductible RESPs will be good for most citizens. My parents were by no means rich and being able to deduct taxes on the money they were putting away so I could get an education would have definitely helped them out.

    Your comparison is inaccurate though: it would be more along the lines of “what if your work changed your budget and you had to accomodate a new cost into your planning”. This isn’t affecting any of the Conservative MPs personally, only their budget. And regardless of how it passed, it’s something that’s needed to be done, and should have been done a long time ago. Just because it wasn’t included in the budget doesn’t make it something we can just sweep under the rug for another couple of years.

  • Traciatim March 12, 2008, 12:46 pm

    Yes Hannah, it does help [the rich]. It would help my family just about as well as any too (two kids, dual incomes, around 55K in income).

    Currently the plans are three fold:
    RESPs: 20% to everyone
    RRSPs: Government gives taxes back, from 0% – 45% depending on how rich you are.
    TFSAs: Everyone saves

    This plan changes it to:
    RESPs: 20% to everyone + 0% – 45% depending on income
    RRSPs: 0% – 45% depending on income
    TFSAs: Everyone saves

    The problems become that the benefits are kind of masked and the problems are not fully understood. Currently the RESP works because the only income that the student has when going to school are the CESG amount and the gains on any investments. The amount of the actual contribution is taxed in the hand of the contributor, not on the student.

    What happens in 18 years when the student withdraws 30K from their RESP in a year to pay for their school and their living arrangement? The current way they pay tax on about half – their 10K in deductions . . .so 5K, which is under the personal amount so they pay no tax.

    If the RESPs are changed they will owe tax on the whole amount of 30K – 10K which is well above their personal amount and now they will be faced with a tax bill of 22% of 10K or 2200 hundred bucks. Now what student by the time April comes around and they do their taxes is going to have 2200 bucks just lying around?

    Add in the fact that the Liberals decided to abstain on the budget because they are too weak for an election and then use some back door hack to get the RESP stuff in there, this thing just stinks all around. The plan should wait until the next budget and be done properly, if they wanted it in there this time they should have had the guts to do it properly.

  • Hannah - The Penny Mine March 12, 2008, 10:30 pm

    While I completely see and understand your point, the one issue I have with it is the fact that no student, save for the super rich, should be taking out 30k from an RESP in a year. I spent in total, tuition, books and living expenses included, approximately 16k last year. That was living pretty comfortably, having been on my own for the first time, and I can guarantee you I haven’t spent that much this year.

    A full time student in Ontario is exempt from paying taxes on about 18k income and while I am frugal by nature, I know for a fact that I spend more money than most students, who still live at home or at least live within driving distance of parents so they get long periods of time paid for.

    The exception to this rule may be BC, where I’m well aware housing prices are making life for students extremely tough, but in general the average student does not pay income tax, even with CESG money.

    So really, the only students who would truly be taxed on this money are the super rich.

    I’m completely with you on the fact that the Liberals are being pretty political, but the way I see it is it’s a bill that needs to be passed and even if it’s just kind of pushed through in the muck of post-budget political bitching, at least it’ll be there!

  • Traciatim March 12, 2008, 11:17 pm

    I’m not so sure, you’re forgetting about private institutions. In 2000 I went to a private college in graphic design and the tuition alone was 14K . . . not to mention living expenses. According to stats Canada here is a list of average undergrad tuitions (2007/2008):

    Medicine 9,937
    Law 7,334
    Engineering 5,131
    Parks, recreation, health (other than medicine) and fitness 5,099
    Mathematics, computer and information science 4,700

    Here is a list of average graduate tuitions:

    Business, management and public administration 13,702
    Medicine 7,168
    Parks, recreation, health (other than medicine) and fitness 4,689
    Education 4,684
    Engineering 4,340

    Now, considering also that historically tuitions have gone up each year far faster than inflation, by more than double . . . just imagine what those will be in 18 – 20 years. Just for drama’s sake that 13702 at 6% for 20 years is around 44K. Sure, the personal amounts are going to be larger, but they will follow or lag inflation at around 3% or less (especially if you use the core CPI like the stingy government uses for everything).

    See, the TFSA thing is open and great, everyone wins and no one loses. The RESP thing you have to sit around and think about in so much detail on exactly what situations it’s worth it, my vote is keep things just with the:
    1) RRSP no tax up from
    2) TFSA no tax out the rear
    3) RESP get a 20% bonus

    Nice and simple and straight forward. . . and only one benefits the rich the most. I just think there are far better things to spend a billion dollars on that aren’t tax breaks for the rich. Like a personal finance curriculum in high schools, perhaps?

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