The Canadian Money Roadmap

Why you're trailing the market, credit card myths, comparing to others and lottery decisions

July 05, 2023 Evan Neufeld, CFP® Episode 88
The Canadian Money Roadmap
Why you're trailing the market, credit card myths, comparing to others and lottery decisions
Show Notes Transcript

Here's the latest Reddit Roundup for July where I cover off popular topics found on Reddit throughout the month.  This month's topics include:

  • Understanding why your retirement funds might not be keeping up with "the market"
  • Debunking credit card myths
  • Comparing yourself to others in better financial shape
  • Should you take the monthly payment or cash upfront with a lottery win? A few factors to consider


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Speaker 1:

Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, evan Newfield. Today we are bringing back the very popular Reddit Roundup. I did this a couple of months ago and we're going to try it again. I looked through a number of the personal finance pages on Reddit to find some posts And I'll offer a few bits of commentary, perhaps some general advice, based on the questions. But the topic is this week Why isn't my retirement account soaring with the market? Another one about paying off your credit card every month, comparing yourself to other people and why some people seem to be so far ahead than others, and what to do with a lottery win. Alright, i'm going to start off with a question from a US based financial planning subreddit, and this one uses American language, so talking about their retirement plans, but the concept still holds true for us Canadians. Here. The person says I contribute to my Vanguard 401k, target 2055. Essentially, this is like someone's defined contribution pension plan, kind of like an RSP plan that you would have at work, and they're saying they contribute to that work and I'm negative on the day, even though markets are soaring. Are there any adjustments I can make to make this better? I'm 30, so I feel like I can keep my money in a more aggressive fund, maybe. What are your thoughts? Two big things that come out of this. So if you are someone who looks at your retirement accounts through work or your defined contribution pension plans, or perhaps you have accounts with an advisor, something like that If you are in mutual funds which would be the vast majority of Canadians, even DIYers, but especially through work based plans, almost every single penny is invested in mutual funds, and the structure of a mutual fund is that the price changes at the end of the day only. It does not update prices throughout the day. So this one's pretty simple. If you're not seeing it changes in your account on a really significant day, just wait till the end of the day, wait till tomorrow. And another thing is stop looking so much. Don't look at your accounts every single day. That is a quick path to feeling nervous or that things are out of control and or anything like that. I really don't recommend that people look. That's kind of my only guarantee that I give people when it comes to investing The less you look, the better you sleep. It's just not doing any good looking, especially if you're not going to make any changes And I wouldn't recommend you make any changes based on something that happens in a single day. Ok, so that's kind of the main thing why you might not see your investment account growing at the same rate as the the market in general on any given day. But the second one, and perhaps more importantly, you have to know what you are invested in before you can compare that, to quote, unquote the market. So if someone is looking at something like the Nasdaq, the Nasdaq is mostly tech companies. There's a few other non tech companies in there, of course, but this would be a really aggressive part of the market, and so if you're seeing the Nasdaq is up one, two percent in a day and yours is only up half a percent or something like that, you might think, oh, i'm not keeping up with the market. Please keep in mind the Nasdaq is not representative of the market in general. It is representative of a very small part of the market and one that is highly volatile and one that you probably shouldn't be an exclusively for retirement purposes. Maybe I'm not going to make broad generalizations there, but that's it's not a very well diversified way to invest, especially for us as Canadians. So for most people that have retirement assets, especially through a workplace plan, a portion of your investments will likely be in Canadian stocks, but also in bonds. So say you had 20% in bonds and you're seeing the Canadian stock market and the US stock market they're both up. What's likely happening on that same day is that your bonds might actually be down, and so when you look at your portfolio as a whole, yes, your stock portion of your portfolio might be up on that day or that month or that year, but the bond portion might be down. And the opposite is also true, where, if you have a rough day, month, year in the stock market, your bonds might actually be positive, and so that might actually soften the blow a little bit, which is diversification. So when you have something that is more diversified across asset classes so broadly speaking that could be stocks, bonds and cash You can't compare that purely to just the stock market or just the US stock market or just the Canadian stock market, because that is not how you are invested, right? Maybe a portion is there, but you have to keep in mind what you own and what you are comparing to. Good question, but hopefully that answers that. Next one was a post from the Personal Finance Canada subreddit just from a couple of days ago. I'll read the post here I'm a 23 year old female and I've always just paid my entire credit card off every month and it's given me a great credit score. However, i think back to a conversation I had when I was 28, a family reunion, when my 35 year old female cousin mocked me for doing that and said they know you're just using it like a debit card and that you have to leave 30% on it at all times. She proceeded to text and say in person to other relatives that I'm stupid and naive and I don't know anything about being an adult. So what's the deal? Is the 30% rule a thing, or have I been doing it the right way? Or, if this is a dumb question? No, it's not a dumb question, because there's lots of this kind of what I'll call tribal wisdom or things that are passed down from person to person or from financially illiterate parent to financially illiterate child. That you think is gospel truth. When you use a credit card, please, please, please pay it off every month. So, whoever the original poster was here, please keep doing what you're doing and please keep paying off your credit card every single month. That way you don't pay any interest. Lots of people think that if you only pay the minimum amount, that's the amount you need to pay to avoid paying interest. No, that is the amount you need to pay before they take away your credit card. Okay, to keep having access to it, you have to pay something every month. They would love for you to not pay it off every month because the interest rates are outrageous. I've seen as high as 29% in some cases. Just think about that and start doing some math in your own head about how much that would cost you. So, no, you do not need to maintain a balance on a credit card. Credit card companies make plenty of money, but it's not even just from people that leave a balance on their card. Every time you use your credit card, there is a charge to the merchant, so the store or the restaurant, whatever for allowing you to use that credit card. It's a convenience thing and there's a cost to convenience. So in some cases it's as low as 1%, as high as 5% to that merchant, dependent on your card and a few other factors. But when you use your credit card, credit card company will make a little bit of money if you leave anything as a balance on your card at the end of month. They make a lot of money. So please, please, please. If you know anything about credit cards, pay it off every month. If you have access to other types of credit that are cheaper, if you need to. If you are unable to pay off your credit card in a given month, if you have access to a line of credit and you can transfer the balance, maybe take a look at that, because the cost of leaving money on your credit card every month is just so extremely high. It is almost never worth it to maintain a balance there for any length of time. So this is just the purest version of general advice that I could give to anybody is just pay off your credit card every single month. Now next one. I'm not going to read the entire post, but the title is Anybody Else On Here meaning Unread It? read these somewhat financially secure posts and think, wow, i'm so far behind compared to these people. So they write turn 30 recently got interested investing for my future, but I spent all my 20s living in the moment and having fun. Don't get me wrong. I don't regret it. Spent my time living life by going backpacking to dozens of countries, working in multiple countries, focusing more in depth with hobbies and, of course, working long hours with the work I enjoy. While researching ways to invest on here on Reddit, i can't help but think how far behind I am. Don't get me wrong, it's not like I'm in a bad spot. I have no debt $50,000 line of credit available at prime plus 3.4%. All my credit cards paid off up to date totaling around $35,000 available with a credit score over 800. However, in terms of savings, such as investments, i have close to zilch a couple thousand for rainy days, if anything but zero in terms of investments, or even TFSA or RSP, which I feel it's awkward looking at with nothing in it come tax time. She goes on to say that she sees people online making more money and investing and she feels like she's really, really falling behind, might end up changing careers, even though she's happy with where she's at making the income that she is. Any tip, suggestions about investing or tips on how to approach a situation like this? moving forward, yeah, i'll offer a few thoughts here. So the first thing that stood out to me was something that I haven't really seen before when someone describes their financial position. She described all of the different ways that she could borrow money and all of the credit that she has available and credit cards, saying I'm not in a bad spot because I've all of this credit available, like huh. That's interesting. I've never actually heard someone describe their personal finance situation in such a term. Having a credit score over 800, really good start. Having all of her debt paid off great. Now is not the time to really worry about having credit available or what your credit score is if you don't have anything on the positive end in your name. Okay. Also, the line of credit at prime plus 3.4,. It's not cheap anymore. When prime was 2%, that was maybe decent, but now that the prime rate is 6.95% Let's just call that 7 for easy math You're looking at about 10.5% on your line of credit. I would almost never suggest that. Anything over 10% is low cost money. That's really expensive, especially on 50 grand. So if you're seeing that as kind of your way to get ahead or maintain lifestyle or anything like that, it's a that's not a good place to be. Yes, awesome to have that available for an emergency or something like that, but now would be the time to focus on building up some cash. The challenge is that most people that find themselves in this position, you have to be okay with the tradeoffs that you make in life. Maybe this is more existential than what I'm really going for here, but if you want to spend your 20s and 30s live in life and traveling and working jobs that don't necessarily pay a lot but you're having a lot of fun, that's great. I did some of that too. But then you also can't have it on the other hand, and compare yourself to people that make twice as much money as you, who don't spend as much as you, getting more financially ahead, of course, that's the tradeoff. There's no miracles here. When it comes to improving your financial situation, a lot of it very simply boils down to you got to make more or spend less. This is the diet and exercise concept. If you want to get in shape and lose weight, what do you do? Move more, eat less. Yes, it's more complicated than that. So is investing. So is your money, but those are kind of the main principles that you have to be okay with. If you don't want to improve your finances, okay, that's fine, but it's really tough to do with, even with an average income. Depending on the city where you live, it can be really tough. So one way that's relatively straightforward to get started with building long term savings is, if you are already poking around looking at a different job, evaluate what employers are offering in terms of retirement benefits. Many, many, many employers are offering RSP matching programs or defined contribution pensions, depending on your industry. These things are out there at many different income levels and in almost any industry. So if you're looking around and you're saying, okay, i want to be able to prioritize long-term saving, but my skill level or industry that I'm focusing on doesn't really pay enough or have a lot of margin every month, perhaps there's an employer that's out there that is willing to contribute to a retirement plan along with you as part of their total compensation package. Trust me, i see it all the time. I see it with engineers, i see it with service industry The full spectrum. Oftentimes, when you see an employer that offers something like that too, what does that say about the employer? That they actually care about you and want you to succeed long-term and want you to be in a good long-term financial position, and so they want to help you build your retirement as part of your compensation package. That's an overgeneralization, for sure. There are bad employers out there that offer RSP matching and things like that, but it is a factor that is worth considering if you're already looking at changing jobs. Another thing for someone that's making $55,000 a year. This poster referenced TFSA slash RSP. These things are very, very different. The TFSA and the RSP are very, very different from each other and you should prioritize each of them in accordance with your own personal situation. Generally speaking, i highly recommend that people do RSPs when they are in a higher income tax bracket, depending on your province. That way, you are more likely to make it work in your favor over the long-term because you are more likely to be in a lower tax bracket in retirement than during your working years. This person making $55,000 a year might be in a lower tax bracket in retirement, but even once you start factoring government benefits and any amount of savings they do from now on, they're probably actually still going to be in the same bracket, so there's no tax savings that will come from an RSP contribution. I have many episodes about this. I'll probably do some more about it. Please look back into the previous episodes to look at how to best use RSPs. If you're someone that's in Ontario that's the vast majority of listeners here. 102,000 is the kind of that point where it really starts to make sense, because your tax bracket jumps up to pretty close to 38% from there, which means if you make over 102,000 bucks and you contribute $1,000 to your RSP, that means you get about $3,800 back. With that $3,800, please put it in your TfSA if you have room for it. That's not bonus money, that's future tax money. Anyways, i'm getting off topic here. But when you are someone that makes about $50,000, 55-ish in most provinces, that puts you in either the lowest or the second lowest tax bracket, and so an RSP likely doesn't make a whole lot of sense unless you can get it through an employer sponsored plan, like I talked about before. So if you're choosing to do a little bit on your own even $25 bucks a month, $50 bucks a month, a little bit, just start I would say, yeah, you can focus on a TfSA. A TfSA is going to be a really, really great tool for building some wealth And it's going to start from zero. Don't let the zero be the thing that keeps you from starting today, because once you have a little bit in there, you can start building a little bit of momentum. No, it's not going to look pretty for a long time, but the only way to have anything in the future is to start today, Even a little bit. I'd highly recommend anybody that is kind of waiting on the sidelines looking for an opportunity to get started or feeling like someone else is in a better financial position than them. Try to find 25 bucks and you can get that in your TfSA and get investing today. You can do it with a very little, small amount like that, but if you can do more, of course it's going to go quicker and it's going to look better, but comparison is the thief of joy. So I would highly recommend that people not really pay too much attention to those people on the internet that are describing their own very fortunate financial situation, because you don't know who they are and they have nothing to do with your life and they might not be telling the truth And There are situations completely different than yours. Comparing yourself to others rarely feels good And if it does feel good, that also feels kind of icky, like if you're starting to feel like you're better than other people. That's probably not a great approach to have either. So when it comes to your money. Stay in your lane, get started lower income. Focus on TFSA before RSPs. If your income is in a place where you don't have any wiggle room every month and you're looking around at other jobs, look for an employer that offers a retirement package As part of the total compensation. That could be one way to evaluate the priorities of the employer as well. So, anyways, few thoughts there. But yeah, don't compare yourself to other people. Last topic here on the Reddit Roundup for this month, the post says One apprise what should I do with my winnings? I have just come to learn that I won playing a scratch ticket. I have the option of receiving $710 per month for life or $332,000 lump sum. In all likelihood, i would put the lump sum in a GIC, maybe a portion in a S&P 500 ETF. I'm 29 years old, no debt, maxed out, all tax-advantaged accounts What makes most sense? I need a financial wizard to explain why I should take the lump sum over the monthly payment etc. Need to make a decision soon on this. Okay, i am not a financial wizard, or at least I don't think so. However, this is the kind of math that us, as financial planners, run into all the time, because we evaluate different things and try to come up with cash flow scenarios and whatever. So the way that you could think about a situation like this and try to put it into context is to combine the two options and try to figure out the missing variables. So the present value, so the option that they could have right now is to take $232,000 upfront. We call that a present value. I'm behind the scenes here. I'm using something called a financial calculator. You can do this through Excel or numbers or whatever spreadsheet program you use on your computer or your phone, or if you wanted to Google something called a financial calculator, you can use that there and kind of follow along with me. So let's combine these two options and see what kind of interest rate the lottery is implying here to give you those two options. So $232,000 is the option that you could have upfront. We call that your present value. The other option was receiving $710 per month for life, so I call that the payment. So now what I'm thinking in my head here is okay, what if I started with $232,000, but I withdrew and spent $710 a month for life from that $232,000. So that means I'm going to spend that down to zero over the course of my life. I'll call that my future value. Hopefully you can keep up with me here on this, but I'm just going to walk in you through what I'm the math that I'm doing behind the scenes. So I'm starting with $232,000. I'm ending with zero at some point in my life And I'm taking out $710 every single month. So now we have to assume, okay, this person is 29 years old. How long are they going to live? Let's use a round number of 90. Okay, so if they're 90 minus 29, that means they're going to live for another 61 more years. And then in terms of months because again we're taking $710 per month until age 90, that means you got 732 times. You're going to be withdrawing that $710 per month. Okay, hopefully you're with me so far. So once I run the fancy math on the interest rate that I would need to maintain that level of withdrawal for the rest of my life or this person's life, we come up with a rate of just over 3%, 3.13%. And so that means if you have $232,000, you have to invest that money and have it earn an average of 3.13 after fees and after taxes, for the rest of your life so that you can sustainably withdraw that $710 per month. Okay, that's a relatively low rate and that could be done with very little risk. Historically speaking, no, risk isn't really an option here, because interest rates have been very, very low for the last period of time. As we speak today, gics, or very, very low risk investments, can pay more than that 3%, but that hasn't always been the case. But if someone was, say, in a balanced fund meaning a combination of stocks and bonds and cash you could very easily do that historically. So if we use even a number closer to like 4.5% per year, if you were to invest that $232,000 at about 4.5% per year instead of running out of money at age 90, you'd still have a balance of $850,000. So your money would actually grow. Okay, 4.5% in a balanced fund is not a crazy number to use. It's a round number and it's non-specific in this case, but that wouldn't be too crazy. So this kind of thing is why most of the comments are saying take the lump sum, because even with a relatively modest amount of risk, you're highly likely to come out further ahead, taking the lump sum upfront instead of just the $710 for life. Now, what are some factors that would change that beyond just the math. Well, if you're someone that's going to spend all that money right away, maybe you need to. You know, maybe you're looking to buy a house or something like that. $232 upfront lets you do that, or a down payment at least $710 a month will not. So if you have a plan for that money. This person says they don't have debt but they have maxed out tax advantage accounts. They're probably looking to buy a house at some point. Maybe it is Canada, after all, is the road that most people describe for their life. If not, no shame in that. Renting your whole life is totally fine as well. But if you need to spend some money upfront, that's great. However, if you're seeing this as kind of like some long-term wealth helping you retire sooner, things like that the risk here is that it turns into extra spending every year until it dwindles away on its own If you don't have the discipline to invest it for whatever long-term purpose you have, maybe getting $710 a month for the rest of your life would actually be better. This is the same idea as having a pension, right? You can never outspend it unless you go into debt. But you can never outspend it because you're only getting so much every single month, but the nice thing is it keeps coming in every single month. So if you live in extraordinarily long time as well, that can start to increase the long-term benefit of this type of option. Now it wouldn't be increasing with inflation or things like that. So there are some financial risks of taking that monthly payment. But a lot of this comes down to discipline, right? Yes, the math could say take the lump sum upfront, but then if your parents or friends or whatever are looking for a handout here and there and you want to take a big trip and you get a new car and poof, it's all gone, right, discipline is everything. Having a plan for it is everything. Managing your taxes appropriately, i would say this person might want to consult somebody else about investment strategy using a GIC or an S&P 500 ETF. These are wildly different approaches with very different tax implications, especially if their tax-advantaged accounts are all used up. Putting it in a GIC means all of that interest is fully taxable. But if you invest in a more balanced approach with stocks and bonds the growth that you can get from a stock portfolio, again diversified through ETFs, mutual funds and whatever, you get the benefit of some capital gains which are much more tax-efficient than interest, and interest is the part that comes out of a GIC. So everything in terms of an investment recommendation or a decision on which one to take comes down to what is the purpose. What would you hope to have happen with this money? File this under good problems. But dealing with a lottery win can be a pretty significant choice that you have to make, and it can lead to many unexpected or unintended outcomes. So there's a few factors that you should consider. What are you going to use the money for? What kind of timeline are you going to use it on? Know thyself and what type of risks you have in your own life in terms of spending or family commitments or things like that. But then you can run the math, and the math that they've given you on a pretty reasonable life expectancy isn't too spectacular, and so if you are someone who's comfortable with a moderate amount of risk and understands taxes and invests in a diversified portfolio, yeah, that might be a decent thing to do if you're going to use that for long-term money. So anyways, hopefully this Reddit roundup for this month was valuable to you. These ones are kind of fun because they're real questions coming from real people, most of them Canadians might get questions in my email inbox all the time. A lot of them are a little bit too specific to use on the podcast here, so I like using these Reddit questions. But, yeah, thanks so much for listening to this episode. I hope that the first half of this year doing weekly episodes has been valuable to you. I used to do every other week and the year before that I was even less frequent. So, yeah, it's a bit of a grind to put together a weekly podcast here, but I really love doing it. I appreciate the emails and all the people that have reached out recently to say how much you appreciate it. Yeah, if you like the podcast, let me know by email or leave a review or a star rating on either Spotify or Apple podcast. That helps other people find the podcast and lets them know that it's valuable and it could be for them too. So thank you so much for doing that and we'll catch you on the next episode. Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.

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