The Voice for Financial Reform in the USA Gets a Boost is a post from: Discuss Economics Blog

It's RRSP season and there are only a couple of weeks left to invest some cash to reduce your taxable income for 2009. Many people are looking for advice on how to spend any extra funds. Some ideas are coming out from so-called 'financial advisers' that are giving out, frankly, really bad advice. Take for instance this article from Yahoo! Finance Canada that suggests it's better to pay off your credit cards over investing in your RRSPs, and investing in TFSAs over RRSPs.

None of that is bad advice necessarily, but within the good advice are some sketchy ideas. Be sure to look at a number of sources when researching online folks! And be sure to chat with a financial advisor that provides instruments from a variety of companies rather than say, a bank who are obligated to offer primarily bank investments.

With these ideas in mind, let's review some reasons why forgoing RRSPs today will cripple your retirement in the future.

One of the main ideas from the Yahoo! article stemmed around reducing personal debt before considering long term investments.

...consumers with substantial credit card debts shouldn't get a loan to make a contribution to their registered retirement savings plan, with the hope of paying off the money borrowed with anything that comes back in the form of an income tax refund.

Yea, well that makes sense, pay off your debts, especially the high interest bearing credit cards. But what they say next misses the mark.

But whether you should or shouldn't contribute to retirement savings - and how much - always depends on age and personal situations.

A 25-year-old with $25,000 worth of debt could forego making RRSP contributions for a couple of years with the goal in mind of paying off the debt as quickly as possible.

On the other hand, a 40-year-old with credit card debt needs to put at least some money into an RRSP and the rest toward paying off what's owed on the charge cards.

Yes, paying debt off is great, but no, investing in RRSPs later on in life isn't prudent. Why?

Simply put, if you use an RRSP as a primary vehicle to get out of paying more taxes then you've completely missed the point. RRSPs reduce taxable income in the year they're used, but they also accrue interest throughout its life until you cash in.

You're supposed to be treating RRSP's as your retirement savings, which is a no brainer. Now stick with me h ere: in order to maintain your current lifestyle you'll need millions of dollars upon retirement. That means your RRSPs aren't going to be GIC or some kind of low bearing interest instrument, and your RRSPs are going to be invested for a longer period of time.

The greatest asset to any investment will be time. TIME will ensure you can retire with more cash (and even retire at all). To NOT invest in your early 20s is to forgo CRUCIAL earning years later in life. If you start investing in RRSPs when you're 40 you will make significantly less even if you accrue over 15% returns annually.

I can understand the need to reduce consumer debt, but the fact remains, debt is an issue of spending by t he consumer, and that's a problem you need to fix. Spending behaviour, however, doesn't change how the market work, and the market accrues interest, and when compounded, will make the bulk of the money at the END of the investment.

So what about TFSAs? How are they int he mix? Fact is you can have the same kind of investment instruments be it in a RRSP or TFSA. The trick is the balance between reducing taxable income this year (RRSP) and investing into a un-taxable account like the TFSA.

Best case scenario is use both. Pay less taxes today and also invest in your TFSA.

But let's go back to the initial question, what should you pay first? Credit card debt or investments?

Credit cards charge huge amounts of interest. If you're stuck in a situation where you're constantly paying off CC debt then you have a fundamental SPENDING problem and will never be able to reach financial freedom because of your inability to be responsible with your money. It's sobering, but the warning is necessary.

"The message should be: First pay down your debt. When you go ahead and try to save for retirement when you're saddled with debt, you are skipping steps,"

This is true, however, fundamentally what needs to change are spending habits. You MUST save not 'try' to save for your retirement. There is no chance that the next generation will be able to rely on a company pension (if one even exists) or government help to live above the poverty line. It's CRUCIAL to save tomorrow or you'll be picketing at 70 for more money to live and buy meds when in reality it was your job to ensure your own financial safety.

Save for your future. DO what needs to be done to eliminate all credit card debt, focus on a balance between your TFSA and RRSPs, come out ahead when you retire. Remember, the single most important factor to your investments is the elements of TIME.

Time is the most important factor because it's in the last years of your investments that you'll have your greatest earning years from your investments. Compound interest will increase on a increasing curve in the latter years.

That means if you're young there is NO REASON to invest long term investments in low and safe investment instruments. RRSPs for a young 20 something should never be in a balanced or GIC fund. Focus on the higher risk but long term reward of equity funds.

When you're getting up in years you unfortunately lose out on the benefit of growing investments from compound interest. You'll also want to hedge your bets by putting your savings into more secure and less volatile investments like the aforementioned GICs and balanced funds.

The conclusion is quite simple. Young people must control spending AND invest for their future TODAY. Earlier is unequivocally better thus control your finances so the money you could be putting away for your retirement doesn't go to your new Wii and jeans. Anybody who mentions something else isn't looking out for your best interests.

If you don't believe me then sit down, take out a piece of paper and decide what the best case scenario for your investments will leave you with at age 65. Calculate all expected expenses for that time over a monthly period and divide it out. Many people will be alarmed to find out they'll have to work till they're 80 before they can retire comfortably.

It's your call, some prudent decisions today to maintain a basic quality of life tomorrow. That's what's at stake.

Why Forgoing TFSAs or RRSPs Will Cripple Your Retirement is a post from: Discuss Economics Blog

Technorati Tags: credit card, rrsp, tfsa

Universal life insurance combines an investment component within a life insurance policy. They are often advertised as a tax shelter or as the best way to save on taxes.

Policyholders are able to choose investments in the policy. Premiums are flexible within the minimums and maximums stated in the contract. The Income Tax Act mandates a maximum investment return. Any gains above that are taxable. If only the minimum premium is paid it is difficult for the investment portion to make any gains.

There are many fees that policyholders must pay. Also within the first ten years of the policy access to invested funds is severely restricted. In all cases a person will pay more than they invested to cancel the policy or get back their investment.

Universal life insurance may be suited to taxpayers who have already maxed out their RRSP or who will have challenges paying tax on the sale of a second property or business. However, objective financial experts agree that investments and life insurance should be kept separate.

Also with the arrival of the Tax Free Savings Plan universal life’s usefulness as a way to beat the taxman will be greatly diminished.

DiscussEconomics will be releasing a full pros vs. cons article pertaining to why people should avoid universal life insurance salespeople so stay tuned.

What is Universal Life Insurance? is a post from: Discuss Economics Blog

Technorati Tags: life insurance, universal life insurance

Great Oil Sands Article in the Globe Interviewing ex-Premier Peter Lougheed

**Re released after six months. Today the AB government, after years in power, have hit a new low stating a deficit of over 4 billion is to be expected this year. It's hard to swallow because of the immense wealth this province had and how short sighted conservative politicians spent it all. Those moves will come back to haunt this province.***

One thing that Albertans under the age of 30 just don't comprehend is why those over 45 are ripping the natural resources from the ground to fatten their already grossly overpaid bank accounts. What's even harder to swallow is the government in charge is doing everything in their power to facilitate the process.

There used to be a bumper sticker in the early 80's: "Oh lord, give us another boom and i won't piss it away." We got another one, and yes, the conservatives have pissed most of it away.

The development of Alberta's oilsands is in full swing despite economic recession. The breakneck speed is chewing up the oil while simultaneously ripping up the environment. That's a double whammy for the generations of tomorrow. Of course, to politicians and their voters it makes zero difference what tomorrow gives. Since the Lougheed there has been no attempt to reclaim the value placed in oil revenue for future generations. One could argue that Ralph Klein managed to eliminate the debt thereby paving the road to future investment in infrastructure, health, and of course the 'Heritage Fund' (endowment fund made of oil revenues).

The Stelmech government has not only gone into debt, but no additional payments have been made into the AHF because apparently 11 billion is enough (which is where it's at now given it's latest 3 billion dollar loss). Alaska has an endowment fund that has pretty much eliminated the need for state tax, Alberta can't be bothered to add money to their fund for a few reasons:

1) The voters are not young, thus they only care about short term benefits for those who put them into office. A punch in the gut to lazy under-30 somethings who don't bother to elect officials who represent their perspectives.

2) They (Stelmach and others) actually BOAST that they 'shore up' the AHF from inflation. In fact, one year they actually PUT money into the fund (just over 1 billion or about 1/3 of surplus that year ('08)) and they thought they were gods. Turns out we don't generally ADD money to the fund, just let the interest accumulate. Thus energy revenues are spent as quick as they are earned. Kind of a like a teenage girl with a limitless credit card.

Had the government not stopped adding royalty monies into the fund this is what we'd have (which other provinces covet but we spent on....stuff) over 160 billion--a number the Globe & Mail likes to point out repeatedly.

A nice case of nearsighted fiscal management. We had the potential to eliminate taxes and prepare for the future spike in health related costs due to an aging population. Do we invest in this future goal? Although we feign interest in reality Alberta's politicians are not this forward thinking.

17 billion (now 14 after one year's worth of losses) is NOT anywhere near these numbers, and yes, you should be scared because 14 billion would only last a few years (especially considering in ONE single year 18% of the fund was lost to the markets).

3) We're all about making profits for private firms. Alberta is certainly the free-market enterprise province of the country. We're more interested in letting people make their millions stripping natural resources rather than protecting something for tomorrow. So on one hand we can't complain since we have a 'chance' to get rich on our own if we're ambitious enough I guess...

Think I'm alone? Thankfully there was a politician who agrees with me. Peter Lougheed was interviewed in the Globe & Mail in a delightfully honest portrayal of how Alberta has single handedly screwed itself over because of short-sighted politicians more interested in a buck for their friends than long term sustainability for their province.

We're not the only ones in the blogosphere that have noticed the ineptitude either. Even columnists and commentaries have noted the shortsightedness of our MLAs.

Alberta Conservatives Are Loosing Support – Heritage Fund Takes Beat Down is a post from: Discuss Economics Blog

Technorati Tags: heritage fund, oilsands, tar sands

A part of all you earn is yours to keep

This is the time of year when we reflect on possible seasonal excesses and think sober thoughts of cutting back, diets, etc. In the past I have mentioned variations of the dreaded 'B' word , and have provided a tool for keeping track of your spending.

Before you yawn and say 'Not again Scrooge,' let's look at finances from a fresh angle.

What does this saying mean to you? "A part of all you earn is yours to keep." (1)

Some of you may have seen the commercial of the young guy on the street where different strangers are helping themselves to money from his wallet. Eventually he is left with nothing except an old woman warning him she will be looking out for him, or more likely, his wallet.

'A part of all you earn is yours to keep.' Yet we willingly enable others to become richer and what does that do to our bottom line? It's red and thin and theirs is thick and black.

How does this enriching of others at your expense happen in real life? Consider a typical month: buy a coffee or 2 or three go for lunch a few times a week, buy gas, clothes, gifts, pay your cable cel phone etc etc.

At the end of the month have you paid yourself? 'A part of all you earn is yours to keep.'

Yet most people have only a few dollars or, even worse, courtesy of some bank LESS than zero in their wallet. The saddest part of all this is that too many people think that is NORMAL! They do not see paying themselves as important as helping other companies become more profitable. When they are ready to achieve their long term financial goals they will see that the little decisions they made daily, weekly or monthly, will certainly add or subtract from the distance they have to reach that goal. Some of my clients have learned that wisdom well, others still have a way to go.

So all it takes is to turn the idea on its head. Instead of 'I hate to budget. I deserve to spend as I please.', think of it this way: Am I going to allow that fancy coffee company, bank, designer. clothing, or cel phone company to take major bucks out of my wallet?' Will they be there for me when I want to retire, pay for my child's education, or taxes?

'A part of all you earn is yours to keep’. No one is holding you hostage. Your spending is solely your choice. That young man could have put his wallet away and ignored those strangers in his pocket.

You may think 'yeah sure, good theory where’s the reality?’ Want a real prime time example of our discussion? Look no further than our neighbor to the south, the Excited States. Their citizens were the best example of people spending money they did not have. Look where that got them.

Good for them that many have learned their lesson and the US savings rate is now in a healthy POSITIVE range. Contrast the US with China’s where the government has little debt and a lot of reserves, and their citizens have understood that ‘a part of all they earn is theirs to keep.’

The key question is: Do you want to be a spender, lender or owner of your business, that business being YOUR financial life?

Get it down to a science. Learn to pay the least amount for the goods and services that you need.

In my financial planning practice I have observed that those clients who put the time into determining if they are financially healthy are the ones that are prepared for an unexpected event and are the most rewarded. If you only think about your financial situation as a hurried afterthought, or it is number 100 on your to do list then your life will reflect that same disarray.

We would never leave the house to go to work without brushing our teeth, combing our hair, or with half our buttons undone. The same can be said of our financial planning or lack thereof.

I conclude this newsletter with an observation because of a remark a client made to me recently. When I mentioned that an update meeting was due she said to me: 'Oh we don't have any money to invest.' In the ensuing discussion I was able to clarify the reasoning behind the meeting and to emphasize that meeting does not equal new money to invest. It did make me wonder how many other clients have to same thoughts. I know many of you understand the importance of keeping me up to date let's hope that many turns into most.

(1) Richest man in Babylon - GS Clason

If you're in the Calgary area and are looking for a financial adviser, please contact us and we'll put you in touch with the writer of this article.

Getting back on track after the spending season is a post from: Discuss Economics Blog

"So basically after i get my pay cheque and decide to put my money into an rrsp, that money has already been taxed by the gov't so how does it really reduce my TI vs. having your employer take the money first to put it in a rrsp for you then taking the taxes off the rest of your paycheque?"

A. You have to consider the potential rebate when u do your taxes. With your own u get to dictate where you put your rrsp investment dollars.

"Would I get a potential rebate or would you get the taxed portion back?"

A. Well it's a formula, they (the govt) would put that into consideration. That portion you invested becomes ''untaxable", how much percentage rebate you get I'm not sure.

"What i'm saying is, if you have $100 gross and tell your employer to invest it b/f taking taxes off of it .. you have $100 in rrsp. If you wait to do it on your own.... taxes are already taken off and now that $100 is only worth $70 (assuming 30% bracket)"

A. i believe so, but remember, you don't tell them where you put it and you can contrbute the remaining 30 when the return comes in. So u loose a year potentially

"So then you only have $70 in rrsp... so isnt it better to just invest with your employer; but i mean is that how it works? you would get that $30 back under the title of "rebate"? so in reality it would be better off to invest via the employer immmediate pre-tax deduction than to lose out the $30 x 12 months, right? Would it be wiser to invest with my company RRSP program and get the non-taxable income deducted right away, or invest on my own by taking deductions off and getting a rebate later.

A. I'm not sure, but u have to think of it from the perspective of the 70 dollars and the return you're getting w/ company or with a real rrsp....

Company RRSP or Do it myself? is a post from: Discuss Economics Blog

The bad news will make economists and markets re-think the timing of the so-called 'economic recovery' in both countries. Canada lost 2,600 jobs in December, after creating positions in three out of the four past months, Bloomberg expected Canada to create 20,000 new jobs in December.

The labour market remains 323,000 jobs below the peak hit in October 2008. Last month's job losses came after employers created 79,100 jobs in November. The bad news also suggests employers in both countries will continue to delay their plans to hire more workers. Key markets to loose in Canada were the transportation and public administration offset gains in health care and social assistance. Self-employment continued to grow, and employment among women aged 25 to 54 tumbled by 24,000. Youth joblessness continued to swell, hitting 16.1 per cent from 15.9 per cent a month earlier.

Among sectors, transportation and warehousing last month lost 24,000 jobs, and business, building and other support services posted losses of 23,000. Public administration shed 22,000 positions and finance, insurance, real estate and leasing cut 17,000 jobs in December. Factories also shed jobs.

Employment continued to climb in health care and social assistance, with 35,000 new jobs, one of the few since late 2008.

A similar story played out South of the border where job losses increased higher than expected.

December's labor market data, nonfarm payroll employment in the USA was down (-85,000). For the entire year of 2009, payroll employment declined by 4.2 million, and the American jobless rate increased by 2.6 percentage points.

In December, job losses continued in construction, manufacturing, and wholesale trade, while employment continued to rise in temporary help services and health care. Construction employment also fell by 53,000, losing 934,000 jobs over the year. The manufacturing sector also lost in December (-27,000), although average monthly job losses in the second half
of 2009 were about one-fourth as large as those in the first half of the year.

The employment-population ratio, at 58.2 percent in December, declined by 0.3 percentage point over the month and by 2.7 percentage points over the year. The number of discouraged
workers rose over the year by 287,000, to 929,000 in December (not seasonally adjusted). -BLS

Job Losses for December 09 and 2009 Year All up for US and Canada is a post from: Discuss Economics Blog

Came across an interesting article that discusses Christmas gift giving from the perspective of economists. Why bother giving a $100 gift to someone who will only appreciate it at $50? There is a loss of half of a Christmas gift, can we not maximize our gift giving by taking care of that deadweight loss?

Turns out an economist has contemplated the best way to maximize gift giving and minimize deadweight loss. Check out some of the articles on the topic from UPenn and Freakonomics, and a link to the actual paper (JSTOR)

Maximizing Your Gift Giving Returns is a post from: Discuss Economics Blog

New initiatives for reforming the healthcare industry will soon affect the online insurance quotes that you receive from major healthcare insurers.

President Obama's plan for American health care reform continues to gain positive ground. Last week, at 7:00 AM on Christmas Eve, when the Senate's version of the new Health Care Reform Bill went up for vote, it needed a basic majority of 51 votes to be passed - and it took only about 5 minutes to receive them. The final vote count was 60/39 in favor of passage. This impressive victory was the result of the second longest deliberation period in the history of the Senate: 24 straight days. Now, both the Senate and the House of Representatives have passed separate versions of the final Health Care bill.

So what happens next?

Although it seems quite imminent, there's no real reason for a massive democratic celebration just yet. The first thing that has to happen is that the separate versions of the Health Care bill that have already passed the House and Senate must be meshed to form a draft for the final bill. And as one might expect from the world of politics, there is dissension there. While Harry Reid, (Senate Majority Leader) enthusiastically stated that the plan was what Americans “have deserved for six and a half decades", Mitch Mcconnell (Minority Leader) called the bill a “monstrosity”. Mcconnell, like a horn blowing discord, stated, “this fight is far from over."

Regardless of the final Health Care bill that is passed in the near future by President Obama, comparing various insurance quotes online will always help you to find the most affordable health care insurance available. Major insurance providers deliver their best rate quotes to you for side-by-side comparisons - and compete for your business.

The general public opinion concerning new initiatives for American health care reform is definitely one of huge interest - and a surprising amount of support. With Mr. Obama just finishing his first year of service, many Americans are impressed with his fervored rate of accomplishment. After years of enduring President Bush's Republican war machine, they also feel quite refreshed to see their government at least trying to accomplish something positive for the American people - even if the details of the 'perfect' health care reform recipe are still up in the air.

United States senator, Chris Dodd stated that every single presidential administration since Harry Truman's has proclaimed the importance of public health care reform - and every one of them has failed to make any significant improvements. He firmly supports the new initiatives for reforming the current system and refers to them as "history making". Those who experience the simplicity of getting insurance quotes online for their families health care provision continue to benefit.

So while the new final Health Care bill (now being written) is one step closer to being made into law, both House and Senate members are anxiously awaiting the day when it is presented to President Obama for approval. Referring to the work that has been accomplished by both the House and the Senate, the president stated, "We are incredibly close to making health insurance reform a reality in this country. Our challenge is the finish the job."

Health Care Reform: The Latest Developments in American Health Care Reform is a post from: Discuss Economics Blog

Technorati Tags: health, Insurance, reform

Here are the basic formulas (work out your own algebra to find alternatives):

Average Total Cost (ATC) = Total Cost / Q (Output is quantity produced or 'Q') Average Variable Cost

(AVC) = Total Variable Cost / QAverage Fixed Cost (AFC) = ATC - AVC

Total Cost (TC) = (AVC + AFC) X Output (Which is Q)

Total Variable Cost (TVC) = AVC X Output

Total Fixed Cost (TFC) = TC - TVC

Marginal Cost (MC) = Change in Total Costs / Change in Output

Marginal Product (MP) = Change in Total Product / Change in Variable Factor

Marginal Revenue (MR) = Change in Total Revenue / Change in Q

Average Product (AP) = TP / Variable Factor

Total Revenue (TR) = Price X Quantity

Average Revenue (AR) = TR / Output

Total Product (TP) = AP X Variable Factor

Economic Profit = TR - TC > 0

A Loss = TR - TC < 0

Break Even Point = AR = ATC

Profit Maximizing Condition = MR = MC

Explicit Costs = Payments to non-owners of the firm for the resources they supply.

Introductory Microeconomics Cost Formulas is a post from: Discuss Economics Blog

Technorati Tags: ATC, break even point, marginal cost, marginal revenue, MC, Microeconomics, MR, TC