Index Mutual Funds

What is an investor to do to combat all these hidden/high fees that effect your bottom line? Well maybe look into Index Mutual Funds....its an investment vehicle to match/track the components of a market index ( such as Standard & Poor 500 Index)  So you get the wider range of exposure ( in this case 500 companies) low operating costs and smaller turnover ( certain criteria to enter this funds). The drawback with this strategy is you cannot control the amount of one company that you buy into as your purchasing the whole fund, so if ABC Company is a dominant player within the fund you are exposed to its swings in the market place. So to finish up with my opinion on this subject, i look for Equity Mutual Funds that have at least 1 Billion in total assets and pays out a dividend that i roll back into the fund ( as stated in the last blog to reduce your "real cost")  Again there are thousands of mutual funds out there, but i believe that only 10% are worth having and remember what i have stated in this past 2 blogs, look for a good fund manager that has a proving track record......this is paramount!

Dollar Cost Averaging & Dividends

A savvy way to invest/reduce risk of market swings, plus pay yourself back!!...... i thought that would get your ears up (lol) The joint power of constant Dollar Cost Averaging and Reinvesting Dividends will result in your "real cost" ( what you paid in) to be lower, that in time with any uptick in equities creates a nice profit. To explain; Dollar Cost Averaging is buying a set amount of investment each month and thus provides insulation against changes in market price. Say we put in $100 per month and the unit cost $10 in January and so we get 10 shares, same $100 in February and the unit price drops to $5.00, so we pick up 20 shares, March, $100 goes in and the unit price has bounced back to $7.50 per unit and we get 13.34 shares. Now looking at this from afar, you say i started out at $10 per share, fell to $5 and rebounded to $7.50, I've lost money, but wait....... that's the magic of Dollar Cost Averaging as you picked up more shares when the price was down during those months. So you ended up with 43.34 shares x $7.50 ( March Unit Price) = $325.00 and your "real cost" was $300.00  Next we buy units that pay a dividend (which is when a company earns a profit and it distributes up to 4x per year) Say Company xyz paid you a $50 dividend for its 1st Quarter in February, so you would of received 10 shares ($5 Feb unit price into $50) again this will bring down your "real cost" as you have more total units. Now if investing larger amounts per month, the entry point into the market is key, this is where a good investment company comes into play. Also ask/watch the management expense ratios (MERs) or sales commissions ( front end loads and deferred sales charges) as these fees can put a huge dent in profits. In Canada, we have some of the highest mutual fees in the world
and most are hidden or never seen on your statements!!

Understanding Compounding Interest & Rule72

Hey bloggers, simple words in that heading but really how many of you keen investors understand the "magic" of compounding?  Not to worry, the K-Man has the goods!!  Basically compounding is interest earned on your Principal (start up money/ plus what you continue to invest) and the interest you've already have earned.....pretty sweet deal. So for an example, you had invested $100.00 and it earned 10% at the end of the year that would be $110.00, simple math. Next year that original investment would be $121.00....the $10.00 interest on your start up of $100.00 + the $10.00 but also $1.00 on the first $10.00 of interest from the year one. So to put some glamor in these numbers lets look what it would take to be a millionaire as that word still sounds sexy when thinking of reaching your financial goals. If starting from age 20 with $150 per month you would be in that exclusive club by age 60, just $5.00 per day ( just think, a coffee lol) wow the power of compounding and time!  Now waiting to start at age 30 you would need to increase your monthly to over $400.00 and at 40yrs old the monthly would be $1300.00, so without saying the earlier you start the better. Another method to calculate your earnings is called the 72 Rule...simply you divide your interest rate of return into 72 to find out approx. how long to double your investment. Example, you have an investment vehicle that pays 8% so divide 8 into 72 and your original investment doubles in 9yrs. To finish up, a wise man once told me.....you wont run out of money, but you WILL run out of time!!

To Become Wealthy

We have everything in place from the previous blogs to move forward and start accumulating assets! These will be generalizations to the road to riches and we will get into specifics of each avenue in future posts. A) Time is your biggest alley to saving and with that comes compounding interest, also
knowing your time frame will tell you how much to be put aside each month, then we look for investments that payout 6-8 % as the historical inflation rate has been 3%, so easy math; so depending on how many years we have the ratio could be 60% stock/40% bonds or maybe a 50/50 split. If you have a big window maybe do margins if your in the 20-30 age bracket and have the tolerance for risk  B) Boost your savings in your RRSPs to save taxes paid to the government and if your employer matches up to 50%......well there is nothing better than investing with someone else's money lol  C)  Increasing your income; hard to find a higher paying job so maybe work part time on the weekends or start a small company on the side to generate more cash  D) Real Estate; you know my opinion on house ownership with my past blog, but the 'X' Factor is location, location and did a mention location hahaha, so do your homework on this subject.  Also look at buying flats/duplex's so you can live in one and rent out the others and take advantage of your 'sweat equity' for some repairs/cosmetics around the property while your renters are paying down your mortgage for you.....nice!!

Credit Score

Onto the next phase of any financial planning, knowing how your credit score works. First its the vehicle that any lending institution uses to check your history to evaluate you, the borrower. Now the higher the score the better rates of interest you ll receive and of course if on the low end of the scale I'm afraid higher payments are for you  as your deemed a risk. So you see its important to know how this system works, so here we go;  A) First get copies of your credit report and make sure the info is correct, also check for identity fraud  B) Pay your bills on time, as missing a payment is bad enough but if over 30 days can do major damage to your score, so set up automatic bill payments from your bank account  C)  Applying for too many cards/accounts will bring down your score as it makes you look like a risky borrower, even if you pay on time. Plus each credit check from this lenders results in points coming off your total.  D)  If you debt amount is too close to your credit limits, or even worse when you go over your set amount and are just making minimum payments will reflect on your score   E)  Inactivity on an account will raise some red flags, so maybe pay your utility bills with your credit cards to keep them active and again set it up for automatic payment before the 21 day window before you incur interest.

How to Save!

Hi everyone!! So we are reeling in the wasteful spending from our "wants and needs" list and also realizing we have to take care of our future ourselves. How are we to accomplish these goals?.....hang on for the ride!! First we need to save for a 6 month emergency fund, why you ask? Well life happens unless your living in a plastic bubble haha ( and that's not free from breakdowns lol)  So put aside 10% of your pay to you've accumulated the 6 months of income, then move onto removing your debt and finally then start saving for the golden years of your retirement. Now if thinking about a mortgage, ( it shouldn't be more than 25% of your gross income) find out what the house payment would be and when paying your rent put the difference in a separate account till you have at least 10% down deposit for your dream abode. For your children's education if your in that category, look for the tax free Registered Education Savings Plan (RESP) and much like any other investment plan, the earlier you start the more savings you will earn towards your kids schooling, also set it up so your parents/friends can contribute.

Why we need to take of overselves!!

That alarm you hear isn't your clock radio telling you to get up for your 9-5, its me saying you need to care of your affairs now for the future. Unless you have an Aunt Mary to leave you her estate or know how to calculate Loto odds (lol), here are some scary facts;  the average Canadian income is $41,000 so if your to retire now this is what you have to look forward to. Old Age Security and the max payment is $524.00 per month and the Canada Pension Fund and that max is $960.00, so in total you have $18,000 for the year. A far cry from the lifestyle of your work income, the answer?....in Canada its either RRSP ( Registered Retirement Savings Plan) or the new TFSA ( Tax Free Savings Account)  So if by yourself that's easy as its called discipline to save, but if you have a partner who loves to spend here is what to do ( and if you think the problem will go away on its own dream on,  peoples brains are geared towards spending rather than saving.....its called instant gratification!) sit down as a couple and discuss what you
are saving for which makes it easier, also talk about where you want to be in 2, 5 or even 10yrs and what are the big goals? After you agree on those subjects, discuss what each of you are willing to give up to attain your future retirement together. In closing, don't you want to control your own destiny?..... i thought so!