First are tax cuts.  The basic personal amount has gone up to $10320 and the thresholds for the 15% and and 22% tax brackets are now $40,726 and $81,452.  Note that the basic personal amount was already scheduled to have gone up to $10,100 this year (from $9,600 in 2008).  Whatever, it’s still less taxes that I have pay this year, right?  Yup.  By my calculation someone earning $81,452 or more will save $391.  According to data from StatsCan http://www40.statcan.ca/l01/cst01/media01-eng.htm the average person earns 41839.2 (the median is probably lower as the income of Canadians does not follow a normal distribution) so the average Gordon will save about $284.  Yay.  Can you hear the excitement in my voice?  Well, at least taxes didn’t go up.

Payroll taxes – I mean “EI premiums” – are going to be frozen this year.  Usually they go up every year, so this year I won’t have to pay more towards Employment Insurance.

“Action to Stimulate Housing” – haven’t we just exited the longest and most pronounced housing boom in decades?  In any case the big news here is a temporary Home Renovation Tax Credit.  This credit is only good for 2009, for projects between $1000 and $10,000.  Remember that credits are for the lowest bracket, or 15%.  So this means a savings of up to $1350.  And it means that I bought my new windows a few months too soon.   There are a few catches to consider:
* the credit is for costs above the $1000 threshold.  So if you install carpet for $1001 your credit is (1001 – 1000) x 15% = 15 cents.
* this credit is only for improvements that are deemed to be “enduring in nature” i.e., not appliances nor maintenance.

There are many other initiatives that are aimed at helping Canadians as whole, like infrastructure, etc.  But these appear to me to be the only things that individuals can take advantage of.

To be fair cheap credit can be a great thing.  It is the ease with which we get it and how we use it that determines whether or not it is a good thing.  Easily obtained credit and cheap credit are two different things.

Financing a house at 4% is definately cheaper than financing it at 4%.  Being pre-approved for twelve different credit cards at the same time while purchasing that dream home is ease of credit. Combining the two can be deadly.

Here are a two tips to help avoid the credit trap.

1. Pay cash for everything!  You can only spend what you have.  An alternative for the more disciplined is use free reward credit cards to pay for everything (and get the cash back, or free groceries) – but only buy as much as you can back with cash.  This takes much more discipline and you need to be extra cautious for the trap.
2. Buy only what you can afford.  It is reasonable to assume that you will need to take out a mortgage to buy a house but buy one that makes sense given your income – not what you can afford based on the monthly payments!

That is it, two tips to sum it up.  Buy what you can afford and pay cash (or equivalent).

Paying the maximum payment you can afford every month for a house is not a house that you can afford.  What happens if/when the payments go up?

If you want a big screen TV, plan for it in your budget.  It may takes months to get enough cash but you will know that you will have enough to pay for it.

Thinking of a car loan?  What happens if you finance that shiny new Escalade for $50,000 and a few months later get into an accident that destroys it?  By that time the car has depreciated, as car do, to below what you owe on it.  E.g., insurance offers you $40,000 but you still owe $45,000.

Joe lives near a lake, he loves water skiing so he decides to buy a boat (and truck to haul it around, of course).  The price tag for the new toys comes to $50,000.  He doesn’t have the money but, luckily, his bank offers him a Home Equity Line of Credit (HELOC) on the equity that now exists in his home.  The HELOC rate is a low 5%.  The great part is that he doesn’t need a re-payment schedule, he can pay interest only  but decides to pay it off over 25 years.  Payment = $290/m.

Joe pays for everything with credit and tries to pay off the full amount every month.  Unfortunately, there always seems to be a good deal on something that he needs.
Month one: 50″ plasma & home theatre combo sale.  Price = $6000
Month two: a much deserved vacation away from work.  Destination, Cabo.  Price $3000
Month twelve: etc.  By this point Joe has somehow seen his credit card debt maxes out at $25000.  At 18% financing, his monthly interest payments are sitting at $375/m.

Total income: $3000/m

debt service liabilities: $2243/m
Other liabilities (food, property tax, utilities): $500/m

Net income: $257/m  Joe is still keeping his head above water (although he’s not really paying down his debt and he still has no emergency savings.

Unfortunately, interest rates have risen.  His house now costs $1800/m (at 5.5%) and his HELOC is up to 7%, so the payments are $350/m.  Property taxes have also gone up to help pay for the infrastructure in the new subdivisions.

Total income: $3000/m

debt service liabilities: $2525/m
Other liabilities (food, property tax, utilities): $550/m

Net income: -75/m  Yikes!  To cover the shortfall, Joe gets another credit card.

Joes truck needs a new transmission, $2000
His house needs a new water heater, $275
Economic downturn means that Joe gets ‘downsized,’ he’s a smart guy and gets a job quickly but has to settle for $45,000/yr, or $2800/m

Monthly payments keep increasing, he sees the power of compounding… in reverse!

Joe has fallen victim to the Jaws of the Credit Trap!

If you’re looking into building or buying your first home and find you don’t have the money necessary for a down payment, you still may have some buying power, that is if you hold RRSPs. According to the Canada Revenue Agency, you may possess the ability of accessing up to $20,000 of your current RRSP holdings without incurring taxes and/or penalties.

Canada Revenue Agency makes this option available to first time homebuyers, as well as to those wishing to buy or build a home for a disabled relative. If your RRSP portfolio is considered to be unlocked, you may be a contender for this program. However, as an applicant, you must meet a few requirements first.

You must have what is considered to be a written agreement for sale between yourself, the contractor, seller or realtor. Please note that having a pre-approved mortgage is not considered a fulfillment of this requirement.

Next, this house must be your principle place of residence and one that neither you nor your spouse/partner may have owned for more than 30 days before your HBP withdrawal request.

To take advantage of this option, you must also be a resident of Canada and have not withdrawn any HBP funding since January 1^st of the year in which you are making the request. Once obtaining your funds, you must buy or build your residence by October 1^st of the year that you made the withdrawal.

There are further clarifications in regards to the HBP option that you can access along with the application form at the Canada Revenue Agency website.

I thought that I would add his information by providing a couple examples.  I once worked at Nortel and was given the great privilege of purchasing stock at a 15% discount.  A discount on a stock that’s rising fast, “what a bargain” I thought, and jumped right in.  At the time I did not really understand what I was doing, I simply saw the ever increasing prices and a supposed discount.

The market value of the stock near its peak was $120/share.  Let’s say that I bought 40 shares of  NT at a 15% discount, for which I paid $4080.  (Note that this is hypothetical since I don’t remember the specifics, but the idea is the same).

$120/share x (1 – 0.15) = $102/share
$102/share x 40 shares = $4080

But the market value of the purchase was actually $4800.  So, my taxable income for this purchase was $720 regardless what happened to the price of the stock.  The tax bill was $360 (%720 at the 50% marginal tax bracket).  After the stock plummeted and became worthless, I lost most of my initial investment of $4080 and I still owed $360 in tax!

Many JDS Uniphase employees were far worse off.  They received huge discounts on their ESPP’s for stock that eventually lost most of its value.  The result, in some cases, were six digit tax bill’s.  (Although they all got off the hook due to a parliamentary an act of kindness.

I admit that I do not like ESPPs simply because I got burned.  However, if you have a plan, an ESPP can still be beneficial.  A good plan would be to sell the stock as soon as possible.  Assume that I could have sold the same day, for the same price, that I bought the stock then I would have made $720 minus my tax bill.  I’d net $360 on a $4080 initial investment, an 8.8% ROI!

I have recently read a tale about two houses.  One was a sprawling mansion using 20 times the energy an average home uses.  The second was still a large home by most standards but also very ‘green’ and uses only a quarter of the average energy use.  The big energy consumer was Al Gore’s home and the efficient house is George W Bush’s home in Texas.

I did some research and found that the Tennessee Centre for Policy Research performed a study on Al Gore’s house.  According to the report Al Gore used “more than twice the electricity in one month than an average American family uses in an entire year.”

However, apparently Gore sleeps well at night because he maintains a “carbon neutral” lifestyle.  This is done by buying carbon offsets or credits from a company that has a net negative carbon impact (the company plants trees or whatever rather than producing greenhouse gases).  So Al Gore is able to be a hypocrite, telling us to live a moderate lifestyle while he lives in luxury, by being wealthy enough to pay for someone else to make up for his excesses.  The details are even more juicy, he owns the company that he buys the credits from.

I apologise, this was not meant to be a partisan post nor am I trying to comment (too much) about Al Gore’s hypocrisy.  In fact, I believe in his message, that is, we need to become less consumptive and more aware of the footprint that we are leaving behind.

My point is that personal finance and saving the Earth can be achieved with a similar strategy; “Spend less than you earn.”
* Instead of the largest house that the bank will finance you for buy a smaller one, you’ll pay less in utilities (and less pollution).
* Instead of commuting in an H2 consider a Camry, you’ll pay less in gas (and less pollution).
* Instead of commuting in a car consider public transit, there are tax credits for your buspass (and less pollution).
* Reduce, reuse, recycle.  Buy less, pay less and it’s less pollution less for the landfill.
* etc

Or, if you want to drive a hummer, live in a mansion, and buy stuff like there is no tomorrow… then start a tree-planting company and swap the carbon credits.

There are two things that you can do with the FOREX.

1. Simply understand the implications of the CAD being traded on the global market, and how that impacts your personal finances.
2. You can trade currencies yourself (in a similar way as on the stock market).

So for your personal finances what do you need to know? With the strengthening CAD (against the USD) you will have more buying power in the global market (or at least in the USA). As long as American prices remain constant (or within a reasonable inflation) your CAD will now allow you to purchase more stuff in the USA than it did two years ago.

The down side is that any US stocks that you own are likely not returning nearly what you thought it was. For example, I purchased Coka Cola (KO) stock a while back at $53.50, but the dollar was trading at around 1.05. So in terms of my currency (the currency that allows me to by bread in Canada) KO cost me CAD56.18 (USD53.50 x 1.05). The USD/CAD rate is currently at around 1.0215 and KO is currently trading at USD55.28. So The current price of KO for me is CAD56.46, I’ve only made 18 cents even though the the price of KO is up 1.78.

The good news is that the CAD will likely fall sometime in the future. If you do purchase American stock while the CAD is up, it will appear that you got a discount when the CAD falls.

Where do you plan on retiring? Some sunny beach locale in the Caribbean, or do you plan on being a snowbird and spending you winters in Arizona? If you want to spend anytime outside of Canada then it is important that you consider your currency risks. Retirement/ vacations with a dollar worth only 0.65 is not very attractive. So you may want to consider buying American stocks or even money while your buying power is good.

Actively trading on the FOREX is another topic for another day. But know that it can be done. If you are passive investor, then it’s enough to know that currencies need to be considered when planning for your future.

ps, While I was finishing this post I noticed that Million Dollar Journey was hosting a pole about how people might take advantage of the current rate.

Now consider F.W. Woolworth Co.  It opened its first retail store in 1878, was listed on the DJIA in 1924, created the first discount store (the model which was later copied by Kmart, Target, and Wal-Mart), and was the largest department store in the world by 1979.  This company did attempt to continually change, from retail, to discount, and then into numerous subsidiary specialty stores.  However, the Woolworth’s dynasty was over by 1997 when it was replaced on the DJIA by Wal-Mart.  The once mighty F.W Woolworths company now exists as Foot Locker.

Unlike the Pacific Mail SS Co which failed to change at all, Woolworths did change, but apparently failed to learn from on both its successes and failures.  In order for a company (or a person) to thrive and survive it must continually reflect and make changes in attempts to improve.  This is the concept called “hansei-kaisen.”

Hansei is to reflect on what we have done, success or failure, and what we are doing.  It may seem obvious to reflect on our failures and change appropriately.  However, it is just as important to examine the success;  what worked, and what can we do better?  I remember my life at Nortel, with its regular parties to celebrate our success… you might say that we “celebrated our success to excess.”  I was just a peon in the company so I had no perspective on the numbers, however, any peon performing hansei could see how horribly we were running the company aground.  I remember looking at our extravagant biweekly parties and wondering how much cash was frivolously being eaten and drank away.  I’m sure that some serious hansei would have revealed more areas for improvement in all operations.  As I said, I was just a single cog among the other 90,000 so my assessment of the situation resulted in no change.

While hansei is important we must strive to continually improve.  Kaisen basically means continuous change in an effort to improve.  Since it is a translation I may be taking a liberty here, but I define it as that because not all change will lead to improvements.  Some changes may not help, but that is why you need to continuously adapt and change.  By constantly making small changes to improve upon weaknesses you quickly determine what works.

The corporate examples I’ve listed would seem to be huge change projects that would be beyond the scope of any one person or team.   However the message is the same at any level; evolution will pick the winners, but you can influence how you evolve by reflecting and improving.

Here are a couple good articles that I’ve seen recently:

• Norman Bodek writes in Industry Week that the secret to success is constant change
• Matthew May, the author of the Elegant Solution, suggests that even in our successes we must reflect on improvement.

Confucius said: “By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.”

What is the benefit of having a lot of money? Probably so that you can afford to buy anything that you want. However, just because you’ve got a large net worth does not mean that you can afford to buy everything that your heart desires.

Consider the fellow who owns the million dollar house; his taxes might run $5000/year and his utilities average $500/month, plus maintenance, insurance, security system, etc and he’s watching a large portion of his income go out the window. It’s great that, on paper, he is worth a million dollars but he’s paying so much to maintain his liabilities that he cannot afford to put food on the table.

Now consider another chap. This guy has a large positive cash flow every month. His income surpasses his expenses so much that he can buy food, and many other things that he desires.

Which one of these two is wealthier? The one who owns lots of stuff, or the one who has a large purchasing power? I argue that a large, positive cash flow by far is the winner. A large net worth is a boon, but mostly so that you can turn it into cash flow.

The Money Diva regularly posts her net worth, even with a widget prominently showing her success.  It’s fun to look at how much we’ve increased our value every month.  However, it is only fun because it’s been  such a great market.  What happens when stocks start tanking, the real estate bubble pops, or your job suddenly disappears?  It won’t be so much fun to watch your net worth drop.  I’m not suggesting that you stop analyzing your net worth, just try to not look too closely at it.  Fear and greed are powerful emotions that will try to sway you from staying your course, and they’ll use net worth fluctuations as a way to control you.  If you like to watch your net worth, at least put it in context and compare it to the general market.  That way when the market goes down you’ll be able to look at the broader economics and know that you’re still doing fine.

Another problem with net worth is that alone it does not provide an accurate picture.  Say that you are saving up for something that will cost you $20 000, with all of the huge real estate increases it may look like you’ve earned more than enough.  However, if all of the gains have been in you primary residence than the increase will not help unless you sell your house.

I applaud Mr Cheap for his decision to stop focusing so much on his net worth.  Instead he is going to look closer at his free cash flow, i.e. the cash that he is able to save.  After all, it is the excess cash that allows us to purchase things, regardless if it’s investments or Ichiban.

If you monitor your cash flow you’ll have  a better idea of your financial health.  You will know where your income is generated from and how you spend your money.  When the market sees a bump you may not panic as you know that as long as your income remains stable, so too can your lifestyle.  If your income is impacted you can quickly see where your expenses are and perhaps make lifestyle changes.

For example, Toyota realized how unproductive meetings can be when we sit there arguing about nothing for an hour, or someone drones on, and on, and on,… However, meetings are also a necessary evil, a part of the much-needed communication with colleagues, supervisors, and subordinates. So how did Toyota fix the problem of the bloated meeting? Nope, not by mandating a 15 minute duration. They eliminated the chairs from the meeting rooms! Now nobody wants to be there longer than possible, but they can still effectively deliver the same message.

What about your personal finances? What wastes can you eliminate to create a Lean and healthy financial outlook? In other words, what are you spending money on that delivers no value? (note that first you might need to define what value is for you.)

Paying 18% interest to your credit card company every month?
Buying lunch everyday rather than packing one?
Buying all the latest cutting edge technology rather than something slightly older and cheaper?
Buying books about financial freedom rather than utilizing your library card?

Note that wastes are not necessarily things you are spending money on, it could be things you are not spending money on.
Do you buy a cheap product every two weeks rather than one product that will last a lifetime?
If you’re cheap (yeah, that’s me) do you scrimp and save every penny at the expense of enjoying life? Wouldn’t that be considered a waste?

Being Lean does not mean being “cheap” but recognizing what waste is and eliminating it.