Planning financially for the far future via TFSA

Since last year, Canadian government has introduced Tax-Free Savings Account (TFSA) to encourage its citizens to save. We (any one holding a social security number and over 18) are allowed to contribute $5000.00 each year to a TFSA. Investment income earned in a TFSA is tax-free. Unfortunately, contributions are not tax-deductible.

I just did some tabulation and found out that if you contribute the maximum amount annually for 40 years and assuming you earn 5% return yearly and the interest is added back to the principal, after 40 years you shall have $634,199.00. Of course we do not know the value of money after 40 years.

What I have decided to do for the TFSA is to buy dividend paying stocks (only Canadian stocks are allowed) with yield at 4.5% or over. Assuming the price of the stock can keep up with the inflation, then after 40 years I shall have $634,199.00 in today’s value. Wow! That shall keep me fed till I die. The down side – stocks can go to zero. Since only Canadian stocks are allowed, diversification (among stocks yielding 4.5% or over) might be difficult.

The thing about the compounded interest is that you have to have a very long time span. With the above number, after 20 years you only accumulate $173,596.00 which does not look very attractive.

There is a saying that you should live as if you were to die tomorrow, dream as if you were to live forever. How about financial planning? I think that I will take the middle road, plan financially as if I am to live till 105.

On Gold

Gold is in a bubble, that I have no doubt about it. The price of gold today is about 4 times its value in 2000 and Hugo Chavez is stockpiling them.

There is a great article called"Gold - a six thousand year-old bubble", which describes all I would have liked to say and more about gold.

In line with the opinion of the author of above article about not to argue with a six thousand year – old bubble: I thought that if IMF sold gold, it might have driven down the price. Nope, India just bought 200 tons of gold from IMF two weeks ago and the price of gold continues to go up.

Should gold be considered as an investment vehicle? Not for me. I would buy stocks such as Coca Cola, McDonald etc. any time before I ever consider buying gold. People eat at McDonald and people drink Coca Cola, therefore, both companies have intrinsic value.

Disclosure: I own stocks of Coca Cola.

Keep your mind open

According to Beau Lotto, all creatures, from honeybees to humans, came to see the world not as it is, but as what proved useful. If you believe in what he demonstrates, keeping your mind open should enable you to see way more.

I am a firm believer of this concept when it comes to opportunities. For those whose mind is open, they see opportunities everywhere. For those others whose mind is closed, they see obstacles instead.

To keep one’s mind open, you have to be willing to put yourself in a vulnerable situation, which is very scary sometimes. Therefore, I am using the Daily Reminder, which is like a personal mantra, to help centering myself and to believe that the universe is benevolent and abundant. Once you have aligned yourself with the positive energy of the universe, you can then see and seize opportunities that come along the way.

Today, we bought a few shares of U.S. stocks that pay about 7% dividend in average. It is true the value of stocks could go down in short term. I do not believe that the value will go down in 8 year, which is about a full economic cycle. We are going to keep these stocks for 8 years or more, therefore, I see today’s purchase as a great opportunity seized to park your cash in high yield investment (7% versus 1% in savings account).

Another point I wish to add here for future reference. According to gurufocus.com, as of today, the Total Market Index is at $ 11067.6 billion, which is about 78.2% of the last reported GDP. The market is therefore considered fairly valued. In our case with real estate, we only bought fairly valued properties and still did very well.

Sooner or Later

Richard Mark Didsbury & Ping Chen

I know that my husband and I are in the minority, which is that we do not depend on somebody offering us a job to live. And saying it out loud in this environment when unemployment is high and people are losing money will sound insensitive. Still, it is something everybody has to learn how to do it sooner or later. Most people retire at around age 65. In addition, this blog is to help organize and cultivate my own thoughts.

Even though we do not work for any one else, we do not like to label ourselves retired, not because we are not at the age of retirement. I believe that the concept of retirement can get one in trouble. Retirement means that you no longer work. In my mind, if your whole or partial income derives from savings invested, you still work. You have to work on your money, which involves thinking about, checking on and changing your investment strategy. A lot of people get into trouble, when they let go control of how their retirement savings are invested.

I am not defending criminals who commit fraud and I do sympathize with people who have lost money in this manner. On the other hand, if you have ever hired anybody and the person stole from you, do you ask yourself whether you have made a bad judgment or somehow your system has aided this type of behavior? When it comes to your money, you should ask the same thing.

We know we are on our own; we do not depend on, nor do we wish to be employed for our living. We live on a pool of income – apartment rentals, sales of my artisan beaded jewelry (c-cassia) and dividend from stock equity. We are constantly working on every single source of income. We do not do a perfect job, but all the mistakes are our own. We learn from and improve upon our mistakes. To achieve maximal freedom is to put all the responsibility on our own shoulders, therefore, is to live a self-disciplined life.

How an investment formula worked

In the down market of real estate, all the articles out there are about how you can get caught investing in real estate. Thinking back on what we did; we used a formula that had worked for us. Of course, you can no longer find any properties that fit this formula any more in Montreal, but maybe in some other cities in North America.

We were only looking at rental market. Our goal was to make 5 – 10% a year from the down payment of a mortgage and let the rent taking care of mortgage and other expenses. Therefore, even if the property did not appreciate over time (which is very unlikely, property will appreciate over a span of 25 years, at least to the amount to offset inflation), one still makes money owning it.

Between 1998 to 2002, you could find quite a few triplexes (3 x 3 bedroom apartments) in the not so hot neighborhood in Montreal for about $160,000 (this number is picked just for easy calculation). 25% down payment comes to $40,000. Monthly payment of a mortgage at 6.5% for $120,000 for 25 years is $804 (yearly at $9,648). Cost of property tax, insurance, maintenance (minimum amount) is about $6,000 yearly. Let’s say rent is about $600 per month at the time of purchase (now is more or less between $850 and $1,200), which gives you $21,600 a year rental income. All said and done, you can make 15% for your $40,000 down payment with this property.

$5,952 = $21,600 (rent) – $9648 (mortgage) - $6,000 (expenses)

Now if you worked very hard and spent very little and saved an additional $105,783 (which is the balance of what you owe after 5 years) when mortgage was due in 5 years and you paid off this property 100%. Rent by then had increased to $800 a month and you moved into one of the apartment. You would then be able to live rent free with an income of $13,200 ($800x2x12 - $6,000) yearly. If you live in a city like Montreal without a car, you embrace simple life style, and you do not have to pay rent, surely $13,200 is enough to get you essentials to live on.

If you pay rent to yourself, with an investment of $160,000, you are making 14% a year (14% = ($800*3*12-$6000)/$160,000).

All you had to do was 10 years of hard working and saving. In my own case, I did 7 years of working and saving.

Of course, if you sold your property between 2006 and 2007, you would have made $190,000 before tax and expenses, as by then triplexes like that sold for about $350,000.

People can call this speculative. It just happened that we and some of our friends have lived through this period and experienced the benefit of it. So if you pay attention, you can always find mis-priced things. It may not be in properties, it could be stocks. I personally believe there are a quite a few mis-priced stocks around in today’s market. I have yet to find a way to screen out all the noises and find value.

The cycle goes on

poppy flower

People debate what started this recession. I do not really know. But we know that all contractions follow over expansions, and vice versa. The cycle goes on. As we have had two decades of great time, this contraction might run a little deeper and longer.

Let's say a group of Joes who worked hard and saved a million dollars in their retirement portfolios. Now they see their portfolios shrink to only half million. So everyone panics and wants to save money now, including those who still have money to spend, which is fine. We are all humans. It is hard to save when everyone is spending and to spend when everyone else is saving. We need to save money sooner or later so why not do it with the flow.

However, with the government pumping all the fresh money into the economy now, eventually (the unknown part is when), the Joes will see their portfolios back to one million on average (some will have more and some less). The money, though, will be worth much less since it has gotten diluted by freshly printed money. However, people will not notice this part right away. They will all be happy to see that their portfolios back to break even or grow somewhat. So, they will start to spend money again, including those who do not really have extra cash to spend. And expansion will start again.

If you have kept the money you have saved in cash, it is great in the contraction period, as the destruction force during contractions would not be able to touch it. We all know that during the contraction, values of all things are going down except cash. But we must worry a little bit about the cash we have saved. Cash is the hardest thing to hold for long. In addition, when expansion starts, the cash needs to be put into things (real estates, stocks etc.) again. During the expansion, values of all things are going up, but cash value can only go down.

As I said before, the unknown part is when, that is why everyone is so obsessed in finding the bottom. It might be too hard to find the bottom. If you pay attention, you might see the beginning of the expansion. It will still be fine to convert your cash into things at the beginning of the expansion.

The worst would be to wait until expansion is almost at end; then convert your cash into things. As at the end of an expansion, things will be the most expensive. Some people, then, have to convert things back into cash during contraction because you really need the cash to live. We see this happen to some of the best people.

Do not believe the general concession, that if you are an average Joe hard at work, you do not need to understand the economy. You do need to understand somewhat in a simplistic way. Just worrying about not losing your job is not enough.

Keep this in mind; you may be able to earn money with the cash you are saving.

Just remember, the universe is benevolent. It is made for you and me to succeed in life.