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Dear Rob: 'Am I headed for financial ruin?' Add to ...

Ever wondered whether you're making smart choices when it comes to your money? Maybe you're fresh out of school and have just started making some money but don't know where to put it. Or you've been burned by the stock market and you're wondering whether there's a good time to get back in. Should you stick with GICs? Mutual funds? A high-interest savings account? What about online brokers? Are some better than others?

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Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. He is the author or co-author of four investing books, including Rob Carrick's Guide to What's Good, Bad and Downright Awful in Canadian Investments Today, which will be published this December.



Globe and Mail personal finance columnist Rob Carrick joined us online to take your questions on a broad range of personal finance topics.

Read through the live discussion using our Coveritlive tool below, or scroll down to read questions and answers organized by topic.



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Investing 101



Claire Neary, Reportonbusiness.com: Rob, In your Let's Talk Investing videos with blogger Preet Banerjee a couple of weeks ago, you talked about people in their mid-twenties who may be starting to earn a decent income for the first time in their lives. For some, student debt payments may be a huge weight that prevents young workers from accumulating any savings. For others lucky enough to graduate debt-free or who were able to pay their loans off quickly, this may be the first time they have any cash to consider investing. In your opinion, what should a person's priorities be in these situations? What's the best way to tackle student debt? If you are able to save, is it time to start an RRSP? Should you be looking at trying to buy a home as soon as possible? What kinds of investments would you recommend to someone who's finally making some money, and really, really doesn't want to lose any?



Rob Carrick: People in their mid-20s who are just entering the work force represent the great void in personal finance. So much of what is written and recommended is for people who are established and have lots of money. So let's dig into the question of what someone in his mid-20s should do. I would say that clearing student debt is the top priority. Keep up with the required re-payment schedule and see if anything is left over. If so, a house- or condo-saving fund would be a good idea. Use something super-safe like a high-interest savings account. Next priority should be to start saving through either an RRSP or a tax-free savings account. Both would be ideal, but you have to take things in steps. For the RRSP or TFSA, someone in their 20s could afford to get pretty aggressive, which is to say a focus on stocks would be just fine. But you say you really, really don't want to lose any money. So how about a 50:50 split between some mutual funds or exchange-traded funds that invest in stocks and a ladder of GICs (that's where you divide you money five ways and buy GICs with maturities of one through five years). One step safer would be to only use GICs or high-interest savings accounts. Problem is, returns are super low for now. They may be higher in a year's time, though.



Declan in Toronto: When a company I own splits its stock, what kind of effects can this have on its dividend?



Rob Carrick: Hi Declan, a stock split means a dividend split. So if you have a $100 share paying $3 in dividends on an annual basis and the share splits two for one, you would end up with two $50 shares each paying $1.50 in dividends. Don't know of any companies that could afford to split their shares and keep the same dividend as before.

Stephen, from Nova Scotia: Hi, two recent articles have decried the large amounts of savings sitting on the "side lines". Given the uncertainty in the economy and assuming a debt-free circumstance, what's wrong with holding cash and near-cash investments?

Rob Carrick: Stephen, a very good question. I wrote one of the articles to which you refer and my point was not so much to criticize the fact that people are saving, but rather to highlight how much money is being saved in the wrong places. Let's start with money market mutual funds, which people are using to park money they've taken out of their investment portfolios.

Money market funds are providing returns of well less than 1 per cent on an annualized basis today. Most of these funds are charging far more in fees than they're returning to investors. It's scandalous. Other rotten places to save are conventional bank accounts, where the interest is minimal at best.

If you want to keep some ready, safe cash around because of the economy, go ahead. But be picky. Find a high-interest savings account paying 2 per cent (Ally, Peoples Trust, Maxa Financial). Investors willing to move a fair bit up the risk ladder might consider some dividend-paying blue chip stocks. Dividend yields on these stocks could easily be 3 or 4 per cent, and you get the benefit of the dividend tax credit in non-registered accounts. Sure, these stocks can fall in value. But with the worst of the recession over, dividends paid by rock-solid companies seem safe.



Mike: Hello Rob, when will you be publishing your survey about online trading? I am about to move some money to one of these and I'd like to use this information. Thanks.



Rob Carrick: Hi Mike. Glad you asked about the next edition of The Globe and Mail's annual ranking of online brokers. We're looking at publishing it later in October. Stay tuned. And, let me urge all online brokerage customers to drop me a line if they have something good or bad to point out about the firm they deal with.



Mutual funds and ETFs, income trusts and REITS





Christian in Ottawa: Are you a fan of mutual funds? Or the fashion nowadays are EFTs?

Rob Carrick: ETFs are not a fashion. The are an evolution. First, we had mutual funds, which to this day remain a sensible, practical way for the average person to invest. Exchange-traded funds give you most of what mutual funds do, but they do it better. ETFs cost less, they're more flexible for building portfolios, they're more tax-efficient in non-registered accounts and, in an age of justifiable investor skepticism and suspicion, they are more transparent. Where ETFs fall down a bit is in the fact that you must have a brokerage account (full service or discount) to buy them. Mutual funds are way more accessible -- you can buy them at the local bank, for God's sake. So, investors, buy mutual funds if you're just not ever going to get yourself a brokerage account, or your adviser simply isn't licensed to sell ETFs. Carefully chosen, funds are just fine. But if you can get over the brokerage account hurdle -- and many investors are, if you judge by the flood of new accounts being set up at online brokers -- then you owe it to your portfolio to give ETFs a long look.



Peter: I am working on creating a passive ETF portfolio. Two questions, are there good ETFs that I can use for holding cash, like a money market fund and still get some kind return? For foreign content I have a hard time putting my money in US or international ETFs when you look their 10 yr track record and how the investments have been hurt by the rising CND dollar and poor performing U.S. market. So I have left this in a couple value based mutual funds that have relatively low fees. Is this a good strategy in your opinion?



Rob Carrick: Peter, there is in fact a money market ETF. It's called the Claymore Premium Money Market ETF (CMR-TSX) and it has a super-low MER of 0.25 per cent. The problem with this ETF is that you have to pay a brokerage commission to buy or sell it. These commissions could well obliterate all your gains at a time when interest rates are so low. As for your decision to leave your international holdings in value-oriented mutual funds, I like your thinking. Even die-hard ETF people concede that a mix of passive investments (tracking indexes) and actively managed funds (where a manager chooses the stocks) can make sense. I think you've hit upon just such a situation. If you've chosen well, your value managers may be able to scout out stocks that have been pounded in the past year or two but have good long-term potential.

Dan: Hi Rob. I worked this past year for a company that had a mutual fund for an RRSP and the fund hasn't exactly done very well and has a fairly high MER. Since I am no longer working there, I only contributed for a year (total is about $3500) and I have a fairly hefty line of credit to go along with my student loan, should I pull the money out of the mutual fund and pay off some of my debt? I have no idea what kinds of costs will incur.



Rob Carrick: Hi Dan. I wouldn't give that mutual fund the chop without first doing some research on it. A bad year? Almost every fund was *&^% last year. I'd be more interested in how it did in the past five or 10 years. Use Globefund.com to check it out. If the long-term results are good, then it might be worth hanging onto this little retirement savings building block of yours. Sure, you can make a defensible case for taking the money out (assuming there aren't any complications here...there could be) and paying down debt. But if you have $3,500 in good little fund and have 20 years to go until retirement, you would end up with almost $9,300 assuming a modest 5 per cent average return. Oh, and what it your mutual fund is an overpriced dud? Now, your escape plan starts to make sense. General rules on selling mutual fund investments: watch out for redemption fees if you bought on a back-end load basis (no upfront sales commissions), or if you bought just a few months ago. Think hard about dumping stuff that's down in price. You're selling low, remember.

Roslyn: In order to live decently, I own a fair amount of income trusts. Do you think I should switch to REIT as they will not be cancelled in 2011?

Rob Carrick: Roslyn, your question will be of interest to the many investors who have continued to hold tight to their income trusts despite many travails. I think you need to do some research for each of your trust holdings to see what the future may hold. Have your trusts announced plans to convert into a dividend-paying corporation? Has management given any indication of how well it will be able to cope with the income trust tax that starts in 2011? I think you have to look on a trust-by-trust basis and not sell everything. As for real estate investment trusts, or REITs, they are protected for the most part from the new trust tax. Again, though, you need to look carefully in the REIT sector and not generalize. Some REITs hold commerical real estate -- offices, motels, strip malls, industrial space -- and have been hit hard in the recession. REITs offer some pretty high yields these days, but there's risk there, too.





Saving money, bank accounts, RRSPs, TFSAs

David: I've done some reading into the subject and there seems to be a lot of buzz around the TFSA as opposed to the RRSP. Could you explain the pros and cons of both and what the major differences are?



Rob Carrick: Hi David, I understand your confusion. Tax-free savings accounts are brand new and they're being heavily marketed. All of a sudden, it appears that RRSPs have a hot new competitor. Truth is, in a perfect world you would contribute to both. The RRSP would offer you tax-deferred savings that you would only draw upon when retired. The TFSA would be a tax-sheltered savings vehicle that you could draw upon in emergencies, to pay for big expenses in the future or, ultimately, to supplement your RRSP savings.

A quick primer on the differences:

TFSA

  • -people 18 and older can contribute up to $5,000 per year
  • -no tax deduction for the contribution, but all investment gains are exempt from taxes.

RRSP

  • -you can contribute if you have earned income, and your limits depend on your salary and whether you're in a company pension
  • -you get a tax deduction on your contributions, and pay no tax on your gains
  • -taxes apply on your withdrawals when retired.

TFSAs offer amazing flexibility in that you can put back what you withdraw (you have to wait until the next year, though), and you're free from the worry of taxes. RRSPs are less flexible, but maybe that's a good thing. We all need retirement investments that work on the idea of putting money in and leaving it there until we finish our careers.

Buck: What would you suggest as the best investment to hold in a self directed TFSA?

Rob Carrick: Buck, let me ask you a question to start. Do you have an emergency fund, which is to say a safe, secure bit of money you could draw upon if you lost your job, the house needed a new foundation (don't laugh -- it happened to a neighbour) or some other such surprise expense? If not, then the best investment to hold in a tax-free savings account is a high interest savings account. By that, I mean a no-free savings account that these days would pay 1 to 2 per cent in interest. Way low, I know. But rates will eventually start rising again. Meantime, you've got a bulletproof source of savings.

You say you already have an emergency fund? Then think about maximizing the TFSA's tax-exempted attributes. You could stick a bunch of GICs or bonds in there and never have to worry about the big tax bite on interest income. You could also invest in stocks that pay dividends. If you put some good blue chips in your TFSA and left them for decades, then you could reasonably expect great tax-sheltered total returns (dividends plus share price gains) over the long term.

Michelle: I'm in my mid-30s and about to start a job with a company matching RRSP plan. I've never worked for any employer with any pension plan before. If I have a mortgage, debt of around $20,000, and RRSP of about $40,000 - should my priority be to pay off my debt first or to take advantage of the employer RRSP plan and try to max out the matching allowance available?



Rob Carrick: Michelle, you suggest here that your employer will in some way match your contributions to the company's retirement savings program. If so, you have to take advantage of this because it's essentially free money that will compound in your RRSP for three decades. Cutting down debt is a great goal, so why not calibrate your RRSP contributions in such a way that you have some money in hand to make periodic double-up or lump-sum payments on your mortgage.

I find it interesting how so many financial questions are phrased in an either-or way. As in, should I pay off my mortgage or invest? Let me answer with another question: Why not do both?



Rob in Orleans, ON: We have been using a home equity line of credit as our one bank account for many years (similar to Manulife One), mainly in order to pay down our mortgage more quickly and be able to access more $ for home renovations at the lowest possible rate - Bank of Canada Prime + 2%. We decided to spend on several renovation projects after considering the federal renovation tax credit and the ultra low rate available. Unfortunately, we recently received a notice that TD will be increasing their prime rate by 1% due to borrowing costs. This will begin on November 16th. They have offered a few deals if we lock in some portion. Questions: Is this real or just a money grab by the banks? What other options are available for low rates with flexible terms?



Rob Carrick: Hi Rob (cool name, BTW) Banks have jacking up rates on credit lines since the beginning of the year. They blame the global financial crisis, which they say has made it most expensive for them to raise the money they in turn lend out to customers. This is a true fact. Banks are paying more. But it must also be pointed out that banks are enjoying some pretty fat profit margins on some of their lending products these days. To answer your question, then, the higher cost on your credit line is partly higher costs for banks and partly higher demand for profits from banks. So whaddya do about it? Hate to say it, but there's not really much choice other than to suck it up and pay the higher rate. For one thing, I just haven't heard of any banks or credit unions who are offering lines of credit at prime (as in the old days, pre-crisis). Also, I have heard that it's somewhat more complicated to move a HELOC - that's bank-speak for home equity line of credit -- from one bank to another. That said, keep your eyes open for a return to price competition in the HELOC market. It should happen one of these days and, if it doesn't, I'll make a big, fat deal of it in a column.

Jennie: Hi Rob. Can you please explain the advantages/disadvantages of using a combined mortgage/savings account (i.e. Manulife One, Canadian Tire one-and-only). The principle behind it makes sense to me, but I'm wary that it's too good to be true. Thanks.



Rob Carrick: Hi Jennie. You're referring to a combined bank account/mortgage product that has always fascinated me in a way. Not enough to actually try it myself, of course, but still...The concept here is that you combine your chequing account with your mortgage so that your paycheques and other deposits at least temporarily count against your outstanding debt balance. Net result, the interest charged on your mortgage should be lowered. There are a few things to be aware of with these mortgages. One, they're essentially variable-rate mortgages. What kind of rate will you get? Right now, VR mortgages at prime are available. Next, what kind of a borrower are you? If you're very disciplined and keep lots of savings on hand, then the all-in-one account can work well because you'll quickly chip away at what you owe. If you're liable to keep dipping into your account and thereby driving up your loan balance, then an all-in-one account can be like a debt treadmill. One other thing to look out for is the monthly account fees for these products. Anything more than $8 to $10 is too much.



Debt, debt and more debt

A reader: I'm lost, I'm scared and way over my head. Was collecting ei for part of 2003. Started working and never had tax deducted from paychecks.I haven't filed taxes since then. I make about $40,000 a year, single father of two and caring for my 80 year old dad. I have the worst credit rating and about $60,000 in debt which I've never paid back. I am 40 years old, have no savings and I worry about retirement and kids post secondary schooling. Where do I start? Bankruptcy?

Rob Carrick: OK, exhale. You need some help and I'm going to tell you exactly how to get it. In many communities across the country, there are non-profit credit counselling agencies that exist to help people just like you. To help find the one nearest you, click this link: http://www.creditcounsellingcanada.ca/ Credit counselling agencies do not judge, they don't lecture. They just size up your situation and help you come up with a plan to make it through. Bankruptcy may be required, but there are several steps to consider before that. One is to come up with a debt management plan to address what you owe. Remember, your debtors may settle for being paid less than the total amount outstanding. Also, there's such a thing as a consumer proposal, which is a legally binding plan to repay all or part of what you owe. It's less of a harsh step than bankruptcy. Don't let this situation fester any longer. Help's out there. Go get it.



A reader: Scenario: 40 yrs old, 2 kids (between 8 and 11), mortgage $326,000, the only savings totals $10,000…no rrsp's no resp's…nothing. Annual gross income $125,000 (this can fluctuate as my spouse is self employed). Right now it has gone up every year for the past 5 years but it's never guaranteed. Other debt's owing, $30,000. Pathetic mess we're in! how do we get out? How do I save? There never seems to be anything left. Do we sell our house? take something smaller to lower our mortgage? Stick it out and pay down as much as we can. I don't want to be 60 and still paying for our house. Our mortgage was $165,000 but we sold for less than expected rolled in some other debts and now have ballooned to more than it should have been. It just got worse and worse after the market tanked last fall. We already purchased our new home and of course builders don't like to refund $30,000 deposits! It drives me crazy and I hate it! I don't even like my new home because it's just a reminder of how bad our financial situation is. I feel like I'm too old to have all this debt. I feel hopeless and fell that I won't be able to retire and that when that time comes I really will have nothing. My oldest child will start post secondary school in about 5-6 years. I don't know how we're going to do it. It keeps my up at night! I don't have fun and can't enjoy anything. We hardly go out because I don't think we can afford to!



Rob Carrick: Financial messes are a relative thing. If you scroll up this discussion to an earlier question on debt, I think you will get some perspective on your situation. Put another way, you are OK. You have options. The question I have is: How well are you able to keep up with your mortgage payments and service your other debt? Are you behind? If so, you need to step up now and take steps to ensure you don't fall into a worsening debt spiral. I think you're another candidate to visit a credit counselling agency. They can assess your full financial picture and then advise you on what to do about your house and the rest of your debts. Let me address a few of your other comments. You say you're 40? Then you have time to work on your retirement savings once your debts are addressed and, anyway, not everyone's going to be retiring at 65 in the future. You may actually want to work longer. You say you have a child who would be going to university or college in 5 or 6 years? There are student loans available and, also, what's so wrong with a kid working for a year or two to build up money for post-secondary education? As I said before, you have options. Go get some help and start reviewing them.

Sarah: Hi Rob. I'm in my early 30s and just started making a decent living. We own our home and owe about $180k on the mortgage. I owe around $16k in student loans after all these years it kills me that they're not paid off, I can't stand that I never seem to be able to make a dent in that debt I have no savings to speak of and don't really know where to start - pay down the student loan debt first? Start saving aggressively and then make a lump sum payment? Pay more on my mortgage?



Rob Carrick: Hi Sarah. You've got the house and a decent living, and that's great. It tells me that if you have the financial smarts and resources to buckle down and pay off that student debt. Put it ahead of everything. Don't renovate the house or buy a new big-screen TV -- put the bucks on your student loan. If you're not already on a monthly payment plan to get the loan paid off, then get on one. Figure out the max you can reasonably afford to pay every month and pay it. If you get a lump sum available, say from a tax return, put that against your student loans as well. When the loans are paid off, you can turn your attention to building up your savings.

Paul: I am 25 years old and a recent graduate from university. I have a stable job with the federal government and my current annual income is $56,000. This figure should rise to approximately $70 in the next 4 years. I am currently live in downtown Toronto, paying a rent of $1300 (utilities included). This figure represents nearly 40% of my after tax income. I don't foresee being able to purchase a home as I plan to enter an MBA program next September at a cost of $25,000. At the same time, I can't seem to save more than a couple hundred dollars each month. Am I headed for future financial ruin? Is going back to school to increase my earning potential a good investment even if I have to take a $15,000 loan to pay for it?



Rob Carrick: Hey, Paul. Going back to school is an investment in yourself and will almost certainly bring you a higher salary and better advancement opportunities in the years ahead. You're young, so I definitely see the benefit of doing the MBA as soon as possible. But what about working a while longer to benefit from your projected salary increases? In that way, you would be in a position to save more towards your tuition fees. Or, you could take a correspondence MBA and complete it gradually. As to your rent bill, it's a lot. What options do you have for cutting your rental costs? I don't think you're headed to financial ruin, but you do need to make some hard decisions about that you can reasonably afford to do.





Financial advisers

Clifford: I have recently inherited a large amount of money. One decision seems obvious, maximize the unused portion of my RRSP. I have no debt to retire. Where would I find the best resources to maximize my return? Should I find an independent for fee advisor, a tax account, read books and go it alone?



Rob Carrick: Clifford, as far as I'm concerned you have answered your own question. Find an independent fee-only adviser. If more people like you knew enough to ask for fee-only advisers, the world would be a better place. Here's why. Most financial advisers are paid commissions and fees related to the sale of investments. This means there are conflicts in the advice they provide - are they putting their own compensation ahead of the client's needs? Yes, this absolutely, definitely and most certainly happens in some cases (not all - let's be clear on that). Fee-only advisers charge you either a flat fee or hourly fee to assess your situation and then come up with a comprehensive written plan to address it. Taxes, estate planning, debt, retirement saving, educational costs for kids or grandchildren - all of this should be part of the package of unbiased analysis you get. That's why I think one of these fee-only advisers would be perfect for your situation, Clifford. You have a great opportunity with your inheritance and, with some good advice, you can get maximum value.













Marianne: Rob, I'm really interested in finding a fee-only financial planner (as per Clifford's question earlier) but don't know where to start. I've had some rotten advice from so-called professionals in the past. Any tips for finding a GOOD planner?

Rob Carrick: Marianne, it beats me why fee-only planners don't develop their own mini industry association and set up a website with a search engine to help investors such as yourself find unbiased financial advice. While we wait for these planners to develop some business sense, let me provide a link that may help you with your search. http://www.canadianbusiness.com/my_money/planning/article.jsp?content=20080310_110229_7096 Let's remember that working on a fee-only basis (that's a flat fee or an hourly rate, no commissions on the selling of investments) is no guarantee you've got an adviser who is right for you. Before you sign on, set up an interview to find out what the rate are, what kind of a financial plan you'll get, how often it will be reviewed, what the adviser's credentials are. Then, ask for a reference of two. Any good adviser will have them ready. Best of luck with your search. There are good advisers out there -- you just have to find one.





Another Dan: Rob, I have a meeting with my financial advisor at one of the big 5 banks coming up. He continually suggests the banks branded mutual funds for me to invest in, often with MER's in excess of 2.3%. Should I continue to heed his advice or time to venture out for a fee-only advisor to give me some unbiased advice?



Rob Carrick: Dan, to me this is the classic argument for fee-only financial advice. Your adviser works for a bank and keeps recommending the bank's funds. Certainly, your adviser and his bank will be happy with this arrangement. But what about you? How do you know you're getting the best possible funds recommended for your portfolio? Frankly, many bank funds are just fine. But no company does all sectors well. Ideally, you'd want to cherry pick the best funds from a few fund families. If your adviser isn't doing this, ask why. Then, ask to see the fees for each of the funds you own compared to category averages, and to the largest and best-performing funds in each category (takes 2 minutes using Globefund.com). Should you stay with this adviser or flee? Can't make that call for you, but I can suggest you get all the facts so you can make a smart assessment.



Rule of thumb

Rob Carrick: Thanks for tuning in, everyone. Great questions today. One of my big personal finance rules of thumb: ask questions - lots of them. Keep it up, whether through me, other Globe writers or your financial adviser.

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