1. Understanding the Business
a. Industry Analysis
b. Competitive Analysis
Note : Frame works are just there to help you organize your thoughts. The industry
and competitive analysis should help you understand what the major challenges and
opportunities the company is facing in its industry /operating environment .
c. Analysis of Financial Statements
d. Company disclosure analysis ( e.g. press releases, earnings call )
At the end of this analysis you should understand the company’s business model.
A business model is how a company makes its money. The customers it targets,
the products or/and services it provides, and how it gets these products and services
to its customers ( supply chain ).
2. Forecasting Company Performance
a . Forecast sales, earnings, dividends
b. Pro Forma Analysis
Overall company forecasting can be done two ways, top down forecasting or
bottom up forecasting. Top down forecasting is when you forecast using
economic factors ( GDB growth), industry ( overall average industry sales number ) ,
and then specific company forecast. Bottom up forecasting is when you forecast
based on some factor of the company , for example in retail you might calculate
individual store sales and aggregate that up to total company sales numbers.
3. Selecting the appropriate valuation model
a. Pick one based on the characteristic of the company and the
context of valuation
b. Some type of valuation models available :
i. Discounted Cash Flow model – Value of stock is the present
value of t expected future cash flows
ii. The methods of multiples
c. Three things that needs to be considered in choosing a model
i. Model must match the characteristics of a company – For
example you would choose the discounted cash flow model
for companies that produce steady predictable cash flows
ii. Choose a model based on data available
iii. Pick a model based on the purpose of valuation
4. Converting forecast to a valuation
a. Tweak output from valuation model using judgment
b. Perform Sensitivity and Situational Analysis on the model to
create a stronger valuation.
5. Applying the valuation conclusions
a. The results from the valuation models can be used for many
different purposes such as investing in a company, evaluating if
the current market price of a company is overvalued/undervalued,
and evaluating if the future strategic direction of a company is
good or bad.
– From Reading 34 of Equity – CFA Program Curriculum, Volume 4 -
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Thursday, February 23, 2012
Sunday, October 23, 2011
Are you Happy at your Job ?
Today, I was reading a book called " First, Break All The Rules" , by Marcus Buckingham and Curt Coffman and came across some questions that I felt I must share with everyone.
The authors have done alot of research in the area of employee motivation and productivity in the work place. At the conclusion of their reasearch ( which took about six years ) , they had identified 12 questions that measure the core elements needed to attract, and keep talented employees.
I believe everyone has the capability to be a talented employee, if you dont consider yourself to be a talented employee you are probably at the wrong work place. Answer the questions below and see how well you score. Give yourself a 1 for a yes and a 0 for a no. A low score may indicate that you need to look for a new job !
1. Do I know what is expected of me at work ?
2. Do I have the materials and equipment I need to do my work right ?
3. At work, do I have the opportunity to do what I do best every day ?
4. In the last seven days, have I received recognition or praise for doing good work ?
5.Does my supervisor, or someone at work seem to care about me as a person?
6. Is there someone at work who encourages my development ?
7. At work, do my opinions seem to count ?
8. Does the mission/purpose of my company make me feel my job is important?
9. Are my co-workers committed to doing quality work ?
10. Do I have a best friend at work ?
11. In the last six months, has someone at work talked to me about my progress?
12. This last year, have I had opportunities at work to learn and grow ?
The authors have done alot of research in the area of employee motivation and productivity in the work place. At the conclusion of their reasearch ( which took about six years ) , they had identified 12 questions that measure the core elements needed to attract, and keep talented employees.
I believe everyone has the capability to be a talented employee, if you dont consider yourself to be a talented employee you are probably at the wrong work place. Answer the questions below and see how well you score. Give yourself a 1 for a yes and a 0 for a no. A low score may indicate that you need to look for a new job !
1. Do I know what is expected of me at work ?
2. Do I have the materials and equipment I need to do my work right ?
3. At work, do I have the opportunity to do what I do best every day ?
4. In the last seven days, have I received recognition or praise for doing good work ?
5.Does my supervisor, or someone at work seem to care about me as a person?
6. Is there someone at work who encourages my development ?
7. At work, do my opinions seem to count ?
8. Does the mission/purpose of my company make me feel my job is important?
9. Are my co-workers committed to doing quality work ?
10. Do I have a best friend at work ?
11. In the last six months, has someone at work talked to me about my progress?
12. This last year, have I had opportunities at work to learn and grow ?
Tuesday, September 27, 2011
Confessions of a Shopping Addict: My $7550 Monthly Credit Card Bill
Two of my credit card bills just came in today. Boy, What a shocker. I have spent over $7550 just last month. I have about $1200 disposable income each month. So I was about $6350 short. Yikes. When I looked at the amount , it gave me a sick feeling in the pit of my stomach. Recently I have started realizing that I have a spending problem( At least I was starting to acknowledge it , and have moved away from the delusional view that I make more than I spend in a month). I believe, as in any addiction, admitting to yourself that you have an addiction is the first step.
Being a very analytical person ( for all the help it did for me from being a victim of the addiction in the first place ) , I decided I am going to analyze my last month’s spending or at least the credit card spending. I don’t carry much cash .
I created an excel expense spread sheet, and categorized each expense . I spent close to $5000 dollars on furniture and house related items, close to $400 on gifts, and close to $700 on charity draws. I really didn’t have any pressing need to spend on any of these items. At that time I had justified the spending as things that brings me happiness or will bring happiness to others.
So today I have decided to take a journey to control my spending. There are probably millions of articles on the internet with some tips for controlling spending (Google returned 99.5 million results). You should read some of them, at the end of the day however, whatever plan you come up with , should be tailored for your personality , and to help fix your bad habits with regard to money.
I am going to share mine, in the hope that it might inspire someone with a similar problem to do something about their addiction.
Here it goes :
1. As you saw from above, one of the things I spend the most money on was household items/ improvements, and these were improvements that were not needed. The question now is , how am I going to control this spending. I am going to go cold turkey. There are no pressing repairs needed or items needed for the house at the moment. For the next 6 months, I will not purchase anything for the house. I am taking an oath today.
2. The second highest item on my list was charity lottos. I am going to apply the same strategy here, and will not buy any more lotto tickets till next September.
3. The hardest item for me to tackle would be gifts. I have always really enjoyed giving people gifts. Over the next 6 months, I am going to try to minimize the monetary gifts I would be giving my family and friends. For the gifts I must , I will try to use the gift cards I have.
These are my 3 action items to help control my spending. After three months , I am going to evaluate where I am, and tackle the rest of the type of spending on my credit card. Wish me luck!
Credit Card Debt, Personal Finance
Being a very analytical person ( for all the help it did for me from being a victim of the addiction in the first place ) , I decided I am going to analyze my last month’s spending or at least the credit card spending. I don’t carry much cash .
I created an excel expense spread sheet, and categorized each expense . I spent close to $5000 dollars on furniture and house related items, close to $400 on gifts, and close to $700 on charity draws. I really didn’t have any pressing need to spend on any of these items. At that time I had justified the spending as things that brings me happiness or will bring happiness to others.
So today I have decided to take a journey to control my spending. There are probably millions of articles on the internet with some tips for controlling spending (Google returned 99.5 million results). You should read some of them, at the end of the day however, whatever plan you come up with , should be tailored for your personality , and to help fix your bad habits with regard to money.
I am going to share mine, in the hope that it might inspire someone with a similar problem to do something about their addiction.
Here it goes :
1. As you saw from above, one of the things I spend the most money on was household items/ improvements, and these were improvements that were not needed. The question now is , how am I going to control this spending. I am going to go cold turkey. There are no pressing repairs needed or items needed for the house at the moment. For the next 6 months, I will not purchase anything for the house. I am taking an oath today.
2. The second highest item on my list was charity lottos. I am going to apply the same strategy here, and will not buy any more lotto tickets till next September.
3. The hardest item for me to tackle would be gifts. I have always really enjoyed giving people gifts. Over the next 6 months, I am going to try to minimize the monetary gifts I would be giving my family and friends. For the gifts I must , I will try to use the gift cards I have.
These are my 3 action items to help control my spending. After three months , I am going to evaluate where I am, and tackle the rest of the type of spending on my credit card. Wish me luck!
Credit Card Debt, Personal Finance
Wednesday, August 10, 2011
All you need to know about RESPs ! Remember anyone can open an RESP for a child not just the parents.
I have a tiny god daughter who is about to turn 1. She is so adorable. Oh the joy kids bring you in the first few years of their lives. Ever since I have heard of or read about the option of gifting RESPs , I have been wanting to start an RESP for her. I think she’ll make a great lawyer ( we’ll see how that turns out ). So being the control freak that I am, I trolled the net for information on RESPs. I am summarizing what I have found in one place in the hope it helps someone else.
What is it and What is so great about it ?
• I figured we start with the question of “What is an RESP ?” – RESP stands for Registered Education Savings Plan, and it is pretty much a plan to save up money for a child’s education. What is really cool about RESPs is that the government will match a portion of your yearly contribution which is similar to employer matched RRSP payments (Yay! Free money). The second cool factor is that the money in the RESP can grow tax free. The government will match :
o 20% on RESP contributions regardless of family net income up to a maximum of $500 a year.
o Additional 20% if your family net income is $41544 or less
o Additional 10% if your family net income is between $41544 to $83088
Note: To find the family net income checkout line 236 of Notice of Assessment. If you are married/common in law add both of your line 236s.
• Some children are eligible for up to $2000 from the government regardless of how much contribution the child has in the RESP. If your child receives the National Child Benefit Supplement as part of the Canada Child Tax Benefit than he/she is eligible to receive a onetime payment of $525 and than $100 every year till they are 15 in their RESPs. That’s $2000 free, the only thing you would have to do is open an RESP account with a provider who will apply for this benefit (It is called “Canada Learning Bond”).
• As you already know, each year you are eligible to receive a maximum of $500 from the government, but if you were not able to contribute the amount required to receive the $500, you can carry forward that amount till the child reaches the age of 17.
How and where do I open one?
• All that is needed to open an RESP is a RESP provider and a SIN number for your child.
• You can open an RESP account at many places such as banks, insurance companies, credit unions etc..
Two important notes when choosing an RESP provider:
o First , make sure the RESP provider offers the option for you to apply for the government grant, and additional 10%, 20% grants, and the Canada Learning Bond option. Surprisingly not all providers offer the ability to apply (I don’t understand why, but not all do ). To see a complete list of providers and the grants they offer, check out this page: Providers
o Second, pick a provider that offers a plan that provides flexibility and minimum fees. This involves asking questions and reading the documents they give you . Make sure to pick a plan that doesn’t have a minimum deposit requirement, and one that will let you make payments whenever you want to ( in other words , don’t sign up for an RESP plan that requires mandatory monthly payments ) . All of us need financial flexibility at certain times in our lives; it doesn’t make sense to create a payment obligation when we don’t have to. If you need help with self discipline, set up automatic payments from your pay cheque. Also make sure the plan doesn’t have penalties, if you choose to close the RESP plan early. Also remember to pick a plan that lets you invest the RESP money in different kind of assets (whether it be stocks, mutual funds, GICs etc ).
• Now that you have a RESP provider , what should you invest in ? The answer to this question depends very much on your risk tolerance, level of knowledge, and your overall financial state. The goal of this investment is a child’s education, so you don’t want to put it in anything where there is a large threat to the loss of principal. That leaves you with GICs, well rated bonds, and etc. If you have a little bit more financial freedom, my recommendation is that you choose a mix of bonds and stock index funds. If you are starting to invest when the child is very young you have a somewhat large investment horizon (18 to 19 years). You should start off with 75% invested in the stocks index fund and 25% in bond index fund. When the child is 10 years old you should switch to 75% in bond index fund and 25% in stock index fund.
Withdrawal and Taxation
• If the child reaches 18 and attends a post secondary institution, the RESP withdrawals will be taxed in the hands of the child. The portion that is taxed is the income earned on the contributions, the contributions themselves are not taxed. If at that time the child doesn’t have any other income, the withdrawals are tax free.
• If the child doesn’t attend a post secondary institution, the earnings from the contribution is taxed at the contributor’s marginal tax rate, and a 20% penalty will be applied to it. One way to avoid this marginal tax rate and 20% penalty is by transferring the RESP to the contributor’s RRSP. In order to do this the contributor must have leftover RRSP contributing room. The government contributions must be returned, and there is no tax on the contributor’s contributions, only on the earnings of the contributions.
• An RESP can stay open for 36 years, which gives the child a lot of time to complete some sort of education after high school.
Where can you find out more information about RESPs ?
I found canlearn to be a great resource. Hope you learned something new.
Child Education, RESP
What is it and What is so great about it ?
• I figured we start with the question of “What is an RESP ?” – RESP stands for Registered Education Savings Plan, and it is pretty much a plan to save up money for a child’s education. What is really cool about RESPs is that the government will match a portion of your yearly contribution which is similar to employer matched RRSP payments (Yay! Free money). The second cool factor is that the money in the RESP can grow tax free. The government will match :
o 20% on RESP contributions regardless of family net income up to a maximum of $500 a year.
o Additional 20% if your family net income is $41544 or less
o Additional 10% if your family net income is between $41544 to $83088
Note: To find the family net income checkout line 236 of Notice of Assessment. If you are married/common in law add both of your line 236s.
• Some children are eligible for up to $2000 from the government regardless of how much contribution the child has in the RESP. If your child receives the National Child Benefit Supplement as part of the Canada Child Tax Benefit than he/she is eligible to receive a onetime payment of $525 and than $100 every year till they are 15 in their RESPs. That’s $2000 free, the only thing you would have to do is open an RESP account with a provider who will apply for this benefit (It is called “Canada Learning Bond”).
• As you already know, each year you are eligible to receive a maximum of $500 from the government, but if you were not able to contribute the amount required to receive the $500, you can carry forward that amount till the child reaches the age of 17.
How and where do I open one?
• All that is needed to open an RESP is a RESP provider and a SIN number for your child.
• You can open an RESP account at many places such as banks, insurance companies, credit unions etc..
Two important notes when choosing an RESP provider:
o First , make sure the RESP provider offers the option for you to apply for the government grant, and additional 10%, 20% grants, and the Canada Learning Bond option. Surprisingly not all providers offer the ability to apply (I don’t understand why, but not all do ). To see a complete list of providers and the grants they offer, check out this page: Providers
o Second, pick a provider that offers a plan that provides flexibility and minimum fees. This involves asking questions and reading the documents they give you . Make sure to pick a plan that doesn’t have a minimum deposit requirement, and one that will let you make payments whenever you want to ( in other words , don’t sign up for an RESP plan that requires mandatory monthly payments ) . All of us need financial flexibility at certain times in our lives; it doesn’t make sense to create a payment obligation when we don’t have to. If you need help with self discipline, set up automatic payments from your pay cheque. Also make sure the plan doesn’t have penalties, if you choose to close the RESP plan early. Also remember to pick a plan that lets you invest the RESP money in different kind of assets (whether it be stocks, mutual funds, GICs etc ).
• Now that you have a RESP provider , what should you invest in ? The answer to this question depends very much on your risk tolerance, level of knowledge, and your overall financial state. The goal of this investment is a child’s education, so you don’t want to put it in anything where there is a large threat to the loss of principal. That leaves you with GICs, well rated bonds, and etc. If you have a little bit more financial freedom, my recommendation is that you choose a mix of bonds and stock index funds. If you are starting to invest when the child is very young you have a somewhat large investment horizon (18 to 19 years). You should start off with 75% invested in the stocks index fund and 25% in bond index fund. When the child is 10 years old you should switch to 75% in bond index fund and 25% in stock index fund.
Withdrawal and Taxation
• If the child reaches 18 and attends a post secondary institution, the RESP withdrawals will be taxed in the hands of the child. The portion that is taxed is the income earned on the contributions, the contributions themselves are not taxed. If at that time the child doesn’t have any other income, the withdrawals are tax free.
• If the child doesn’t attend a post secondary institution, the earnings from the contribution is taxed at the contributor’s marginal tax rate, and a 20% penalty will be applied to it. One way to avoid this marginal tax rate and 20% penalty is by transferring the RESP to the contributor’s RRSP. In order to do this the contributor must have leftover RRSP contributing room. The government contributions must be returned, and there is no tax on the contributor’s contributions, only on the earnings of the contributions.
• An RESP can stay open for 36 years, which gives the child a lot of time to complete some sort of education after high school.
Where can you find out more information about RESPs ?
I found canlearn to be a great resource. Hope you learned something new.
Child Education, RESP
Tuesday, June 14, 2011
How to get a 278% return Vs. a 10% return using the same amount of initial investment.
Borrowing to invest if done correctly can magnify gains. However it’s a double edged sword, it can also magnify your loses. Any investment that has the potential to earn you lots of return also should have the potential to lose a lot of money for you. If someone says otherwise, I recommend you get out :). Important concept here is your risk tolerance. Let’s take a look at an example.
If you borrowed $100 000 @ 6%, and earned a return of 10% on this money this would be your return. Remember interest expense on an investing loan has a tax advantage.
i.The cost of your debt is 6% which equals to $6000, however you only pay in interest, interest expense * ( 1 – marginal tax rate). Let’s say you are in a 40% marginal tax rate, than your interest expense on the 100k would be :
• 100000* (.06)(1-.4) = $3 600
ii.The return on your investment was 10% of 100k which equals to $10 000. If all of the $100 000 was your money , and you had a 10% return than your rate of return is 10%. In this case the $100 000 was not your money, you borrowed it to invest. Your cost was just the interest cost of $3 600. In this situation your rate of return is : ( 10 000 / 3600 ) * 100 = 278%
iii.How about that ? 10% return versus 278 % return :) .
The above scenario has a downside as well. If you had a bad year and lost money resulting in a -10% return if all of the $100 000 was not borrowed money, than your rate of loss is -10%. However if you had borrowed the $100 000, than your rate of loss now jumps to -278% :).
Debt/Leverage if used responsibly can help increase your capacity to earn returns. The key concept here is “ if used responsibly”. Now, what does that mean?
1. Only use debt for investing if you can tolerate the risk. If there is a queasy feeling in your stomach at the thought of using debt for investing, that’s a sign to stay away from it
2. The 10% return on the example is not an easy amount to attain. On average Majority of mutual fund managers don’t hit this return. So you need to have an understanding of what is the average type of return for the asset class you have invested in. That’s a good starting indicator for the type of return you can expect.
3. Only borrow to invest, if you have the capacity to service the interest and principle, and have the capacity to take on a reasonable amount of loss on the borrowed principle without pushing you in to financial distress territory ( fancy term for bankruptcy) . If you are already carrying a lot of debt, taking on more debt to invest is not a good move for most people. Wait till you have gotten rid of some of your debt, than look into using debt for investing.
Credit Card Debt, Investing,Leverage, Taxes
If you borrowed $100 000 @ 6%, and earned a return of 10% on this money this would be your return. Remember interest expense on an investing loan has a tax advantage.
i.The cost of your debt is 6% which equals to $6000, however you only pay in interest, interest expense * ( 1 – marginal tax rate). Let’s say you are in a 40% marginal tax rate, than your interest expense on the 100k would be :
• 100000* (.06)(1-.4) = $3 600
ii.The return on your investment was 10% of 100k which equals to $10 000. If all of the $100 000 was your money , and you had a 10% return than your rate of return is 10%. In this case the $100 000 was not your money, you borrowed it to invest. Your cost was just the interest cost of $3 600. In this situation your rate of return is : ( 10 000 / 3600 ) * 100 = 278%
iii.How about that ? 10% return versus 278 % return :) .
The above scenario has a downside as well. If you had a bad year and lost money resulting in a -10% return if all of the $100 000 was not borrowed money, than your rate of loss is -10%. However if you had borrowed the $100 000, than your rate of loss now jumps to -278% :).
Debt/Leverage if used responsibly can help increase your capacity to earn returns. The key concept here is “ if used responsibly”. Now, what does that mean?
1. Only use debt for investing if you can tolerate the risk. If there is a queasy feeling in your stomach at the thought of using debt for investing, that’s a sign to stay away from it
2. The 10% return on the example is not an easy amount to attain. On average Majority of mutual fund managers don’t hit this return. So you need to have an understanding of what is the average type of return for the asset class you have invested in. That’s a good starting indicator for the type of return you can expect.
3. Only borrow to invest, if you have the capacity to service the interest and principle, and have the capacity to take on a reasonable amount of loss on the borrowed principle without pushing you in to financial distress territory ( fancy term for bankruptcy) . If you are already carrying a lot of debt, taking on more debt to invest is not a good move for most people. Wait till you have gotten rid of some of your debt, than look into using debt for investing.
Credit Card Debt, Investing,Leverage, Taxes
Saturday, March 5, 2011
4 Major Impediments to Wealth
1. Lack of Financial Knowledge – Our schools interestingly enough don’t teach personal finance concept at any level other than as university courses. Unless your parents have a good basis in personal finance knowledge, and teach it to you, you don’t have a mean to learn it other than teaching it to yourself.
2. Taxes – People need to understand the different types of taxes that are levied on them, and do tax planning to minimize the effect of tax on their incomes and earrings. Not maximizing your tax shelter can overtime add up to a large amount of money lost.
3.Inflation – Another effect that can overtime erode the value of money is inflation. The average rate of inflation in Canada is approximately 3.9%, based on inflation data from 1950 to 2009.
Let me demonstrate the effect with an example. $1000 today will equal in:
10 years = $682
25 years = $384
50 years = $147
As you can see, if someone didn’t understand the effect of inflation, and decided to keep their retirement savings in a chequing account that earns very little interest, the value of their money would have eroded significantly by the time retirement arrives due to inflation !
4. Life Challenges - such as:
a.Debt
b.Divorce
c.Disability
d.Unemployment/Business Failure
e.Death
f.Procrastination/Delay
A person has to understand the effect such events can have on their finances and plan for it accordingly. Most of these items are not pleasant to think about, however they are crucial in planning one’s finances.
2. Taxes – People need to understand the different types of taxes that are levied on them, and do tax planning to minimize the effect of tax on their incomes and earrings. Not maximizing your tax shelter can overtime add up to a large amount of money lost.
3.Inflation – Another effect that can overtime erode the value of money is inflation. The average rate of inflation in Canada is approximately 3.9%, based on inflation data from 1950 to 2009.
Let me demonstrate the effect with an example. $1000 today will equal in:
10 years = $682
25 years = $384
50 years = $147
As you can see, if someone didn’t understand the effect of inflation, and decided to keep their retirement savings in a chequing account that earns very little interest, the value of their money would have eroded significantly by the time retirement arrives due to inflation !
4. Life Challenges - such as:
a.Debt
b.Divorce
c.Disability
d.Unemployment/Business Failure
e.Death
f.Procrastination/Delay
A person has to understand the effect such events can have on their finances and plan for it accordingly. Most of these items are not pleasant to think about, however they are crucial in planning one’s finances.
Wednesday, March 2, 2011
Financial Planning News Article Analysis
I read an interesting article. Here are my thoughts on it.
Source/Issue: “The 20-minute financial expert” , (MoneySense , www.canadianbusiness.com )
Written by: By Ian McGugan and Duncan Hood
Key points from the Article:
1. This article attempts to give the reader a good basis on personal finance related topics such as how to save, smart ways to invest, tax tips, how to use leverage for benefit, insurance, will , how to find a financial adviser, and how to retire. One of the key points is paying yourself first. This is a very popular concept in personal finance and is recommended by a lot of financial advisers, bank employees, articles and books. The concept is to automatically withdraw a set amount from your paycheque . This is supposed to force someone to save and learn financial discipline.
2. Another key point from this article is about how to invest your money smartly. It covers two important concepts in investing, diversification and keeping transaction costs low. It recommends investing in diversified , low cost mutual funds as a investment strategy for people who wants to start investing, and doesn’t have the time or expertise to invest in other type of investments. This is also a very popular concept in personal finance , and is recommended my many financial journalists and advisers.
3. The article also covers how to handle taxes. Its main view is tax minimization is a waste of time, since the system is set up to discourage it. It provides steps on how to approach your tax. The steps are, save all your receipts, contribute as much as possible to your RRSP, take advantage of spousal RRSP contribution, and use tax software if you want to do your own tax.
4.Insurance is also covered by this article. The article’s spin on insurance is that a person only buys insurance for events that are unlikely occurrences, and if the consequences of that event(s) will be expensive. Also that term policies are the best approach for life insurance, life and universal policies cost too much, and that it is not a good idea to combine savings and insurance in universal policies. It also suggests a user increase their deductible to reduce their monthly cost, since most claims are big ones for house insurance or auto insurance. The article advocates shopping around for insurance, and buying it only if you need it.
5. The article covers retirement, and it takes an interesting approach to retirement. It goes against the norm, and indicates you don’t need to save too much for retirement. The argument for it is that by the time you reach age 65 you would have paid off your house , and your kids would have all grown up , and you don’t need to save any more money reducing your overall need for money. Also that government benefits kick in, and if you are not looking to change your life style drastically you would be ale to sustain your lifestyle.
Short Critique
1. As mentioned before this article attempts to give the reader a good basis on personal finance related topics such as how to save, smart ways to invest, tax tips, how to use leverage for benefit, insurance, will , how to find a financial adviser, and how to retire. The biggest critique I have about this article is, by attempting to explain many topics at once it reduces the seriousness of the topics, and gives the reader a false sense security that they have enough information to understand the concept. Each of these topics can be standalone articles or even series.
2. The author starts off the article by implying if you follow “pay yourself first”, and allocate some money to yourself first from your paycheque, you don’t need to have a budget. “You're done. By saving first, and spending only what's left over, you never again have to worry about sticking to a budget or falling victim to temptation.” This will work if someone has a cash budget, but even than they will miss out on things that they may only see if they had a complete budget , like the one we did in class, that helped create a balance sheet, and cash flow statement for an individual. The paying yourself first is a good idea to help someone save, however that idea itself doesn’t eliminate the need for a budget.
3. The articles talk about using leverage for many purposes, such as investing. From my experience most people don’t have the discipline to use leverage properly. I feel that it doesn’t highlight the risks involved in using leverage for purposes such as investing. The good thing is it highlights not using leverage for want spending such as a cruise. Another good aspect in terms of the discussion of leverage is , it highlights the fact when you borrow to invest as long as your returns are higher than the cost of your leverage you are making money. This is an important concept in using leverage for investing, that many people tend to forget due to emotional investing.
4. The article talks about how many financial planners recommend mutual funds based on the percentage of the funds they receive for recommending the fund. I believe this maybe true for some advisers, but the article spins it in a way that makes it seem like most financial advisers are such people. Also I don’t agree with the view in the article that “financial advisers are worthwhile for only people who has above $200 000 available for investment”. I think if someone was able to accumulate $200 000 in investable assets, they have some financial smarts. I think flat rate financial advisers should cater to people who would benefit most from the advice and guidance of such people. People who are trying to accumulate wealth, and need help creating a plan to achieve such a goal with their means.
5. The article also takes a very easy attitude towards retirement. It almost gives the reader the feeling that they don’t need to save for retirement in Canada, and they can still get by. It does this based on the assumption most people would have paid off their houses by this time, and would not have any debt. However studies have found a lot of people approaching their 60s still haven’t paid of their mortgages, or has a loan against their mortgages, and still have some debt left. The article doesn’t cover the pitfalls or the dangers of such actions; rather it takes an overall happier view of the situation.
Source/Issue: “The 20-minute financial expert” , (MoneySense , www.canadianbusiness.com )
Written by: By Ian McGugan and Duncan Hood
Key points from the Article:
1. This article attempts to give the reader a good basis on personal finance related topics such as how to save, smart ways to invest, tax tips, how to use leverage for benefit, insurance, will , how to find a financial adviser, and how to retire. One of the key points is paying yourself first. This is a very popular concept in personal finance and is recommended by a lot of financial advisers, bank employees, articles and books. The concept is to automatically withdraw a set amount from your paycheque . This is supposed to force someone to save and learn financial discipline.
2. Another key point from this article is about how to invest your money smartly. It covers two important concepts in investing, diversification and keeping transaction costs low. It recommends investing in diversified , low cost mutual funds as a investment strategy for people who wants to start investing, and doesn’t have the time or expertise to invest in other type of investments. This is also a very popular concept in personal finance , and is recommended my many financial journalists and advisers.
3. The article also covers how to handle taxes. Its main view is tax minimization is a waste of time, since the system is set up to discourage it. It provides steps on how to approach your tax. The steps are, save all your receipts, contribute as much as possible to your RRSP, take advantage of spousal RRSP contribution, and use tax software if you want to do your own tax.
4.Insurance is also covered by this article. The article’s spin on insurance is that a person only buys insurance for events that are unlikely occurrences, and if the consequences of that event(s) will be expensive. Also that term policies are the best approach for life insurance, life and universal policies cost too much, and that it is not a good idea to combine savings and insurance in universal policies. It also suggests a user increase their deductible to reduce their monthly cost, since most claims are big ones for house insurance or auto insurance. The article advocates shopping around for insurance, and buying it only if you need it.
5. The article covers retirement, and it takes an interesting approach to retirement. It goes against the norm, and indicates you don’t need to save too much for retirement. The argument for it is that by the time you reach age 65 you would have paid off your house , and your kids would have all grown up , and you don’t need to save any more money reducing your overall need for money. Also that government benefits kick in, and if you are not looking to change your life style drastically you would be ale to sustain your lifestyle.
Short Critique
1. As mentioned before this article attempts to give the reader a good basis on personal finance related topics such as how to save, smart ways to invest, tax tips, how to use leverage for benefit, insurance, will , how to find a financial adviser, and how to retire. The biggest critique I have about this article is, by attempting to explain many topics at once it reduces the seriousness of the topics, and gives the reader a false sense security that they have enough information to understand the concept. Each of these topics can be standalone articles or even series.
2. The author starts off the article by implying if you follow “pay yourself first”, and allocate some money to yourself first from your paycheque, you don’t need to have a budget. “You're done. By saving first, and spending only what's left over, you never again have to worry about sticking to a budget or falling victim to temptation.” This will work if someone has a cash budget, but even than they will miss out on things that they may only see if they had a complete budget , like the one we did in class, that helped create a balance sheet, and cash flow statement for an individual. The paying yourself first is a good idea to help someone save, however that idea itself doesn’t eliminate the need for a budget.
3. The articles talk about using leverage for many purposes, such as investing. From my experience most people don’t have the discipline to use leverage properly. I feel that it doesn’t highlight the risks involved in using leverage for purposes such as investing. The good thing is it highlights not using leverage for want spending such as a cruise. Another good aspect in terms of the discussion of leverage is , it highlights the fact when you borrow to invest as long as your returns are higher than the cost of your leverage you are making money. This is an important concept in using leverage for investing, that many people tend to forget due to emotional investing.
4. The article talks about how many financial planners recommend mutual funds based on the percentage of the funds they receive for recommending the fund. I believe this maybe true for some advisers, but the article spins it in a way that makes it seem like most financial advisers are such people. Also I don’t agree with the view in the article that “financial advisers are worthwhile for only people who has above $200 000 available for investment”. I think if someone was able to accumulate $200 000 in investable assets, they have some financial smarts. I think flat rate financial advisers should cater to people who would benefit most from the advice and guidance of such people. People who are trying to accumulate wealth, and need help creating a plan to achieve such a goal with their means.
5. The article also takes a very easy attitude towards retirement. It almost gives the reader the feeling that they don’t need to save for retirement in Canada, and they can still get by. It does this based on the assumption most people would have paid off their houses by this time, and would not have any debt. However studies have found a lot of people approaching their 60s still haven’t paid of their mortgages, or has a loan against their mortgages, and still have some debt left. The article doesn’t cover the pitfalls or the dangers of such actions; rather it takes an overall happier view of the situation.
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