With the 2009 stock picking competition over and done with, the same group of bloggers wanted try it  again in 2010.  As my last years result was mediocre relative to the market, I’ll still take the 20% that I gained.  This years picks will be along the same lines, but perhaps a little more aggressive.

What do I expect from the market in 2010?  I’m still waiting for that pullback, but I’m not so sure that we’ll see a test of the March 2009 lows.   Having said that, we may see some gain in the TSX in 2010, but I doubt that it will be anywhere close to the 30% returns of 2009.

My Top 4 Stock Picks for 2010

1. Hanwei Energy (HE.TO) – This Chinese company provides products and services for the oil pipeline transportation, wind and coal energy industries.  Even though they have been oversold, they maintain a strong balance sheet.  They currently trade at less than half their book value, carry no long term debt, and have $0.28/share cash on their balance sheets.  Trading price as of Dec 31, 2009: $0.82.
2. Manulife Financial (MFC.TO) – Most of you have probably heard of Manulife Financial as they are the largest insurance company in Canada (in terms of market cap).  I believe that Manulife has been oversold but hopefully return to strength in 2010. Trading price as of Dec 31, 2009: $19.33.
3. Cenovus Energy (CVE.TO) – I picked Cenovus as my oil play.  Never heard of them?  Neither did I until I looked up the constituents of the energy index.  Encana recently split into two companies; ECA is now a natural gas company while all the oil and gas assets have gone to CVE. Trading price as of Dec 31, 2009: $26.50.
4. QLT Inc (QLT.TO) – This is a riskier play of the batch as I picked them solely on their financial statements.  QLT is a pharmaceutical company that creates and commercializes eye treatments.  They trade below their book value, have no long term debt, and carry $3.81/share in cash on their balance sheet.  Trading price as of Dec 31, 2009: $5.23

Note that I own some of the stocks listed above and they are not recommendations to buy.

Here are some stock picks from other bloggers:

• Where Does All My Money Go
• Dividend Growth Investor
• Four Pillars
• Zach Stocks
• The Wild Investor
• The Intelligent Speculator
• The Financial Blogger
• My Traders Journal
  

What are your favorite stocks for 2010?

Popular Posts:

• Canadian Discount Brokerage Comparison
• Top 6 ways to Save on Auto Insurance
• High Interest Rate Savings Accounts
• MBNA SPG Credit Card Review
• Questrade Review
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Mark is an IT contractor residing in Alberta and needs some advice about what to do with excess capital and general tax optimization.

Here is the story:

We’ve got a rental property which we decided to try and sell. We located an investor who is interested. We’ve agreed on a price of $25,000 ‘cash to mortgage’. Once we pay legal fees, cancel the management company contract, and pay for title insurance, we’ll walk away with about $23,500. Here is our tentative plan for the cash (all numbers rounded for simplicity), but this is where I’d love some feedback.

• Credit card debt repayment $4500
• Line of Credit repayment $9500
• Leftover $9500

Paying off these two debts will leave us with no debt except for our principal mortgage. So, the question is, what to do with the $9500 extra?  Here are some other relevant details:

• I work as an IT contractor, earning approximately $80,000 per year in income through my corporation. I do not earn any “employment” income.
• Wife does not work.
• Most of the income is dividended from our corporation to my wife and I would like to have a nest egg in place to protect against job loss, as I am not protected by EI as a contractor.
• I have lots of RRSP contribution room from previous years as an employee, but I’m thinking this might not be the best, as I would like to keep the money accessible as an emergency fund.
• I’m in Alberta.
• My mortgage is approx $260,000 with a 35 yr amortization at 3.89%, 5 year term started in August. Regular payment is $267 weekly, currently we’re paying $325 weekly, with plans to increase that amount to the $400 a week range once the other debt is repayed.
• $11,000 in RRSP account.
• We have 2 kids under 3 and are planning to have at least 1 more, maybe 2 more, in the next 5 years.

As far as goals, we want to have enough money to enjoy life, take the odd vacation, and be able to retire comfortably (not expecting to be wealthy, although of course that would be nice.

Right now of the approx $1,600 per week I earn, we save $300 for taxes, $75 for healthcare (since I have no benefits).  The rest of the expenses are; $150-$300 goes to debt repayment,  groceries, utilities, property taxes, and all the rest ($4,500/mo total).

So the question is, what to do with the $9,500 windfall?  Before we get to that, lets take a step back.

Lets start with the rental property.  Typically speaking, selling a rental property for a profit would result in capital gains tax.  That is, 50% of the profit would be added to income and taxed accordingly.  But Mark’s situation is a bit unique where they have no T4 income to report as Mark is a contractor with his own corp, and his wife is a stay at home mom with no other income.  If we were to assume that the profit was split evenly between spouses, it would result in about $6,000 in income for the year (each).  Depending on how much is “dividended” out from the corp to the wife, it will most likely result in very little tax to be paid.

If they were to pay out all of the corporate income in the form of dividends, they would report $6,000 income each, along with $33,800 each ($80k after tax and assumed split in two) in dividends from the Canadian Controlled Private Corporation (CCPC), which would result in $4,700 family income tax.  The $4,700 family income tax is about $2,300 more than if they never sold the rental property.  Having said that, the $9,500 windfall is now $7,200 after tax.  Alternatively, they could reduce the payout from the CCPC equal to the amount that they will receive from the sale of the rental, which will result in about $200 tax payable on the rental.

Another tax issue that Mark might want to consider is paying himself a salary instead of dividends only.  Why?  Paying himself a salary will enable him to make CPP contributions along with build his RRSP contribution room.  Even though he would pay more tax personally, the corporation would get a tax deduction which generally evens things out in the big picture.

I’d also like to say that it’s generally a very good move to pay off consumer debt first.  Not only does it release the burden of those monthly payments, it offers a psychological and financial confidence boost.

Options

So lets go through some options on the windfall amount assuming all consumer debt has been paid off with the old payments going towards the mortgage:

1. RRSP – An RRSP contribution is an option, but in this situation, it’s perhaps not the most efficient choice.  I would avoid RRSP contributions as both Mark and his wife are in low tax brackets due to their corporate structure.  In addition, it’s not as liquid as other options should they need the cash.
2. Emergeny Fund TFSA – With 2010 here, people 18 and older now are permitted to contribute $10,000 to their TFSA.  With very little savings, a single income and 2 young children, I would highly recommend an emergency fund that can cover expenses should the need arise.  $7,200 is definitely a good start.  With the TFSA providing a tax shelter, it’s the first place that comes to mind.  Even though rates are low right now, he would want to have the cash easily accessible, like in a cashable GIC or a high interest rate account.
3. Corporate Account – As I mentioned above, instead of withdrawing everything out of the corporation, they could withdraw less and use the capital gains from the rental sale to cover regular expenses, thus get taxed less in the current tax year.  This would result in keeping the cash amount within the corporation until it is needed or withdrawn in a more tax efficient manner.  Note though that interest earned within a CCPC is taxed at the highest possible corporate rate which is close to 50% in most provinces.
4. Mortgage Paydown – To continue paying off debt, Mark could put the $7200 towards his $260,000 mortgage balance.  Although this option provides a guaranteed return higher than a savings account, it doesn’t provide his family with any liquidity.  The liquidity problem could be solved by obtaining a HELOC (providing he has enough equity) and using that if an emergency arises.

Conclusion

Personally, because of the financial scenario, I would use the rental sale windfall as an emergency fund.   There are a couple options for the emergency fund.  He could simply open a TFSA and deposit the money in there while withdrawing from his corporation as they normally do to cover expenses.  However, this causes additional personal income tax to be paid.

The alternative would be to withdraw a little less from the corporation for the year equivalant to the amount of the windfall to reduce overall taxation.  This would keep the emergency fund within the corporation temporarily until withdrawn during more tax efficient years.  At which point, a TFSA should be used.

What do you think?  What would you do with the extra money?

Popular Posts:

• The Smith Manoeuvre – A Wealth Strategy – I
• The Smith Manoeuvre – A Wealth Strategy – II
• Canadian Discount Brokerage Comparison
• Top Cash Back Credit Cards in Canada
• Child Care Tax Credits
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Copyright 2009 MillionDollarJourney – All Rights Reserved

Every year I make out a list of goals or resolutions for the year to come. I keep my list in google spreadsheets so that I can track my progress and see how I’ve done at the end of the year. I try to make the list reasonable and attainable.

Here are 8 Ideas for Financial Resolutions for 2010. It gets overwhelming to do them all at once. Pick two or three high priority ones and work on those first.

1. Track your spending.

Tracking your spending is one of the best ways of finding out if your money is going where you want it to go. Every time I work with someone and they do this exercise they are surprised at how much they spend on something. Love going out for dinner? Great! Go out more often. Find out you are spending $4000 a year on it when you’d rather spend it on something else? Suddenly making dinner at home becomes a lot more exciting.

2. Open and max out your TFSA

If you haven’t opened a TFSA yet, now is the time to do it. For the first few years of savings (you get $5000 a year contribution limit each) it’s a great plan for your emergency fund. After that you may want to sit down with a professional to decide which you should max out first, your RRSP or your TFSA. I happen to agree with Ed Rempel’s advice.

3. Track your net worth

The vast majority of the people I meet with have no idea the value of their total net worth. Nearly all are surprised one way or another when they do this exercise for the first time. Some are shocked at just how much debt they have and others are pleasantly surprised that they have more than they thought they did. Tracking your net worth every month is a great way to motivate yourself to keep on track financially.

4. Write or re-write your will

You need a will. If you have children or dependents, you really need a will. Some people argue that it’s easier to download a will online or order a will kit that does all the work for you. I’m a strong believer in getting a will done by a lawyer. For those who already have a will, read it over to make sure it doesn’t need updating since it was last done.

5. Max out your employer matching

I am amazed at the number of people that miss out on free money. Some companies have an employer matching program where for every dollar you contribute to your RRSPs, they will match it up to a certain percentage. You want to make sure you are maxing this out. Call your HR department and check. I’ve worked with several people who were amazed that they answer was yes, and they’d been missed out on an employer match for years.

6. Pay off the credit cards

Don’t just make minimum payments. The faster you can pay off your high interest debt the more cash you’ll have to spend now and save for the future. Make a plan to get the cards paid off quickly and if it’s too tempting to buy on credit, consider switching to cash or debit.

7. Build your Emergency Fund

Most financial professionals recommend having between 3 and 6 months living expenses in an emergency fund. If your job is volatile, a baby is in your near future or you highly value security, you may want to make it more. Many couples I know like to have between 9-12 months of living expenses in their emergency fund. Money in your emergency fund shouldn’t be invested. It should be in a high interest savings account or short term GIC. This is money you may need in the short term. It’s not for long term investing.

8. Save up for something fun

Getting your financial life in order doesn’t mean it has to be boring. Life is about finding the balance between saving for the future and living in the now. Want to go on an exotic vacation? Set up a vacation fund. Looking for a Vespa or a Harley? Start saving now. There is nothing wrong with spending money on fun things. Just save up for it first.

Our resolutions for 2009 were to pay off the car and max out our TFSAs. For 2010, our goals are to save up for a potential move or second car depending on whether we decide to relocate or commute and increase our savings by a certain percentage.

What are your financial resolutions for 2010?

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario.

Popular Posts:

• Canadian Discount Brokerage Comparison
• Top 6 ways to Save on Auto Insurance
• High Interest Rate Savings Accounts
• MBNA SPG Credit Card Review
• Questrade Review
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Copyright 2009 MillionDollarJourney – All Rights Reserved

There are a number of options for unlimited banking in Canada. These are a few from Canada’s most popular banks. I was disappointed to hear recently that citizensbank no longer offers a personal banking option. Share with us here if you know of other Canadian banks that offer unlimited free transactions or where it’s possible to have the fee waived.

I was surprised to see that CIBC is the only bank without any option to waive their fees. I even called their customer service line inquiring about this specific account. I asked if there was any way to have to fee waived, any multi-product discount or a minimum balance required. The representative apologized and said that no, it wasn’t possible to have the fee waived under any conditions with their unlimited chequing account.

What is even more surprising is that President’s Choice Financial is a division of CIBC. I bank with PC Financial and regularly use CIBC machines at no cost. When I put my card in, the screen on the ATM at CIBC welcomes me to President’s Choice Financial. I even deposit cheques and withdraw money at no charge from CIBC ATMs. Why is it then, that they can’t offer their own customers free banking?

I was also surprised to see how complicated eligibility is for the RBC No Limit Banking Account. I understand the idea of a multi-product rebate and agree that it encourages loyalty. I have our children’s RESP accounts at RBC and have a RBC Visa card. It makes me eligible for a multi-product rebate on their Day to Day Banking Account which would give me 15 transactions a month. In order to receive unlimited free transactions I would also have to hold a mortgage or equity line. Fifteen transactions a month is not enough for my daily banking needs.

There is so much information available easily online. I’m surprised with so many other options out there, banks can continue to charge such high fees when their competitors have other alternatives. I understand that some people like having a brick and mortar bank. Internet banking isn’t for everyone. I’ve always been happy with it but I know for the first few months using it, I was a little bit uncomfortable with the idea of virtual banking. It’s been over 10 years now, and I’ve never had an issue. I’ve even ordered bank drafts, deposited US cheques and used my debit card internationally, all without any issues.

If I were to choose a brick and mortar bank today, I would choose one where, for a minimum balance, I could have my monthly fee waived.

The types of people who read personal finance blogs are probably already pretty careful with their money. It wouldn’t surprise me if most Million Dollar Journey readers pay no fees for unlimited banking in Canada. What continues to surprise me is that hundreds of thousands if not millions of Canadians continue to pay these fees when there are other options.

If you are looking for banking options in Canada, you have a choice. If you’re unhappy with your current bank, it’s easy to switch.

Are there other Canadian banks you want to tell us about? Feel free to share in the comments.

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario.

Popular Posts:

• Canadian Discount Brokerage Comparison
• Top 6 ways to Save on Auto Insurance
• High Interest Rate Savings Accounts
• MBNA SPG Credit Card Review
• Child Care Tax Credits
• Questrade Review
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Copyright 2009 MillionDollarJourney – All Rights Reserved

With the new 2010 Honda CRV released, a renewed interest in a replacement vehicle has occurred in our household. After browsing around the auto makers website, I was curious as to the difference between purchase and lease payments. As someone who likes to pay cash for everything to avoid the interest, I’ll reluctantly admit that leasing does have a certain appeal as it reduces the monthly payments.

One thing that caught my eye on the lease payment calculator was that the monthly payment was higher than I had expected. As a lease is basically paying for the depreciation of a vehicle, I assumed that the interest rate quoted is applied to the purchase price minus the end value. However, using a simple loan calculator, the numbers don’t match.

So after some digging, I figured out why my calculations were off. The lease payments are calculated a bit different where the deprecation AND lease fee must be paid for.

What is a lease fee?  Basically, the formula is:

Lease Fee = (Purchase price + Residual Value) * Money Factor
Money Factor = Interest rate on the lease payment divided by 2400.

Lets do an example on the Honda CRV and pretend for a moment that I pay full price for the vehicle.

• MSRP + freight/PDI: $29,880
• Residual Value: $15,276.60 (after 3 years)
• Depreciation over 3 years: $14,603.40 ($405.65/month)
• Annual Lease Rate: 4.9%
• Money Factor = 4.9/2400 = 0.00204
• Lease Fee = ($29,880+15,276.60) * 0.00204 = $92.12/month
• Lease Payment = $405.65 + $92.12 = $497.77/month * sales tax

As you can see, before sales tax, the payment is approximately $498/month which is higher than having a loan (@4.9%) for the depreciation only which would work out to be around $437/month.  In fact, paying $498/month is basically paying 4.9% on $16,640 instead of the stated deprecation $14,603.

In other words, the $498/month payment represents a 14.2% interest rate on the depreciation over 3 years.

When it comes down to it the important thing is to look at the big picture when comparing purchasing and leasing.  Ask yourself, what is the total cost of the vehicle after accounting for the payments, sales tax and other fees?

In this example, assuming that the leased CRV is bought out after the 3 years, the total cost of the vehicle would be around $37,740  However, if this vehicle is financed over 3 years at the same 4.9%, the total cost would be $36,488 (with $0 down, but double the monthly payments).  A difference of around $1,250 with both at the same interest rate.

The benefit of a lease is obvious, lower monthly payments and the “benefit” of returning the vehicle after the term.  However, the lower payments usually result in a higher overall cost in the end.

If you’re interested, here is a previous article on how to reduce your car lease payments

At the beginning of every year, I typically set financial goals for myself. The goals are usually fairly lofty but achievable with the proper discipline and desire.

Although 2009 was a great year for net worth and income growth, there was room for improvement in terms of achieving the financial goals that I set out for myself.  In 2009, I was really focused on career and business growth which pushed a lot of important items onto the back burner as you’ll see from my report below.

Goal 1: Open a TFSA with a discount brokerage and maximize the contribution – As of January 1, 2009 (or a bit later), some discount brokerages will offer a tax free trading account.  We will open 2 accounts, one for each spouse, maximize the contribution ($10k total), and start the TFSA income fund strategy that I’ve written about before.

Right out of the gate, I messed this one up!  As a last minute effort, I managed to open 1 TFSA account (Questrade TFSA) near the end of 2009 after reviewing my financial goals.  Why didn’t I open one earlier?  My original plan was to open a TFSA trading account and purchasing income trusts to increase my passive income.  However, I procrastinated a bit and the markets took off leaving the trusts that I liked a little too expensive.   Now that we have an account funded, I will be on the lookout for attractive income opportunities.

Goal 2: Maximize RRSP Contributions – Due to higher income in 2008, my contribution limit will be higher and I plan to maximize my contribution.  This will do two things.  One, it will put some cash into my RRSP account so that I can buy beaten up equities.  Two, it will reduce my taxable income significantly in 2009.

I am happy about this one as I managed to maximize both of our RRSP accounts for 2009 and generate some growth due to the rising markets.   For those of you who haven’t contributed yet, here is the RRSP contribution deadline for tax year 2009.

Goal 3: Pay Down Mortgage Principal by $20,000 on Top of Regular Mortgage Payments – Seems like a stretch, but in addition to maximizing both the TFSA and RRSP, I plan on paying down the mortgage principal by an additional $20,000.

During 2009, I made the decision to aggressively pay down the mortgage and I’m happy to report that it is working out better than planned.  We started January 2009 with a mortgage balance of $101,200 and as of the end of 2009, the mortgage balance stands at $25,200.  The relatively low remaining mortgage balance is well within striking distance of being completely paid off.

Goal 4: Charity Goals – As charitable giving is becoming more important to our family, we plan on giving at least $3,000 this year to registered charities.  In addition to the financial contribution, we plan on donating at least 30 hours of our time to a local charity that we support.

This past year was a decent year in terms of giving, but didn’t quite meet the bar that I set out for myself.  In terms of monetary donations, we increased our monthly giving to the local children’s hospital, continued our monthly giving to another cause that we support, and we started sponsoring a child through Compassion Canada (thanks to Kathryn for the idea).  Total donated in 2009 is around the $2500 mark.  Not quite the $3000 that I set out for, but I’m pleased none the less.

Donating time to charities, on the other hand, was a bit more challenging.  Even with a hectic schedule, I managed to donate 15 hours this year to a local charity that I support.  I hope to do more in future years.

Goal 5: Blog Goals – The quality of the Million Dollar Journey community never ceases to amaze me.  I hope to continue the strong readership growth of this blog in reaching 7,000 subscribers by the end of the year.

I’m extremely pleased with how this goal panned out.  We started the year with about 4000 subscribers, and thanks to you, we have doubled to over 8000 by the end of 2009. If you are interested in getting daily content updates delivered straight to your email, you can get it here.  Alternatively, you can sign up for the MDJ Money Tips Newsletter which is delivered once or twice a month.  It’s all offered for free of course.

Goal 6: Dividend Income Goals – One of my higher priority goals is to increase my passive or alternative income.  My current Smith Manoeuvre portfolio is paying about $1,000/year in dividends which I plan to increase this year.  Combining both my dividend portfolio along with our TFSA’s, I hope to reach $2,500/year in investment income by the end of 2009.

This is one of the goals which was hinged on setting up a proper TFSA portfolio.  As I explained above, I didn’t get to invest within the TFSA for 2009, so passive income from investments plateaued in 2009.  Although SM portfolio dividends are up to around $1,500 per year which is significantly more than last, it’s still not in the range I want to be.  However, I plan to get more focused on passive income in the coming years.

Final Thoughts

Although the results were positive for the most part, there is room for improvement.  Over all though, I am pleased with the way that 2009 turned out financially.  For those of you who track your financial goals, how did you do in 2009?

Popular Posts:

• Canadian Discount Brokerage Comparison
• Top 6 ways to Save on Auto Insurance
• High Interest Rate Savings Accounts
• Top Cash Back Credit Cards in Canada
• Questrade Review
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Copyright 2010 MillionDollarJourney – All Rights Reserved