Birthdays can be a harsh reminder of our inevitable mortality, but there is a lot to be grateful for. For instance you can take advantage of birthday freebies. Here are two that I learned about the other day.
1) Booster Juice - just mention it's your birthday and you can get a free smoothie (you may have to print out a coupon online, but I was able to just show some ID).
2) Denny's - Ok the food isn't great at Denny's, but in this economy who can turn down a free meal. You can get a free grand slam breakfast there on your birthday, just make sure you bring some valid ID.
I heard also that you can get a free coffee at Starbucks, but I haven't tried that. Apparently you need a Starbucks card of some sort.
If you know of anymore birthday freebies, add it to the comments!
What is behavioural finance anyways? Sounds like overly complicated jargon, but it's actually an interesting subject of study that has come about over the last decade or so. Behavioural finance is the study of how people react to market conditions as a whole and how this reaction in turn effects the markets. It's the study of economic mob mentality and when it comes to your investment portfolio it can be an important factor.
Understanding the psychology of how we make financial decisions is critical for our long term financial health. We would like to believe that all our financial decisions are well thought out and calculated, adjusting for risk and maximizing the returns. In reality a lot of our decision making is irrational, driven by two main emotions. Fear and greed. Like a recovering alcoholic, the path to recovery is to acknowledge that you have a problem and take steps to mitigate the problem.
In Carl Richards' "The Behavior Gap", the topic of behavioural finance is discussed with emphasis on how understanding the role of money in one's life can lead to a healthier wealthier one. Here are three important lessons from this book:
1) There's a difference between investment return and investor return. Investment return is the amount your investments will earn over the lifetime of the investment, given that you do not make any adjustments to the investment. Investor return is the actual return you receive, which in most cases is lower. This is caused by jumping in and out of the investment as a result of the fear (when the markets perform poorly) and greed (vice versa). The difference is what Carl calls the behavior gap.
2) The more you make, the happier you'll be (only to a certain point). There is a point when extra income won't make you any happier. There was a recent study by Noble Prize winning economist Daniel Kahneman that showed there is little increase in happiness after earning more than about $75,000 a year. It's hard to quantitatively measure happiness, but the idea is that once your basic needs are met and you have some extra to travel and have a few perks, you may meet a plateau of happiness with earnings. Also, the extra earnings may not be worth the extra stress it comes with.
3) Financial plans are worthless. Since most are based on assumptions and try to extrapolate out to decades into the future, financial plans need to be flexible. Having an idea of where you want to be financial is good, however the idea of having a rigid financial plan is useless. Life has many unexpected bumps that can lead you way off course from your financial plan. Instead its best to have guiding principles that help you make financial decisions that are in line with your long term goals.
Here's a video where Carl explains the "Behavior Gap":
The two main way to meet personal financial goals is to save more by cutting expenses. The other way is to increase your income. There are only so many hours in the day to work and quite frankly working every waking hour may not be much of a life at all. One way to increase your income is by increasing it passively through investments. One of the best sources of passive income is through dividend paying stocks.
In Charles Carlson's "Little Book of Big Dividends", he goes through the basics of investing in dividend paying stocks. Given that you already know how to go about purchasing stocks, this book focusing on the process in which to choose solid companies that will likely be safe and will continually pay you through dividends.
So what are some of these important criteria that a stock must meet in order for it to provide big safe dividends. One concern is the dividend payout ratio. When a company makes money through sales it has to subtract costs to obtain its earnings. These earnings (if the company is making money at all) can either be reinvested into the company or paid out to shareholders as dividends. The percentage of the earnings that is paid out as dividends is known as the dividend payout ratio. For instance, if a company earns 1 dollar per share in earnings and pays 50 cents at the end of the year per share, than the payout ratio is 50% (0.5 divided by 50).
Carlson says for the dividend to be safe the payout ratio should be no more than 60%. That way some of the earning is kept within the business to allow for its growth.
Another main consideration is if the company has a history of raising dividends over time. This is critical because growing dividends helps your income keep pace with the increased cost of living (known as inflation). An additional screen would be to find companies that have consistently grown there dividends over the years. Inflation averages out to be about 3 to 4% per year, so dividend growth that exceeds that would be optimal.
A final word of caution is not to chase exceedingly high dividend yields. A dividend yield is calculated by dividing the dividend by the stock price. Say the dividend per share is 10 cents a year and the stock is trading at 1 dollar share. In this case the dividend yield would be 10% (10 cents divided by 1 dollar). That's a pretty sweet yield. Chasing high yields is tempting, but it can also be a sign of trouble. It is difficult for companies to sustain high dividend yields, therefore exceedingly high yields could mean that there is going to be cut in dividends in the future or that the company is in dire financial trouble.Historically, safe dividend yields can range from 1-6%, anything greater should be investigated with caution.
For more information I would recommend borrowing this book from the library. It's a really quick read and gives you the basic foundation for dividend investing. Good luck and keep saving!
Joel Greenblatt has done it again. Here's written another excellent book that breaks down the complex subject of investing in stocks into a way that anyone could understand. Greenblatt is also the author of "The Big Secret for the Small Investor." I'm a huge fan of the Greenblatt's down to earth investment strategies. He's what the industry would term a "value investor". In "The Big Secret for the Small Investor" Greenblatt recommends investing in value oriented index funds. To understand this concept it's best to read the book itself, but to put it in a nutshell, indexes usually weight the holding of stocks based on market capitalization. The danger lies in being weighted to heavily in stocks that have reached unreasonable highs. Thus, you would not be following the old adage of buy low, sell high if you are investing in a regular index fund. A value index fund differs in that weighting of the holdings. There are several different ways this can be done, but the important thing to understand is that the way your holdings are weighted in an index fund can help you improve your overall investment return.
In "The Little Book that Still Beats the Market", Greenblatt discusses two main metrics that should be looked at when choosing individual stocks in your portfolio. These two important metrics are earnings yield and return on capital. Earnings yield measures the same thing as the price to earnings ratio (PE) and is simply the inverse of the PE.Typically, you look for a low PE (for a value investor) because it means that you are paying less for a dollar of a company's earnings. Earnings yield is the exact opposite, so in this case you're looking for a high earnings yield.
For example, if a company earns two dollars per share a year and the shares are selling for 10 dollars a share the price to earning ratio would be (10 divided by 2) 5 and the earnings yield would be (2 divided by 10) 0.2 or 20%. Both numbers are measuring the same thing, which is the price you are paying for a dollar of a company's earnings. So whether you're looking at a low PE or high earnings yield, you're still trying to look for the best bang for your buck. This metric tells you whether you're getting a company at a bargain price.
The second metric is the company's return on capital. This statistic measures the ability of a company to convert the company's capital to earnings. For example if you invested $10 to start a lemonade stand (i.e. signs, chairs, cups, lemonade, etc...) and made $20, your return on capital would be 2 or 200% (20 divided by 2). The higher the number the better, meaning that the company is efficient at using it's capital to generate earnings.
Putting it altogether, Greenblatt recommends ranking companies by their earnings yield and return on capital choosing company that have both high earnings yield and return on capital. It's important to find both factors in the stock because it means you're buying an excellent company at an excellent price. Knowing this why wouldn't everyone be doing it. Greenblatt explains that this strategy can lead to short term under performance, but over the long term (5+ years) you can expect returns that exceed the market average.
Keep savin' and with your savings be sure to get your money working for you!
Here's Greenblatt discussing the investment strategy in this book:
Eating out regularly can be costly. The highest mark up items on the menu are desserts and drinks, especially alcoholic ones. Another additional cost of dining out is the tipping, which adds 15% to the bill.
Ordering take-out instead can save you on the tipping costs and drinking something in the fridge at home can help you avoid having to order drinks. Also, some restaurants offer discounts on take-out since it saves their staff from serving you.
Here are two classic books about investing in the stock market. Peter Lynch had an impeccable record when he managed the Magellen Fund for a little over a decade. In his writings, he claims that small investors can do just as well by investing in things they understand well. As consumers we may notice trends before Wall Street does, and that according to Mr Lynch gives us an edge.
But just because you eat at Taco Bell doesn't mean you should run out and buy shares in that stock. Lynch explains that shopping at your favourite store or buying your favourite product can help put these companies on your investment radar, however one should research the company thoroughly before taking the leap and investing their hard earned cash.
Lynch takes a bottom-up approach to investing, which means he researches companies and the fundamentals that drive their business. The top-down approach looks at investing within a certain country or industry until settling on a company. Lynch will invest regardless of the economic climate if an attractive enough company presents itself.
I found that both books are quite similar in their lessons. So it's probably not worth your time reading both. There are a lot of great lessons here and perhaps after reading it you'll find yourself a ten-bagger!
Peter Lynch talks about bottom-fishing on Wall Street:
Mortgage Freedom by Sandy Aitken is about a strategy of converting your non-tax deductible mortgage into a tax deductible line of credit. Unlike the United States, any interest paid on your principle residence in Canada is non-tax deductible. Sandy explains something called the "Smith Manoeuvre" where one converts all their mortgage debt to a Home Equity Line of Credit (HELOC). Interest paid on a HELOC is tax deductible if the money is used to purchase investments. Investments include: mutual funds, stocks, bonds, rental property, and business investments. The definition of an investment is not clear cut and should be discussed with a tax accountant before proceeding.
The type of HELOC that makes this strategy work is call a "Re-advancable Compartmental HELOC". The re-advancable part means that everytime you make a mortgage payment, the part that pays off the principle is added to the HELOC, giving you more credit. For example, if you make a $1000 mortgage payment each month and $400 goes toward the principle of the loan, than the credit in your HELOC increases by $400. This allows you to invest an extra $400 every month. The "compartmental" part is the partitioning of accounts to keep track of your HELOC and what you invest the credit in, as well as what you do with the returns you receive on the investments. This is for book keeping purposes.
By the end of this strategy you will have converted all your mortgage debt into tax deductible debt and hopefully own an investment that is worth the same amount as the mortgage you started with (given that your investment holds its value, ideally it will have appreciated in value). The two benefits of this strategy are:
1) You get time diversification on your investments, which makes your portfolio less volatile overall. Instead of waiting to pay off your mortgage entirely and then investing, starting earlier by borrowing to invest will allow you to ride out more of the ups and downs of the market. Trying to invest over a shorter time period will leave you susceptible to the short term volatility of the markets.
2) You get a tax deduction.
The things to keep in mind in order to make this strategy work and the downsides are:
1) You need at least 20% equity in your home to start a re-advancable compartmental HELOC.
2) Your investment must provide income frequently (monthly or quarterly) so that you can keep up with the interest payments on the HELOC.
3) The return on the investment must be equal to or greater than the interest rate being charged on the HELOC.
4) The interest rate on the HELOC will be likely higher than the interest rate that you are getting on your mortgage.
If you are earning more on your investments than the amount your paying in interest on the HELOC than the extra money is suppose to go towards paying the mortgage, freeing up more credit. This will accelerate the rate at which you pay off your mortgage. Once the mortgage is paid off the investment income and your mortgage payments go towards paying off your HELOC. With all this in mind it sounds like a risky proposition. This strategy isn't for everyone but it's an interesting alternative to tap into the equity in your home.
Going out these days is so expensive. Whether it's going to the movies or going out for a few drinks with friends, the cost of these outings can end up adding up to sizable chunk of change. Why not opt out for a board game night? One of my personal favourites is The Settlers of Catan.
If that doesn't suit your fancy check this game out:
Warren Buffett is undoubtedly the best investor of all time. When people hear about Warren Buffett they wish to imitate his investment results and because of this countless books have written about his investing philosophy. To get a deeper understanding of how Warren's investment philosophy came to be, it's important to understand what Warren Buffett is like as a person. In Roger Lowenstein's "Buffett: The Making of an American Capitalist" he paints a picture of how Warren grew up, his development as a young adult, and his triumphs and failures managing his holding company Berkshire Hathaway.
Warren Buffett has always been a business person at heart. In his youth he used to buy a 6 pack of Coke from his family's grocery store for 25 cents and sell individual cans to his neighbours for 5 cents each to net a tidy profit of 5 cents. He also ran a paper route as a boy, which taught him the art of sales, how to make deliveries on time, and how to collect payments from customers. As a teenager Warren bought a few used pin ball machines and placed them in local barber shops, Warren eventually sold this business. After which he invested the money in a fixer up Cadillac that he would rented out. Throughout his youth he gained valuable experience running various businesses. One of Warren's most memorable quotes is "being a businessman has made him a better investor and being an investor has made him a businessman."
An important relationship that developed in Warren's investment career was when he went to graduate school at Columbia University, where he was mentored by Benjamin Graham, the author of Security Analysis and The Intelligent Investor. Benjamin Graham's investment philosophy made a lot of sense to Warren. Graham's investment philosophy was to purchase stocks that the market had undervalued. This was the "cigar butt" approach to investing, where you could pick up a cigar butt off the floor virtually for free and get a few puffs out of it. Warren followed this practice until he studied Philip Fisher's investment philosophy which was based more on valuing companies based on their brand value, the quality of management and other less quantitative qualities. Warren started looking for companies that were not only cheap relative to value metrics but also had a long term competitive advantage in its industry. This blend of investment philosophies is the reason for Warren's success.
One of the most incredible investment stories of our time is the story of how Warren turned a dying textiles manufacturing company, Berkshire Hathaway, into the world's most prosperous holding company. When Warren purchased Berkshire Hathaway he was still using the "cigar butt" approach to investing, purchasing the company because it was priced cheaply. The business was cheap because the textiles industry was dying in North America, losing market share to cheaper textiles manufactures operating in developing countries. Warren had tough management decisions to make in order to keep Berkshire Hathaway from becoming a failed investment. He could either keep plunging capital into the textile mills or start diverting precious capital to more lucrative investments. Fortunately, with Warren's incredible vision he chose the latter. Warren diverted Bershire's capital by purchasing insurance companies, which had a much better return on capital. Eventually all of Bershire's mills were closed, however what remained was the most successful holding company of all time.
A final note on Warren is that although he is one of the top ten wealthiest people on earth, he lives a very modest lifestyle. He has lived in the same house that he bought in the 1960's. He doesn't believe in giving his children a huge inheritance, in fact he believes in having high inheretence taxes so that the wealth one accumulates should return to the capilist system that helped create it. He believes in taxing the wealthy at higher rates. Warren himself plans on giving all of his wealth away to charity. He tap dances to work everyday and loves his job. If you're a frugal person than Warren's investment philosophy is for you and learning from him would be beneficial for your investment portfolio. If you study enough about Warren perhaps one day you will create your own Berkshire Hathaway.
David Chilton has returned with a sequel to his best selling personal finance novel the Wealthy Barber. The original Wealthy Barber was one of the first of its kind, telling the story of how a barber (seemingly low-income earner) ends up being financially secure by following a down to earth financial plan. The barber teaches his clients about how he ended up being in a strong financial position through diligent saving and living within ones means.
In David Chilton's sequel he no longer uses the fictional characters in his original book, but uses a more casual approach discussing personal finance, as if he were chatting to you in your living room. The good news is you can just close the book when you don't want to hear from him anymore, since it would be awkward to try to kick him out.
Unfortunately, there isn't a lot of new information in this sequel. He still preaches a lot of the maxims you'll see in other personal finance books (i.e. The Automatic Millionare by Bach) such as: pay yourself first, live within your means, credit is a dangerous thing when not used properly, don't try to keep up with the jones' and always save for a rainy day/retirement. There are a couple tidbits of wisdom and it is a very quick read with very short paragraphs and chapters.
One insightful thing Chilton mentions is how income is sometimes confused with wealth. Having a high income is great but if you also live lavishly it can be difficult to save. Plus the income won't be there indefinitely especially if you plan to retire (we can't all work forever) or if you lose your job. Wealth on the other hand is something that you build over time by diligently saving and making good investments decisions. The idea of wealth is having your money work for you, the idea of income is working for money. There's a big difference and it's important not to get the two confused. I would highly recommend reading the original Wealthy Barber but would suggest passing on the the sequel.
The host of CBC's Dragon's Den, Kevin O'Learly has come out with an autobiography entitled "The Cold Hard Truth". For those of you who have never watched the show, it would be the American Idol of venture capitalism. Keven O'Learly is one of 5 panelists who decide whether a new venture is worth staking their own money on. All the panelists have entrepreneurial experience, building up multi-million dollar companies. When a prospective start-up company pitches their idea, they are hit with a barrage of hard to answer business finance questions from the "Dragons". There is no doubt that the "Dragons" know business and that they've gained knowledge from where it counts, main street.
So what can we learn from O'Leary? O'Leary built his fortune on a variety of software products. He himself was never a computer geek, but was the marketer and business force behind the products. His first venture was selling printer software his business partner developed. They snagged a huge client, Hewlitt Packard, and with that deal they were earning royalties on every printer sold. Later he developed and marketed educational software packages.
Throughout the book he preaches the message that the only thing that really matters (when it comes to business) is money. One story that comes to mind is when O'Leary is trying to get their educational software on the shelves at Wal-Mart. Wal-Mart is absolutely ruthless when it comes to giving up retail space. Being the best low-cost provider of consumer goods in the world, everything comes down to the dollars and cents.
When O'Leary met with a Wal-Mart executive to talk about putting their software on Wal-Mart shelves, the executive told him that he would put his product on the shelf if they could sell it for $30 a unit. O'Leary said they currently sold it for $60 and that it wasn't possible to cut the price so low. The Wal-Mart executive said it was going to either be tube socks or his software sitting on his shelves and that every inche of shelf space was precious. If he wasn't willing to cut the cost then his software wouldn't enter their stores and the meeting would be over. O'Leary and his team ended up developing a version that could sell for the price Wal-Mart demanded and they ended up selling millions of units.
Business is a tough environment and it takes a thick skin to thrive in it. O'Leary had been very successful at it and has a keen eye for value. He makes an important point that money although crucial in buisiness, isn't everything in life and that money can really only buy you two things. The first thing is the freedom to do what you want and never be bossed around. The second thing that money can bring is the ability to help others. Other than that money can't replace the things that bring us the most joy in life such as good health, friends & family, and valuable experiences. The cold hard truth is that we all have to make a living somehow and that the reality is money is a huge driving force in the decisions we make. We need to seriously contemplate what money can and can't do for us and know when to choose between our time, ambition and values. The Cold Hard Truth was really entertaining and definitely worth borrowing from your local library.
Happy new year and thanks for making Cash Saving Tips the #1 cash savings blog. This year will be filled with new and interesting ways to save and make that dollar go the extra mile. After all we work hard for our money, so our money should work equally hard for us.
Be sure to stay tuned for lots of book reviews and great cash saving tips! There have been over 100 posts over the years. It may be time to compile them into some sort of publication. If anyone out there has experience in publishing and editting please contact me at reynoldtor@hotmail.com. I would love to turn these posts into a practical cash savings book.
2012 is going to be filled with great savings tips!
Here are some wise words from the Oracle of Omaha to start the year:
