The Invisible Tax

This article is about that unseen tax that on average steals 2-3% of our money’s spending power each year. This tax is known as inflation. On average our money loses 2 to 3% of it’s value each year, this is mainly due to the increase in the amount of money circulating in the country. There are many other complex factors involved that influence inflation rates, but the important thing to note is that on average our money loses value. This means that in about 30 years what would have cost us a $1 (say a can of pop) will cost $10, a whopping 10 fold increase (that better be the best damned tasting pop ever!).

Inflation is also known as “The Widow’s Worse Enemy” (sorry for the sexist remark). It was given this name during World War I. During this period most men went off to fight and when they did not return their wives would be left a lump sum settlement from the government. Being that men were the main bread winners (earners) during that time the widows would have to invest their money to live off the interest. Most widows would invest in a fixed income investment (i.e. bonds) that would pay a constant interest rate each month. Widows who depended on their investments to survive saw the cost of living persistently and gradually increase each year due to inflation, while their investment income remained the same. Most widows in this situation were forced to work in old age or suffered alone in poverty.

Before we can even worry about inflation it is critical to pay off all your bad debt (Check out: Know your Debt & pay-off-debt-or-invest.html). After your debts are settled you can begin to invest (Check out: top-4-forms-of-passive-income.html). When looking for an investment you have to beat the average inflation rate. Otherwise you’re not producing any extra value with your investment. Most “high-interest” savings account offer an interest rate that is a complete joke. I believe most banks are offering something like 1%. That means that your money is losing value at 2% a year instead of 3%. Leaving your money in one of these accounts would be a bad idea. Your money has to be in some kind of investment vehicle that at the very least is beating the average inflation rate.

There will be many questions to ask yourself when examining investment options. One of the first questions you should always ask yourself is: “will my return on investment keep pace with the average inflation rate (2-3%).” Having your money in the bank is not a terrible idea. It’s a safe place to accumulate your savings, until you have a sizable sum it's difficult to make a serious investment. When your savings do grow to a large enough sum (say more than $1000 or so), then it’s time to start thinking of ways you can make that money work for you. Don’t let the invisible tax erode your spending power. Become a wise investor and kick inflation’s ass!

Check out this Rich Dad video on inflation:

Rich Dad Scam

I recently watched a video from CBC marketplace in which Robert Kiyosaki author of Rich Dad Poor Dad was exposed as a fraudster. I would not immediately discredit all his work. I do think he writes entertaining, easy to understand, insiteful personal finance books. However, Robert may have gotten too greedy with his latest attempt at increasing his earnings.

In his books he often talks about fundamental concepts on how money works and how important cashflow is rather than looking for large jackpots (or what he calls capital gains). Robert Kiyosaki has many investments that brings him cashflow such as: rental property, stocks, board games, royalties from books, and licensing of his Rich Dad brand. Licensing of his Rich Dad brand is where Robert has gotten into trouble. Robert Kiyosaki has relentlessly marketed his Rich Dad brand through his books and educational board games. He now uses his brand to sell educational seminars. Robert does not actually teach any of these seminars but licenses out his Rich Dad brand to slick huckster salesman to sell expensive seminars that provide very little value to their students.

Check out this link from CBC Marketplace which has a video that exposes Robert Kiyosaki's grave mistake. It seems that Robert's greed may have irreversibly devastated his Rich Dad brand which he worked so hard to build. I think that his books still have merit and are still worth reading. However, some of Robert's choices with his Rich Dad brand were not well thought out, unethical, and may cost him his life's work.

Road to Rich Dad: Who's Getting Rich Off Rich Dad?

http://www.cbc.ca/marketplace/2010/road_to_rich_dad/main.html

If you enjoyed this article be sure to check out:

Top 3 Signs of a Scam

http://reynold-savemoney.blogspot.com/2010/07/top-3-signs-of-scam.html

The 4 Hour Work Week Scam

http://reynold-savemoney.blogspot.com/2010/07/4-hour-workweek-is-it-scam.html

Conspiracy of the Rich

Robert Kiyosaki (a.k.a. Rich Dad) author of Rich Dad Poor Dad, a bestselling personal finance book, has recently come out with a book entitled the Conspiracy of the Rich. This article does not only provide a synopsis of the book, but I also wrote this in response to some comments about my last article. The comments were addressing today's education system in Canada and how it avoids teaching children valuable personal finance information. Schools rarely teach basic money management, the ideas of debt and interest, or how to invest for the future. According to Rich Dad, this is not an accident.

Our school system is based on the early 20th century Prussian education system. Back then Prussia was a communist country and the education system was training children to be future government employees. Under these circumstances, Prussia needed workers that would obey authority and stay in line with political agendas set by the communist dictators. In order to train children to become docile, who would later become adults in the work force, they designed an education system similar to the one we have today.

This education system starts with a teacher at the head of the class with 20 to 30 students sitting and listening to what the teacher has to say (who is the authority figure and disciplinarian). The students are constantly searching for praise from the teacher, while trying to avoid punishment. The students therefore have to search for the "right answers" and abide by the rules. This fosters a herd mentality which is perfect for a communist dictatorship who is trying to train the next generation of government workers. So in this environment you're not rewarded for trying new things or questioning the authority of others.

This education system has it's advantages. It is an efficient use of human resources (i.e. 1 teacher to 30 students). However, we can clearly see the drawbacks since it stomps out creative ingenuity and independent thought. Why would the uber rich want to have an education system like this. First off, the uber rich own large corporations and would rather have you as an employee than an entrepreneur who could later become their competitor. The rich, like the communist dictators, want docile employees who are hard working and who don't question their authority.

This brings us to the comment of why personal finance is not covered well in our current education system. The financial institutions such as banks (i.e. TD Canada Trust, Scotia Bank, Royal Bank of Canada, and Bank of Montreal) are a multi-billionaire dollar industry. They are in the business of selling financial products (i.e. mutual funds, mortgages, credit cards, etc...). The more financial knowledge you have, the less money they make. I know that banks care about their bottom line just like any other company, so it is very plausible that they don't really want you to have a good handle on your personal finances. After all TD would love you to pay management fees for their mutual funds (because it is too difficult to manage your own money) and have you making minimum payments on your credit card (because nobody told you that 19% interest is highway robbery).

Conspiracy of the Rich could just be a cracked out theory, like Major League Baseball trying to steal our thoughts (Simpson's reference). However, Kiyosaki makes a plausible argument and at least an entertaining read. Hopefully, our education system will change and start to teach the leaders of tomorrow better personal finance management, until then be sure to bookmark Cash Saving Tips.

Check out this video from Rich Dad about his new book:


If you like this article also check out:

Rich Dad Poor Dad, What's an Asset?
http://reynold-savemoney.blogspot.com/2010/07/rich-dad-poor-dad-whats-asset.html

Rich Dad Lesson: 3 Types of Income
http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html

Top 4 Forms of Passive Income
http://reynold-savemoney.blogspot.com/2010/08/top-4-forms-of-passive-income.html

Know Your Debt!
http://reynold-savemoney.blogspot.com/2010/08/top-4-forms-of-passive-income.html

Rules of Retirement Have Changed!

We all occasionally daydream of the day when we don't have to work anymore. Images of feet in the sand and a cold beer in hand come to mind. For most of us retirement is far from reality and it may seem to far away to think about. Now with the recent changes to company and government pension funds retirement may seem more like fantasy than reality.

First of all it's important to note that the rules of retirement has changed. In the past people would work at one company for 30 years or so and get a pension where 70% of there annual salary would be paid to them for the remainder of their life. This type of retirement plan is known as a defined benefit plan. Most companies have found that a defined benefit plan is too costly to their bottom line since they have to ensure they can pay for employees that are no longer working. Therefore, companies are moving towards a new type of pension plan known as a defined contribution plan. The way this pension plan works is the employee contributes a certain portion of their pay cheque (usually 5-10%) into a registered retirement savings plan (RRSP) and the company matches the contribution.

There is a dramatic difference between these two types of pension plans. The pro to a defined benefit is that the company will ensure that you get a steady pay cheque after you retire (unless the company goes bankrupt). The con is that you have to stay with the same company for 30 years, which is happening less and less these days. The pro to a defined contribution plan is that it is usually portable, which means it travels with you if switch to a different company sometime down the line. The con is that now the employee is responsible for the management of their own retirement fund (to a certain extent, more on this in future articles), so if the markets perform horribly just as you are retiring you are up the creek without a paddle.

So now that we know the rules have changed and that our retirement is now our own responsibility, what can we do to ensure that we can retire? The simple answer is to set a goal, calculate your current cost of living, and to save and invest wisely so that your savings and passive income can support your cost of living. This is one article that can lead to endless topics, but the most important step is to realize that the retirement rules have changed and we need to change our financial planning accordingly.

For more on passive income check out the following articles.

Top 4 Forms of Passive Income
http://reynold-savemoney.blogspot.com/2010/08/top-4-forms-of-passive-income.html

Rich Dad Lesson: 3 Types of Income
http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html


Here is a clip from http://www.howdini.com/ of David Bach the author of Start Late, Finish Rich on saving for retirement:


For information on "The Automatic Millionaire" by David Bach check out: http://reynold-savemoney.blogspot.com/2010/09/whats-your-latte-factor-automatic.html

Top 4 Forms of Passive Income

There are limitless possibilities when it comes to generating passive income. Passive income is a way of earning income without actively trading your time for money. Conversely earned/active income is when your time is traded for money, like when we earn a wage or get paid a salary. We’re raised to believe that we should get an education, then get a secure job so we can earn an income. (For further information about the different types of income check out http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html). Although, this is an excellent way of earning a living this is not the way the wealthy earn a living. The wealthy maximize their passive income streams. Passive income also comes with huge tax breaks, which is the biggest expense in life. Therefore, we should learn to maximize our passive income streams. Here are the top 4 ways of maximizing your passive income.

1) Stocks and Bonds – this form of passive income is also known as portfolio income. Depending on the stock you purchase you will be either paid a monthly or quarterly (every 3 months) dividend. This is to reward the shareholders for the risk they take holding the stock. There are some stocks that do not pay a dividend at all, these companies believe that they produce more value for their shareholders by reinvesting the money back into the company, hopefully leading to an increase in share price. Since we are talking about passive income it’s best to choose a stable company that pays out dividends on a regular consistent basis.

When a country or company is in need of money they can issue bonds which is a form of loan. I won't be getting into the details of bond trading today, since bond trading is a very complex topic. Basically they are seen as a much safer investment than stocks, however the returns are typically lower. Bonds pay monthly coupons which is the interest on the loan. For beginners who want to get into the bond market, you can start by purchasing some bond index mutual funds with low management fees at your local bank.

2) Invent Something – people who have patented inventions can make a fortune, if their invention sells well. This is easier said then done, however we all have had that aha! moment in our lives where we thought of a great idea. The trick is writing it down, designing, testing, building your invention, finding a patent lawyer and selling your idea. Also easier said then done (passive income sounds easy but can be quite challenging to earn). However, a lot of inventors have taken this route to maximize their passive income, like the guy who invented the pet rock. You can also think of writing a book. I know of one professor who wrote a mystery novel when he retired. Not sure if it’s selling, but if you love writing you can turn your ideas into a great read.

3) Rental Property – owning rental property is definitely one of the top ways of earning passive income. There are several ways you can get into the property game. Fire sales and foreclosures pop up often, where the original home owner cannot afford to make their payments. In these cases you can often get a great bargain on property. Renting property is not going to earn you a huge income as long as you have a mortgage on the property. However, over time you will own a huge asset. Your rental property can then be your collateral for a low interest loan to purchase more property! If the idea of dealing with tenants is already giving you a headache, you can hire a property manager (your rent may have to increase). For more on investing in property check out: http://reynold-savemoney.blogspot.com/2010/07/your-home-one-of-best-invesments-youll.html.

4) Build a Business – building a business can be a lot of work at first, but also very rewarding. Once the business system is set up you may not have to put as much time into it if you can hire a manager to take over the daily responsibilities. The Four Hour Work Week by Timothy Ferriss is an excellent book that talks about building efficient business systems (http://reynold-savemoney.blogspot.com/2010/07/4-hour-workweek.html). Another amazing read that will inspire you to become an entrepreneur is entitled Start Small Finish Big by Frank DeLuca who started the Subway franchise (http://reynold-savemoney.blogspot.com/2010/06/start-small.html).

I've included a video from our Rich Dad (Robert Kiyosaki) who briefly describes the different kinds of income.

Know Your Debt!

Money can buy almost anything (except love). You can even purchase money with money. The cost of money is determined by interest rates when it is loaned out. Interest is a certain percentage of the total loan amount (the principal) that is paid over a period of time, until both the principal and all the accrued interest is paid off. The longer you hold the loan the more interest you pay. For instance if you were to borrow $1000 (the principal) from the bank at an annual interest rate of 5%, than at the end of the year you will owe $1050. In this case the cost of borrowing for over a year was $50.

All of us, at one point or another will take on some sort of debt. There are many forms of debt, for example: a mortgage on a home, financing on a vehicle, or credit card debt (consumer debt). With all these different forms it is important to be able to distinguish between what a good form of debt is and a bad form of debt.

We are raised on the belief that all debt is bad. That having to pay any interest at all is a bad thing. The truth is there are good forms and bad forms of debt. Being able to distinguish between the two is a critical component of building our financial intelligence. When we can distinguish between the two, we can attempt to eliminate all of our bad debt in our life and take on as much good debt as we can safely handle. Let’s take a look at some of the differences.

Good Debt
1) Mortgage on a Rental Property – this is a beautiful example of good debt. After making a down payment on your rental property you can use the rent money you collect from the tenants to pay down the mortgage. You won’t make a huge profit as long as the mortgage is being paid off, but once the mortgage is paid off you will have a nice profit and have a huge asset under your name.

2) Student Loan – investing in your education is always a good thing. People who have a university degree or college diploma make on average 10-20% more on their yearly salary than someone who only finished with a high school diploma. Getting a quality education is important since modern careers demand more education.

3) Debt for an Investment Where the Return is Greater than the Interest Accrued – in our example from above where $1000 was borrowed over a year and the interest accrued was $50 (at an annual interest rate of 5%), good debt would be if the loan was invested in anything with a greater than 5% annual rate of return. For example, if you were able to invest the money with a 7% return, you would have $1070 at the end of year. In this case you have made $20 out of nothing!

Bad Debt
1) Consumer/Credit Card Debt – this is the worst kind of debt imaginable. Imagine buying a pair of jeans for $50 and making the minimum payment on your credit card. Interest rates on credit cards vary between 10-20%, which is incredibly high. Making the minimum payment on your card for your jeans will end up costing you something on the order of $200 over 3 years. So the lesson here is to always pay down your credit cards otherwise you’ll be paying an exorbitant amount of interest.

2) Financing for a Vehicle – unless you get 0% financing on a vehicle, any financing on your vehicle is a bad thing. A car losses 15-20% of its value as soon as it’s driven off the lot. Not a good investment at all. If you have to make interest payments on an asset that is constantly losing value, it is not a good investment. In this case you should try to buy a used car and drive it as long as possible (this is how you get the most value out of your vehicle). Check out this archived article about purchasing a used car: http://reynold-savemoney.blogspot.com/2010/06/buy-used-rather-than-new.html. Car dealers love it if you pay for the car all at once, if you can pay for the car in full you can usually negotiate a better deal!

3) Mortgage on Your Own Home – the mortgage on your own home is not necessarily good debt. This is a drastic contrast from a rental property where the mortgage is pretty much paid by the tenants (good debt). In this case the mortgage on your own home is paid by you! You want to pay down your mortage on your own home as quickly as possible. Whereas for a rental property you could amortize (length of the loan) your mortgage over a longer period, as long as your payments are below the monthly rent you receive from your tenants. So in the case of the rental property, it creates cashflow. While owning your own home takes away from your cashflow. This is the reason why Rich Dad (Robert Kiyosaki) believes that your home is not an asset (http://reynold-savemoney.blogspot.com/2010/07/rich-dad-poor-dad-whats-asset.html). So be sure to pay off your mortgage quickly and perhaps rent out your basement to supplement your income and pay off your mortgage faster.

Here's another lesson from our Rich Dad:

Expand Your Means! Another Rich Dad Lesson

The other day I was out with a friend. We were sitting on the patio at our local pub sipping on some suds and enjoying the beautiful summer evening. We were discussing our summer plans and she mentioned that she'd love to go see a football game in Toronto. Unfortunately, she was currently on a job hunt and unemployed which meant funds were low and this particular game was going to be pretty costly. Immediately she said "I can't really afford it."

This one phrase is really the killer of ambition, drive and ingenuity. It's this phrase that can really be detrimental to our financial livelihood. As we were growing up we were taught that the best way to handle our personal finances is to live well below our means and save. Nobody really gave us the advice that we should seek to expand our means so that we can afford the things we enjoy most in life. Sure, our parents always told us to go get an education and get a secure well paying job, but that's not quite the same as telling someone they should expand their means to get the most out of life.

This one phrase "I can't afford it" is really a brick wall. After it is said that's the end of the conversation and the end of the financial road. Instead we should be asking "how can I afford this?" The subtle wording is enough to unleash a brainstorm of activity. Once you start asking this question your paradigms shift and your whole financial situation takes a drastic 180 turn. "How can I afford this?" is a phrase that unleashes the entrepreneurial spirit and your mind to delve into a world of possibilities. It's well understood that money is traded for things of value, so with this little phrase we begin to think about ways we can add value to the economy and the world!

So the next time you're about to say to yourself "I can't really afford that", change it to this question "how can I afford that?" and unleash the possibilities!

Included is a video from our Rich Dad.

Rich Dad Lesson: 3 Types of Income

Like I promised here is another lesson from the book Rich Dad Poor Dad by Robert Kiyosaki. Robert explains that he is often approached by reporters for interviews, where he is asked what he does for a living and how much he gets paid. He usually tells the reporter that he makes a small salary from working at his company (compared with Fortune 500 CEO's), and that's usually where the interview ends. What most reporters fail to ask Robert is if he has other sources of income. Robert is rarely asked what kind of business he is in, what investments he has made and if he has other sources of income.

In Kiyosaki's book he explains that there are three types of income. There is active income, passive income and portfolio income.

1) Active income comes from your full-time job where you work 9-5. Active income typically comes from exchanging your time for a salary or wage.

2)Passive income is the opposite of active income. This is where you receive cash flow without actively putting in long hours. Passive income comes from what Robert defines as an "asset" (see article http://reynold-savemoney.blogspot.com/2010/07/rich-dad-poor-dad-whats-asset.html ). In this case it can be something like owning rental property, where tennants pay you rent on a monthly basis.

3) Finally, there is portfolio income which comes in the form of stocks and bonds. When you own these types of investments you receive cash flow in the form of dividends, distributions and coupons.

Reporters often fail to ask what are Robert's passive income streams, they are only interested in his active income or how much he earns at the job he works. They fail to notice that he owns apartments, stocks, bonds and patents. He has published various books that he continues to receive royalties for. He owns patents on board games that he invented to help people learn about personal finances. These patents provide Robert with a constant flow of cash.

We learn from a young age that we should go to school, get good grades, so that we can get a high paying job. We are told to strive to become doctors or lawyers. Doctors and lawyers make a great salary, however they have to put in their time and expertise to earn their salary. These professionals are limited in their earnings by the amount of hours they can work in a day. So, it's important to understand the other forms of income, such as passive and portfolio income if your goal is financial freedom!

Your Home - One of the Best Investments You'll Make!

After I published my last post I had a discussion with a friend. She said that she was now worried about buying a place to live since she always thought that purchasing a home was a good investment. My last post stated that Robert Kiyosaki author of Rich Dad Poor Dad did not consider a home as an "asset" since it does not generate cash flow. Because of this Kiyosaki believed a home is more of an expense than an asset. Without getting into details about how Kiyosaki defines an asset, I think that my friend is right and that your home is one of the best investments you will ever make.

First of all no matter what happens in life we all need a roof over our heads. When we rent a house or apartment money goes into the pockets of landlords. You can claim a bit of it on income tax but most of the money is loss. When you purchase a home however, whether it's a house or a condo, money is paid to the mortgage every month (given that you did not pay for it all upfront). With each mortgage payment a portion goes to the bank as interest and a portion goes to paying the principal of the loan. The interest portion is loss and is known as the cost of borrowing. The portion that gets paid toward the principal becomes yours and is known as home equity.

Now the reason Kiyosaki thinks that a home is not a good asset is that you only access your profits on the home when you sell it. Typically it is not a good idea to buy and sell your home over short periods of time since it doesn't have time to appreciate. With little time to appreciate your profits will be eaten up in real estate, lawyer, land transfer taxes, moving expenses etc... . So it's usually a good idea to own your place for a while before you decide to sell it again.

That being said there are other reasons why owning a home is good investment besides providing you with a place to live. Owning a home with multiple rooms can allow you to rent out some rooms to help pay for your mortgage which ends up as home equity. If you have a separate entrance to a separate basement apartment, even better! Another reason is that if you own a small home business you can expense part of your mortgage. Finally, owning property gives you incredible leverage. Leverage is the ability to take a home equity loan with your home as collateral. Banks will lend you money at a very low interest rate when it is backed by your property. If you default on payments however you can get your property repossed.

Why would you want to take a large loan out on your home? If you have any other debts that may be charging higher interest rates it would be best to pay them off using money from your home since the interest will likely be less. Also if an investments yields a higher rate of return than the interest you're paying on the home equity loan than you may as well be using money from that. Sometimes the bank will not loan money to finance a business idea or anything else you may want money for, if the bank thinks it's too risky. In this case a home equity loan is a no questions asked low interest loan. So with all those reasons to own what are you waiting for? Stop renting!

Rich Dad Poor Dad: What's an asset?

I hope that you've had a chance to look into some of the books about personal finance I've recommended in the past. Rich Dad Poor Dad is one that has been around for a while now. Robert Kiyosaki has created an entire brand around the title of this book which has its own line of instructional board games and personal finance seminars, not to mention a whole slew of other books. The ideas in his book can be a bit abstract sometimes but very insightful once you understand what he's getting at. There are many lessons in which he preaches in his book, I will try to go over a few of them briefly, but to get the full impact of the lessons it would be best to give it a read.

The story in which Kiyosaki tells is one of growing up with two dads. One is his biological father and the other is his best friend's father. Both have great influence over Kiyosaki as he grows up, but have very different outlooks on life and how to go about making a living. Kiyosaki's biological father is known as Poor Dad. He made a living as a teacher who eventually became the superintendent of the entire district school board. He always preached to Kiyosaki that he should get an education then get a secure well paying job. Kiyosaki's Rich Dad on the other hand made a living as an entrepeneur who owned several businesses. Rich Dad preached that the path to freedom and wealth was to own and operate businesses. Kiyosaki was always confused by the lessons taught by his Dads since they differed greatly from one another. Poor Dad's mentality on living life was very risk adverse while Rich Dad's mentality on living life was full of risk.

For now I'll leave that lesson about entrepeneurship since it can be very lengthy. I will be sure to post more on Kiyosaki's entrepeneurial lessons in the future. Another important lesson in his book is when Kiyosaki creates a definition for an "asset." He defines an asset as something that provides positive cash flow. He tries to explain how most people are confusing what an actual asset is, since a majority of people think there biggest asset is their home. Although you are building equity in home ownership, it does not provide a positive stream of income (unless it's a rental property). The important thing to note is that your home is more of an expense then it is an asset. Every month you have to pay property tax, utilities, a mortgage and maintenance fees. In the end you are working for your home, your home is not working for you. It does not actually put money in your pocket at the end of the day. Once you understand what Kiyosaki defines as an asset and can distinguish between what is an asset and what is an expense, than the path to true wealth is to gain as many assets as possible.

Rich Dad Poor Dad is filled with valuable lessons. I will have more posts in the future about the many different lessons from Rich Dad Poor Dad. The one thing that I really feel that this book lacks however is the concrete examples of how Kiyosaki would go about building wealth. He explains a lot of principles but does not go into to many details. He leaves it up to the reader to go out and get the information. The lessons are important and they are quite inspiring. I highly recommend starting with this book and reading some more of Kiyosaki's work in the Rich Dad series.