Monday, February 4, 2013

Good Debt Bad Debt

So there's a Globe and Mail article today on Good Debt and Bad Debt. The writer separates good debt into things like school loans, mortgages and bad debts as credit card debt and in general car loans.

I think this article simplifies things a bit. I don't think there is such a thing as good debt. I think all debt is bad. Mortgages are ok, if you are only taking out one mortgage for your own home. If you're taking on multiple mortgages for an "investment" that's just as bad as borrowing to play the stock market or to gamble. Real estate will likely go up in the long run, but if you need cash quickly, and you're caught in a downturn, it may be hard to cash out and you could be in the negative. And no, don't tell me real estate is a straight linear shot upwards. Canada is not an insular market and we've had market dips just like the rest of the world.

Car loans are always bad debt. Yes, you may need a car to get to point A to point B, but you don't need a luxury vehicle. If you have cash then buy that luxury vehicle. If you have to borrow, no matter how low rates are, it's a bad bet because you are essentially betting that you will lose. A vehicle will not appreciate in value. (Unless it's super rare.) Thus, I'd rather borrow to play the stock market. At least there's a chance your worth will go up in the end.

Tuesday, January 22, 2013

Going to school... is it worth it?

So on Til Dept Do Us Part today, Gail follows a young couple who have 60,000 worth of student debt and are not making enough money to get themselves out of this hole. I also recently was speaking to a young relative of mine, in undergrad, about the relative merits of a 4-year college/university education.

Here's the thing. Debt got me to where I am today. If I didn't take out huge loans for medical school, I wouldn't be making what I'm making now. But before I got into this debt, I knew that I would be making a lot of money, enough money to easily pay off my debt.

Problem is, many other four year degrees will get you nothing, if you don't have a plan as to what you're going to do with the degree. If you're going to school for the sake of going to school, you have got to re-examine your priorities. I have friends, who in their early 30s are still living in their parents house, with loads of student debt, and still going to school. Colleges and universities don't care about you--they care about their bottom line and getting your tuition dollars (especially true with for-profit colleges). If you're in a professional degree program (law, medicine, pharmacy, nursing, engineerign, etc), it may be worth it. If you're in an arts, science, or even a business program, you better damn well have a plan when you're done as to what you're going to do. Is it more schooling? Or is it work experience.

From my experience, employers desire work experience. You can always go back to get that Masters degree later. Going to graduate school (unless you are in medicine or law or another professional degree program) is delaying the inevitable--finding a job. You can easily be that friend of mine who is in his 30s and still undertaking a Masters degree (after having already achieved one Masters).

As I've stated before, your financial situation depends not just on how much you make, but WHEN you make that money, HOW you invest that money, and WHAT you spend your money on. By going to school perpetually, you are delaying making money--no problem, you say, I'll just make it up when I'm done. But the money you make in your 20s, if invested properly, is worth way more than the money you make later on in life. As a doctor, I didn't start making money until age 26 (residency) and a few years later, I then started making a real income. I lost 4-8 years of income making potential, money that could've been invested. Now, I make a huge income now, and to me, it's still worth it, but for many degrees, it's not.

So before you undertake that expensive degree, ask yourself what your future goals are. Don't just go to school because your parents are telling you to go. Going to a trade school or in the case of a couple of my other relatives, who dropped out of college because they didn't like school and went into business, starting low and working themselves up, can be much more satisfying financially and career-wise.

Wednesday, January 16, 2013

Pay down the mortgage, or invest?

A new article was posted on CBC today on mortgage debt and how one should pay it down.

I think this article is too simplistic. It tells people to pay off the mortgage now rather than invest. Mortgage rates right now are at historic lows, and if you have a locked in rate for a few years, I think you should use the money you have to invest, in stable, well established stocks that pay a good dividend. Then, when your terms are almost up, if rates have risen, use that money to then pay down the mortgage.

Stocks are risky, but not stocks are the same. There are many stable companies that will give you good dividends and will also give you a decent capital gain, or if you're unlucky a slight loss. Index funds are generally very safe long-term, and also give out dividends. Of course, the last few years in real estate in Canada, we're led to believe that RE goes up forever, which is not true, of course. RE is plunging at ground zero, although not reported by the main stream media, some houses in Richmond, West Van, Van West are off about 20% from last year's assessed value already.

Friday, January 11, 2013

You don't borrow money to gamble, so why would you to invest?

I think most people would agree with me that borrowing money to gamble is a bad bad thing. So why would you borrow money to buy stocks, or worse, real estate? I got a call from a large Canadian bank recently, asking me all sorts of questions about my investments. The woman then goes to say that rates are so low right now that you should borrow some more money to invest in a condo or even a house (even though I already told her I had a mortgage). First, real estate is falling right now in Vancouver. Second, the price to rent ratio is so out of whack that it makes no financial sense to buy a condo even if you had the cash to do so.

Check out this article. Let's say you can buy a 1-br in Vancouver for about 275,000 right now (all cash transaction). You can rent this out for about 1000 a month. But factor in real estate transaction fees, lawyer fees, property taxes, maintenance fees, and your rental income is only going to be about 2% of your initial investment (not including any capital gains or losses). If you look at stocks, you can certainly find many stocks that give annual dividend yields of more than 2%, minus all the headaches of looking for a good tenant, the upkeep, etc. Not to mention that transaction fees are cheap in buying stocks, and it's more liquid.Thing is, most people don't have all cash to buy a 275,000 condo, and you have to take out another mortgage to do so. Real estate may go back up, but for now, I see it as a big gamble, precisely because you have to take out another loan to buy this "investment." Well, I'll just wait until the market is good... well what if something unforeseen happens and you need cash right away? A death in the family? Job loss? Need to finance your kids' education? You can go under very quickly if you don't have a sufficient downpayment for this "investment." At least for stocks, if you lose money, you're losing money you already have, as you normally wouldn't consider borrowing to buy stocks or to go to the casino.

This is why Canadians are in big trouble right now, particularly those who've overleveraged themselves to buy depreciating assets, like real estate and luxury cars. And as the article above shows, Canadian banks are not more conservative than American banks. If rates rise just 1%, that couple in that article is in big trouble, as would be many of their Canadian brethren.

Monday, January 7, 2013

Travel insurance, a rip-off?

As a doctor, I see a lot of elderly patients who take off to the US for the winter. Every year, I warn them of the costs of medical care and to make sure that not only they have travel insurance, but that they understand the policy and what they're signing up for. For instance, I once had this patient who wanted to embellish a bit on his questionnaire, that he didn't have a certain condition when it was stated in his chart that he did. I warned him that should something happen, the insurance company will come looking in his medical chart (with his consent; which he has to give if he wants them to process the claim) to see if he answered everything in the questionnaire truthfully. He wanted to answer no to a certain question to save on the premiums, and I told him you might as well not pay the premiums then because you are buying no coverage at all, essentially.

So CBC runs this story on a couple of poor seniors duped by insurance companies when they had health issues in the US that they didn't cover. One guy had a bowel condition that was diagnosed in the 60s, for which he still took medications, yet he didn't report it, claiming he thought it was irrelevant. The other answered a question incorrectly regarding the start of her policy and whether she had certain ailments 12 months prior. As much as I would like to feel sympathy for these seniors, it's hard to. For instance, for me, a young guy in my 30s, I had to answer a question whether I had a physical by my doctor in the last two years to qualify for the cheaper rate. I hadn't, so I answered no to that. The thing is, very few people my age go to see the doctor for a complete physical. In fact, in BC, if you're healthy, the government doesn't even cover complete exams (if your doctor is billing the government for complete physicals and you're completely healthy, other than for PAP exams, he or she probably shouldn't, unless you had some medical condition that justifies a complete exam). I know that had I answered yes, and God forbid something happened while I was on vacation, the insurance company would not cover me for false representation and there's nothing I can do about it.

My point is, if you're going away and you're buying additional travel insurance, make sure you know what you're getting into. Answer every question truthfully. THink of it this way, if you lie, all you are buying is a false sense of security. It's equivalent to buying no coverage at all essentially.

Thankfully for me, I am incorporated and thus have my own corporation buy this great plan for me that covers pre-existing conditions. I pay a ton (out of my corporation with a much lower tax rate), but I feel secure knowing that I will be covered.

Friday, January 4, 2013

Real estate crash? Fiscal cliff averted? Stocks back to bullish territory? Happy New Year!

Happy New Year to everyone. After some well-deserved rest, I'm back to work and back to reality.

A lot of things have happened since I last posted. First is Vancouver real estate. Sales are slumping. Prices are starting to drop. But as long as sellers refuse to sell and will relist in the Spring when they hope prices will rebound, this will not be reflected in any official statistics. I maintain the outlook that shorter term and even medium term, RE is not a good investment. There are about 15 townhouse units out of 35 on sale where I live; only one has sold since January 2012. That's 15 YEARS of inventory at today's prices. And this is discounting the fact that numerous units are still going up around us. When people start running out of money, or when interest rates inevitably rise, people will have to drop their prices. My advice for those waiting to get into the market: don't. Buy if you can afford it and as a way to diversify your assets. I bought near the peak, with a huge (30%) down payment and what I pay right now for my mortgage is about the same as what I would pay for rent. Buy if you plan on living there for a long time--if you have a stable job and are stable in life. Don't buy if you're planning on leaving Vancouver in the near future. You will be screwed. Definitely don't buy investment properties--dumbest mistake people can make.

Which leads to my second point about the fiscal cliff. So it's been averted so far and stocks are bullish. Stocks are more liquid that RE. If you're renting, invest any positive cash flow that you don't need in well-established companies like Coca Cola, GE, Telus, Rogers, banking stocks, etc. Buy stocks that give a good dividend and re-invest the dividends. Then when real estate drops, get into the market then.

So Happy New Year everyone and all the best for 2013!

Friday, December 28, 2012

Performance service plans... a waste of money? or a good protection?

So I was at the local Best Buy for Boxing day the other day (and trust me, that was enough to get me and my wife running back home). We were shopping for a 3DS XL. I know I said before I didn't need any electronics but we couldn't resist the pull of a 150 3DS XL (regular price 200 bucks). Besides, after trading in our old one on ebay, this upgrade was only about 70 bucks, which is worth it in my opinion because video gaming is where my wife and I get almost all of our entertainment (and yes, we all need entertainment, because we're humans).

Anyway, the point of this post isn't to brag that we bought a 3DS XL. It's to discuss the performance protection plan the customer service person was peddling. Its a 3 year plan and it's to protect your device from power surges and any other malfunction.I think it was something like 40 bucks. I never buy these plans and neither should you. These performance service plans are big winfalls for stores like Best Buy because most people's electronics don't break down within three years, if you handle it properly. The plan specifically excludes any damage that occurs outside of "normal daily use" whatever that means.

I've bought these service plans before. About 8 years ago, my parents bought a big TV from a now-defunct Vancouver retailer. They bought the service plan. Less than a year later the screen was flickering so my parents took it back in, but they said that they would not cover it as the problem was in the back lighting, which was excluded from the contract. So we essentially paid the extra several hundred dollars for no reason. A year or two later, that retailer went out of business anyway. Of course, nobody reads the contracts.

I remember a few years ago, I bought some really cheap clock radio from Radio Shack. The price of the radio was not more than 20 bucks. I could've bought a service plan for another 7 bucks, which was 30% of the purchase price! God, if the cheap clock radio I bought broke down, I will just buy another one. To day, of course, the radio is still working.

Point is, yes, electronics do break down. But usually the manufacturer's warranty is good enough. I cannot justify buying these plans because when you really do need it, more often than not they don't cover anything.