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Is a cottage a good investment?

Posted by on Jun 26, 2014 in Mortgages, Travel | 3 comments

Summer has begun and many Canadians are flocking north to cottage country, to relax and get away from the hustle and bustle of the cities. For many Canadians, owning a cottage is a dream. There’s something about having a place to call your own. A place that your children can grow up in and build memories. And we did as well – although, my parents never purchased a cottage.

When we were young, they would rent the same wonderful cottage every year, about an hour north of us and minutes from the beach. It neighboured two other cottages, side-by-side, which my uncles had rented as well. They were pretty sizeable cottages, but we come from a pretty sizeable family and we all shared living quarters with one other. All in all, including us kids, there were about 20 of us. Many of my closest cousins were there. And some of my fondest memories were there: playing soccer in the grassy fields, swimming in the neighbourhood pool, hiking adventures and days at the beach, and catching frogs and skipping stones. We made fun and memories out of pretty much nothing.

So I completely get it and I completely get generations of cottage owners wanting to pass it down. But although the idea of it sounds lovely, my wife seems to think that because I don’t want to ‘own’ a cottage, that I’m not really a cottage person and that’s not really the case. I also like to travel and explore new places, experience different cultures and not necessarily be tied to one place. Aside from being tied to one place and not being able to afford one right now, there’s also countless other financial reasons why I don’t think it makes sense for us.

What’s it worth to you?

Unless you want to drive for a while, it’s not uncommon to see little cottages within an hour drive of us, selling for upwards of $200,000. In fact, it’s fairly common to see some going for upwards of $300,000. And unless you plan on that being your primary residence, it’s pretty pricey, especially considering the short seasons we have here. At most, I think most provinces get about two months of great summer weather – two months! July and August really are the prime cottage months with temperatures where I am, hovering around the high 20’s, with anywhere from 5-10 days above 30ºC (86ºF) and water’s generally much cooler. Yes, there are the avid cottagers that go year-round, and some who work from their cottage, but I would say those are few and far between. Saying, if you owned one, that you’d go more often and actually doing it are two different things.

But here’s where financially the thought of a cottage, just doesn’t make sense to me. I can rent a cottage for the price of about $1000/week, $2,000/week for one that sleeps about 8 people or 2 families, which essentially brings me back down to $1,000. So my thought is, would I rather spend $300,000 on a cottage, or take three-hundred $1,000 vacations? Let’s say it’s a beautiful $2,000/week cottage, $300,000 can still buy me 150 one-week vacations, 75 two-week vacations – or another way of looking at it – 75 years worth of $2,000 vacations, twice a year.

Look, even if you were to spend $10,000 to take your family on a nice big trip once a year, you would still be able to do that for the next 30 years. And that doesn’t include a pinch of maintenance costs, which can be really expensive. Decks and docks, replacing old plumbing/septic tanks, just to name a few. And it also doesn’t include the mortgage carrying costs. For most buying into the cottage market, it’s usually their second home. And after interest costs and all is said and done, that $300,000 cottage is closer to a $400,000–$500,000 cottage.

On the bright side

Now, I’m not saying cottages are bad investments. Some things hold sentimental value. And in some markets, you may be able to find a cozy little cottage for $50,000. Or maybe you live in an area where you get longer periods of sunny weather. And if you’re comfortable sharing that family cottage, there’s also the ability to turn that cottage into a rental property, in which, even a couple of months a year can help cover your annual maintenance costs and help to pay down some of your mortgage. Which depending on the area, could turn out to be a great investment, provided you can afford the upkeep costs.

Now this cottage example could be a metaphor for so many other things. Whether it’s a cottage or any other long-term investment/purchase that you’re thinking of, put aside your beverage and Muskoka chair, stop romanticizing for a second, and ask yourself if it’s worth owning. Are there other options? Or how can you get the best value out of your investment?

Dream of owning a cottage? Own a cottage (*gulp*)? Is a cottage a good investment? What are your thoughts? Leave your comments below.

Image courtesy of Evgeni Dinev / FreeDigitalPhotos.net

Worry about saving first. Then your investment performance.

Posted by on Jun 19, 2014 in Investing, Saving | 6 comments

Investment returns are important. No doubt. Just a few extra percentage points compounded over time can add tens of thousands to your portfolio or retirement nest egg. But sometimes we get too caught up in the numbers, and chasing investment performance, when we lose site of what’s arguably more important – how much we’re saving. And other times we just lose site of what we’re really getting.

The 100% return

I was having a conversation with a friend who was complaining last year when he got his annual investment performance report from his company that his investments in his company’s defined contribution retirement plan weren’t doing all that great. Now most defined contribution plans that company’s offer here in Canada seem to be restricted as to the funds they offer. My last company plan was like that. You had to pick from a pool of a little over 20 funds – of which maybe 5 were balanced funds, 5 Canadian equity funds, 5 U.S. equity funds, 5 global, 5 fixed income and so on. On the one hand it’s a good idea for the average investor, in that they don’t offer terribly risky funds – this is your retirement nest egg after all – but you also get handed a limited (crappy) selection of funds that you would probably never pick yourself. So, in the end, the returns never end up being that great, or are they?

So he was complaining about a 4% return. Not a great return. But not a terrible one either. So I joked “well, at least you’re not losing”. But I wasn’t really joking and he didn’t really seem all that amused. So I told him, “you’re not making 4%, you’re making 104%, and that’s a pretty good return to me.” He laughed, “what do you mean 104?” Most people forget that in defined contribution plans / 401k’s, where the company matches up to a certain percentage of what you contribute, they are doubling your investment right off the top. Where else can you get a return like that? I can be happy with that.

We’ve gone through a few years now of great returns. Markets across the world are at all time highs now, and continue to rise, ignoring all sensible market indicators. Low interest rates have definitely fuelled a lot of it. Where else is someone to park their money? But what happens when interest rates rise? Or are we headed for a big correction before then? No one can say for sure, and it’ll differ depending on where you live too.

If we look at the US S&P 500, since 1960, there have only been 3 years when the market did NOT experience a 5% correction. So for my defined contribution plan, I’ve been slowly moving to more conservative investments for now, preserving some of my capital. After all, I’m already getting a 100% match dollar for dollar, up to 3% of my earnings.  Sure, it would be nice to get a few extra percentage points above that. But as long as I’m not losing, I’ve already doubled my money. I’m not all that worried about a percentage here or a percentage there.

Why what you save is more important

Is what you save more important than your return? Absolutely! Let me paint this simple example. Let’s say you set aside $100/month, Warren Buffet lent you his good luck shoes and you make a great 10% return, compounded monthly. At the end of the year you made $1,256.56. Let’s say you decide to double your savings and put aside $200/month, but instead are weary of the market and decide to lock it into a safe 1-year Guaranteed Investment Certificate (GIC) bearing a paltry 2% return (compounded annually). Can you guess who comes out ahead. Right, of course, the paltry 2% GIC. At the end of the year, you’ll have accumulated $2,421.92, and all with no risk. Extrapolate both numbers 10 years, that works out to $20,484.50 and $26,519.36, respectively. A 2% return trumps the 10% return.

Now of course this may sound overly simplistic and you’re probably thinking, okay, but you’re asking me to double my savings. But you don’t have to double your savings. All I’m really saying, is if you focus all your energies on how well your investments are performing, and don’t pay attention to what your saving, you’re really not coming out any further ahead.

Of course there is the flip-side argument that if you can generate a larger return, you don’t have to save as much. And this is true. But what kind of returns are you chasing? In most cases, buying index funds, have been shown to outperform the majority of management-led funds and investment earnings are not guaranteed after all. Savings can be.

I’m not disputing the fact that investment returns are important nor that you shouldn’t try and get the best return on your investments. But I’m always cautious when the markets reach these peaks. And if you want to really bump up your investment returns, just start saving more. Save early, save often.

Image courtesy of scottchan / FreeDigitalPhotos.net

Trick yourself into saving more

Posted by on Jun 12, 2014 in Saving | 8 comments

Why is that when people start the discussion about saving more money, their first inclination is to put up barriers as to why they can’t save? It seems as if the more time we have to think about saving, the more time we have to talk ourselves out of it. Yes, life is expensive. But that should be even more of a reason, to start saving more. After all the expenses, sometimes finding the money can be tricky. But here are a handful of ways to trick yourself into saving more.

Sometimes it’s easier to save big

Research suggests that people may spend small bills more freely than large bills. And when I think about it. It’s often the case for me. I have had a $50 bill in my wallet for months now. I feel bad about breaking a $50. But in the meantime, $5, $10, and to a lesser extent, $20 bills, have come and gone. Of course you could forego using cash altogether, but that opens up a whole other can of worms.

Getting credit for using cash

As many already know, there’s a lot of evidence that points to consumers spending more money when paying with credit cards than when paying with cash. But by how much? Well, in one study by Drazen Prelec and Duncan Simester, randomly selected participants were told they would be offered the opportunity to purchase sold-out tickets to an upcoming pro basketball game. One group had to pay in cash, the other by credit card, and were then asked how much they would be willing to pay for the tickets. Those who were told they would have to pay by credit card were willing to pay over twice as much on average, as those who were told that they would have to pay by cash. Sometimes it pays to leave your credit card at home. Especially for larger purchases, cash is still king when it comes to bargaining.

Round up your spending and bank the rest

If you’re already using cash to pay for your purchases, carry bills and toss the change into your piggy bank. Or every time you make a purchase, round up to the nearest dollar or nearest five and deposit the difference into your savings account. So if you spent $18.98, throw an extra $1.02 into the piggy jar. Some debit cards now allow you to round up your spending. The only debit card that I’m aware of in Canada that does this, is the Scotiabank Bank The Rest savings program, where they automatically deposit the difference into a savings account.

Automate your savings

Whatever your goal, the simplest and by far, the most rewarding trick in the book is to automate your savings. Set aside a certain amount to be deducted from every paycheque to go towards saving for an upcoming vacation, child’s education, retirement, or whatever it may be. But unless you make it automatic, you’re relying on your memory and your motivation to save. And even in my case, that’s not a good thing.

You can set up a savings account at a small bank, virtual bank or a credit union that offers no ATM machine near you and where you do not have a checking account. This will force you to think about taking money away from your savings. I have my short-term savings going into an ING (now Tangerine) account. It has limited branches and ATMs around. And while I still can transfer freely among my online accounts, it still takes a couple days for transfers to appear. So it takes a bit a planning. Who knew hassles could be a good thing?

Bank your raises

If you get an increase in salary or wages, and just leave it in your checking account, some other expense will soon take it over. Instead live like you’re living now and bank your increases in a separate savings account. Even a paltry 2 or 3 percent raise might not seem like much now and on each paycheque. But at the end of the year, you’ll probably earn a healthy sum you can put towards an emergency fund, add to your retirement funds, or put towards that trip that you’ve always wanted.

Turn habits into dollars

Smoking, drinking, or expensive hobbies, you get the point. They all add up. Some habits/hobbies are more difficult to bury than others. But cutting back even one cigarette a day, one drink a week, or limiting your hobby spending can put a few more dollars in your pocket. Just save the extra savings, and in this case, what’s good for your wallet is also good for your health.

Snowballing your savings

Once you’ve paid off a debt, car loan, student loan, what have you, continuing making those payments – except this time – to your savings account. And watch as your previous debt payments snowball into savings rewards.

How about negative incentives?

Sites like StickK have popped up to help you track your goals. Except it’s a goal-tracker, with a bit of a twist or shall we say, penalty kick? You set what your goal is (i.e. to lose 30 lbs or pay off $1,000 in debt) and a time limit (i.e. in one month, one year, etc.) But if you fail to meet your goals you can StickK penalize you. For example, you can have it deduct $10 from your credit card, every week that you miss your goal, or some people are penalizing themselves by having it donate to an organization, political party or corporation that they really hate, if they fail. That way they’re motivated to keep on track of their goal. This is probably one of the most unorthodox ways I’ve heard of motivating you to save money. But, hey, whatever works.

As you can see, there are countless ways you can trick yourself to save, when the motivation just isn’t there. Longer-term savings take a lot more discipline, but that’s why it’s always important to give yourself little rewards along the way. Make saving fun, and the money will follow.

What methods or motivations do you use to save?

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