Credit life insurance is purchased so that the balance of your car loan or credit line would be covered if you die before your debt is paid.

As with many of the policies in the Insurance You Can Do Without series, credit life insurance in too expensive compared to the premiums for term life insurance. With a set amount such as a car loan, this is made even worse since the amount insurance declines as you pay down the loan. The reason it declines with the amount owed is that this form of insurance only protects the bank that lent you the money. If you were to die, the pay out goes straight to the bank. With term life insurance, you set an amount to cover all your debts, plus an additional amount to cover your salary or maybe your children’s education. If you’re debt is reduced before you die, the insurance payout would still be at it’s original amount, so your beneficiaries would receive a larger amount after the debts are paid.

If the cost of credit life insurance, compared to what you get for it, hasn’t made you want to cancel and sign up for proper life insurance, then this might have you getting some life insurance quotes. If you’ve ever signed up for credit life insurance, did you notice how easy it is to get it? There are rather simple, vague health questions and no tests required. If you have a pre-existing condition, this might make you think that this type of insurance is easier to qualify for than term life insurance. The problem is that if you were to die and a claim is made, the insurance company would then begin their post-claim underwriting process. This means that the insurer will decide at that point if you actually qualify to receive a payout, even though you may have been paying premiums for years.

Everyone happy with life insurance premiums? Of course not – we all begrudge paying any type of insurance premiums, and life insurance is likely at the top of the list. Combine that with an industry that seems fond of overselling, and you’ve got a country full of consumers who are always suspicious that they’re overpaying for life insurance. So here’s a list of concrete examples you can use to ensure you’re paying the lowest premiums.
Ask for a Compulife(R) quote. Compulife is a software company that provides insurance companies and brokers with a database of insurance company premiums. That way you’ve got most of the companies available to you, sorted by premium. Otherwise you’re starting with the foregone conclusion of just working with your agent’s favourite 3 companies. Most brokers have the ability to shop the market, but not all will unless you specifically ask. And if you’re being sold on other factors like large companies, then don’t you want the cheapest, large company? Or maybe you like the savings of a smaller company (aside: there’s no correlation between size and competitiveness. Large and small companies both frequently have competitive premiums.) Compulife maintains a free online life insurance quote system for consumers at www.term4sale.ca. I also run the same database on my website at www.insurecan.com. Same numbers on both sites, my website has nicer pictures though.

Size doesn’t matter. Unless you’re shopping for some huge amount of life insurance, a small company is as good (or as bad, depends on your perspective) as a large company. If you’re concerned about stability, there’s no correlation in Canada between company size and stability that I’ve seen. Plus, the entire industry belongs to an organization called Assuris, where they all guarantee all the other companies’ life insurance policies within certain limits. So if a smaller company is cheaper, it’s probably as good as a more expensive ‘big’ company. Either way, if you’ve got a Compulife(R) quote, and you do want a larger company or a brand name, you’ll be able to define how much extra it’ll cost you to deal with a specific company just by looking at the quote.

Quit smoking – anything. Nicotine or marijuana even once in the past year means you’ll get smoker rates and that’s about double the nonsmoker premiums. Pipe and cigar smokers are occassionally an exception. But in the end, if you can quit you can lower your premiums. And if you have quit, then after a year contact your existing insurance company for reconsideration.

If you recently quit smoking or are planning on it, buy a shorter term. If you need 20 year term for example, buy a 10 year term for now. Then once you quit smoking for a full year requalify for non-smoker premiums and then bump your policy type up to a 20 year term. Between now and then you’ll be paying the cheaper 20 year term rates. There are a few life insurance companies that offer you the ability to bump up from a 10 year term to a 20 year term in the first five years, you may want to investigate those. As in #4, make sure you buy a policy that has a conversion option.

Having the right amount is more important than having the right type. If you’re on a restricted budget, buy a shorter term rather than buying less life insurance. That way if you die (which is what we’re preparing for here) you’ve got the right coverage. And I assure you, nobody who’s received a death claim has ever cared if the insured had whole life or 10 year term – we only ever care ‘how much’. This strategy means you need to take a medical exam and buy a new policy in the future, so make sure you only buy term insurance that has a ‘conversion’ priviledge. This lets you buy permanent insurance with no medical exam should anything go wrong medically.

Rated or expect to be? Have your broker ‘pre-shop’ companies. A broker can take down information (more is better) and contact a bunch of companies to get an initial estimate. Sometimes you can find a wildcard company that’ll give you a much lower rating than other companies. And sometimes, you can’t find that wildcard company – but there’s no harm in asking. Insurance companies and brokers dislike this extra work, but it’s your pocketbook – make them do it. If you’ve been rated on your policy already, first accept the policy, then have your broker do the shopping after the fact. Here’s an illustrative example:
Company 1: Client applies and receives $2500/year rating. I contact company 2 for a second opinion.
Company 2: No rating, wants an exclusion clause for scuba diving instead. I contact more companies.
Company 3: $2500/year rating.
Company 4: $2500/year rating.
Company 5: No rating, wants an exclusion clause for scuba diving.
Company 6: Asks for additional information on client and scuba diving. I provide the information. Company responds with standard policy – no rating, no scuba diving exclusion.

So, some of the companies feel that there was an underwriting issue that was worth $2500/year but didn’t care about scuba diving. Others didn’t see the same underwriting issue, but cared about scuba diving. And one company didn’t care about either the scuba diving or the underwriting issue. While the companies are mostly consistent, they are certainly not ‘always’ consistent.

Take the medical exam first thing in the morning. It’s called a ‘fasting blood test’. Discuss this with the paramedical who calls to book the medical exam, but you want to minimize any false readings in your bloodwork as the result of your breakfast.

Tell the insurance company everything. In fact, don’t just give them the facts, tell them all the surrounding details. Give them dates, diagnosis, cause, treatment, whether it’s resolved or ongoing, medications, and so on. Don’t leave them guessing and have them assume the worst. If you’re not sure, tell them anyway. This is perhaps the most counterintuitive concepts because it seems like the more we tell them, the worse it’ll be for us. But I have a saying -”everybody’s got something” – there’s hardly ever a clean case for life insurance. And the insurance companies still issue lots of life insurance. And you’ll likely be surprised about what they don’t care about (and perhaps, what they do care about).

A top ten list with only 9 items won’t work. So here’s the final one to round it out to 10 items.. Make all your insurance decisions financial not emotional. Buy insurance to cover catastrophic financial losses – and it helps to write out a list. What’s the financial loss? Can you define it on paper financially? (i.e. If this happens, I lose $X dollars?). Is it catastrophic, i.e do you need to insure it? Or are you buying a feel good decision (i.e. If this happens, I don’t ‘lose’ $X, but I like the idea of having that money given to me..

One of the challenges of the privacy laws and the current regulatory system is the bias for spouses to invest on an individual basis, not for spouses investing together. I’ve written in the past about how this is causing all investing to look the same.

When a couple goes in to buy RRSPs, the financial institution must set up separate accounts and acknowledge the separate risk tolerances, time horizons and investment objectives for each spouse. Although you might expect that spouses will get two different and unique portfolios, many couples are walking out with extremely similar portfolios.Although there can be benefits of spouses having individual portfolios to reflect unique wants and needs, there are also situations where spouses can benefit from working together to maximize tax efficiency and minimize risk. Here’s a great example of a couple working together as a team.
Rick and Cyndi working together on their investments

Rick and Cyndi are in their late 50’s and getting ready for retirement in a few years. They have lived in what I will call the traditional relationship where Rick was the primary income earner and Cyndi stayed at home to raise their three children. Cyndi entered the work force much later in life after staying home to raise the kids.

When looking at their retirement assets, Rick has an excellent defined benefit pension and over $200,000 in his RRSPs. Cyndi has no pension and only $60,000 in her RRSPs. They will both qualify for Old Age Security (OAS) as well as Canada Pension (CPP) but Rick will get more CPP than Cyndi.
Conservative or aggressive?

When it comes to investing, Rick is by nature more aggressive. He likes to play the stock market a little and there have been times he has done quite well. Cyndi is more conservative because she feels she has so much less than Rick and needs to keep it safe. As a result, his portfolio is much more aggressive.

Although Rick has a higher tolerance for risk, one might argue that he does not need to take more risks when investing. In other words, there is s difference between how much risk Rick wants to take and how much risk he needs to take. I call this the difference between his risk tolerance and risk capacity.

Rick and Cyndi feel they can easily live off the Pensions and government benefits alone in retirement. That means the RRSPs are ‘extra’ and Rick does not need to take any risks in his RRSPs. Even if Rick, theoretically, put all his RRSPs in a sock drawer with no interest, they should still be able to enjoy their retirement because of Rick’s work pension, their CPP and OAS.
Growth can cause tax problems

One of the challenges that Rick potentially has with having a good pension is that he may find it difficult to get the RRSPs out in a lower tax bracket in retirement. Even with some of the pension splitting opportunities in retirement, some future income projections show that Rick will be in the 32% marginal tax rate (MTR) for any RRSP withdrawals in retirement. If he continues investing for growth, the RRSPs could potentially become a bigger tax burden at higher levels in the future. Cyndi on the other hand has a lot of room at the lower levels (25% MTR) to get RRSPs out at the lower marginal tax rates.

In fact, when you look at the bigger picture, there may be advantages in keeping Rick’s portfolio more conservative and Cyndi’s portfolio more aggressive, which is the opposite of what risk tolerance suggests. Since higher rates of return in Rick’s portfolio could actually mean more tax in retirement, putting the higher risk investments in Cyndi’s name is better because higher growth rates does not mean more tax for Cyndi because she has more wiggle room to get the RRSPs out in the lower tax 25% bracket.

Overall, from a tax and risk perspective, Rick and Cyndi are better off working as a team on their investments. Rick should invest his RRSPs more conservatively, while Cyndi puts all the growth oriented investments into her RRSP. Overall, they might target the same balance between stocks, bonds and cash but instead of balancing the mix within each of their RRSP accounts to reflect their individual needs, Rick might be loaded with the safer investments and Cyndi’s with the growth investments.

Utilizing other accounts like the Tax Free Savings Accounts (TFSA) is another great place for Rick and Cyndi to invest in higher growth investments because there will be no tax on the growth.

There are many examples and strategies where couples can implement good financial strategies together like spousal RRSPs, income splitting, and cashflow strategies but don’t lose sight of the merits of working together when it comes to investing as well. Good planning makes all the difference.

Risk is such a simple little word that it is amazing how many different meanings are given to it by different users.

Risk is different from uncertainty. Risk describes the expected payoffs when their probabilities of occurrence are known. Actuarial mortality tables are a familiar example. The actuary does not know what will happen in 14 years to Mr. Frank Smith but does know quite precisely what to expect for a group of 100 million people as a group—in each and every year. “Riskiness” in investing, by contrast, is akin to uncertainty, and that’s what the academics mean when they discuss beta (relative volatility) and market risk. Too bad they don’t use the exact terms. Risk is not having the money you need when you need it.

Risk is both in the markets and in the individual investor. Some of us can live comfortably with near-term market volatilities—or, at least, resist the primal urge to take action—knowing that over the long run, more market volatility usually comes with higher average returns.

Active investors typically think of risk in four different ways. One is “price risk”: You can lose money by buying stock at too high a price. If you think a stock might be high, you know you are taking price risk.


The second type of risk is “interest rate risk”: If interest rates go up more than was previously expected and are already discounted in the market, your stocks will go down. You’ll find out that you were taking interest-rate risk.

The third type of risk is “business risk.” The company may blunder, and earnings may not materialize. If this occurs, the stock will drop. Again, you were taking business risk.

The fourth way is the most extreme, “failure risk.” The company may fail completely. That’s what happened with Penn Central, Enron, WorldCom, and Polaroid. As the old pros will tell you, “Now that is risk!” And that’s why we should all diversify.

Real risk is simple: not enough cash when money is really needed—like running out of gas in the desert. The old pros wisely focus on the grave risk all investors—and 401(k) investors in particular—should focus on: running out of money, particularly too late in life to go back to work.

Another way to look at risk has come from the extensive academic research done over the past half century. More and more investment managers and clients are using it because there’s nothing as powerful as a theory that works. Here’s the concept: Investors are exposed to three kinds of “investment risk.” One kind of risk simply cannot be avoided, so investors are rewarded for taking it. Two other kinds of risk can be avoided or even eliminated, so investors are not rewarded for accepting these unnecessary and avoidable kinds of risk.

The risk that cannot be avoided is the risk inherent in the overall market. This market risk pervades all investments. It can be increased by selecting volatile securities or by using leverage— borrowed money—and it can be decreased by selecting securities with low volatility or by keeping part of a portfolio in cash equivalents. But it cannot be avoided or eliminated. It is always there. Therefore, it must be managed.

The two kinds of risk that can be avoided or eliminated are closely associated. One involves the risk linked to individual securities; the other involves the risk that is common to each type or group of securities. The first can be called “individual-stock risk,” and the second can be called “stock-group risk.”

Few examples will clarify the meaning of stock-group risk. Growth stocks as a group will move up and down in price in part because of changes in investor confidence and willingness to look more or less distantly into the future for growth. (When investors are highly confident, they will look far into the future when evaluating growth stocks.) Interest-sensitive issues such as utility and bank stocks will all be affected by changes in expected interest rates. Stocks in the same industry—autos, retailers, computers, and so forth—will share market price behavior driven by changing expectations for their industry as a whole. The number of common causes that affect groups of stocks is great, and most stocks belong simultaneously to several different groups. To avoid unnecessary complexity and to avoid triviality, investors usually focus their thinking on only major forms of stock-group risk.

The central fact about both stock-group risk and individual-stock risk is this: They do not need to be accepted by investors. They can be eliminated. Unlike the risk of the overall market, risk that comes from investing in particular market segments or specific issues can be diversified away—all the way to oblivion.

Leveraged investing involves borrowing money to invest a larger amount up front, rather than if you made the contributions as income becomes available. While this does provide an opportunity to benefit from larger dividends and capital gains, leveraged investing presents some risks that you need to be aware of before funding investments with a loan or borrowing through a Home Equity Line of Credit (HELOC).

Perhaps the most obvious risk is that the value of the stocks you buy can drop while the amount owing on the loan stays the same. If the loan is backed up by the investments as collateral, the lender could ask that you immediately pay back part of the loan. With a HELOC or personal line of credit, you won’t have this issue and with a long term investment horizon, the stocks would likely recover.

The next issue is that you can magnify your losses. If you were able to pay for those stocks anyways then the loss is the same. However, if you purchased more shares since you had the available loan, then you multiplied the amount of your loss. This brings us to the next point…

By investing all at once, whether leveraged or not, you miss the benefits of Dollar cost averaging (DCA). Dollar cost averaging is when you invest an equal dollar amount on a periodic basis. This forces you to buy less shares when the price is high and more shares when the price is lower.

While there are quite a few investment risks, another risk is related to the loan. You might be comfortable with your interest payments since the current interest rates are historically low. But what if the rates increase, will you still be able to afford it? This is a real concern as there is room to potentially double or triple the current rate. If your payments are interest only, this means a doubling or tripling of your required payment.

So while leveraged investing has the potential to provide an increased gain, you have to understand and be comfortable with the additional risks involved.

I’m sure most of you guys have heard of a bottled drink called Fanta. For those of you unaware, it’s available around the world in various flavors, usually fruit based (orange, grape, strawberry, etc.) It’s bottled by Coca-Cola on a local level, hence why certain areas have flavors that others don’t. What’s much more interesting is the story about how Fanta was introduced.

Back in 1941 in Nazi Germany, the local Coca-Cola bottler was in a pickle. They wanted to sell Coke, but couldn’t import the syrup because of that pesky World War that was going on. When a local bottler signed their distribution contract with the main company, there was one main stipulation- that the Coca-Cola syrup be purchased directly from the company. The head of the bottler improvised, coming up with his own drink, made from the waste of apple cider production. It sounds gross, but it was wartime so ingredients were kinda scarce. It became pretty popular and eventually, in 1960, the parent company bought the rights to the drink from the German bottler.Around the same time, IBM started working closely with officials in Nazi Germany. Their purpose though, was a little more gruesome than quenching Nazi thirst. The government used IBM counting machines to help them identify Jews, Gypsies and other unwelcome minorities during national censuses during the 1930s. Once the concentration camps were established, IBM technology was used to manage and identify the inmates. Many historians think the camps couldn’t have handled as much volume of prisoners as they did without IBM’s help.

Every day, each and every one of us make decisions that wrestle with ethics. Most of them are pretty simple decisions. Should I take candy from a baby? (Most definitely. Babies can’t fight back.) Should I go 55 kilometres per hour in a 50 zone? (If you don’t, I will laugh at you.) Should I jaywalk? (Only sissies use crosswalks.) Nobody who’s any sort of normal wrestles with the morality of these decisions.

I have just been informed that taking candy from a baby is actually quite mean. I am clearly a terrible person.

Other decisions in life aren’t quite so simple. Since this is a finance blog, lets focus on investments. As an investor, you’re presented with 4 investing options:

1) Investing in Altria, the parent company of cigarette manufacturer Phillip Morris.

2) Investing in Fortune Brands, the parent company behind alcohol brands such as Jim Beam and Canadian Club.

3) Investing in Exxon or BP, oil companies with a history of environmental damage.

4) Investing in a company that provides very high interest loans, like a payday loan or credit card company.

Feel free to tell us which you would or wouldn’t support in the comments.

One can easily make the argument that these companies do things that are morally questionable. Smoking is bad for you, just ask that dude with a hole in his throat. (On second thought, don’t. You don’t want to hear that guy talk.) In small doses, alcohol can have many benefits, like making members of the opposite sex look more attractive. If it’s abused, it can be one of the most destructive habits a person can have. It’s not very hard to figure out why these companies may be bad for society in general.

But should it be up to the investor to make that call? After all, we elect governments to pass laws, and each of the offending businesses is legal, in this country at least. In fact, government coffers depend on additional taxes levied on cigarettes and booze. Are investors really doing anything wrong if they invest in legal companies? These companies employ thousands of people, donate money to charity, pay their share of taxes and have historically provided some good returns for investors, which enriches the country in general. Are they really as evil as they appear on first glance?

Where do you draw the line with ethical investing? My real job is for a snack food company. The products they sell are not good for you. If not eaten in moderation, they will make you have to purchase two airplane seats on your next flight. Does that make the company I work for bad? Or, are they just supplying a product that should only be eaten sometimes?

At what point does personal responsibility factor into this whole equation? Payday loans and credit cards charge very high interest rates. They also make unsecured loans that can be spent on anything the borrower wants, which is a pretty risky loan to give. Is the company the bad guy? Or should the borrower be the one to figure out this service isn’t in their best interest? It doesn’t take a mathematician to figure out a 25% interest rate is a little high.

Personally, I don’t draw any lines with my investments. In the past, I’ve invested in Canadian cigarette maker Rothmans, along with American beer giant Budweiser, even though I don’t smoke and don’t really care for the taste of beer. I believe that the people who partake in those activities are silly to do so, but it’s not up to me to say whether they should or shouldn’t. Who am I to say what people should or shouldn’t do with their lives? I’m just not that important.

I don’t begrudge anyone who tries to make a statement with their investments, or with their purchases. If you don’t like booze, or gambling, or anything else that’s fun, then feel free to boycott them. I just don’t think those things are so bad.

The terms “real” rate and “nominal” rate are sometimes used to refer to rates of return on bonds. These terms represent a method of adjusting bond yields for the rate of inflation. The nominal rate measures the actual dollars earned, based on interest rate yields. To obtain the real rate, subtract the inflation rate from the nominal rate. For example, the coupon rate on the long bond is currently close to 6%. That is the nominal rate. Subtracting the current rate of inflation, which is around 2.5%, results in a real rate of return of about 3.5%.

The relationship between the real rate of return and the nominal rate has varied during the century. So has the level of interest rates. Interest rate levels are governed, first, by what is happening to prices (that is, inflation or deflation) and secondly, by expectations of what will happen to prices. Until 1950, even though interest rates were low, bonds earned a real rate of return because inflation was low. As inflation began to rise, the real rate of return began to decline, despite a rise in nominal rates. The real rate of return throughout the 1960s and 1970s was negative even though rates were high and rising. Moreover, inflation eroded the purchasing power of older issues. That was the main reason interest rates rose to such high levels: few investors were willing to purchase long-term bonds because the nominal rate did not appear high enough to compensate for anticipated increases in yield as a result of continuing high inflation.

Historically, the real rate of return on long bonds has averaged about 3% above the inflation rate. Since that is an average, it has sometimes been higher and sometimes lower. During the 1990s inflation averaged under 3% a year, and that rate is considered benign. Inflation, moreover has been relatively benign worldwide. But note that benign as it may seem, the recent low inflation rate does not mean inflation is dead. Over a 30-year period, if inflation were to remain as low as a constant 2% a year, an item costing $100 at year one would cost $181 at year 30. If inflation rates were to rise to 3% over that same 30-year period, an item costing $100 at year one would cost $243 at year 30. Beginning in 1999, the inflation rate rose slightly, and since then, concerns about inflation have increased somewhat.

Unless there is an extended period of actual deflation, nominal rates will probably continue to remain 2% to 3% above the inflation rate. But none of this is predictable. No one knows whether the next 30 years will see deflation or whether higher inflation rates will return. Some experts worry that the current economic boom will inevitably lead to inflation worldwide. Others feel that central banks will be able to keep inflation at bay. Still others point out that the recent belief that central banks can successfully control inflation, and hence manage growth, is overly optimistic. The one point no one disputes is that crystal balls have been notoriously unreliable in predicting interest rates. More to the point, no one has ever consistently predicted interest rates correctly over a period of 30 years: that is, over the life of a long-term bond.

The strategies described in this book are predicated on the assumption that interest rates cannot be predicted but that you can manage your bond portfolio so that no matter what happens, your portfolio will not suffer severe erosion.

Even though the size of the bond market dwarfs the size of the stock market, bonds don’t get nearly the attention stocks do. Many investors don’t know squat about them. And let’s face it, bonds are boring. Stocks are much more sexy. Certain stocks have the potential to go up exponentially, even though that rarely happens. A lot of stocks have the potential for both capital appreciation and income, thanks to their dividend. Only Grandpas own bonds! They’re more boring than a rambling story about onion shortages in 1934. Why should an investor even care?
Bonds typically move inversely to stocks. If stocks are down, bonds will usually be up. During periods of stock market weakness, bonds will lessen the damage on the total portfolio. Even during periods of stock market gains, bonds will still be spinning off interest, adding to portfolio returns, albeit at a lower return than the stock component will. But first, the basics. What is a bond?

A bond is a debt instrument issued by a corporation or a government. The issuer needs money now for whatever reason, so they ask investors for the money. Since investors want to be compensated for use of their capital, the issuer agrees to pay interest, usually in six month intervals, back to investors. Such greedy investors, always looking for their interest. The bond issue will have a length of time, after which investors will want their entire investment paid back, which is called the maturity. The appeal in bonds is getting the interest payments in the meantime.

A bond trades a lot like a stock, just in a much less public market. All bonds start off trading at 100, which is known as par. If a bond is trading above par, it’s said to be trading at a premium. If the bond trades below par, it trades at a discount. The prices move, just like stock prices do. As the prices move, that affects the return on the bond. If a bond yielded 6% when it traded at par, it would stand to return more than 6% if it was trading at a discount, since the investor would get a capital gain once the bond matured and the original investment was paid back. If a bond was trading above par, the investor would get slightly less than the yield as a return, because of the slight capital loss.

Whew! Bored or lost yet? I think the real reason nobody cares about bonds is that they’re complicated.

So why does a bond move up or down in price? There are two main reasons, either company specific reasons or general economic reasons. Take General Motors for example, back in circa 2007 before they went bankrupt. Much like the share price, the price of GM’s bonds began a slow slide into the abyss, as bankruptcy became more and more likely. The bonds suffered because of the health of the company.

The reason why bonds move in a more general direction is because of interest rates, or rather the expectation of interest rates. If news comes out that is good for the economy (which would drive up interest rates) bonds generally go down in value. The opposite happens when bad financial news comes out. This is why the business news shows quotes of popular government bonds, since they serve as a proxy for the bond market as a whole.

All right. I know half of you are probably asleep by now. Let’s get to something slightly more interesting. How should an investor play the debt markets?

I don’t think someone should be investing in individual bonds. Buying bonds isn’t nearly as simple as buying stocks. Instead of charging a commission, brokerages take a spread between the price that the buyer pays and the seller gets. The smaller the order, the higher the spread. Because of that, institutional investors get a much better deal when buying debt than individual investors.

So why bother? There are all sorts of exchange traded funds out there that hold bonds. The level of risk of these ETFs ranges from the ultra conservative government bonds to risky bonds trading at large discounts, aptly named junk bonds. Investors can choose between Canadian, American or international issues, just by buying an ETF. You don’t need to take on any company specific risk either, since most of these ETFs can hold hundreds of different issues.

Most of the bond ETFs on the Toronto Stock Exchange come with an added feature, one that is mostly advantageous to Canadian investors – Canadian dollar hedging. This means that investors won’t be punished for currency fluctuations.

I’m a young investor, so I only hold two bond funds in my portfolio. The first is a fairly conservative fund filled with high quality Canadian bonds, which trades on the TSX under the symbol XBB. It yields just a bit under 4%. Over the past 5 years, the fund has traded between $28 and $30. The yield isn’t very high, but the fund is very conservative, hence the 4% yield.

The other fund I hold is on the exact opposite end of the risk spectrum. The Dryfus High Yield Strategies Fund (DHF) invests in junk bonds, and then uses a 25% leverage position to enhance returns. The yield as I write this is over 10%. Obviously, that 10% yield reflects the riskiness of the position. It invests in the most speculative of debt issues, and uses leverage to get a higher yield. It’s not for the faint of heart.

This is only a basic look at bonds. The bond market is complex, but investors need at least a portion of their portfolios to be in fixed income assets. Yes, it’s not the most sexy of investment topics, but it’s too important to not learn about.

The trick to staying in a home is being able to afford its mortgage to start with. Here are a few tips that you can use to acquire an affordable mortgage for you and your family.

Buy a Home that you can Afford

According to Realtor, one of the mistakes that a lot of people made during the housing crisis was to buy way more home than they could easily afford. Banks allowed customers to take out home loans that were well beyond their means. Homeowners quickly fell behind on their payments because those amounts far surpassed their monthly incomes. You can avoid making this mistake by keeping your mortgage payment to no more than 25% of your monthly income. That way, your mortgage payment will be something you can easily make without throwing the rest of your finances into disarray.Base your Purchase on the Home’s Current Value

Way too many people bought homes expecting them to appreciate year after year forever. They depended on the equity in their home to give them the money that they needed to pay their other bills. Although a home may increase in price, you should never count on using your equity for bill management. The equity in your home is much nicer if its a bonus instead of a necessity.

Refinance your Existing Mortgage

If you are already in your home and have a high interest rate, there are steps that you can take to make things easier for you. If you aren’t upside down, you can take advantage of the currently low interest rates and refinance your existing home loan. Reducing the interest rate of a mortgage leads to lower payments plus you will be paying more towards principle and less towards interest.

Build Up Savings

The current economy demonstrates just how important it is for every homeowner to have an emergency savings account. You never know when your own employment situation will get rocky. You can protect your finances by saving up at least 6 months worth of monthly expenses in a savings account. This way you can keep paying the mortgage and protect your most expensive investment no matter what happens in the short term.

What other ways can you think of to acquire an affordable mortgage?

There has been a lot of talk recently about the financial state of 30-somethings. Apparently the future does not look very bright for those of us caught at the tail end of Generation X and the beginning of Generation Y.

The amount of financial responsibilities facing this age group can seem daunting. Raising a family is expensive enough without having to worry about setting up an emergency fund, paying down the mortgage, putting away money for retirement, saving for your child’s education and everything else that comes along with improving your financial situation.

So how do you balance your savings and investments with the everyday costs of raising a growing family? You can start by setting up a simple plan for each of these categories to ensure that you are on the right financial path.
Streamline Your Mortgage

Many 30-somethings entered the housing market during the peak of the housing boom with long amortization periods and little –to-no down payments. Luckily there are two quick fixes you can make to your mortgage immediately to pay off your balance faster and save on interest.

The first is to switch your payments from monthly to bi-weekly. On a $300,000 mortgage at 5% interest amortized over 30 years, switching to bi-weekly payments would only cost you $133 more each month and would save thousands of dollars and over 5 years off the life of the mortgage.

The second way to help streamline your mortgage for the future is to switch to a variable interest rate, but maintain your payments at the fixed interest rate. Using this technique while interest rates remain low will further reduce the principal on your mortgage while still giving you a cushion for when interest rates start to rise again.
Utilize Your TFSA for Short Term Savings

The Tax Free Savings Account allows you to contribute up to $5,000 per year and withdraw that money anytime without paying any taxes on your gains. This is a perfect savings vehicle for someone in their 30’s who has many short term savings goals.

As a couple, make it a priority to contribute and fully fund at least one of your TFSA accounts each year. Create a list of short term goals that need to be looked after in the next 1 – 3 years and use this money to pay for these items in cash.

Your list might include anything from buying a new car to doing some minor renovations or repairs in the house, taking a family vacation or upgrading your furniture. You don’t want to go into debt for something you could have easily planned for a year or two in advance.
Contributing to an RESP

An RESP (Registered Education Savings Plan) is a great way to start saving for your child’s education. The mistake a lot of 30-somethings make is to try and maximize their RESP contributions before they even have their own finances under control.

After your child is born, make sure you get the account open and take advantage of the initial grant money, but then just contribute what you can afford in the beginning. If you are eligible for the Child Tax Benefit you can start an RESP with the Canada Learning Bond of $500 to begin with and contribute $100 a year until your child turns 15 years of age, without even putting a penny of your own money towards it.

Once you are comfortable increasing contributions to your child’s RESP you can maximize the account by contributing $2,500 per year, which will get you the maximum annual CESG of $500 in free money from the government.
Saving for Retirement

Retirement savings is the most common thing put on hold by most 30-somethings until they have a firm grip on everything else that comes with raising a family. There is still plenty of time to focus on saving for retirement once the rest of your finances are in order.

Setting up an RRSP is simple and with a low cost index fund like TD E-Series you can contribute as little as $25 per month towards your retirement account. Again start small with what you can afford and then slowly increase the amount until you are contributing about 10% of your income.

One thing to take full advantage of is an employer matching program. Some employers will match your RRSP contribution dollar-for dollar up to a certain percentage of your salary. Calculate that amount and make sure you are contributing at least that much in order to receive the full amount from your employer. You can’t beat 100% returns on your investment.
Light at the End of the Tunnel

There are so many financial pressures facing 30-somethings today that it’s no wonder the so-called experts doubt what the future holds for this generation. We can’t possibly maximize every savings vehicle and make extra mortgage payments without sacrificing the joy of creating memorable experiences and spending quality time with our families.

The key is to strike a balance in your 30’s where each aspect of your finances can be set-up for continuous improvement, all while taking care of everything that comes with raising a young family. It’s not an easy task, but if done properly you can help dispel the rumours of our doomed financial future.