How Important Are Credit Scores ?

I have been trying out social media to see what I can learn. About a week ago I put up a simple Twitter Poll on @bigcajunman, about Credit Scores and the results were interesting.

The first thing I saw was that only 16 folks answered, which is a little disheartening. I have 3600+ followers, but I guess folks are busy these days.

The question I asked was quite simple. Which is more important:

  • Blood Pressure Level
  • Credit Scores
  • Cholesterol Level

I was glad to see the results.

Results from my first Twitter Pool on Credit Scores

Yes, your blood pressure level is much more important than your credit score. Nobody died from their credit score, but many folks die from the complications from High Blood Pressure. Remember the most important part of your Retirement plan, don’t die! Your Health is the first thing you should worry about.

credit scores

Risks of a Low Credit Score

If Equifax gives you a low score you won’t get loaned money or won’t get a Credit Card. You can repair it if it is low. You may feel stress due to a low credit score. Stress is bad for your health as well.

Risks from High Blood Pressure or High Cholesterol Levels

Aneurisms, Blood Clots, Stroke, Heart Disease or Death.

From a lay person’s perspective, I would say that your Blood Pressure and Cholesterol levels are something you should know. Being able to quote your Equifax Numbers, doesn’t seem as important.

Do something about your health and then worry about credit.

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Exposed on Banks

Even as a simple country Index Investor (to paraphrase Bones McCoy), you need to understand the Index you invest in. If you own a TSX-based, Canadian S&P Based or Dividend Royalty based index you hold a lot of Banks.

Two examples of this are:

  • S&P/TSX Composite Index, (OSPTX) which holds 36 % “Financials“. The top 10 holdings 4 are banks (Royal Bank RY, Bank of Nova Scotia BNS, TD Bank TD and Bank of Montreal BMO).
  • S&P/TSX Composite High Dividend Index ETF (TXEI) which holds 30% “financials”. You find 4 banks in their top 10 holdings (Bank of Montreal BMO, Bank of Nova Scotia BNS, Canadian Imperial Bank of Commerce CM, National Bank of Canada NA)
exposed on banks

Why this imbalance? Banks are doing very well lately, and have done well for over 15 years.

Are banks likely to “Nortel out“, in the near future? No, but realize that you are holding a lot of Banks if you are investing in Canadian Indexes.

My problem is that I am highly exposed on Banks. From my days as a Stock holder, I still hold TD and BMO in one of my larger investing portfolios. In this same portfolio I also hold a TSX index fund, which means my exposure to banks is too large (given I may retire within the next 10 years).

As Interest Rates slowly rise to more normal rates, I should start thinking about some more stability and start building a GIC Ladder in my portfolio. I should be looking for more stability given I am within 10 years of retirement.

Treat This as Informational

I am not offering advice. I am simply pointing out that many passive investors are heavily exposed to the Financial Sector in Canada.

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CPP and EI for 2019

Happy New Year! I have been rummaging through my archives and a tradition seems to be talking about CPP & EI for each year. Who am I to argue with traditions?

As we start a new year, all we folks who receive pay cheques (I believe the Japanese term is Salaryman), we get to start paying CPP and EI premiums again.

For a lot of folks, they are just deductions that appear on every pay stub. For folks who make more, this deduction disappears some time in the year, and after that, they get a “virtual raise” given they do not have to pay these deductions for the rest of the year.

It is easy to approximate how much someone makes, by knowing when they stop paying EI premiums.

It’s actually a pretty simple game to play and well worth a couple of minutes time to create a little model to figure this thing out.

Meet Jill for 2019

Jill gets paid bi-weekly, lives in Ontario and works as an employee of private firm NUJAC. She gets paid a regular salary (assuming no bonuses ), so if we list the month in which Jill tells us “I stopped paying EI premiums in August” we can then approximate how much Jill actually makes in salary.

We learn from the EI web site that the 2019 premium is 1.62% of insurable earnings (and the maximum insurable earnings is $53,100 in 2019).

EI Rate1.62%Max income $  53,100.00
Max860.22
CPP Rate5.10%Max income $  53,900.00
Max$2,748.90
MonthBi-Weekly
Pays
Approx Gross
Income
Per Pay EIPer Pay CPP
January3$460,200.00$286.74$902.70
February5$276,120.00$172.04$541.62
March7$197,228.57$122.89$386.87
April9$153,400.00$95.58$300.90
May 11$125,509.09$78.20$246.19
June13$106,200.00$66.17$208.32
July 16$86,287.50$53.76$169.26
August18$76,700.00$47.79$150.45
September20$69,030.00$43.01$135.41
October22$62,754.55$39.10$123.10
November 24$57,525.00$35.84$112.84
December26$53,100.00$33.09$104.16

So Jill makes about $76,000 a year.

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If you are planning on making financial New Years resolutions do yourself a favour and make them measurable. When they are measurable they are attainable.

My Personal Opinion On Resolutions

Here is a good example of some noble resolutions

  • I will save more this year
  • Pay down my mortgage
  • Lose weight

I applaud you if these are your goals, however, how are you going to know whether you have succeeded or not? Without a tangible financial goal you are doomed to failure.

More tangible versions of the same goals might be:

  • The balance in my TFSA on Dec 31 2019 will be 10% larger than on January 1 2019. This is very specific, you can even put actual values in there, which makes things easier for you to monitor your goal.
    • Remember if you are saving for your kids’ educations an RESP goal of $2500 added to the account would be good.
    • RDSP contributions for your child need to be there as well.
  • My mortgage principal will be $10,000 lower at the end of this year. The important thing is to set a tangible financial goal. How you do it is left open, but what the goal is, is concrete.
    • You can automate this goal, and make it easier. Setting up automatic over payments on your on-line banking of $400 per pay (if you are paid bi-weekly) makes this resolution real.
  • I will lose 60 pounds this year by going to the gym at least 150 times. Ideally I will try to lose 5 pounds a month. Again, this is very concrete, and easily monitored.
    • In my case I am lucky as my office has a gym I can use for free.

Resolutions are wonderful things (although you can set goals any day of the year), but they must be specific. Saying, “I will be a better person” is admirable sentiment, but what does it mean and how are you going to do this?

  • Give more to charities?
  • Being more positive in your life outlook? (again really hard to monitor this, unless you tell someone who can say, “You really are being a sour puss these days”).

Make your goals and resolutions tangible and measurable and you are more likely to succeed. Also, remember to put your resolutions somewhere where you can be reminded about them.

  1. Set the background of your computer or tablet with them?
  2. Put them on your refrigerator?
  3. Tell your spouse, they will remind you.

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Stock Picks 2018 End of Year

At the start of the year, I actually did publish a Stock Picks for 2018 article, which is a rarity for me. I am not in the stock picking business I am into Index Funds, and my stock picks reflected that fact.

Stock Picks
I even made a fancy slide

This year has ended quite nastily for the markets. After 10 years of growth, you had to know something was going to change, and so far the great shart of 2018 continues. We shall see when the bottom hits.

What happened with all of my picks? Let me refresh your memory.

  • Canadian Index Fund based on a TSE index like TDB900 – TD Canadian Index (e-Series)
  • US Index Fund based on the Dow Jones Industrial Average like TDB902 – TD US Index (e-Series)
  • A Canadian Bond Fund like TDB909 – TD Canadian Bond Index (e-Series)
  • International Index Fund like TDB911 – TD International Index (e-Series)
  • A Dividend ETF (if you are so inclined) like FTSE Canadian High Dividend Yield Index ETF (VDY)

A fairly typical Couch Potato portfolio. How much of each you buy is up to you, but let us assume an equal amount bought in each of these funds.

        Jan 2 2018    Dec 26 2018
TDB900 $      1,000.00  $            961.20
TDB902 $      1,000.00  $         1,103.88
TDB909 $      1,000.00  $            995.90
TDB911 $      1,000.00  $            958.60
VDY $      1,000.00  $            959.30
Value $      5,000.00  $         4,978.88     -0.422%

At the end of the year you would have lost about $21 or 0.42% of your investment. Given how the markets are running right now, not too bad really.

If you are an investor in individual stocks, I wish you good luck. For Indexers let us remember the sage words of Preet B., “I am an Indexer, I don’t care what the Index did today!

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