Straight Talk on Your Money
Many financial mistakes people make are a result of conventional wisdom. That means, the generally accepted money advice some people follow – is wrong. This includes some of the advice you’ve accepted by your parents, your friends and even from your “expert” financial professionals. Don’t assume what any of them tell you is always correct and don’t assume it must apply to you and your family.
That’s the premise of Straight Talk on Your Money by Doug Hoyes, who skewers 22 of the biggest financial myths in Canada today. Doug knows how to bust myths and help Canadians. He is a Chartered Professional Accountant and Licensed Insolvency Trustee. Over the course of his career, Doug has advised over 10,000 people in financial difficulty.Doug was very kind to send me a copy of his book this fall and I checked it out while travelling last month. (FYI – Good plane-reading-material Doug.) Here are some of the selected myths Doug is going to help you bust when you pick up a copy of his book.
Myth-busting in Canada (or anywhere else for that matter)
Myth #1 – Humans are Rational
Heck no. Here is Doug on this myth when it comes to housing: “…the first step in making that decision is to acknowledge that you are not rational; that you, and I, make decisions on emotion and are often influenced by social norms. If we realize this, we can briefly and intentionally set our emotions aside so that we can consider the facts and make an informed decision.”
This certainly easier written than done but I agree with the point. Our judgments in life (and in money) are often clouded by the forces around us. If we can work a bit harder to strengthen our cognitive muscles we’ll be financially wealthy for it.
Myth #3 – Experts are experts
Refreshing to see a financial professional admit he is biased. Heck, I am too. News flash, so are you.
So be mindful of experts Doug warns who claim they are not, because “the problem with some experts is they don’t encourage debate; they stifle it.”
The reality is, nobody cares about you (or your family) more than you. If you want to include the words “your money” into that sentence then by all means do so. I have and will always continue to believe in this mantra.
Myth #8 – Pay your small debts first
Conventional wisdom argues you’ll feel better about your debt issues if you tackle your small debts first, before the major ones. I disagree (and so does Doug). Math should trump psychology but it hardly ever works.
Myth #11 – There is good debt and bad debt
Here are some real reasons you are in debt.
One of these reasons is you focus on good debt – such as borrowing money for a house that should appreciate in value over time. While this could be a form of “good debt” Doug provides a checklist of questions to consider if you’re going to be using someone else’s money:
- Can I afford the payments?
- Will I profit from using the debt?
- What is the risk?
Consider debt as a practical tool for your financial life but only if it fits the task.
Myth #13 – A house is a great investment
Don’t think I didn’t notice why this is myth #13 in the book, as in unlucky #13. A house is not always a great investment. Our own case study is evidence of that.
After upgrades and some repairs, we’ll be lucky to break even if we move from this house after 7-8 years here. You can read more about our housing dilemma here.
Doug reminds us that houses do not generate income (like my portfolio does here) and there are opportunity costs to consider – choosing any housing investment over any other form of investing. No doubt my wife and I would be far ahead of where we are today (financially) if we rented over buying this house. At the end of the day however, living here has been great to date and it was a lifestyle choice we were more than happy to commit to at the time. Simply acknowledge with any housing decision that emotion will probably guide your house-buying decision much more than math.
Myth #17 – Budgeting is essential for financial success
Yes and no on this Doug. While Doug believes budgeting “is a waste of time” for most people, I tend to believe in it. I believe there are better ways to budget but to his point, you have to find some system that works for you.
Myth #22 – Life is like a box of chocolates
Doug cites potential loss of employment and medical issues as the key reasons to have plans and contingencies in place when things aren’t as rosy. “The point is that stuff happens, so think about it now, and make a plan.”
Like most personal finance books that come my way, and find their way to a plane or anywhere else I’m reading material, I found this book both enjoyable and full of practical advice. The purpose of Doug’s book entitled Straight Talk on Your Money was not to tell you how to live your financial life. It was to share the perspectives of Doug and some of his lessons learned from thousands of client’s experiences with money. With that objective in mind, I thought he did a good job.
Have you read Straight Talk on Your Money yet? What financial myths would you like to see get busted?
I did a spreadsheet to compare on the house question. I bought in 1989. I live in a “hot” area of downtown Toronto. Even ignoring interest, property taxes, maintenance like replacing windows and the roof, etc, the IRR is just over 4%. Easily beaten by the TSX or SPX over the same time frame.
Having said that, I’m still glad I bought the house as there has been great non-financial value from being here.
Very interesting Ed. 4% even in Toronto?? Not doubt your home has given you some great comfort over the years; good on you. Thanks for reading.
People have short memories. Toronto real estate was booming in the 80’s. I bought at the peak of that cycle. Prices fell 20-25%-based on the selling prices of my neighbours’ similar houses. I did not get back to break even for a decade. Real estate markets have cycles just like other markets!
Yes, they absolutely do Ed. It begs the question – when will the TO RE market drop? It’s got to come down at some point I think. When, no idea…
Indeed. It certainly has cooled off a lot in Toronto. There was a palpable feeding frenzy before the government brought in the foreign investor tax in the spring. Before, houses almost always went for 20-25% over ask with 2-3 days of being listed. It was rare for a house to be on the market for a full week. Now, they can sit on the market for months, despite price reductions. Prices have softened a little.
But I think interest rates will drive a more substantial drop. If you look at the interest rate data on the BOC website for the 80s/90s, The cycle low bank rate was 7.14% in March of 87. Rates crept upwards from there. I bought in June 89 when the bank rate was 12.31%. It was shortly after that that the market started to soften. The cycle high rate was 14.05% in May of 1990 and then rates started to drop to where there are today. So its clear interest rates can go up a long time before something snaps, but it eventually does.
I think higher rates are key for lower housing prices Ed. I think most people have mortgaged too much. I know when we moved into our current house, our mortgage was more than $300k. I almost fainted when I signed the papers. The mortgage is now almost half that and I’m sleeping better now because of that.
No question, to my mind, that housing isn’t a great investment. It’s first and foremost a lifestyle choice and a place to live. Just listened to an interview by Dan Bortolotti speaking with Robert Shiller. Shiller stated that he and his colleagues analyzed the US housing costs over the past 100 years and adjusting for inflation found that the average annual gain was less than 0.5%. He noted that although available Canadian data didn’t go back 100 years he estimated it to be similar to the US data.
Thanks for sharing Wreckingball. What’s your take on housing costs in general? I know for a fact I won’t make a pile of money on our current house.
Funny you would ask Mark. I sat down and worked out my gain? on my last house purchase after listening to the interview. Factoring in 15 years’ interest, property taxes and the total of major maintenance items only (roofing x2, upgraded windows, new deck and some interior hardwood to replace worn carpeting….left us with a gross profit of around 3%. If I factor in annual inflation of say 1.5% I figure we managed to squeeze out 1.5% for a property in London. Bear in mind taking account of only some major items and neglecting a rigorous assessment of all the other smaller cumulative costs, I’m guessing we might lose another 50 basis points off the 1.5% dragging potential profit down to 1%.
Having said that it’s hard to put a price on the sense of well-being and stability one gets from owning vs renting. I think that the well-being and stability feelings extends to our 3 children who may not have been as successful as they are had they lacked the community roots that home ownership engendered. That’s just an opinion though.
You sound like me. When I think about the new roof ($25k – steel metal roof) + new ensuite bathroom ($25k) + other updates around the house (a few thousand bucks), while our house value has likely gone up $100k since we bought it I would be lucky to break even after 7 years.
You’re right – ownership does include some stability vs. renting but I’m not convinced that has huge monetary value!
Ps, our house price increased just about 120% over that 15 year period.
Wow. That puts things into perspective.
Agree on houses. They are a place to live and not normally a great investment. Budgeting may not be important, but to be an investor you need to spend less than you make and invest the excess. Knowing what that excess is so you can plan your investments is important. Seems like an interesting book. Tom
Change Budgeting to “Controlling or Managing Your Expenses”. One won’t have money to invest if they don’t.
Fair. You can’t invest what you don’t have (without leverage).
Leverage just means more debt.
Looks like another good one to check out. If I pick up any small nugget or something that moves me even a tiny bit off my own biases that’s probably a good thing.
I’ll be loading up the ipad with library books for and during our upcoming winter getaway. Right now it’s The Undoing Project – Michael Lewis most well known for Moneyball that the movie was based on.
I want to read that book as well. Going to ask for that one for Christmas 🙂
Don’t buy. Rent free from your library!
Good point below Cannew.
I don’t see a house as an investment, rather it’s a place to live. It’s a very expensive place to live, with many known costs (mortgage interest, insurance, property tax), costs by choice (updates, renovation), and long-term costs (hot water heater blows, new roof, new appliances). As a renter, my costs are fixed, however, in my current situation, rental accommodation is becoming scarce due to Air BnB sucking the long-term rentals out of the local housing market, plus rents have gone up due to rising housing prices. At this late point in my life, I might be forced to buy, though I would prefer to rent, because I don’t want to keep moving as landlords sell to profit from the rising housing prices. Rents are becoming more and more expensive, and it will probably be cheaper for me to buy IF I can find a reasonably priced condo to buy, which may or may not exist. I need a secure place to live as I work until my retirement in five to seven years. A house can be considered an investment if you happen to buy love and sell high, say in an inflated housing market like Vancouver. People are able to cash in, but then the question becomes, where are they going to move? Generally, to make money on their house, they have to move somewhere less desirable than the lovely city of Vancouver, which is not so lovely anymore.
Very interesting take Beth – you might be forced to buy.
“Rents are becoming more and more expensive, and it will probably be cheaper for me to buy IF I can find a reasonably priced condo to buy, which may or may not exist.”
I’m reading more and more about this. Are you in Vancouver?
I was certainly forced to buy as my family has outgrown my old little house and my kids need to go to better schools. Now I lived in my new expensive home for few days and saw how happy my family is, it’s definitely worth the price tag.
I for one always think you cannot consider a house only from financial terms. It’s the living style you choose and you pay for it.
Absolutely May – where you buy and what, for what reasons, is absolutely a lifestyle choice. This means emotions can and often do trump math when it comes to houses and other big purchases in life.
I just talked to my kids piano teacher, she has friends who are also piano teachers who were renting and now kicked out by the landlords sold the house. They had to look for new rentals, and one landlord doesn’t allow his tenant to teach piano. Renting could be hard and you have more control over your life if you own the house. I think I sleep better in my own house than in a rental house.
Ouch. That sounds rough and not much fun. I believe I would also sleep better in my own home (as in now) vs. a rental. It’s been a long time since I’ve rented.
I used to read these types of books and magazines a lot. Gordon Pape, The Wealthy Barber guy (can’t remember his name), Gail something, MoneySense magazine, and countless others. I’ve come to the conclusion that they all say basically the same thing. Having said that, I’ll probably read this one too if I see it somewhere.
It’s a good read. But yes, to your point, the basic principles are a) basic and b) never change – only the context. It’s undoubtedly the behaviours that are far tougher to master than the general advice. No book in the world can likely help change behaviour drastically.
Too bad Doug has his designation backwards on the jacket of his book. It is always CPA first, then the legacy designation, such as CA, CMA or CGA. Appart from that quibble, the book sounds interesting. So far as number 13 is concerned, I would tend do disagree based on my own experience, yet at present I do not own a house. Clearly, home ownership has a large degree of emotion in it, but with careful thought and planning, it can be beneficial financially as well as emotionally.
I think homes can be beneficial as well, however, there are so many uncertainties with any investment that I find it hard to believe anyone can see the future clearly – that includes what the housing market will or won’t do over any course of 5, 10 or more years. Sure, after a generation or two it’s very easy to see inflation rise and house prices move up with them. However, in the short-term, decades ago, could anyone have predicted Toronto and Vancouver housing prices accurately? I doubt it 🙂
Thanks for your comment Richard.
Myth three, paying off your debts has been a difficult one to figure out. The mathematical and logical method to pay off debts is to tackle the most expensive form (highest interest) first. However, there are also the emotional and motivation factors for that help you stay motivated to tackle and eliminate your debt.
Regardless of which method one chooses, the best one will be the one that help you get out of debt and stay out.
For me personally, I have a mountain of debt, but these debts help me make money. I have been able to use my debts to help accumulate assets and earn income. In turn, I use the income generated by my debt to pay it off.
I’m not sure you’d be saying mountain of debt are a great thing if rates rose to 5-7%. That said, they are not there now nor will be for potentially decades to come so leverage can work out well Leo.
What happens if you lose your ability to earn an income with all that debt? Is that a risk you are comfortable with? Curious.
These are great questions Mark. First, my mountain of debt is inherited by choice and for the purpose of investing rather than for consuming. The principal value of my investments are still higher than my loans so I can choose to pay off my loan once I need to renew.
Secondly, the interest rate for my loans are under 3% and are locked in until 2020. If interest rate is higher than 5%, most likely, I will repay the loan and wait for the next opportunity to come. It’s a bit risky when interest rate is higher than 5% in my opinion.
Third, if you are not financially independent yet, you will always have the risk if losing your main source of income. If that happens now, I will definitely feel some pain, but it’s not a disaster by any means. It will definitely throw my financial plan off course until I can regain my sources of income. I have built a sufficient amount of access to fund that will be able to last me a year without being in a cash crunch. If I can’t find a job for that long, then I will definitely need to do whatever it takes to not put myself in a worse situation.
Hum..If your investments are double than your debts, then that debt is fine for you. You might have taken HELOC right? If the rate is locked and you are so sure of making it work, then of course it is really worth the risk.
“Secondly, the interest rate for my loans are under 3% and are locked in until 2020.” I assume that means some form of mortgage or mortgages.
“If I can’t find a job for that long, then I will definitely need to do whatever it takes to not put myself in a worse situation.” Fair points. I don’t know many folks that wouldn’t be tapping their investments if they were out of work for a year. Interesting answers – thanks for sharing.
My investment loans are in the form of a second mortgage or a refinanced mortgage to borrow more. I prefer to lock in the rates for five years so I know exactly what my investment costs are for five years. Plus, I am forcing myself to save more when I have to pay both the interest and principal of my loans.
Loans are certainly a form of forced payments! As long as you can handle the risk…all good Leo.