Practical Index Investing Course is Complete

January 2nd, 2017 by Potato

My online course to guide you through becoming a do-it-yourself investor is now complete. Click here to download the final syllabus.

I want to thank everyone who signed up for the early access period, some of whom signed up over half a year before expected completion on little more than an outline and a promise (and a clever quote from the Hitchhiker’s Guide to the Galaxy). I ended up a month late on delivering the completed course, with some entirely reasonable extenuating circumstances. Having those paying customers patiently waiting was hugely motivating, and kept me going even as the work ballooned.

About the Course

The course is your complete guide to all the practicalties involved in becoming a do-it-yourself investor with index funds or ETFs, including:

  • Coming up with a basic plan to guide your investing.
  • Assessing your risk tolerance, and understanding the risk involved in investing.
  • Creating an account and purchasing an investment.
  • Choosing between your TFSA and RRSP.
  • Tracking your gains and reporting your investment income on your taxes.
  • Managing your behaviour and setting up good processes for long-term success.

What Does Complete Mean?

I say the course is complete, but what exactly does that mean? Well, I’ve delivered on all the essential modules in the syllabus, and what I had originally envisioned1. That doesn’t mean that now I’m going to unplug and ignore it. I’m a strong believer in continuous improvement, and will keep tweaking the course to refine the content that’s there, and add material to address questions as they come up. The course platform has a discussion section, which will help identify areas that people may be having trouble with. I also plan on running a few webinars through the year — a feature other courses charge extra for — in case people want more chances for discussion and Q&A.

1. Note that a few minor changes were made to the structure since the original outline, in particular much more information in the middle sections, and I realized that there was a lot of overlap between sections 5 and 9, so those were streamlined.

Never Weight

January 2nd, 2017 by Potato

I’ve gained a crapload of weight in my life. I started undergrad as skinny and ended a touch on the pudgy side. But the final year of my MSc was the worst — I was depressed, my experiments failed so I had to repeat a number of experimental runs, and my nominal two-year master’s took over three to finish. Plus I got a kidney stone and was bed-ridden for over a week, and had trouble even making the 20-minute walk to work for several months afterward. In that short span of time I gained so much weight I blew right through fat to obese. Over half that weight was packed on in a span of just a few months, weight gain so rapid it left me with stretchmarks.

But I had work to do — thesis to write, experiments to science, thorium to mine. Losing weight takes willpower and mental energy (and moreover, can’t be done while also powering through consecutive all-nighters on the power of caffeine and refined carbohydrates).

After I defended my MSc, I managed to lose a tiny bit of that weight (not much) and get in a bit better shape (not much). As my PhD was coming to an end, I knew that I might backslide a bit, but set a “never weight” for myself so that I wouldn’t go through another round of that kind of damage to myself as I finished my PhD, especially because at that point I had (somewhat) figured out that I wasn’t destined for an academic career and science wasn’t worth the sacrifice. If at any point I hit my never weight, I made a deal with myself to miss deadlines or whatever it took to keep that under control. I managed to finish my thesis with minimal weight gain, and lost that and then some after Blueberry was born (having a kid is a great impetus for changing bad habits). I figured ok, this is just my life now: I’m overweight but have held steady here for a few years running.

Then I hit a few busy periods at work, and again all-nighters and 100-hour weeks became a central part of my life. Here’s a hot bio-hacking tip: you can survive on just 3-6 hours of sleep per night for up to 2-3 weeks of insanity if you just keep eating. Can’t fall asleep while you’re mid-chew!

I gained 10 pounds in just a few weeks for one big project (my “Discovery Frontiers” weight), managed to hold the line for a year, and then gained another 10 lbs over a few weeks (the “CFI Innovation Fund” bonus gift). By then I let some bad habits form (esp. eating at my desk at work), and got really run down from chronic sleep deprivation (many causes), so even holding the line became hard, let alone losing that weight after the crises passed. But as long as I had shown I could work so intensely for someone else, I decided that rather than simply throttle back after those busy periods and focus on recovery, I would keep it up and work for myself. I wrote The Value of Simple. I started developing the Practical Index Investing for Canadians Course, both brought to you by the letter C for chocolate, chips, coke, and caffeine, and the number 5, for the hours of sleep I averaged most nights.

Then in the last big project (that ended in early October) I gained some more weight and hit my never weight. I was about to put up this post and commit to focusing on my health as soon as the investing course was done, but then Wayfare got sick, which was not exactly a stress-free time. But now it’s a new year, and the course is done, so this seems like a good time to commit to making this year all about improving my health. I started already, skipping any bound-to-be-disappointing New Year’s Eve stuff to just get to bed by 8 last night :)

I don’t have a diet/exercise plan sorted out precisely yet, but I’ve got some ideas. My first priority is to fix my sleep schedule, as that alone will close some positive feedback loops.

And that’s it for the year’s goals: I’m not writing another book, I’m hoping that now that the course is done I’ll have put myself out of the investment coaching business, and I don’t have plans to take on many freelancing projects. A few speaking gigs will likely be the extent of my non-daddy, non-day-job stress-inducing activities.

Winter Tires and Bang-for-Your-Buck

December 17th, 2016 by Potato

When it comes to safety and your vehicle, seatbelts are likely the obvious winner in bang-for-your-buck. They’re cheap and save a whole bunch of lives. Yet when I was a kid, I knew adults who wouldn’t wear their seatbelts and just “wouldn’t drive like idiots.”

When I was a cheap grad student driving an older car, I also said something similar as a rationale for not getting winter tires. I didn’t want to buy dedicated rims for a car that might only live another three or four years. I didn’t drive to work so I could always plan my driving to avoid the worst winter storms, and I mostly drove on the highway which was excellently plowed. Well, of course none of that was really true: there were always the storms that came in by surprise (or because I didn’t always check the forecast), or the times when it was important to brave the weather, or the times when most of the route I wanted to drive had been plowed and salted, but part of it was slushy or icy. And even driving carefully there would be a time or two when instead of stopping at the line as I meant to, I’d stop in the crosswalk. Or I’d slip and spin the wheels trying to get started. Never with anyone there, thankfully, but visceral reminders that you can’t cheat winter.

Finally, my tires needed to be replaced. And at the time a new kind of tire was on the market, an “all weather” tire (vs “all season”) called the Nokian WR. They’re good enough in winter conditions to earn the mountain+snowflake mark of winter tires, but the rubber stays hard enough in the heat that you can drive them all year long, so no need for a second set of rims and twice yearly change-overs. They were such a huge improvement over all seasons in winter driving.

So huge that I didn’t need fancy equipment like tape measures and controlled conditions to see the difference. It was like night and day in the ability to drive, and I was never going back to trying to muddle through winter with all-seasons (or “three seasons” as called by car buffs).

Now, they are a bit more expensive, but for the amount of safety edge they give you, it’s really cheap. And important – I definitely recommend them to everyone. After all, “Tires are the sole point of contact to the road. Do not underestimate their importance.” And I used the words “night and day” above – go and find people who have put winter tires on their car and see how many express the increase in traction that way. Yes, it’s anecdotal data, but try to find the number who say “meh, I’m not sure winter tires were worth it.” I could find a few such opinions online, but in person everyone I knew who had got winter tires was satisfied with the value for them and would not go back. The only people who weren’t sure winter tires were worth it were people who hadn’t tried them.

I idly speculated on Twitter that winter tires were possibly the second-best bang-for-your-buck when it came to safety, after seatbelts. Determining how much added safety you get is a bit of a tough metric to come up with, but we can bracket in the cost side fairly easily.

For my Nokian WRs, they cost about $200 more, all-in, than the set of three-season tires I would have purchased instead. There was no hassle about changing them over, storage, etc. So if we assume that a car would need about three sets of tires in its lifetime, that’s about $600 total.

For dedicated winter tires on my Prius, I paid about $850 for the first set, which included steel rims. Then, I had to either pay $20-30 each season for a change-over, or $100 for a jack and jack stands to do it myself (plus the hassle of actually doing it myself). However, the cost of the tires is offset a bit because while the winter tires are on the car, the three-seasons are not getting worn down. So the added cost of winter tires for a 15-year car lifespan would be about $850 for the first set, $650 for the next two sets, $600 for 30 change-overs, less $800 for saving a bit over one round of three-season replacements. $1950 all told over the lifetime of the car.

Safety margin added? Huge. Tremendous. Just enormous. See this video (H/T Preet) for a demonstration of just how much extra traction winter tires provide (and don’t forget that even on clear, dry roads, the cold temperatures alone increase the stopping distance of three-season tires).

What would some other bits of gear people often pine over for their cars for safety reasons?

How about all-wheel-drive, which many people say they need for winter driving? Well, on a Rav4 adding AWD will run you $2,265 on the sticker price, and it will decrease your fuel economy by about 0.5 L/100 km. The total lifetime cost could be over $3,500. Safety margin added? Really not much. As much as people swear by AWD, it really does not add much on safety. If you can’t “get up and go” on two wheels, it’s maybe a sign you shouldn’t be driving, rather than that you need help from the rear wheels. Plus every car has all-wheel-stop (i.e., brakes on all four corners), so AWD sometimes provides a false sense of confidence when you get going, which is shattered when you try to stop. I’d take a FWD car with winter tires over an AWD SUV with three-season tires.

Electronic stability control is another feature that adds a margin of safety in winter driving, helping you to keep steering in the direction you want to go and preventing an uncontrolled skid. This one also has a fairly high addition of safety. However, I can’t even find a set of models to compare to tell you how much extra it costs now because many manufacturers have made it standard equipment — and when I was thinking of ranking features by bang-for-the-buck, this one was one I thought might possibly beat out winter tires.

Conclusion

Winter tires will cost a bit more money than three-season tires. However, they add a huge margin of safety to your winter driving. In terms of the bang-for-your-buck, they’re well worth the money in my opinion, the only thing you can optionally buy for your car that provides that kind of value. Plus you can think of them like insurance: you pay a bit more to get them and hope that you never need those extra few meters of stopping distance – you can still not drive like an idiot, but it’s there if you need it.

Go ahead and ask around, this is one area where there is virtually zero disagreement from experts and those who have tried it. Winter tires are awesome and well worth the price.

With winter-rated all weather tires now available, there really is no excuse to not at least have something winter-rated and better than a typical all-season. Not having storage or the ability to do a change-over is no longer an excuse, and the extra cost is so small that if you can afford to drive in the winter at all, you should be able to afford to drive on something decently safe.

What if you really can’t afford it? Like, driving at all is barely within your grad student budget? This may be bad advice in the end, but if you need to sacrifice something on your car to afford the trade-off for all-weather cars, sacrifice an oil change. Many people change their oil twice per year – dropping one of those should free up the money you need to buy a slightly better set of tires.

CPP Calculator with 2016 Changes

December 16th, 2016 by Potato

“How much CPP will I get?” is a common question, and an important one that will help feed your financial planning. You can get a statement detailing your CPP contributions from Service Canada, but unless you’re close to retirement this isn’t super-helpful for planning purposes because it’s harder to do what-ifs with it. Indeed, it will basically assume that you’ll continue earning at your current rate until a given age, which is not helpful if you’re trying to evaluate early retirement scenarios. Plus, it’s a fair bit of work for precision when you may just want a good enough estimate. There’s also a calculator at Service Canada that includes the CPP, but it’s web-based so not great for playing around with, and it doesn’t do a good job of incorporating changes to future income, nor does it appear to be updated for the coming changes to CPP (announced in 2016).

So I’ve built a spreadsheet to let you do just that. Click here to download it (Excel). Keep reading for details on the calculations and how to use it.

A screenshot of the CPP calculator spreadsheet

Background and Acknowledgements

This came about because Sandi Martin came to me asking how to solve the problem of estimating the future CPP for people that would partially benefit from the changes to CPP announced in 2016 (which will be slowly implemented over the coming years). She had a spreadsheet for the old calculation, but I pretty much started from scratch to build this in. Having her sheet in front of me as I did so was helpful, and she was instrumental in the testing and trouble-shooting.

This post by Doug Runchey was hugely helpful on the algorithm CPP uses, which is not as intuitive as you would think. Doug offers a service to calculate your CPP precisely, so if you need to know down to the last dollar how much you’re going to get, contact Doug and pay him to run that calculation for you.

Instructions

Simply fill out the boxes shaded blue, then scroll down to see how much your CPP is. The year and age should be self-explanatory.

Dropout: You’re allowed to drop a certain number of years from your CPP calculation. This lets you have a few years of low/no earnings and still collect the maximum CPP. Right now you’re allowed to drop 17% of your working life (over at CPP it’s actually in months but the spreadsheet uses years). So the number of years that works out to depends on when you collect CPP. However, there are cases where you can use the child-rearing provision to drop more years — use this field to add those drop-out years, in percentage form. Note that if you’re adding years as a percentage, now you’re making an assumption on when you’ll take CPP, so the table at the bottom will have further approximations for you.

Income: Enter how much you earned each year towards CPP. For years before 2017 enter the actual amount in that year’s dollars. For years after 2017, use real dollars. That is, if you’re earning $50,000/yr now (just a bit under the YMPE), and next year expect to get a cost-of-living raise only, enter $50,000 for 2018 — you’ll still be at the same fraction of that year’s CPP maximum. If you’re expecting a 4% raise — 2% cost-of-living, and 2% real increase in pay, then enter that increased amount above inflation for the future year ($51,000 in this example). And that continues for future years: if 10 years from now you expect to just pace inflation, keep filling in the same salary figure in 2017 dollars.

Otherwise, have fun exploring your what-if scenarios for when you stop working, etc.

Results

Keep scrolling down past all the years to enter your income history, and you’ll find a little table with the results — how much you can expect to earn from CPP annually. This includes the bonus/penalty for waiting to take it/taking it early, so you can quickly see about how much you’ll get for taking it at different points.

Approximations

The calculation should give you your CPP benefit to the nearest 5% or so (several people have sent me their statements of CPP and even for those collecting under the old system, there are differences of ~1-3%). I’m happy with that level of good enough — after all, you can get about that much difference just from deciding whether to enter your age as of the beginning of the year or the end of the year. If you need more precision, lookup Doug Runchey’s service.

CPP is actually based on months of contributions (and months of drop-outs, etc.). Here I’ve just rounded off (discretized) to years, which is going to cause a bit of discrepancy. This will also cause a slight issue in the table of results for taking CPP at different ages, as whole years of drop-out pop up at 62 and 67 (vs. the more gradual inclusion of drop-outs when you discretize to months).

You can drop extra years for the child-rearing provision, however there are some extra rules about the dropping out that the spreadsheet doesn’t account for. If you add extra percentage drop-out for child-rearing, that’s not necessarily going to translate into the same years dropped out at each age for taking CPP, so it will be less accurate if you’re including extra drop-out years for disability or child-rearing. On top of that, there has been concern that the drop-out provisions wouldn’t apply to the enhancements, though with several years to the enhancement roll-out this may yet get patched. To assume the CBC article is how it will be (i.e., it won’t get patched), reduce your drop-out by ~33% for years after the full implementation.

The five-year average rule for determining the pension payout is hard to apply in the future where the inflation rate is unknown, so I’ve assumed an inflation rate similar to that of the last 5 years.

Commentary

I was actually somewhat shocked as I went through this at how mis-leading the initial government release on the CPP enhancement was. I had seen the “upper earnings limit will be targeted at $82,700” in all the news stories — which sounds substantially higher than today’s ~$55k figure. What I didn’t see was that this figure was not in today’s dollars, but in 2025 dollars, and that they assumed a rate of inflation close to 3% (well above the recent experience) — in today’s dollars, the new upper limit is actually just $62,586 (14% higher).

I was also surprised at some of the little things in the calculation, like that the payout is based not on the YMPE level when you start collecting, but a lower number (the average of the previous 5 years). I can’t fathom the point of this step of the calculation.

Otherwise, I haven’t seen explicit information on precisely how the CPP enhancements will be rolled out, but have made reasonable guesses as to how they will be pro-rated. What are the CPP enhancements, you ask? In short, an increase to the maximum amount you can contribute to CPP (so it will cover more of your income if you earn more than the maximum now), and an increase to the amount of income CPP will look to replace (from ~25% now to ~33% for those in the future). These were announced in the summer of 2016, and will start being phased-in in 2019 over the course of 7 years.

Updates

Version 2: Adjusted the age 66-70 calculations to keep using 48 years as the number of contributory years as part of the over-65 drop-out provision (see comments). Also rolled forward the calculations for 2017’s YMPE.

Once again, click here to download the CPP calculator (Excel). (click here for version 1).

Emergency Funds FTW

December 1st, 2016 by Potato

I don’t want to risk having my personal finance blogger license revoked, but I haven’t been paying attention to our budget as we deal with Wayfare’s recovery. I’m pretty sure we’re spending a bit more than average — we’re certainly eating more pre-made food, and spending more on drugs and parking and a walker, but much of that pre-made food is brought over by family and friends.

I actually haven’t been thinking or worrying much about money the past few weeks, which is as it should be. Early on my mind would wander to the topic and I’d try to crunch numbers as I rode the subway, without the benefit of a proper spreadsheet. But at some point I internalized the message that we’ve got an emergency fund and we’ll be ok. So I stopped worrying and focused my energies elsewhere.

And really, that’s what emergency funds are for, so you can make it through these completely random, crazy events without also having to worry about money in the short term.

TTP is a very rare disease, with an incidence of about 3 in a million. But that means that next year about 100 families in Canada will be hit by this. Another 200,000 or so will face a cancer diagnosis. Some others will be hit by a job loss, or a major repair bill.

As financial literacy month draws to a close I just wanted to quickly underscore how important it was to be savers when times were good, so that we could make it through a trying time like this. Yet many Canadians don’t have an emergency fund (here’s one survey that says a quarter have less than $1000). I mostly focus on investing stuff — it’s important too, and where I can actually make a difference — but emergencies can strike at any time. I don’t know what to say to all those people to get them to start, but having an emergency fund is important. I don’t know how we’d be handling this situation without it.