A GIC That Doesn't Completely Suck

So I normally don't dish out specific investment advice (i.e I won't tell you exactly which stock/bond to buy or sell), but I'll make a quasi-exception here.

I'm not a big fan of GICs (Guaranteed Investment Certificates) given their lousy rates of return, but I understand that some folks might be highly risk-averse. If you're the type of person who really can't stand losing your capital, but would still like to earn some decent rates of return, or if you'd like to partially benefit from the gains of the stock market while not suffering any of the losses, there are some GICs out there for people like you.

RBC (just as an example, as there are other banks/institutions that offer them) offers what they call MarketSmart GICs. These are broken down into two types: Guaranteed minimum and unlimited returns.

Guaranteed minimum returns GICs guarantee you a minimum return, but also impose a maximum - the maximum return is the penalty you pay for principal protection. Unlimited returns GICs give you...well, the name is pretty self-explanatory. The catch with the unlimited return is you only partially participate in the market returns. For example, their Canadian Market-Linked GICs have a participation factor of 35%. This means you'll receive 35% of the rate of return of the market (if it's positive - remember if it's negative you simply get 0% but don't lose any of your invested capital). So if the market is up 10% in any given year, your GIC will get a return of 3.5%. You give up 75% of the potential market return (or in this case 7.5%) in exchange for capital protection.

While any given year can be quite volatile in the markets, if you buy one of these GICs and hold them for a 5-year period, there's a really good chance that you'll get a positive return. While there's obviously no guarantee, historically the stock market tends to return somewhere between 7%-10% per year (on average over a 5+ year period). Based on historical averages, you should be able to get 2%-4% returns on these GICs, but once again no guarantees (though your invested principal is).

Anyway, I thought I'd share this information, since the current low interest-rate environment can make it hard for those looking for guaranteed fixed-income products that can provide more than 0.5% interest rates, and give you a taste of stock market returns without any of the risks.

Of course, if all you're looking for is a moderate return on your savings in the short term, I suggest you check out EQ Bank. They're an online-only bank (much like PC Financial or Tangerine/ING Direct) but they offer interest rates of 2.25% on all deposits all the time. Since they're a member of CDIC, your deposits are guaranteed by the federal government (up to a maximum of $100,000).

Why A Payday Loan Is Like Renting A Car

Payday loans (and the companies that provide them) have been getting bad press in the last few years. We've heard numerous times about the exorbitant rates charged by these companies, and there have been calls for tighter regulation, as well as simply shutting the entire industry down. But what's the real deal with payday loans?

A payday loan is typically a short-term loan (usually for a few hundred dollars) and instead of charging you a certain amount of interest on the amount of the loan, they charge you a set fee. For example, in Ontario, MoneyMart will charge you $21 to borrow $100 for a two-week period. In other words, you borrow $100 and have to pay back a total of $121.

The maximum amount a payday lender can charge is set out by provincial legislation. In Ontario, it's capped at $21 per $100 borrowed over a two-week period, while the highest cap in Canada is $23 per $100, and the lowest is $17.

Now, a $23 fee to borrow $100 for two weeks might seem like a small amount of money, but that represents a 23% interest rate over a two-week period. This is equivalent to an annual interest rate of 600% (well, 599.64% if you want to be technical about it). See here for more information. Given that Payday loans aren't supposed to compound, that's simple annual interest, not compounded.

This is where most people get all up in arms about the whole situation. A 600% annual interest rate? Outrageous! Who would borrow money at such an outrageous amount? Turns out, a lot of people. How are they allowed to charge so much? Isn't there a law capping annual interest rates at 60%? Well yes, there is a section of the Canadian Criminal Code (section 347 to be exact) that limits the aggregate of all fees, interest, charges etc. to 60% per annum (with the exception of a few select fees like overdraft).

But then there came Bill C-26, which recognized, and made an exception for, payday loans. So while banks, credit card companies and even pawn shops can't charge you more than 60% interest per year, payday loan companies can (since their loans have to abide by a certain set of rules, such as being capped at $1,500 and having a term of no more than 62 days).


Carday Lenders

Let's compare payday lenders to the "payday lender" of automobiles, the car sharing program (such as Zipcar, CarShare, etc.) These car-sharing programs allow you to rent a car for as little as an hour at a time (though you can essentially rent it indefinitely if you so choose). Zipcar will charge you around $11/hour or $89/day for renting entry-level cars (such as a Honda Civic). If you were to rent that Civic from Zipcar for $89 for an entire year, you'd have paid over $32,000 - which is far more than what that Civic actually costs. You can rent a Civic from a traditional car rental company (such as Enterprise) for as little as $40/day or so. If you were to lease it from Honda, the base model Civic would cost you around $10/day (including taxes!). So renting from Zipcar costs nine times as much as leasing from Honda.

You could almost compare them like this (sort of, anyway):

Leasing from Honda = borrowing from a bank
Enterprise car rentals = borrowing on a credit card
Zipcar car rentals = Paypday loans

Zipcar (and others like it) sell you a product, namely the short-term use of a car, and they charge you a large premium for doing so. Payday lenders do the same - they charge you a (very large) premium for the short-term use of money. All you need to get a payday loan is be of the age of majority, have a bank account and a job. That's it. No credit checks, background checks or anything like a traditional lender would do.

You don't often see people complaining about auto-sharing programs, even though the rental costs are outrageous. Why? Probably because it's a product that fulfills a need people have, and they are willing to pay for it.


Final Thoughts

Payday lenders could be seen in the same light. They offer a product people need and are willing to pay for. Heck, now payday loan companies often have to post the effective annual interest rate, which means you can see (before you even walk up to the counter) that you'll be paying an equivalent interest rate of 600% per year. It's not like it's a secret.

The one big difference, of course, is that people who use auto-share programs often do so for convenience and as a lifestyle choice (though for some, it's because they can't afford to spend all that money on buying a car outright, and only need a car for a few trips a month/year). These people typically don't sign up for Zipcar because they're in financial distress. Conversely, people turn to payday loans usually because they're in a financial crunch. You don't resort to paying 600% annual interest rates as a lifestyle choice. That being said, for some, the payday loan is used in times of occasional (and temporary) cash flow issues.

Another argument that can be made in favour of payday loans is that they cater to a segment of the market that wasn't previously being filled. Some people would likely go bankrupt, end up homeless or go hungry were it not for payday lenders.

Personally, I think that while payday lenders aren't really any different in concept from an auto-sharing program, they cater to people who are typically in financial distress. But I don't know what the alternative is. If payday lenders were shut down, where would these people go? They don't have credit cards, no bank will loan them money, and they're in trouble.

In short, payday lenders aren't the problem - they're a symptom of the problem.

Getting rid of payday lenders without first addressing the underlying societal issues won't solve anything. In fact, in the short term, it may make things worse. Payday lenders will disappear by themselves once they're no longer needed.

So in the future, instead of getting all emo and upset about the payday loan industry, you should be upset that this industry has any (willing) clients at all. Focus your attention and problem-solving skills on the problem itself, not the symptom.

Tired of Crappy Cell Phone Plans? Check This Out

So, it's no secret that the Big Three phone companies have horrible plans that they'll charge you an arm and a leg for. They can do this because lemmings sheep people really want that new fancy phone for free/cheap, and the only way for that to happen is to allow yourself to be gouged with a pathetic plan that you pay out the wazoo for.

So wake up folks, nothing is "free". You either pay for that phone up front (and then get a great plan for cheap) or you pay nothing/little up front, and get gouged with huge monthly plan fees for a sub-par plan. Learn to math folks, learn to math.

That being said, should you choose to join the ranks of the enlightened, I'll help you out.

First, go here and sign up for a really good plan. 

How good you ask?

For $48 + tax, you get the following:

-Unlimited Canada-Wide Calling
-Unlimited Worldwide Texting
-Unlimited Picture/Video Messaging
-5GB LTE-Advanced Data
-$10/GB Data overage
-Voicemail 10
-Caller ID
-Call Waiting and Conference Calling

Now, if you already have a phone, simply get it unlocked (many services, such as this one, can unlock your phone so it will work on pretty much any network). You are now all set up.

If you don't have a phone, or need a new one, you have a few choices available.

If you're comfortable using/buying from Kijiji, simply look for a phone there. For $300, you can get a brand-new Moto X Play, or a Galaxy S5 (still totally decent phones). Just make sure you check the IMEI of the phone here to make sure it hasn't been blacklisted.

If you don't feel comfortable buying from Kijiji, I'd suggest you buy yourself a brand-new OnePlus X. It will cost you $300 CAD (including tax and shipping), is brand-new straight from the factory, and is quite a nice device. It's about on par with a Galaxy S5 in terms of power, and comes with a screen protector already applied, a case and it ships unlocked. 

If you'd rather buy from a physical store, and don't mind a cheaper/less powerful phone, Costco sells the Samsung Galaxy J1, which costs around $140 (other stores sell it too). Or you can buy a Moto G outright for around $240 from most stores.

Bottom line is, for $300 you can get a really good smartphone these days, and combine that with a $48 monthly plan (which is one of the best plans you'll ever get) there's really no need/reason to lock yourself into a two year contract for $70+ per month for a shitty plan, just to get a cheap/"free" phone.

Give it some thought.

Canada Pension Plan Expansion

So the government recently announced an agreement to "enhance" the CPP going forward. This means your contribution rate will increase, but you'll get more money in retirement in exchange. These changes will be phased in quite slowly, so it will be many years (even decades) before any meaningful impact is felt, both in terms of less money in your pocket now and more money for your retirement.

But is this a good thing? Should we enhance the CPP? The answer depends on your point of view.

Much has been made about the returns the CPPIB (CPP Investment Board) has been earning on its investments, and truth be told they can be quite good certain years. But this is different from YOUR actual return on your contributions. In other words, is the pension you receive from the CPP a good return on the money you (and your employer) have contributed to it?

The answer to that question is "no". While estimates vary, the Fraser Institute estimates that our real return is around 2.1% (real return means it has taken into account the effects of inflation) going forward. You can read their paper on the matter here.

To put this return into perspective, the average annualized return for global stock markets (Canadian, US and international) since 1970 is around the 9.5% range. Taking into account inflation of 3.5% or so, you're looking at a 6% real rate of return. Compared to this, the 2.1% return the CPP gives you is pretty...dismal.

Now on the flip side, the CPP is forced savings. As I mentioned (very diplomatically, I might add) in one of my previous posts, the reason a lot of people don't have pensions/retirement savings is that they simply don't save. For all its faults (and the CPP has many) a forced savings plan that essentially saves people from their own laziness/ignorance/stupidity is a good thing, regardless of its poor returns.

However, for those with the discipline to save and invest their own money, the CPP is a pretty bad deal. But that's socialism for you - you gotta take the good with the bad.

Buying a new smartphone on the cheap

Everybody loves a brand new, shiny (and expensive) smart phone.

But if you’re just looking to replace a broken phone (you dropped it one too many times), take a look at Koodo. They’re selling the Moto G for something like $80, or a Galaxy S3 for around $130. The phones can then be unlocked for $10 or so and can then be used on any network. I believe Best Buy is selling them outright too.

These phones may not be as powerful as the newest iPhone or Galaxy S6, but they’re still perfectly capable, and if all you do is text and listen to music while surfing the web a bit, they will serve you just fine. No need to buy a Ferrari if all you do is drive 2km to the grocery store.

Rant Rant Liberals Rant

So, a Chamber of Commerce study has concluded that the high electricity prices in Ontario are bad for business. You don’t say. What a shocker.

Also, it turns out that an Environment Canada emissions study showed no material benefit resulted from shutting down coal plants (from an air quality point of view). Our hydro bills, however, have definitely felt the hit. Obviously shutting down the coal plants greatly benefitted the wind and gas plant companies (my money is on political cronyism, probably a lot of Liberal connections has vested interests in shutting down coal and building new, privately-owned generation).

Good job Liberals. I’m so glad you are the custodians of our growing mountain of debt (with nothing to show for it), sagging economy and messy electricity sector. At this rate, we’ll make Greece’s current situation look pleasant by comparison when we finally blow up.

Mutual Funds

This one is a touchy subject. In my first job after graduating from university, I worked for the investment management arm of one of Canada's large banks as a performance analyst. This firm managed about $30 billion of assets, and I was responsible for calculating their monthly, quarterly and annual performance, which involved talking to the fund managers and analysts on a regular basis. I therefore knew quite well what they did, why, and how well their funds performed. The truth is, all these intelligent people, with the MBAs and fancy analysis couldn't beat their benchmark index most of the time. This means that if you had just invested in a passive, index fund (meaning a fund that simply tracks a broad index like that S&P 500 or the TSX), you would have done better.

Most banks will try to sell you mutual funds. Not just any mutual funds - THEIR mutual funds. Why? Because they charge a high management fee. Most normal funds charge around the 2% range. Think about that for a second. If your mutual fund generates a yearly return of 7%, you only get 5% after they deduct their fee. And they get this fee regardless of how well your fund does. If your fund loses 3% in a year, your actual performance after fees is -5%. Sucks, doesn't it?

So, next time your financial adviser suggests one of his bank's mutual funds, you should ask some questions. Make sure the management fee isn't too high.

If you're looking at mutual funds, I would suggest sticking to index funds (i.e passive funds that simply try to mimic an index). They tend to do better over the long term, and their management fees are usually quite low, well beneath 1%. Even better, look at passive, index ETFs (exchange-traded funds). Some have management fees as low as 0.15%. This means you get to keep more of your money.

Bottom line? Banks push their own mutual funds because they make more money off of them, and your adviser is probably going to get a higher commission by investing YOUR money in a high-fee mutual fund than in a low-cost index ETF.

If you need more advice or tips, feel free to ask questions in the comments section, or fire me an email. I'm happy to help people save their money and give the banks less.