The Fed wants to see wage growth but is the annual raise dead?

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Did the “Great Recession” kill the annual raise and replaced it will variable compensation – the annual bonus? Base salaries are often a company’s major fix cost of doing business and can be a drag on corporate profits during recessions. In a perfect world, variable compensation allows companies to align corporate and worker incentives, it rewards high performers and hard workers. It also allows companies to pull back on employee costs during hard times without resorting to layoffs.

In reality, switching from raises to bonuses has mucked up a lot of things. For starters, it’s hard for an employee to make long-term financial plans with such short-term financial commitments from their employer. It’s nerve-wracking to take on a 30-year mortgage if your income is $100,000 this year but might be $80,000 next year.

Managers are caught in the middle, they feel the need to give something to everyone. In some cases, managers believe that the bonus is not related to performance but part of the employee’s salary. Ultimately, less money goes to the top performers and the poor performers are getting more than they deserve. This more humane approach throws a big monkey wrench into the big cost saving idea behind bonuses. Many corporations are having trouble holding on to their best employees.

The Towers Watson survey found that 40 percent of firms said turnover is rising, and 52 percent said they are having difficulty retaining “critical-skill” employees, compared to 41 percent last year. You’d think the solution to the problem of “talent mobility” would be relatively easy to solve — more pay.

Is it just my imagination or has corporate culture become more greedy? When did employees become liabilities instead of assets of the company. The captain of the corporate ship is getting well compensated for sub par performance by his bubbies sitting in boards room. Corporate boards are suppose to protect shareholders but they are allowing  financial engineering (share buybacks) to mask poor performance.

Are you prepared for your annual job review? I would recommend making a list of possible job perks that you may want if  your bonus or wage increase is lower than expected. You may want to read, Money Tip: Ask for Job Perks, to get some ideas on what to ask for.

A personal experience: As an owner of a small business, I have sat on the other side of the desk. I found the whole employee job review process to be very stressful.  The most uncomfortable experience that I had was seeing a grown man cry during his job review. He was not only older than me but had more industry experience. He expected to be fired but I decided before the tears to give him a second chance. In the end, we were both winners. 

 

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My 100th Post: If Money doesn’t buy Happiness, than you are spending it Wrong

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I wouldn’t have worked as a financial advisor or be writing a financial blog if I didn’t believe that most people have a happiness number.  Your happiness number will be adjusted over time based on changes in your lifestyle choices.

You don’t need a degree in psychology to recognize that happiness is a state of mind. I have to admit that after a modest level of income, there isn’t really any evidence to suggest that people’s happiness increases with their wealth.  Money is not going to turn an unhappy life into a happy one. Some people are unhappy no matter how much money they have. However, I have also seen where spending money that you don’t have can turn a happy life into an unhappy one. Whether you are loving life or hating it, I do believe that it could really depend opon how you are spending your money!

“I’ve been rich and I’ve been poor. Rich is better.” This insightful bit of personal financial wisdom has been credited to entertainer Sophie Tucker, comedian Joe E. Lewis, comedienne Fanny Brice, actress Mae West and many others.

Some tips on buying some happiness:

Tip 1 – Buy experiences instead of things

Who we are as individuals is the sum of our experiences not the sum of our possessions. The joy of buying something new tends to deteriorate over time but creating memories last a lifetime. Sharing those experiences with family or friends can make you even happier.

Tip 2 – Many small pleasures might be better than a few big ones

Will you be happier saving money for a big-ticket item like a luxury car or indulging in small things like going to a spa or out to dinner with friends. You may be surprised at how many small pleasures can add up to a happier lifestyle.

Tip 3 – Spend on others and not yourself

There is a lot of merit to the saying “it is better to give than receive” The holiday season is just around the corner. Isn’t seeing the reaction of family & friends opening a gift that is thoughtful and unexpected, priceless?

Tip 4 – Rent a dose of happiness

You can enjoy something without having to own it. Rent a cabin hideaway if you enjoy the great outdoors. If you love the thrill of driving a luxury sports car, rent one occasionally or sign up for a weekend racing experience.

Tip 5 – Before you buy think about all the downsides

Often people buy with rosy colored glasses, they only see the good buying points and forget all the shortcomings. For example; some people think that owning a truck and a large trailer would be a great way to see the countryside. What they don’t see is having loud neighbours at camp sites, buzzing insects, traffic jams and vehicle breakdowns. Happiness is often in the small details.

 

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During my career as a financial advisor, I helped many clients find their happiness number. For some it was buying their first home, for others it was seeing their children graduate or get married will little or no debt. In my own case, my happiness number allowed me to retire early and spend more time with family & friends.

I am very fortunate to go south every November to play golf with my buds. We started 13 years ago with a total of 8 golfers, we now have 20 and there is a waiting list to join our group. We have so much fun that one of my house mates made a surprise comment. ” I would have to be on my death bed,  for me to miss this golfing trip” (Money well spent!!!)

When you think about it, money has no real value except that it can be exchanged for goods & services that we need and want. In my humble opinion, the whole purpose of having wealth is to use it as a tool to create a life you desire, enhance the lives of people you care about and hopefully leave a legacy that you are passionate about.

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Rebooting Year-end Tax Planning Tips

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When I was a financial advisor, I use to contact my clients with some year-end tax saving ideas. As a writer of a financial blog, I decided to remind readers that now is a good time to review your tax situation. Holiday season is just around the corner, you are going to be busy visiting with family & friends and Christmas shopping.

You will be glad during tax filing season that you planned ahead! You could reduce your tax bill or generate a bigger tax refund. I updated a similar post that I wrote last November and added some new tax saving tips.

Tip 1 – Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Do you need new eyeglasses or hearing aids then buy them now. Planning a winter vacation that requires medical shots, get them ahead of time.

Tip 2 – Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and the full amount is tax-deductible creating a bigger tax deduction.

Tip 3 – Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax-deductible retirement account could generate a bigger tax saving. (Plus stock market returns have been known to be higher from November to April) If you are retired and your income is lower than last year, consider withdrawing a little extra from your retirement account and put it into a tax-free account.

Tip 4 – Have you sold any investments in 2015 that will generate a taxable capital gain?  Do some tax loss selling of investments that are underwater to offset the capital gains. In Canada, a capital gain loss can be carried back three taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5 – Postpone selling your investment winners in non-registered accounts until January to avoid paying tax in April. If you have losses, consider selling some winners and buy them back again to increase your cost base.

Tip 6 – Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket. For example, in Canada you can contribute to your spouses’ retirement fund and claim the deduction.

Tip 7 – Top up education savings plans for your children or grandchildren to ensure your plan gets any eligible government grants. (Canadian grants stop the year in which the child turns 18)

Tip 8 – Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 9 – Check to see if there are any changes to tax laws that could affect your tax return for 2015 & 2016. There could be some new tax deductions or some deductions that could be eliminated. (In Canada, the Family Tax Cut allows families with children to split their incomes for a tax credit maxing out at $2,000.00)

Tip 10 – Small business owners should go over their account receivables and make a list of potential bad debts. Consider writing off any bad debts that are more than 120 days overdue before tax season ends.

According to the Fraser Institute, tax freedom day in Canada was June 10 this year. The average Canadian family with two or more people will pay 43.7% of their annual income in taxes. The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

Do you have any year-end tax planning tips?

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Sometimes Being Frugal May Not Be Worth It?

Friends of mine invited us to join them on a four-day bus tour to New York City. I wasn’t very keen on accepting their offer; travelling ten hours by bus from Toronto to a hotel in New Jersey and back again wasn’t very appealing. After a little arm twisting from my wife, I decided to take the plunge to go on my first ever long distance bus tour.

Some Positive Points of Touring by Bus

  • Lots of stops to stretch our legs, get some food and use restrooms
  • We watched an interesting documentary on the Statue of Liberty & Elis Island on the trip down
  • Our route was very scenic  through the rolling hills of Pennsylvania and upper New York
  • Discount coupons for shopping in New York City, plus at an outlet mall on our return trip home
  • Really well-organized, lots of information on things to see, handouts on train & subway lines
  • Tour guide provided some fascinating facts at all the different stops (The Wall Street Bull isn’t on Wall St because of permit problems)

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Biggest Negative Was I needed More Time to See the NYC Sights

  • Traveling back & forth from New Jersey to Manhattan wasted 2 hours a day
  • Lots of time waiting for everyone to rejoin the group at the different stops plus getting on and off the bus
  • Spent too much time on sights that I wasn’t interested in and not enough time on other sights
  • 10 hours by bus verses 1.5 hours by plane
  • Great travelling weather but it was cloudy & raining during touring days     : (

There were too many highlights to share in one post so I will only mention two that really moved me. The first was visiting Elis Island because the ship that my mother and I took from Italy stopped there before we boarded a train from New York City to Toronto. Thousands of immigrants made the same journey under much worse conditions.

The second was the One Trade Center Memorial where the names of all the people who died during 9-11 are listed. The two reverse water fountains symbolizes tears. Memorial staff remember victims’ birthdays by placing a single white rose by their names.

Some Travel Tips for NYC

  • Admission tickets to popular sites have to be booked in advance (2 weeks or more)
  • Popular high-profile sites have airport like security checks, give yourself some extra time
  • Manhattan Streets run east-west and Avenues run north-south, impossible to get lost, or so they say
  • Trains & subway lines are relatively safe and easy to use
  • Expect carrying bags & backpacks to be checked even at low profile sites like at St. Patrick’s Cathedral

Now I did save money taking this bus tour but in hindsight, there are so many things to see in New York City.  I think it would have been worth it to spend the extra to fly to New York and stay in a relatively cheap (for Manhattan) hotel. Either way, I highly recommend putting New York City on your bucket list.

Happy Thanksgiving to all my Canadian readers & followers!!!

Bank of Mom & Dad, Cutting the Purse Strings

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It’s natural for parents to want to help and support their children. But should that help continue well into adulthood? By helping too much, parents run the risk of imperiling their own financial future and creating dependence. The reality is that you are not doing the adult kids any favors  by always bailing them out.

The Great Recession rewrote some of the rules of financial independence for many young adults. With jobs being scarce, student debt soaring and high household debt, it wasn’t uncommon for grown children to take refuge in their childhood homes.

Those were unusual circumstances when even hardworking children found themselves in financial straits. It is okay to help them if they are financially responsible but have fallen on hard times. However, an “open wallet” policy is dangerous for parents as well as children. Always coming to their rescue can jeopardize both your child’s drive and your retirement security.

Tough Love: Teaching Financial Responsibility

The best defense against dependent children is increasing financial responsibility as children grow. You need to start the process when your children are young. Counting on the school system or waiting until after they graduate college can be a costly mistake.

I strongly recommend pushing your young children to get part-time jobs. If they are driving the family car, make them pay for some gas or a portion of the car insurance. Paying for some or all of their cell phone bill is another way to teach financial responsibility. Avoid always acting as their personal taxi service, make them take public transportation once in a while.

My son never wanted to use the family van when going out with his friends while living at home. Going away to university, he spent two years taking public transportation, that experience really changed his attitude. He was so grateful that I gave him our 10-year-old van instead of trading it in.

It’s okay to say no! My eight year old daughter asked for horseback riding lessons. I honestly didn’t take her request seriously. I said that riding lessons are expensive and we didn’t have the money right now. She came back with the job section of our local newspaper. She pointed to an ad that was looking for delivery people. “Is this enough money to pay for riding lessons”? It wasn’t but we said yes to riding if she was willing to give us half her earnings from the paper route. (We invested her money and gave it back when she graduated from university).

The Right Kind of Help

  1. If your children need a car to get to work, consider giving them an old family car that is still reliable. A few repair bills can teach them some added responsibility and give them an incentive to save for a new car.
  2. If your children are paying a high rate of non-deductible interest on their student loans, loaning them money at a lower rate of interest can be helpful. Put all the details of the loan in writing and make sure that your children make regular monthly payments to you.
  3. Some assistance with a down payment for a house is okay as long as your children are willing to disclose their financial situation. Bank of Mom & Dad should ask the same questions as your local banker. Are they paying off their credit card balances every month? What are their fixed monthly debt payments? Add the estimated mortgage payments, property taxes and heating costs to those payments, if it exceed 40% of their gross income then they probably can’t afford to buy the house.
  4. Help your children save for retirement. Deposit money directly into a retirement account that generates a tax refund. The refund gives them a little extra cash but the compounding effect from investing the money early can increase the chances of a successful retirement.
  5. Some children will never be financially responsible, skip a generation and open an education plan for your grandchildren.

As a financial advisor, I encountered financial mistakes made by some of my wealthier clients. For example; a client  gave his newlywed daughter and son-in-law enough money for the entire down payment for a house.  Three years later, they got divorced and the ex-husband walked away with half the proceeds from selling the house including half of the Dad’s down payment.

As a parent, you need to protect yourself, get some legal advice when transferring large sums of money.

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Gifts vs. Loans

For U.S. citizens there is a gift tax on sums greater than $14,000 or $28,000 per couple. In Canada, there isn’t a gift tax on money given to adult children. However, transferring investments or property to your children can trigger capital gains tax which must be claim on your tax return. Be extra careful transferring investments to a minor, the parent incurs tax on any interest or dividend income from those investments until the minor turns eighteen.

Be aware that the tax man requires a minimum interest rate charge to loans made to family members. The interest rate varies from year to year. The current rate for Canadian families is only 1% with no time restriction regarding payback.

However, Internal Revenue Service rules are different, in March the Applicable Federal Rate was 0.40 percent for loans up to three years, 1.47 percent for loans of three to nine years and 2.19 percent for loans longer than that. If your children don’t pay it back, it becomes a gift.

Keep in mind that a child in their 30s or 40s has lots of options for generating income; a retiree does not.

Money & Life Lessons from My Immigrant Father

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In honour of Father’s Day, this post is dedicated to my father who left this earth way too soon. You may find some of these money lessons in this post out dated but I hope that it will  inspire you to make some positive changes in your life.

The first life lesson that I learned from my Italian father is “Life is not fair!” In 1939, my father was forced to serve in a war that he didn’t believe in. He was only 18 years old at that time and was lucky to have survived. He rarely talked about his war experiences except that he ate potato peels that he found in the garage because he was so hungry.

Life after the war in Italy must have been horrific for my father to come to Canada, leaving his pregnant wife to earn some money. I can’t imagine going to another country with no marketable skills and not being able to even speak the language. He found that the streets of Toronto were not paved in gold. Two years later, my mother & I left Italy with only a suitcase and a few dollars in our pockets. A whole new meaning to “Desperate times requires desperate measures!”

I am amazed that within four years my parents who were illiterate, with no education, manage to save enough money to buy a house. They earned extra income by renting a portion of our house for many years to assist with the mortgage payments. My mother used her sewing skills to earn extra money making bridesmaid and wedding dresses.

As a kid, I never played in the backyard because it was turned into a vegetable and herb garden. It never occurred to me how much that garden help reduced our family’s grocery bill until much later in life.

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Homemade food products that also reduced the grocery bill:

  • Pasta sauce – we still make a year’s supply of pasta sauce every September
  • Pasta – my mother’s ravioli & cannelloni would make even top chefs envious
  • Pizza dough / pizza
  • Cured meats – ham, bacon, salami …etc.
  • Sausages
  • Wine & sometimes vinegar
  • Preservatives – jam, peaches, peppers, pickles…etc.

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My father had a background in farming back in Italy and would often purchase some meats directly from local farmers to save money. Chickens, rabbits, pigeons and quails found their way into a large chest freezer and later on to our dinner table. For years, my father raised his own rabbits in the garage. (Rabbit is still one of my favourite meals)

Other ways that my father saved money:

  • Avoided eating out, told people that restaurant food made him sick
  • Always took a bag lunch to work – thermoses full of leftovers & coffee – ate by himself to avoid ridicule from his co-workers
  • Paid cash – never own a credit card
  • Rarely borrowed money – only from family and always paid them back
  • Car pooled to work
  • No pets, in his opinion, a total waste of money
  • Restricted vacations to going back to Italy to visit family
  • Limited his entertainment to visiting friends & relatives (plus weddings of course)

When I was in high school, my father got me a high paying summer job at the industrial plant where he worked. He stressed that doing the most boring, dirty and repetitive jobs well would guarantee that I would get rehired next summer. Following his advice, I ended up working at the same plant all through high school and university, graduating debt free. (After three summers, I was put in charge of an all student afternoon shift)

My father taught me that it is easy to excel in jobs that you enjoy but surpassing expectations doing lousy jobs can have its benefits. In my opinion, the real irony was the work experience from my summer job was more valuable in running my own small business than my university education. An argument that I never won with my father even after his plant shut down and he had to come to work for me. “You will always have that piece of paper to fall back on!”

Considering that my father was a teen during the Great Depression and then drafted into World War II, he enjoyed the simple things in life to the fullest. Despite all his hardships, he was proud to own the roof over his head. He really enjoyed sharing a home cooked meal with his friends, along with a glass or two of  his homemade wine. To honour all the sacrifices that he made, I followed a old Italian tradition and named my son after him.

wine   Salute Papa!

 

HAPPY FATHER’S DAY