Getting a grip on financial reality
Expert’s book explores how to approach income and spending
Money might not buy happiness, but it does allow you to rent it.
Happiness and the pros and cons of renting versus buying a home are major issues in the new book Cash Cows, Pigs and Jackpots, by Ontario chartered accountant and personal finance author David Trahair.
“It’s become clear to me now, having thought about it for a decade, that there’s nothing wrong with renting — in fact there are a lot of positives,” Trahair said recently. “If you own, what if you don’t like your neighbours, there’s shoddy construction, or you have to wait for three years for a place to be built while you’ve got money tied up?”
The book is part reference guide, detailing ongoing changes in the Canada Pension Plan and Old Age Security, but also explores behavioural finance by examining how we should approach our income and spending, a combination known as cash flow; plus the value of our assets minus debt, otherwise known as net worth.
“I’m trying to get people back to basics, back to reality, back to focusing on what’s important and to forget this notion that if something great happens, all of a sudden all my problems are solved,” Trahair said. “And I think the (financial) industry has been feeding that for awhile.”
The book speaks about cash cows, things that give you an income stream; cash pigs, things that are a drain on your money; and jackpots, potential sources of huge cash amounts that come with risk.
“People are burning themselves out, they are getting into debt trying to buy assets that will appreciate at a higher rate, they’re not thinking about cash flow, they’re not thinking about themselves, the biggest cash cow they have. I’m hoping to get them to think more about their quality of life, about avoiding situations that are going to be stressful every single day of their life; we’re talking about huge houses and rental properties all over the place and what happens when interest rates go up?”
Trahair says income from employment, entrepreneurship and even social benefits like pensions and retirement plans means that individuals are their own biggest cash cows. Yet, we often take insufficient care of ourselves.
“I’ve always had migraine issues. I’m 53 now and this year the symptoms took off. My biggest revelation was that if I got sick, it stopped my ability to earn income; that’s when I went to my GP (general practitioner).
“And if you project ahead to retirement, if you’re in good shape you’ll be in hospital less and not paying all this money out to health care that isn’t covered by provincial plans.”
Home ownership is one item that could be either a cash cow if you earn rental income, a cash pig if you sink money into interest and maintenance on a house that falls in price, or a jackpot if the house increases in value significantly.
Ownership makes sense for many people. But renting may be preferable for people just out of school, retirees with a debt- free principal residence they can sell at a profit, or those living in Toronto or Vancouver.
“Because of the historic low interest rates, people are almost encouraged to take on more debt, thinking about just the interest payments and not the principal, let alone renovations, upkeep and maintenance.”
Similarly, investing can be either a cash cow with regular dividend and interest income, a cash pig due to fees and capital losses if the investment drops in value, or a jackpot with huge capital gains if the investment value jumps.
“Mutual funds are a great invention for banks, great cash cows for them. They get fees through their MERs (management expense ratios) and commissions and back-end loads and trailer fees, no matter what happens to the investment. I still invest in the stock market if there’s a direct correlation between profits and stability of a company and its share price, but often it’s more about emotions, fear and greed.”
He’s worried about the next generation. “Students are graduating with an average of $25,000 in student debt, and there’s a shaky job market — maybe not in Alberta, but it’s not that great in Ontario. And if you want to buy a house, house prices are at stratospheric levels. It doesn’t add up the way it did for previous generations.”
And he’s worried about seniors. “The key to retiring well, if you can afford a home, is to retire totally debt free with the mortgage paid off. People are living their lives spending more than they make, and that’s fun, and the banks encourage it by lending people more than they should get, but eventually that’s got to be paid off. Some people are assuming their debt will never be paid off.”