Is It Time to Downsize?

Everyone knows that the North American economy is in for some lean times, and there are three ways in which the general population, especially in the US, have reacted to these more austere times. There are those who have started to tighten their belts and re-examined all aspects of their spending (and saving) and adjusted accordingly. There is the second camp who have put on the blinders and pray that this mess all goes away..... soon. They are unlikely to curb spending, partly because they are addicted to consumerism and partly because they think it beneath them to lower their standards. Not unlike residents who ignore hurricane evacuation warnings, they hope that they will be able to ride out the storm. The third camp sits somewhere in between, making small changes to their spending patterns. Regardless of which camp one falls into, it is hard to imagine anyone having escaped unscathed in some way or another. Whether it's one's home, job, retirement savings, investment portfolio, small business or daily expenses, we have and will continue to feel its effects. The silver lining on this dark cloud is that it may, finally, be the impetus for North American society to review its values and priorities, and in the process, become less materialistic and more values-oriented and community-minded. And by so doing, also maximizing their dollars by spending less.

Let's start with what has caused all this - real estate and the accompanying purchases/expenses related to home ownership, thereby straining mortgage loans, credit cards and lines of credit. Home ownership is the cornerstone of the American Dream, and usually the largest purchase and (hopefully still) asset in one's personal balance sheet. There's nothing wrong with aspiring to have a piece of land that you can call your own. Unlike our European counterparts, the aspiration towards home ownership is more ingrained into the North American psyche. Home ownership rates are markedly higher on this continent versus across the pond. Where we have gotten ourselves into trouble is the excesses that have accompanied home ownership. In many other parts of the world, houses tend to be small whereas the trend in North America over the past few decades has been to build super-sized single-family dwellings, hence the term McMansions. These seem to be prevalent in the southern states, most notably in the big-is-everything state of Texas.

Whether the purchase of a trophy home is a signal to everyone that you have made it, or merely to keep up with the Jones, the future reality is that a home of this size (along with all the accessories) will be increasingly looked upon as being largely unnecessary and will start to become obsolete as homeowners and buyers re-evaluate their priorities, given the current financial and environmental climate. Gourmet kitchens for families that don't cook or entertain much, formal living rooms that rarely get used, three-car garages for people with only two cars. The cost of accessorizing, heating, landscaping, maintaining and paying and property taxes alone should be a red flag to home owners that these monsters will suck the life out of your savings account.

This lesson has come too late for all of those homeowners whose houses are now under foreclosure. While one's first thoughts may be that those who over-extended themselves were from the lower-income sector of the population, that is far from the case. Look at cities like Phoenix, Miami, Las Vegas and many communities in California where many of those families losing their homes are middle-class, well-paid, educated white collar workers.

In the 1970s, the average home in the U.S. housed 3.14 occupants, and was 1,520 square feet in size. By the end of the century, that had increased to an average of 2,225 feet, even though the numbers of occupants declined to 2.59 per household. But the tide has been shifting in the past few years, as baby boomers started to realize that they did not need to live in a cavernous, half-empty mansion, nor wanted to expend the energy and expense for the upkeep of them. Progressive communities such as San Francisco are limiting the size of homes, making building permits for monster homes increasingly difficult to obtain. Increasing numbers of home builders are emphasizing quality (finishing and detail) over quantity (size of the home).

The average millionaire in America has lived in a modest home usually in the same unpretentious neighbourhood for 20 years, with little or no mortgage debt. Read about it in the book "The Millionaire Next Door". Those are the ones who may be least affected by this crisis, unlike the people who may live in flashy homes and have luxury cars in their driveway but are a few months away from having the bank foreclose on their home and repo their car.

My wish is that North Americans follow the lead of the Europeans. Instead of cocooning themselves in their huge houses, do what the Europeans do. Live in smaller homes and spend more of their time and income in their communities - enjoying life by leaving their homes to meet friends and families for coffee, a drink or dinner in town. Stroll the park instead of your backyard. Hopefully, my wish comes true.

High Quality Computer Software .... for Free?

I am frugal, and carefully watch where my money is spent. I spend money on things I am passionate about, such as travel, and scrimp on other things that, to me, are mundane. I do not need to be an early adopter nor necessarily conform to the masses although I do admit that I did finally give up using both a Mac and PC, and reverted to the latter.

When it comes to computer software, I look at a combination of features and price. Free is my price preference, and what many people may not realize is that one can run virtually every type of application imaginable without ever having to pay a cent. Now, I am not one who understands how companies can give away their products without charging any money (doesn't sound like a profitable operating model to me), but I think that open source software has given the public the ability to use software such as the Linux operating system for free while creating an opportunity for companies to provide consulting services to large organizations that have installed Linux to their servers.

Many people also buy software whose full capabilities they never use. Sometimes, they upgrade because everyone else has, and thus they want to be able to open up documents that others have sent that may be created on the latest version of Microsoft Office, for example. Yet they can still do this, while constantly having their software upgraded free, if they use productivity software such as Open Office (which is free). I was hesitant to use Open Office, but also unwilling to pay $600 for a full-blown version of Microsoft Office, so I gave it a bash, and have been pleasantly surprised. Aside from a few glitches with their version of PowerPoint, I am a convert, and will never pay a license fee to Microsoft again (even though I am a shareholder). Areas where Open Office has not been completely compatible has been in some instances where macros are used in Excel etc. But how many people use complicated macros in Excel everyday? Accountants maybe, the average Joe, not likely.

With a browser, I use Mozilla Firefox which I think is far superior to Internet Explorer, and Google has recently introduced its own new free browser called Chrome which, I am sure, in time will be a superior product to both Firefox and Explorer.

These are just two examples. Don't just take my word for it. Read PC Magazine for their picks of the best free software and the reviews on each of them. The annual edition comes out early in the new year, but for the moment, take a look at the picks for 2008.

http://www.pcmag.com/article2/0,2817,2260070,00.asp

In these tough times, it pays to start to keep your money in your pockets anyway you can.

Why Being Employed is the Most Expensive Way to Make Money in Canada

A start of a new year and I`m sure many people are making resolutions, not least of which is probably to save money , make more money, or for almost all investors, to recover some money. I spent New Year`s with a group of thirty-somethings and the conversation turned to the topic of money. Being an ambitious group, they were also discussing career opportunities and advancement possibilities in the new year. Being at least a decade older than them, they asked me for my opinion. What I said to them about employment and money startled them, but changed the way they perceived the two topics.

My opinion which would be considered to be radical by many, is based on an unemotional analysis of the numbers, and does not take into consideration things such as employment benefits or the social aspects of working within an organization. Nevertheless, my opinion is that being an employee is the most expensive way to make money in Canada. Below is my list of the most cost efficient way of making money.

1) Tax-free Savings Account. Totally tax free and extremely flexible, the only downside being the limits to how much can be put into this account. Otherwise everyone should open one and put money into it.Note, I am not including things such as proceeds from a life insurance policy which is tax-free, but is not something that is accessible to everyone and as well, involves the hardship of losing a loved one.
2) Capital Gains. Whether you sell your principal residence with no taxes levied on it, or whether you sell investments (at a profit, obviously) that attract taxes on only half the gains, this is the second most effective way to make money.
3) Dividend Income. The dividend tax credit makes it more efficient earning than interest income. And depending on what type of investment vehicle you are using, not always riskier than a bond (ask anyone who purchased corporate bonds, mortgage-backed securities or even some money-market nutual funds)

4) Self-Employment Income. Because of the deductions allowed, self-employment income usually places the entrepreneur in a lower tax bracket, thus attracting less tax than someone doing the same job as an employee. I was a consultant with an organization and after awhile, I was required to become an employee to comply with Canada Revenue Agency guidelines. Even though the company had to increase my remuneration by 20%, I still wound up taking home less money than when I earned less money as a consultant.

5) Interest Income. Fully taxable, yes, but usually involves little cost in earning this interest.
6) Employment Income. Fully taxable, but many people underestimate how much it costs to earn this money, i.e. just getting to work costs money in the form of transportation (whether it is using public transport or maintaining a car), lunches, coffees, daycare, drycleaning and laundry costs etc. All this adds up, and the underestimation results from the fact that most of it is paid for using after-tax resources. So, in order to pay for a $150 monthly transportation cost, about $2,500 to 3,000 of your annual income will be spent just to get to your desk.

Obviously, the trade-off is that a job provides security (not as much as many people might think), comeraderie in a social setting, and employment benefits (some that self-employed or unemployed people may have to pay themselves). However, Canada`s social safety net is such that the gap is not as large as might be perceived.

So, think about how much it costs you to make money, and you might think twice about landing that job.

An Interesting & More Real Christmas

If your local newspapers are correct, it would appear that the recent financial turmoil has changed the way in which many people have viewed Christmas in 2008. Everyone knows that Christmas is overly commercialized and it is difficult not to get caught up in the hype and frenzy. But recent reports appear to indicate that spending will be down this year, and that many people will be looking less at the material aspects that typically surrounds the holiday, and more toward the important aspects of Christmas such as spending time with family, giving gifts with meaning (i.e. making them) and still giving to those who are less fortunate as well as donating their time. Shelters and food banks in my hometown of Toronto have been turning volunteers away, as they already have more than they need. Some charities have noticed an increase of people making donations in others' names in lieu of giving them a Christmas gift.

Perhaps this year and possibly 2009 (if economic predictions hold true) will build the foundation away from rampant consumerism and materialism and with future holiday seasons remaining closer towards the true spirit of Christmas. That is my Christmas wish this year.

One Sector That's Thriving in These Thrifty Times

When bad news prevails throughout the economy, it's sometimes hard to find sectors that are thriving. The one I did find was the thrift store sector which encompasses those business that sell second-hand goods, sell items on consignment and even sell gently-used high-end, brand name clothing. I'm happy to see this sector thrive for a number of reasons:

1) It reduces waste by having more people recycle their unwanted clothing, and curbs rampant conspicuous consumption
2) Often donations and their subsequent sale of unwanted clothing helps support charities such as Goodwill and Salvation Army to provide important social programs in the community

3) More people start to realize that they can buy almost any type of item at far less than retail prices

4) It reduces the temptation to adopt a 'keeping up with the Jones' mentality

5) Greater adoption of buying used items, starts to change the stigma associated with thrift and second-hand stores

So, for me, there is a silver lining to the dark cloud sitting ominously over us.

10 Easy Ways to Save Money Right Away

The economic news continues to be bleak, with ongoing reports of job losses, gloomy forecasts and weaker economic numbers. Not even the euphoria of an Obama victory or aggressive rate cuts by numerous foreign central banks has been able to wash away the harsh realities of the current financial mess the world is in.

Now is the time to hunker down and tighten belts. While never easy to change one's long-standing habits, it can be easier than one thinks. Here are some easy ways to quickly (and somewhat painlessly) save some cash.
1. Lessen your debt by cutting up your credit cards, so that you don't spend as much

2. Reduce interest costs by paying off as much of your credit card debt as possible, or by consolidating your loans

3. Review all your insurance (car, home, life) and utility (cable, phone, cellphone, Internet) rates and change vendors

4. Cook rather than buy prepared foods (cheaper and healthier)

5. Cut out daily impulse purchases, such as candy, lattes, cosmetics, magazines etc.

6. Sell unused items - those items that you have purchased, but now languish in a closet, garage, attic or basement.

7. Use the library as your source for DVDs, books and magazines

8. Use coupons, and buy in bulk on staple items that are on sale
9. Comparison shop before actually buying

10. Dine in with friends, rather than dining out at expensive eateries

Sweetening the Deals in a Car Buyer's Market

With news that the Big Three Detroit automakers are flirting with bankruptcy, it is probably a great time to make a deal on a new car. While prices are rapidly falling through generous incentives and discounts, financing may still be expensive, but for anyone with cash, this is a particularly fruitful time to start shopping for a vehicle. I have noticed that prices have been dramatically lowered on cars that do not need to be financed through the dealership. In Canada, you can buy four cars for less than $10,000 if you pay for them in cash. These are the Hyundai Accent, Chev Aveo, Kia Rio and Pontiac Wave. I have recently seen the Kio Sportage SUV offered for less than $15,000 (cash price), a discount of $5,000. Or when I was in Vancouver last month, I saw a Honda dealership offering a brand new Honda Odyssey minivan for $24,000, an $8,000 discount on the $32,000 MSRP.

While you won't find incentives for the most popular of the fuel efficient cars such a the Honda Fit or Toyota Yaris, it is the complete opposite for the (sometimes perceived to be) gas guzzling sectors such as trucks and SUVs.

Traditionally the best time to buy a new car in North America is at the end of summer (mid-September onwards) as dealers attempt to get rid of the current year's stock, and making space on showroom floors for next year's models. Models whose sales have been disappointing are also ripe for a great deal. These days, with sales of almost all vehicles falling (and therefore having disappointing numbers), most car manufacturers are offering deals, discounts, rebates and incentives on almost all models.

With Christmas looking bleak for many consumer-oriented sectors including retailers, look for December 2008 and January 2009 to be another opportunity to strike a good deal, as car dealers experience a quieter-than-normal new year lull. Certain cars have specific times of the year when it is best to buy them. For obvious reasons, autumn and winter is the best time to buy a convertible. Likewise, after the summer holiday driving season is over, the price of minivans start to fall.

For new car buyers with cash in hand, the next year or two will feel like Christmas all year round.