Monthly Archives: February 2014

Is Secondary Education Becoming an Obstacle in Your Life?

Student debtIn the U.S. there are 115,000 janitors, 83,000 bartenders, 323,000 restaurant servers, and 80,000 heavy-duty truck drivers with bachelor’s degrees. Was college education a good investment for these people?

I personally know two PhD professors in social science that, over coffee, have admitted to me that they could be earning more and have a better quality of a life by being a waiter. One of those professors is still buried under student loan debt and is considering getting another student loan to change careers.

I also know a middle level manager who has 8 employees under her supervision. When she gets home she continues working or updating her skills, while her boyfriend, a plumber with an 8th grade education, sits on the couch having a beer and watching tv. As unfair as it seems, her boyfriend earns more and works less.

We have been led to believe that a degree will lead to a lucrative career, but this is not always the case. Sure, statistics show that someone with a college degree will earn more that someone without one, but what kind of degree? Certainly someone with a French literature degree will have a much lower salary than someone with a software engineering degree. Students should look at the job market before embarking in a four-year commitment and incurring thousands of dollars in debt. You can get most French literature works for free on Amazon and read them after work instead of watching tv.

The average student who goes to school from age 18 to age 22, incurs a debt of $28,000 and takes 10 years to pay off this debt. That means that they are breaking even at age 32. If the student decides to go to post secondary school, he can expect to graduate at 26, have a student debt of $30,000 and break even at age 36. It is not unusual to see students in their 40s still struggling to pay off their student debt. Students burdened with debt also delay buying a home, delay starting a family, delay making investments and delay saving for retirement.

In contrast, consider the person who decides to go to trade school for one year. In Canada an electrician earns on average $53K, a brick mason earns about $47K, a paralegal earns about $50K, a plumber earns about $53K per year. These people get out of trade school at age 19 with very little debt. They can have a family, buy a house, and start saving for retirement many years before the college educated people finish paying off their student debts.

In conclusion, we have been led to believe that the surest way to success is to have a college education. But consider that the longer you spend getting educated, the less time you will have in the workforce, which in turn gives you less time to put away for retirement. Maybe having a college degree is not as valuable as we once thought that it was. For me personally, the real value of my college education was to find out by my own experience that I could have been much better off without a college education.


Do I need an attorney to write a will?

Do I need an attorney to write a willEventually we are all going to die, and one way to be ready is to write a will.

I don’t like to think about death but recently I borrowed a significant amount of money from a friend and one of her conditions to lend me the money was to include this debt and the resolution of it in my will so that if I got run over by a bus, she would get her money back. So I set up to write my will.

The first question that came to my mind was: Do I need an attorney to write a will? My conclusion was that I didn’t need to hire an attorney in addition, it is my belief that most Canadians don’t need to hire an attorney either.

Most of us know what our assets and liabilities are. If you die and your assets are bigger than your liabilities you have specify how your debts will be paid off and how to distribute the rest of the money.

Let’s come back to my case. I own two condominiums and I still owe a mortgage on both of them. I also have some cash in my bank account.

When I die, my two condominiums should be sold by my executor. The executor is the person who carries out my wishes. The bank and the government will be paid first, then my personal debts will be paid, and finally, whatever is left over will be equally distributed between my mother and daughter. This is so simple and clear that I don’t see why I would need an attorney.

Many Canadians have simple finances and if they write their will every year they should be in good shape. They will save time and money. On the other hand, if you have a more complex financial situation, then you should hire an attorney to help you.

So how do you write a will?

  1. Write a list of all your assets and liabilities.
  2. Choose an executor and let your executor know where they can find a copy of your will, or give them a copy right away.
  3. Write specific instructions on how those debts will be paid. Taxes and mortgages always take priority.
  4. Indicate how the rest of the money should be distributed once the debts are paid off.
  5. Make sure that you compensate the executor.

Have you written a will? Try it! When I wrote my will I started to cry when faced with my own mortality. Let me know about your experience.

Understanding The Bond Market

bondsOne of my readers, Natalia, asked me: “How does the bond market works?” If anyone else has a question about investing or personal finance, please write me a message.

Here is your answer, Natalia. Assume that one of your uncles wants to borrow from you $100 for one year and he is promising to pay you 10% interest. You agree to lend him the money. You give him the money and in return he gives you a piece of paper that he calls a “Bond” with a “Face Value” of $100 and a coupon (interest rate) of 10%.

Six months later, you need money and you want to sell your bond. While having dinner with your family you declare that you want to sell this Bond to anyone who is willing to buy it.

Let’s say that your sister wants to buy the bond, but 6 months have already passed, so you have earned 5% ( if one year is 10%, then 6 months is 5%), so you don’t want $100, you want at least $105. This additional $5 above the face value of the bond is called “a premium.”

Let’s change the scenario a bit. Let’s say that your uncle loses his job and he is having a hard time paying his bills. You become worried because you are afraid that he might not be able to pay you back. You offer the bond to your sister for $95. Your sister has confidence that your uncle will be able to pay his bond and she buys it from you. She is buying the bond for $5 less than what you paid for it, this difference in value is called “a discount.”

In the real bond market, companies, cities and governments need to borrow money all the time; they borrow money by selling bonds. Generally they sell all their bonds to one financial institution like the Royal Bank or to a consortium of financial institutions (Royal Bank, TD bank, BOM). This direct sell from the borrower to the financial institutions is called the primary market. Then the financial institutions sell the bonds to the general public, the general public is the secondary market. Once the bond is out on the secondary market, people buy those bonds from each other as if they were buying stocks.

There are many factors that determine the price of a bond, but two of the most important are risk and the interest rate.

Risk: If a company or a government has a good reputation, lets say Google, then people feel comfortable holding those bonds and would even pay more, but if a company is on the brink of bankruptcy, like Nortel, then the value of the bonds is lower, people will be willing to sell those bonds to someone else, even at a loss.

yieldsInterest rates: If the government increases interest rates, bond prices fall. Let’s say that the government increases interest rates from 2% to 5%. People will want to get rid of the bonds that were paying 2% to be able to buy the new bonds that are now paying 5%. They will be so desperate to sell the 2% bonds that they will sell them at a discount, and therefore driving the prices down.

The safest bonds are those issued by the federal government. If ever the government doesn’t collect enough tax dollars to pay back the bond holders, they can always go to their photocopy machine and print more money. Many people feel that with the escalating debt of the United States, one day people would not be willing to lend them money anymore. Their national debt is over 17 Trillions dollars. Canada’s debt is about $680 Billion.

When people invest in bonds, they get a lower return for their money than they would have gotten by investing in stocks, but bonds are a lot less volatile and its earnings more predictable. Many money managers recommend to have a portfolio composed of mostly stocks for younger people and a portfolio mostly of bonds for people close to their retirement.

I have grossly oversimplified the bond market. I have never traded in it and I don’t know anyone personally who has traded in it. Nevertheless, investing in the bond market is a fundamental part of personal finance and the economy and at the very least we should all understand how it works.


How To Retire By Investing Internationally

IMG_0911Find a Muse

A few month I read the book The 4-Hour Workweek by Tim Ferriss. In his book Tim encourage entrepreneurs to find a muse, a  business that will sustain your lifestyle without sucking the life out of you. Today, I like to propose a muse.

One Week Vacation

About two weeks ago, I spent a one week in the Dominican Republic. Departing from Montreal, I got on to the airplane wearing my winter coat and by the time the airplane landed I had peeled off  layers of clothing and I was down to my t shirt and shorts. As I got off the plane I felt the salty breeze from the sea in my face and I could hear the merengue music in the background. Since my passport is from Colombia, customs always double checks to make sure that my Canadian visa is not counterfeited. This doesn’t bother me anymore.

The Airbnb Link

My daughter Andrea and I
My daughter Andrea and I

I stayed at an apartment that I had rented through Airbnb (affiliate link), a website that puts together properties owners with tourists. By the way, I own two properties in Montreal which I also rent to tourists. If ever you want to stay there, let me know.

The apartment where I stayed was a two bedrooms, 2.5 bathrooms and a big terrace which I used to smoke Cuban cigars and drink mojitos.

I Can Smell Business

I went to Punta Cana for vacation, but my business nose is always at work. I found out that the whole apartment complex where I was staying belonged to international investors. I found out that the average apartment was valued at $145K U.S. and that each apartment produces about $50k in rental income per year. Now, that presents a great opportunity. To put it in perspective, I can buy two condos in Punta Cana, next to the beach, for the same price as one of my condos in Montreal and get a higher rental income. It really makes me wonder how many more winters will I be willing to tolerate here in Montreal.

Sky sailing

Speaking Another Language

As soon as I got back, I told some of my friends about my discovery and how they can find a better return than the 1.5% they get from their Government of Canada or the Government of Quebec Savings Bonds. Many of them looked at me as if I was talking in another language. (It is a reaction that I get often).

Here Is The Plan

So here’s a plan for someone without money to achieve immediate retirement. Borrow $300k at a 10% interest rate to buy two condos. That will be an interest expense of $30K per year. Each condo can produce a revenues of $50K, for a total revenue of $100K. Pay $20K in management fees and utilities. That’s it, you just created a $50k per year passive income to live on.


Other Benefits

Of course, nothing is as easy as it seems, but doesn’t the idea of immediate retirement deserve at least 5 minutes of reflection instead of brushing it off? In addition, if you move to the Dominican Republic, you will earn in U.S. Dollar and spend in Dominican pesos. You will be getting a bigger bang for your buck. And to make the picture more appealing, you will not have the government of Canada and Quebec with their hands in your pocket all the time.

Introduction To The Stock Market

Investing in Canadian ETF
Buying and Selling the Canadian Market

Imagine that I create a corporation, which rents apartments to tourists, called “Alain’s Short Term Apartment Rentals” which is worth half a million dollars. When I created the corporation, I got half a million  pieces of paper, each one valued at $1, to represent ownership of the company. Those pieces of papers are called shares. If I sell those piece of paper to other individuals, in actuality I am selling parts of the company. .

Here is something to confuse you. The words “Shares” and “Stocks” are related and sometimes used interchangeably, but have different meanings. We use the word shares when we talk about one specific company. For example, I could say “I bought 500 shares of Google”  and we use the word “stocks” when we talk in general about any company, for example, “I bought several stocks in the stock market.”

Imagine that the company that I created gets a contract with the government, every politician who comes to Montreal will stay at one of my apartments and they will pay a premium price in exchange for confidentiality.  This new contract will increase my earnings for the next 5 years. At this moment the share price will probably be higher than its original $1.

Imagine also that the government of Quebec creates a successful advertising campaign that brings a lot of new tourists to Montreal. “Come to Montreal, where you can get two cultures for the price of one.” At this moment, the stock value of almost all the tourism related companies in the city will go up because they will be earning more money.

Since the financial projections of each company are constantly changing, the price of individual shares in the stock market is always going up or down and it’s difficult to predict.

When a person becomes an investor in the stock market, the goal of that person is to benefit from the constant change of prices. Ideally that person will buy low and sell high.

The purchase or sale of stocks is done through the service of a broker. This service is done electronically. Most people just log into their account, press the button “buy” and the stocks are bought, generally within a few seconds. All of the major Canadian banks offer brokerage services and the commission rate is as low as $10.

Investing in the stock market is generally considered risky because the outcome is always uncertain. Nevertheless; Investing in the stock market is a fundamental part of personal finance and the economy in general.  Since money is a big part of our lives, we should be aware of how the stock market works.

This is one of the topics that I like the most. If you have any comments or questions I’ve love to engage.

Book Review: Delivering Happiness by Tony Hsieh

Delivering HappinessThis book was an autobiography of Tony Hsieh, the CEO of Zappos.

Zappos is an Internet shoe retailer that sells over 1000 different brands of shoes in every style, size and color. The shoes are shipped 24 hours per day, as many as the client wants, with free shipping both ways.

At its headquarters in Las Vegas, Zappos has created a strong culture where the main management objective is the happiness of the employees and the satisfaction of the clients.

Tony Hsieh is the son of Taiwanese parents who expected Tony to become a lawyer, a doctor or an engineer so that they would have bragging rights in their Taiwanese community. But Tony was not interested. Instead Tony wanted to be an entrepreneur. His first business at age 9 was a worm farm, but he also ventured into garage sales, lemonade stands, newspaper routes, Christmas cards and custom photo buttons.

Tony got admitted to Harvard University, but he hardly attended classes. He just showed up for the exams and got A’s. This really upsets me. As a student I worked my butt off and I got C’s and B’s most of the time.

Tony encourages young entrepreneurs not to waste money on college education. Instead he advises them to take that money and start a business. I wish that someone would have given me this advice. To this day I am still resentful of all the time, energy and money that I spent on a college education that in retrospect, I consider useless.

Tony’s entrepreneur spirit continued to flourish when he was at Harvard. He used to buy frozen McDonalds burgers, cooked them on campus and sell them to students. He also started a pizza business.

After graduation, Tony accepted a job at Oracle corporation because it was the offer with the highest salary. He figured that more money meant more happiness, but soon discovered very fast that not to be true. In spite of his high salary Tony was going crazy with boredom. Tony quit his job and created Link Exchange, an Internet advertising company that was sold three years later to Microsoft for a nice 265 million dollars. Tony sold Link Exchange because he wasn’t having fun anymore. It is clear by now that Tony valued happiness more than money.

Tony had it made. Lots of money and no responsibility. He got into playing poker, the stock market, angel investing and organizing lots of parties. He squandered almost all his money. The last 2 million, he invested in Zappos, a start up company. When Zappos ran out of money Tony sold the loft where he lived in order to get another 2 million to keep Zappos alive.

Tony never had any interest in shoes, but he made up his mind to make Zappos the most amazing place to work and at the same time he was determined to offer the best customer service ever. Work culture became the most important asset of the company. In less than 10 years Zappos went from $0 revenue to more than one billion (wow!). In 2009 Zappos was sold to Amazon for 1.2 billion dollars, but Zappos was allowed to keep its identity and culture.

The main message that Tony shares with us it that the pursuit of happiness of his employees and absolute customer satisfaction is more important than short-term profits and in the long run is more profitable as well.

I truly enjoyed the book. I call it a feel-good book and I am happy to recommend it.