Category: Risk Management

Shrinkflation

Posted on by Chantel Gibbs

Dishwashing soap bought in 2021 vs same dishwashing soap bought in 2022 on right. A decrease of almost 60 mL for the same price.

If you feel like the stuff you are buying is just not going as far as it used to go, I’m here to tell you that you are not imagining things. I started noticing it in small ways around the grocery store and it is quite subtle. The packaging looks basically the same to the naked eye, but there is less in it than there used to be. This is a phenomenon known as “shrinkflation” and is a way to make people feel like prices are still similar when they are not.

You’ve probably noticed the increase in food prices, particularly staples like meat, eggs, and milk. There have certainly been complaints made about those, but those items aren’t the ones usually subject to shrinkflation because they have standard quantities. It is the shelf items that you will need to watch out for. I suspect that, as a result, prices have increased even more than the inflation numbers the government is currently putting out.

How did we end up with such large inflation? Contrary to popular belief, the government does not create value – it merely redistributes it. Granted, the government has some public utility companies and transportation services that do produce value, but very inefficiently (just ask my brother who worked for BC Hydro). The government has recently been touting it’s success at creating jobs after the pandemic, but upon closer examination, we discover those jobs are mostly government jobs – in other words, those jobs do not create value but just leech money from the sectors of the economy that are actually creating goods and resources. Worse, most government jobs are created to expand some sort of compliance requirement, meaning more paperwork and lost time for the sectors of the economy that are trying to produce value.

Inflation historically has often occurred in countries where the government attempted to print money to buy their way out of a crisis. Germany in the 1920s, Zimbabwe, Brazil, and Argentina to name a few. The inflation sometimes got so bad that the money wasn’t even worth the paper it was printed on and people would go after work and spend their whole paycheque on goods because otherwise their money would lose value overnight. During the recent pandemic, many countries including Canada started printing money to distribute to needy people and sectors of the economy. Problem is, that money was still chasing the same amount of goods produced. Divide the money over the goods available and it means the goods suddenly cost more. Economics 101. Now, the consequences of the government spending are hitting the country and the people will pay for it one way or the other – either through more taxes or higher costs of living. Value cannot simply be summoned out of thin air by government.

The next time a politician promises you a bunch of new programs and spending that are supposed to help you out, remember that they are bribing you with your own money.

Welcome to a Time of Inflation, Uncertainty, and Higher Interest Rates

Posted on by Chantel Gibbs

TIPS FOR STRETCHING YOUR DOLLAR

  • Make more meals at home and buy things in season and freeze or can it for later.
  • Use the food you buy instead of throwing out a bunch.
  • Teach your children the value of money and actually make them work for their allowance.
  • Get to know your community so you can trade favours with those around you.

WELCOME TO A TIME OF INFLATION, UNCERTAINTY, AND RISING INTEREST RATES

It has been a long time since we have had this much inflation – in fact, the last time was when we had Trudeau Senior in power. History has a funny way of repeating itself, doesn’t it? The Bank of Canada is increasing interest rates to slow the inflation and housing market down and it is beginning to work, but it also means that the massive amount of debt the federal government has taken out lately is about to become very expensive to maintain. People who took out a big mortgage to buy in to the recent housing frenzy are going to be hit with a double whammy as the price of houses fall again and interest rates rise. Supply chain issues still plague the world and now there is talk of potential famine. Things are about to get rough.

What should you do with your savings in this kind of an environment? Let me give you an example of diversifying wealth in a time of inflation and uncertainty. My grandparents moved to Canada in the late 1970’s. They were lucky in that they brought quite a lot of wealth with them, but when the inflation came, they were also trying to figure out where to put it so that it wouldn’t lose value. Here is a list of what they invested in and what worked out 40 years later and what didn’t.

 

 

As you can see, the home was a good investment because the land was a reasonable price and it was a good time to find builders, but our current market isn’t there yet. The vacant land was a mixed bag. The huge sacks of wheat was a panic buy that didn’t end up being needed and the gold was also a panic buy because everyone else was doing it. This time, people aren’t yet fleeing to precious metals and the prices are more reasonable, so it may work out better. Taking up farming was a decent move since it was both a hobby and a source of food and clothing security, but it only really worked because there was the land at a good price to do it. Starting a business was great, but only because they already had the seed money and didn’t need to get a 25% interest rate loan from the bank. In our current environment, interest is still fairly low, so starting a business could be good if you can lock in a longer term loan at the lower interest rates and if you are in an industry where demand will still be high in a recession.

Should you invest in something like cryptocurrency? Probably not. While it is a secure medium of exchange (unless the end user on either side is hacked), it has no asset backing and is only valuable because a bunch of people agree it has value. If you decide to invest in it, please only invest about 5% of your total savings, not 50%. Diversification across different industries, different countries, and different kinds of assets are key. If it is a decision between paying down your mortgage quicker or investing in risky assets with your extra cash, it is wiser to pay down your mortgage as housing will always be essential.

What can you do in your daily life to reduce your living expense and make your money go further? Growing your own food is an option, but there are many other ways to reduce what you spend on food. How much food do you end up throwing out? Do you eat out often or do you make meals at home? Have you learned the art of cooking big meals and freezing portions for a later day when you don’t feel like cooking? Do you buy things in season and on sale and have you learned things like canning and drying fruits? If you buy food in bulk, do you actually use it all or does a large portion get thrown out? Managing your food expense can go a long way. Pets are another potential money pit. Your dog really does not need all that pampering. If you have children, teach them the value of money and pay them according to the money and time they save you; ie. when they do their household chores, walk the dog, and make meals. They shouldn’t get an allowance simply because they live under your roof (heck, after 18, I had to pay my parents rent and there was no allowance).

And finally, let me stress the importance of community. The next few years could be rough, but let’s get out of our COVID isolation mentality and start helping each other out. Practice your bartering skills and learn how to exchange favours with your neighbours. We can get through the rough times by working together.

If you need help managing your cash flow and trimming expenses, feel free to reach out to me for a no-obligation introductory meeting to discuss your situation.

 

 

Getting Your Estate Documents Done

Posted on by Chantel Gibbs

Getting Your Estate Documents Done

No one likes to think of their own mortality and getting your estate documents done is probably one of the least fun activities out there. Personally, it took me about a year to have my will and POA documents done and signed. Part of that roadblock might be that the average cost of seeing a lawyer and having those documents done is $1000. However, the cost of dying without a will for your family is usually far more.

Dying without a will – otherwise known as intestate – means that your assets are distributed according to provincial law. Some provinces have everything go to a surviving spouse while others give a portion to children immediately. With no spouse or children, it goes to parents and siblings first, then grandparents, and finally aunts and uncles if there is no immediate family. Inheritance for a person under 18 is usually administered by the Public Trustee for a fee until the beneficiary is old enough.

A survey in 2018 found that 51% of Canadians do not have a valid signed will.

 

The administration of an estate without a will tends to drag out and pile up in costs. First, one of the family members needs to volunteer to administer the estate and may need to put up bond to personally guarantee that they will do it properly. This step alone can drag out and in the meantime, the deceased’s bank accounts and assets are all frozen. If a deceased person owned a business, this is especially bad. Secondly, the court needs to determine who the beneficiaries are going to be and there can be family squabbles over that. All this goes to show that it is better to have the will done ahead of time.

The main steps in getting a will done is to pick an executor/administrator, determine if there are any specific gifts you want to give (like a lump sum to charity), and then divide whatever is left in the estate pot between named beneficiaries according to a percent. For instance, you might have three children and no spouse, so the estate pot would go 33% to each child. You also need to think about who would get a person’s portion if they died before you. For example, if one of your children pre-deceased you, would their portion go to their children or to your other surviving children?

Picking an executor can be difficult. You want someone trustworthy and decent at administration. It is best to pick someone who lives reasonably close since the job of an executor often includes sorting through household items and visiting banks. Don’t pick someone who lives in the USA if you can help it for reasons too complex and annoying to get into. If you pick a family member, remember that being an executor can be a lot of work so they should be allowed to take a fee from the estate over and above their inheritance. If you use a trust company as executor, they will tell you the fee calculation ahead of time and you will need to approve it and add clauses to your will permitting them to have certain rights and abilities. You can also name an alternate executor in case your first choice can’t do it. In my experience, most spouses will name each other as the main executor and then maybe another family member as alternate.

Power of Attorney documents are also highly recommended and come into affect while you are still living if for some reason you are unable to make certain decisions or do certain tasks. The Power of Attorney for property allows a named person to run your finances and pay your bills for you. They can’t change your will or beneficiary designations, but can otherwise do most financial things for you – which means you need to name someone trustworthy. The Power of Attorney for personal care, otherwise known as representative for personal care, names someone to make medical decisions on your behalf if you can’t. You can spell out your general wishes like “Do not resuscitate” to help guide the decision maker. Most provinces provide the default forms for these so you can complete them without a lawyer if you so choose. The link for the province of BC’s forms can be found here: POA for BC

If you know exactly what you want in your will and if your situation is straight-forward, you may consider using a will kit instead of having a lawyer draft the will for you. I still recommend sitting down with a lawyer for a review once you have a draft that you are happy with. There may be things you missed or didn’t think about. The benefit of a will kit is that it is far less expensive than seeing a lawyer and in every province except Quebec, you do not need a lawyer or notary to sign your will; you can use friends and neighbours as witnesses. For a user friendly online will kit, try LegalWills.ca

Estate planning, however, is not just about getting your documents done. For instance, a person may have more taxes at death than at any other time during their lives? How should that be planned for? Who should care for children and hold children’s inheritance in trust until they are old enough? What about accounts like the RRSP and TFSA where you can name beneficiaries directly on them so that they don’t even go through the will and the estate? For these considerations and others, feel free to contact me for a free initial consultation to discuss your estate planning.

What kind of life insurance should I buy?

Posted on by Chantel Gibbs

What kind of life insurance should I buy?

You’ve probably heard about life insurance, but you might be uncertain what the best options are for you and your family. In this article, I’ve put together some general tests to determine what product would be better for your situation. For a brief introduction to the types of life insurance, please look at my prior article The Basics of Life Insurance

The most basic type of life insurance is term insurance that covers a person for a set number of years (though you can get a permanent kind called a Term100). If you are in your prime working years, this is the best way to have affordable coverage for 10, 20, or 30 years at a set premium to cover your income earning potential for that time and protect your family. This is the ideal insurance to buy when you are unable to put much into savings and need to cover debt like a mortgage. A lot of insurance companies like Empire Life, Manulife, and Equitable Life also allow you to bundle critical illness insurance into it for an extra premium. Term insurance is also good for a business owner who intends to retire out of the business or sell at a later date and only needs insurance for a certain number of years.

Whole life insurance is a permanent kind of insurance where the insurance company invests the premiums in a fund and pays dividends to each policy holder yearly based on the performance of the fund and whether more or less people insured died than were expected to die. The dividends are very consistent year over year, making a whole life policy a very stable investment that will far outperform a GIC or most bond funds. In some ways, a whole life policy is like a TFSA on steroids. As long as the cash you invest in the policy stays in the policy, the return on that investment is tax-free. The cap on how much you can put in a whole life policy is quite high, so if you have already maxed out your TFSA and want more tax-free savings, this could be ideal for you. The down side, however, is that it usually takes over 12 years for the cash value of a whole life insurance policy to surpass the premiums you’ve put in – meaning you better not need liquidity from it anytime soon. Also, whatever cash you pull out of an insurance policy directly will become taxable, so when the policy eventually does have a large cash value, the best way to tap into that is to get a line of credit against the cash value. Manulife Bank specializes in these kind of insurance policy loans for a reasonable interest rate.

Many people get a small whole life policy to help pay for final expenses and combine it with a term insurance rider to cover those income producing years. Combining all the insurance needs in one application can reduce policy fee costs and save time. If possible, use an insurance broker who can shop for you among the major insurance providers for the best rates for your age and health status.

If you are a business owner who is saving a lot of your business earnings in a holding company, permanent life insurance can have huge tax benefits. Be very careful to put the insurance in the correct company since insurance cannot be moved on a tax deferred basis between companies like most assets can. Generally, a permanent insurance policy should never be put in the active business company, especially if it is a business you might sell in the future.

Permanent life insurance in a private company is a tax-free investment just like in personal hands, meaning that putting money into an insurance policy instead of a regular investment portfolio can reduce taxable investment income. As of 2018, any taxable investment income over $50,000 grinds down the small business limit for earnings that get to enjoy the lower tax rate compared to the usual business tax rate.

The greatest tax benefit of permanent life insurance for a private business is the death treatment. On death, the majority of the insurance payout becomes an addition to the capital dividend account from which tax-free dividends can be paid out to shareholders. This can greatly reduce the tax on death for the estate of the shareholder who is insured or enable other shareholders to buy out the deceased shareholder with tax-free dollars.

If you would like to discuss the kind of insurance that might work best for your situation, feel free to reach out for a free initial consultation.

 

  • Term insurance is to cover short term needs like income replacement for a family or business.
  • Permanent life insurance can be a great investment for retirement or  a way to pass the family business  along with less of a tax impact.     

 

 

 

 

 

 

What is the Craze around Cryptocurrency all about?

Posted on by Chantel Gibbs

What is the Craze around Cryptocurrency all about?

You’ve probably heard of Bitcoin and how it has gone up a ton in value over the last few years and made some young geeks into multi-millionaires. You may have also heard of other cryptocurrencies like Dogecoin or Ethereum. You may be wondering whether you should invest in some yourself and what the best way is to do that. I did some research on the topic and here is what I learned:

 

  1. What is a cryptocurrency?

Cryptocurrency is built on the blockchain technology that has been around for almost two decades. Think of it like a Google Doc. There is a starting document or piece of information, call it a block, that is shared with many others over a network and everyone who has access to that block can add information to it. The information in the starting block is summarized into a hash ID and encrypted. Any change to that block would change the hash ID and show that it has been tampered with. If someone adds information or a transaction to that starting block, it is another block with another hash that is linked to that other one. Hence the “blockchain” name. If you’ve used a Google Doc, you will note that it tells you who has made changes to it and you can go back and look at each version over time and even restore a previous version if someone added bad data or messed up the file. Blockchain gives the same sort of audit trail because it is possible to view every block of information that has been added to the chain. Blockchain goes a step further than a Google Doc, however, because the encrypted hash information is kept by servers all over the internet and any time anyone wants to add a block to the blockchain, they first must prove they have all the data from the rest of the blocks and that they have permission to add to it by verifying the data with all the other servers. For someone to alter a blockchain, they must tamper with the data held by all the different servers at the same time. That’s pretty much impossible.

A cryptocurrency like Bitcoin starts with that hashed block of information that then has blocks added to it as transactions happen. In the case of Bitcoin, there are 21 million possible coins and creating a coin means solving a very complex set of mathematical functions. Think calculus on steroids. “Miners” use super computers to solve the mathematical functions to create possible blocks and are rewarded with Bitcoins for their efforts. So far, about 18 million of the 21 possible Bitcoins have been solved and created. Other computers and servers work as nodes that verify the information in the blocks and process transactions using Bitcoin and are also rewarded with some Bitcoin. The whole thing is completely decentralized and works because it rewards those who participate in enabling the network and disincentivizes those who would try to hack it because it would take far more computing power to reverse engineer the hashed info than it would take to just solve the mathematical functions and create another Bitcoin.

Not all cryptocurrencies are created equal. Bitcoin is one of the first and most secure in terms of being unable to decode. There are now over 4000 cryptocurrencies in existence and most of them are garbage. Some of them were created for fun and there is at least one out now that is a bit of a game where you can have your smartphone “mine” the coins in the background while you go about your day. Are those coins going to be worth anything? Probably not.

A cryptocurrency has no asset backing, unlike the currency of a country which is backed by the economic strength of the country. The value of a cryptocurrency is in its ability to be bought and sold easily on exchanges, its ability to be transferred worldwide to anyone with a receiving address for hardly any transaction cost, and the security of the blockchain underlying it. It is still mostly a perceived value and speculation that drives the cost up.

 

2. How do you transact with a cryptocurrency?

Cryptocurrencies have sender and receiver addresses that differ based on the coin. You can’t send Ethereum to a Bitcoin address, for instance. You hold your cryptocurrencies in a “wallet” which can be either a software program on your computer or smartphone or a hardware wallet that looks like a USB drive. The hardware wallet is the most secure since it is only accessible to the internet when you actually plug it in and use it, but otherwise it is sitting offline. Most hacks regarding cryptocurrencies happen with the user at the end point, not with the blockchain itself. If someone gets a hold of your private keys or password to your wallet, they control your cryptocurrency. Some of the more common software wallets include Jaxx and Bitcoin Core and hardware wallets can be purchased from Trezor, Ledger, or Keepkey.

Cryptocurrency can be bought or sold on an exchange much like a stock exchange. Most exchanges like Coinbase and Kraken are centralized and allow you to exchange country money like USD$ into any common cryptocurrency. You will need to set up an account and most of those exchanges will allow you to leave your currency in your account, much like PayPal allows you to keep a balance. However, exchanges have been hacked in the past, so it is not best practice to leave your currency there. Move it into your software or hardware wallet instead.

Whatever you do, don’t lose your password to get in to your wallet! Some guy in Ontario put a few thousand into Bitcoin years ago to try it, forgot about it and forgot his password, then realized he had millions of dollars worth of Bitcoin, but couldn’t access it. Since Bitcoin is decentralized, there was no central authority to help him recover his access. Tough luck.

 

3. What is the future of cryptocurrency?

Good question. There seems to be a move by certain governments, particularly China, to shut down the decentralized cryptocurrency like Bitcoin and introduce their own. They express concern with how much electricity super computers are using to mine Bitcoin and other cryptocurrencies and the environmental impact, but it is likely more of an excuse to try and control this craze. You may have read that Tesla was accepting Bitcoin for a while, but then Elon Musk changed his mind and cited environmental concerns as a reason. The real reason is probably the volatility of Bitcoin and the difficulty in setting a value on it for ongoing financial reporting to shareholders.

You should also be aware that any gains made on trading cryptocurrency needs to be reported on your taxes. You might think the government can’t track your trades, but remember that you have an address that is yours alone that you can send and receive trades from. An auditor can go to blockchain.com and look up your address to see all the transactions that have been done with that address. That is because that transaction history is embedded in the blocks that make up the coin itself and that is being verified through all the different servers. It is public knowledge.

In conclusion, I think cryptocurrency is quite revolutionary, but I also think government is going to try to take over that space to better control and tax it. This will mean that more businesses will be willing to accept cryptocurrency once government validates it, but it might be new cryptocurrencies that government introduces, not Bitcoin and other decentralized ones. If you are going to invest in cryptocurrency, only invest what you are willing to lose.

The Financial Cost of Broken Relationships

Posted on by Chantel Gibbs

The Financial Cost of Broken Relationships

It is well-known that divorce comes with the splitting of assets and financial costs to one or both sides. We all go into relationships hoping they will last, but sometimes they don’t. The divorce rate in Canada is now close to 40%. The breakdown of relationship is one of the biggest risks to a person’s financial plan. Cohabiting or being in a common law relationship doesn’t provide much protection either, despite a common misperception that it does. The Family Law Act of BC has a number of definitions that you should be aware of before you walk into any relationship:

“The divorce rate in Canada is now close to 40%. The breakdown of relationship is one of the biggest risks to a person’s financial plan.”

A marriage-like relationship is defined as when a couple is either married by law or has been living together for a continuous period of two years or more. If there are any children in the relationship, spousal support claims can be made regardless of whether the two years are met. Indicators of a marriage-like relationship include sharing shelter, sexual activity, attending social gatherings together, monetary support, and in general doing life together. If the definition of a marriage-like relationship is met, then any family property is subject to being split on relationship breakdown.

Family property includes all assets and debts that were accumulated during the marriage or marriage-like relationship. If each person brings assets into the relationship, then any growth on those assets is family property. Any assets that have been put into joint are usually considered to have become family property. The onus is on each person to prove what assets they brought in to the relationship, that those assets should be excluded property, and that those assets are still intact and not changed into something that is joint.

Excluded property includes assets brought into a relationship that are still intact, gifts or inheritance meant for the one person, a settlement or insurance money that is meant for the one person, and property that is held in trust for the benefit of the one person. Everything else is subject to be divided, including private company shares and pensions.

It is advisable to have a pre-nuptial agreement outlining the assets each individual is bringing in to the relationship and what would be excluded in the event of a separation. Please note that I am not a lawyer and this is a general information piece to help make people aware of the financial risks associated with entering into any kind of marriage-like relationship.

The Basics of Life Insurance

Posted on by Chantel Gibbs

The Basics of Life Insurance

There are two main kinds of life insurance and they are suited for different purposes. Temporary life insurance provides coverage for those years while raising a family and needing to protect family income. Permanent life insurance can be both an investment and a way to pass assets on to heirs or pay final taxes.

Term Life Insurance is life insurance that has a set premium for a specific number of years and then renews at a higher amount after that. It can usually only be renewed up to age 85. For example a Term 10 policy is usually very inexpensive for the first ten years, then it renews at a higher premium for the next ten. Eventually, it becomes more expensive than a permanent policy taken out at the same time. That’s why a term insurance policy is best for temporary coverage.

Whole Life Insurance is a permanent kind of insurance with a cash value that grows over time as more money is invested into the policy and the insurance company makes a return on the investment. The policy can be paid for over 10 years, 20 years, or a set premium every year for life. In retirement, the cash value can be leveraged with a line of credit, providing some tax-free income. At death, the insurance company first repays any outstanding loans on the policy and then pays the remaining death benefit to the named beneficiaries. Whole life is a great way to make some tax-free investment returns as well as provide a benefit to heirs on death.

Universal Life Insurance is a flexible kind of permanent insurance. It works best for a person who has a set amount they want received at death and they aren’t looking for substantial growth in the death benefit. It has the flexibility to be minimally funded or funded with more than the minimum premium and invested tax-free to help pay for future premiums. It can in many circumstances be less expensive than a whole life policy.

If you are interested in life insurance, I can help you pick out what would most suit your needs. I also have access to the major insurers in Canada and can provide you a quote with the lowest cost out of those insurers. 

 

Government Support and Helping Yourself

Posted on by Chantel Gibbs

Government Support and Helping Yourself

If the 2020 coronavirus pandemic has taught us something, it is that many of our jobs are fragile and the government will only offer limited support. Businesses need to be prepared to deal with a sudden loss of revenue and adapt quickly.

If tragedy befell you in your personal life, what kind of support could you expect the government to give? The simple answer is that the government will give you just enough money to sustain basic living. The rest you would need to source from your own assets, your own insurance, or from friends and family.

The CPP Disability benefit is a taxable benefit available up to the age of 65 for severe and long-term disabilities. The benefit is based on how many years contributions have been made to the CPP and how much. There is also a benefit available for the children of a person who qualifies for the CPP Disability benefit.

Employment Insurance (EI) provides a sickness benefit for up to 15 weeks if unable to work due to sickness. To qualify, the person must have 600 hours of work at the job and apply within a short time of stopping work. It is a taxable benefit that only covers part of the salary. Insurance is also available, of course, in the event of a lay-off or loss of work for reasons other than being terminated for just cause. During the Covid 19 crisis, there are EI benefits available for anyone who has been unable to work for 14 days or more.

The Workers Compensation Board (WCB)  pays short term or long term benefits to people who are injured on the job. The payments are intended to cover up to 90% of a person’s after-tax income. Payments are reduced for any other insurance coverage or government benefits you may receive.

On death, CPP Canada will pay a one-time benefit of $2500 to the estate of the deceased. If the person was a CPP contributor, the surviving spouse and children could qualify for monthly support payments from the CPP.

Individual provinces also have their own long-term disability programs that are often asset tested. For instance, BC’s program only allows a person to have a primary residence, one vehicle, and up to $100,000 of savings apart from an RDSP or RESP account to be eligible.

In conclusion, it is best to combine reliance on government programs with your own insurance. This may be partly provided by your employer’s benefit plan, but it may also require buying your own. Most insurers, however, still require you to fund the first few months of loss of income, so you should have an emergency fund in any event.

  • The government will only give you enough in the long term to sustain basic living
  • Short term benefits for sickness are more generous, but still only cover part of prior income level.
  • There is nothing available to businesses to weather an economic storm unless the government specifically sets up bailouts.