12 things you should know before you buy a house

Home ownership is both exciting and stressful at the same time. I write a lot about real estate and home ownership because it’s the biggest financial purchase most people will make in their lifetime. And since we all need a place to live, it’s important to know what you signing up for with home ownership before you sign the papers. Here are my top 10 things you should know before you buy a house. They are not in any order of importance.

What’s the motivation behind your purchase?

A home is so much more than just an investment. It’s a place to raise your family, creating memories, and yes it also provides the most basic human need; shelter. But taking on a mortgage requires you to understand what’s the true motivate behind your desire to buy a home. Seeking shelter doesn’t require you to take a mortgage. Therefore, I feel it’s important you understand why you want to purchase a home. Identifying your motivation will allow you to stay focus and avoid falling for any emotional trap you might otherwise fall for if you don’t understand what’s motivating you to purchase.

Are you feeling pressured to buy? Is everyone around you buying a house and you feel like you’re missing out? Feeling pressured by your parents? Do you want to start a family? Whatever is behind your buying motive, it’s not for me to pass judgment but rather for you to be honest about what’s motivating you to want to take on a mortgage. Honesty and emotional balance are keys to a successful home purchase.

Know your budget before you even start to looking

Before you even call a realtor or a mortgage broker, figure out what you can comfortably afford as a monthly mortgage payment. Aim for a payment that doesn’t take more than 42% of your gross monthly income, that’s before taxes.

Don’t tell your real estate agent what you can truly afford

When we bought our house I didn’t tell my real estate agent what we could really afford. Why? Well, to be honest, there are some lazy real estate agents out there. They simply want a quick sale and first time home buyers are an easy pick. First time home buyers are unprepared, emotional, and lack the proper knowledge. So, if you tell a real estate agent who is lazy what you’ve been approved for by the bank, the agent will only show you houses at the top of your price range, even if there are cheaper housing that might fit your needs.

They do this because they know most first time home buyer will naturally fall in love with high-priced houses and feel the need to buy the house even though it’s not something they can truly afford. Remember it’s in the realtor’s interest for a quick sale at the highest possible price you can afford. I’m not saying all realtor are like this because I know great ones. But it is important to understand what’s motivating each of the parties that will be helping you throughout your home purchase.

This isn’t a race, take all the time you need

Pressure. It’s something you will feel as you begin to look for your house. You will be told you have to make a quick offer, offer above asking price or have no subjects. Basically, if you don’t act quickly when you see something you like it will be gone! To be fair, that’s something that could happen. But here’s what you also need to realize. It’s far easier to make an offer on something you can’t afford than it is to actually pay for something for the next 25 years that you can’t afford.

It’s important you think of the home purchase process like a marathon. You shouldn’t try and sprint through the process. Rather, you want to find a pace that suits you best in order to avoid financial disaster. When my wife and I were looking for a place we took several breaks. Sometimes they were up to a month. Don’t be afraid to take a break if you don’t see what you like or if things are not fitting your budget. If the process starts to feel stressful or  you feel you are starting to cave to pressure, take a break. Stop looking until you feel you’re ready to start the process again.

Apply for insurance once you start looking

Insurance is often the last thing on people’s mind when they are looking for a house. But you really should start this process once you’ve started the mortgage application process. Why is this important? Well, if you get a house for say $400, 000.00 and can’t get life insurance this might be a deal breaker. Therefore, it’s best to start this process right when you start looking for a house. I recommend you go with an insurance broker and look for a term life insurance that matches the same number of years as your mortgage.

Lastly, don’t forget to also look for home insurance. It’s not just life insurance but also insurance for the content in your home and overall property.

Is it a home or an investment you’re buying?

A home is a place of comfort and security. Somewhere along the way home ownership became an investment. Here’s the thing about investment; the vast majority of the time it’s based on past performance and past performance do not necessarily repeat again. If you’re overextending yourself because you believe it will be a good investment in the long term, please understand that real estate like any investment has ups and downs and there is no guarantee it will work out the way you hope. Do yourself a favor, buy a house that you can comfortably afford and avoid trying to overextend yourself in the name of it’s “good future investment”.

Can you handle the cash flow restriction?

A home can be a good long-term investment and possibly a good hedge against inflation. However, mortgage payments take up a considerable amount of your cash flow. If you’re under 30, this a major concern as the money you put in the house could restrict your monthly cash flow and other opportunities you could pursue. If you’re under 30, chances are you’re just starting your career and perhaps thinking about a family or perhaps marriage. At this point of your life cash flow is key and if you purchase a home too early in your life you can tie up significant cash flow that could prevent you from planning and saving towards other things you are soon to want such as; family, wedding, or travel. But on a more practically level, it prevents you from putting away money to ensure you stay liquid for opportunities and life’s challenges.

Housing isn’t very liquid

There are two ways you access money from a home. You can sell the house and take the proceed of the sale after all your expenses are covered. If you do not want to sell and have some equity built up, wait for it, borrow money from the bank against your house. So basically, you can move or you can borrow more money against your house to access the money you’ve put towards it. That’s a pretty terrible choice if you ask me. The reality is having a million dollar property means nothing if you’re not willing to act on the information and transfer that into cash.

Location is extremely important but even more if you’re purchasing a townhouse or condo

A starter home is something I tried to avoid in my first home. Since home prices are so expensive in cities, most of us can only afford townhouses or condos. The problem at least from my point of view with townhouses and condos is that they will forever be more of them coming on. Remember basic supply and demand rule. When there’s an oversupply of something prices have to drop to get rid of the over-supply of inventory. Therefore, if you’re buying a townhouse and condo, it’s extremely important you keep the location in mind. This will be your saving grace as people will generally pay more to be closer to all amenities they need. You shouldn’t avoid townhouse or condo rather just be mindful of demand and supply basics.

And if you’re buying a detached home the supply and demand rule still applies to you. However, since most people are not able to afford a detached home there tends to less inventory and prices tend to be higher. For detached home, the land is critical to be mindful of. Ensure you’ve bought in a good place with good land value for the area. Remember it’s local but local location is what’s really important, so buy in an area people want to move to.

Understand the true cost of home ownership

Housing cost a made up of two components; one-time cost and on-going cost. Most people are familiar with the one-time cost, which are costs that occur once during the home purchase process. Realtor fees, lawyer fees and inspection fee are examples of one-time fee. On-going cost are things such as mortgage payments, hydro, strata, property taxes, garbage, water, home insurance, and general maintenance. Most people only think of the mortgage payment as their on-going cost. To be able to afford a home you not only have to be able to afford the one-time cost but you also have to be able to afford the on-going cost of owning the house. Failure to truly understands a house’s on-going cost could mean financial disaster.

Like any investment, think long term

I view investment such as stocks and bonds the same as real estate investment. They both carry the same level of risk and ultimately to be successful with either it’s best to think long term. When it comes to home purchase you should be thinking long term about the house you’re purchasing. Look for a house you can stay in for a long time, somewhere around 15 to 20 plus years. The less moving you do the better. Don’t have kids now? What if you did, would this house still work? Purchasing a townhouse or condo, you should look into strata bylaw with respect to renting. Can you rent this house out perhaps in the future? Bottom line, don’t just buy a house for what you need today. You have to think long term about what you could do with the property today and also in the future.

Read The Wealthy Renter Book

I’ve read a lot of books on the topic of home ownership and real estate Alex Avery, author of The Wealthy Renter : How to Choose Housing That Will Make You Rich, is by far one of the best books with a focus on the Canadian housing market. If you truly want to be successful at home ownership you must read this book! If you own a property you must read this book! And if you’re a millennial or younger this book is not a choice but rather mandatory!

There are so many things to know about real estate and I hope those 10 tips put you on the right path to buying a home you can afford and create memories for your family.


Be committed to your employer and avoid blind loyalty

Loyalty is something that should be earned over time. It shouldn’t be something that’s simply given in exchange for something. That sort of loyalty often results in a breakdown of the relationship at the first sign of trouble. And one such relationship where providing blind loyalty should be avoided is the employer-employee relationship.

I’m writing this from an employee perspective but this can also be taken from an employer perspective. I find people are often shocked and surprised when their employer makes a decision they feel goes against the loyalty code, such as job requirements, performance review, bonus matrix or layoffs.

If you’ve never attempted to run a business, then you might not appreciate the difficulty involved in doing so. Starting a business isn’t an easy thing because it requires sacrifices that most of us are probably not willing to do. It’s one thing to run a business; it’s another thing to realize you are responsible for your employee’s economic source for providing for their families. That’s a tremendous amount of responsibilities that brings with it a lot of stress.

Having said all that, it’s important you avoid blind loyalty to your employer. The difficulty involved with running a business ultimately means constant change is a necessity to the business success and also could be a result of your pink slip.

It’s important to understand your responsibility to your employer to avoid developing a blind loyalty relationship. As an employee, you have the following responsibilities, to your employer in my opinion. Show up for work each and every day ready to perform to the fullest of your abilities. Participate and engage with your employer to improve the business performance. Take an interest in your company’s performance and strive to be a positive contributor to the organization’s success.

You do not owe your employer the following; your life, your health, your children, your spouse, every single second you are alive. Blind loyalty isn’t a requirement for your job and you should offer blind loyalty simply because you’re being paid. Remember loyalty is earned over time not given simply because you work for an organization. Same is true from the employer side.

The perfect employer- employee relationship is one that’s based on respect and over time becomes a deep relationship between the two side. Unfortunately, most employees offer blind loyalty and do not let such a relationship to properly foster.

Your employer can’t guarantee your employment forever because they can’t guarantee the future any more than you can. Be loyal to your employer after they’ve earned your loyalty and avoid giving blind loyalty to employers that haven’t worked to earn it from you.

Why you should strive to travel

When I was young my family moved often, which is a form of travel that comes out of necessity. Today, I travel out of a thirst for new experiences and knowledge. Due to my travel experiences, I’ve become a strong promoter in the importance of travelling as a means for personal growth and knowledge accusation.

But travelling isn’t an easy thing to do even though most people in developed countries can afford to. To be a successful traveller you have to open to new ideas and new possibilities. In short, you ask a lot of questions and avoid putting your judgments on the answers you receive. That’s a hard thing to do because often we’re told to label something as either good or bad. Travelling requires you to simply appreciate or at times acknowledge something is different; not better or worse, just different.

And as I get older, I’m even more convinced each of us needs to make travelling an important activity we try to participate in any form our budget permits.

Before I go on, I think it’s important I acknowledge the fact that not everyone in the world is able to fly around the world every year. There are real economic pressures and limitations that make travelling difficult for some of us and impossible for the rest.

But I believe everyone can travel in some form or another. Travelling isn’t simply the act of going to exotic countries or eating exotic food.

Travelling is the way you approach life with a constant curiosity and eagerness to learn. It goes much deeper than just a getting that perfect selfie. In fact, some of the best moments while travelling are the moments when you’re able to block out everything and simply enjoy the very moment you’re in without any need to share it with anyone but those who are in that moment with you. I strive and seek those moments every time I’m fortunate enough to travel.

Unfortunately, most people who travel never get those moments because they confuse going on vacation as travelling. I’m not opposed to going on a good hot vacation (I go on them too) but I think we all should strive to travel. A vacation to me is as an expensive staycation that offers only a change in scenery. The point of the vacation isn’t really about personal growth through new experience; rather it’s about enforcing beliefs you already have or are unwilling to change. If that’s the case, I for one would rather do that at a much cheaper price without all the airport delays at home.

Having said that, it is possible for a well thought out vacation to produce elements of a good travel experience. When’s the last time you ask your server about their family at a resort? The truth is any sort of travel you take whether it be a local trip or an oversea trip or resort trip can become a travel experience if you travel with the right mindset. Travelling is achieved based on how you approach your trip and most importantly the mindset you take with you.  If you are open to new possibilities and drop your judgement radar, you can achieve travel.

If you think about travelling in that manner you soon realize you do not have to travel halfway around the world to travel. Although,  I would strongly encourage you to strive for that at some point in your life because we truly live in an amazing world.

Strive to travel and embrace the traveller’s mindset to have a richer and more immersive travel experience. Happy travels!

Most of us are better of chasing opportunities rather than our passions

Passion. It’s become an irritant of mine because apparently if you’re not doing something that you’re passionate about you’re not living. Really? Is that how success is being defined now? I don’t believe that should be the case, but sadly a lot of smart and gifted individuals are buying into this definition of success.

Our society loves extreme positions and over-simplification of complex matters. Passion has fallen victim to this as well. When my parents grew up the extreme was the opposite; work and forget your passion. For my generation, we’ve flipped that script and it’s now about passion or nothing else. And from my observation, this endless quest for passion seems to be the cause of a lot of people’s unhappiness and frustration with our economic situation.

How did we get it so wrong? How did a simple advice go so wrong? Well, I’ve been thinking about this a lot and I’ve come up with one possible explanation. The conversation with respect to following your passion is often had without discussing a word that’s equally as important; economics. I said earlier our society often looks for simplified answers to complex problems. The advice to follow your passion is a simple answer to a more complex conversation that should be discussed.

Everyone has a passion, find it, and the world is yours

The key to success has been oversimplified. It goes something like this. Find something you love and are passionate about. Do that consistently and economic prosperity will follow.

I frequently enjoy the occasional wine. During one of my frequent occasions several years ago it occurred to me that wine was my passion. Consuming a good glass of wine is heavenly to me. I thought long and hard about how I could make this new found passion into my economic prosperity. Upon waking up the next day, I looked at my notebook of ideas to see what I came up with during my wine drinking night. The ideas were simple. Start a blog or some sort of wine show.

And there lies the first problem with passion. The assumption the key to a successful and economically fulfilling life is as simple as finding your passion. When most people say follow your passion they really are saying; find something you love and naturally you will make a lot of money from it. The advice comes from a good place but fails or entirely ignores the economic reality we operate under.

The truth is everyone one of us should strive to do things we are passionate about and give our lives meaning. However, making each of our passion into an economic money producing machine is far more complex and requires more than simply having a passion for something.

We further complicate things by giving the illusion that everyone has a passion waiting for them that will be the engine for their economic prosperity. Everyone does have some passion but not everyone’s passion will bring them economic prosperity. Some passions are simply meant to enhance your life and offer no economic benefits.

And why is that? Economics. Look you don’t buy every single product available in this world because not every single thing appeals to you or adds value to your life. The assumption that every single person in this world can merge their passion into an economic source of living is false. It’s false because that would mean each and every single passion we each have has enough buyers, no other competition for our passion, and people are willing to pay what we ask to deliver that passion. I just simply isn’t the case.

The economic reality we avoid to acknowledge

The economic reality we avoid when we discuss our passion is that most of the passion we have are not economically viable. As a result, we are blinded towards the fact most of our ideas we feel we are passionate about can’t yield enough economic value to warranty our full-time attention when we consider the alternative available to us.

Secondly, we are not alone when it comes to our respective passion. We are operating in a marketplace where there are many sellers and buyers. There are many people who share similar passions as us and many who are also trying to make that passion into an economic reality. And some of these people’s skills and ability far exceed ours. The point I’m trying to make is that you are not alone in your passion. There isn’t a passion out there that’s strictly dedicated to you and you only.

In our economic system, it’s impossible to have the entire population find a passion in something they each like while each individual also making millions of dollars doing it. Think of Oprah. We all can’t be Oprah with respect to making as much money as her, otherwise, there would no Oprah in the economic sense. But are a lot of Oprahs in the world who are just as passionate or even more passionate about helping others than Oprah. And when most people say follow your passion they avoid acknowledging this economic reality; passion alone isn’t going to make you into an economic powerhouse like Oprah. You require a plan, a marketplace full of buyers, and an attractive offer.

Not all of us can turn our passion into a business that provides us with a pay cheque. That’s okay, you don’t have to put that kind of pressure on yourself. Take me for example, I simply do not have the skill set to maximize or turn my passion for wine into a profitable business (though I want to really bad) but that doesn’t mean I should stop or can’t continue to be passionate about it. I just realized it’s not something that will be my economic driver for providing for myself or my family. I have other opportunities that yield me far greater return than trying to start a wine business. And that’s the key to overcoming passion unhappiness. Learning to quickly identify if you’ve got a passion or an economic passion.

Most of us are better of chasing opportunities over our passions

I know, it’s not what you wanted to hear but it’s the truth. Most of us are better off chasing economic opportunities available to us rather than forcing a passion into an economic passion.

That doesn’t mean you shouldn’t attempt to see if you’ve got a viable economic passion. It simply means you’ve also got to realize having a passion doesn’t necessarily translate into economic prosperity.

When you chase opportunities you’ve got a lot to work with. You know the possible return you can expect along with the economic value of any skills or abilities you might have. Opportunities can create a pathway for you to continue to building up your passion into an economic one or simply provide you with a means to enjoy your passion more (more wine drinking).

Unfortunately, most of my generation have been told pursuing existing economic opportunities (working a job you like) as a conscience choice is the same as giving up on your passion. Therefore, most people in my generation hate their jobs and often give up their job in hopes of turning simple passions into economic passions with a big pay day. And while I think the vast majority of people come out losing, I still feel a need to provide some guidance.

Chris Guillebeau, author of The $100 Startup provides 3 excellent question to ask yourself to determine if a passion is a hobby or potential business idea. He suggests you ask the following questions:

  • Does the project produce an obvious product or service?
  • Do you know people who will want to buy it (Or do you know where to find them?)
  • Do you have a way to get paid?

Most of my passions fail on the third point. Not so much that I do not know how to get paid. It fails because, given the skills and abilities I have, the marketplace is usually willing to pay me far more than what my passion is able to generate.

For me, if you’re doing something you like that’s a good thing. If the standard is finding a passionate job at any cost, then I think you will have a  difficult time and might end up making yourself more miserable. You have to understand there are approximately 7.4 billion people who also desire to do something they’re passionate about. You don’t have to give in the passion trap. Avoid doing things you hate but be content with doing something you find interest but might not be your passion. Use the opportunities you’re provided to further your passion or simply be able to spend more time on your passion.

That’s how I’ve decided to proceed. I have a lot of things I’m passionate about and enjoy what I do for work. I use the money from what I do to explore other passions further and enjoy a more fulfilling life.

Perhaps one day one of my passions might become an economic passion as well, but I don’t spend every moment of my life trying to force it. I chase opportunities instead given the skills and abilities I already have and avoid getting trapped by my passion.

Are you a smart idiot?

I know the title of the post is somewhat offensive. But I decided to go with it in an effort to wake you up. According to Statistic Canada, 64.1% of adults between the ages of 25 to 64 had a post-secondary qualification in 2011. Today, we are more educated than ever and yet it seems all that education isn’t necessarily helping us make better choices or decisions. And why is that? One possible explanation could be that our education system is creating more smart idiots rather than better decision makers.

Someone once said the more you learn about a subject matter the more you become dumber about the subject. I think that best describes the effects higher education has on people’s finance. The problem isn’t so much that people don’t have the information or that they are unaware where to obtain the information; the problem is they think by virtue of their educational background they are financially competent as well.

Obtaining a diploma, bachelor, MBA, or PHD doesn’t also translate to you being financially competent. Education is about learning how to make good decisions based on the facts available to you.  Personal finance is not the same thing. It’s emotional and most of the things we seek and want our money to do aren’t necessarily rooted in logical decision making. We ignore the facts because everything we want to do with our money on some level is to satisfy some sort of emotional desire or gap.

Therefore, smart idiots can be found all over the world. And if you’re rolling your eyes because you’ve got a bachelor degree or perhaps you’ve got an MBA and can’t stand the fact my writing is grammatically incorrect, you’re likely a smart idiot. But since this is a finance blog, I will focus on smart idiots behaviours that hinder them from obtaining financial freedom.

I know people that are extremely smart, much smarter than me. I’m not going to name them to avoid inflating their egos any further. But when it comes to personal finance these same people are complete idiots.

They are smart idiots not because they don’t know the difference between an RRSP or TFSA. No, they are smart idiots because their education fools them into believing they are financial experts and cannot be fooled. They are smart idiots because they can’t be bothered with the boring stuff like saving and building an emergency fund. They rather focus on how to make money on shorting a stock or some fancy real estate idea or some get rich quick scheme they have discovered. They can’t see the warning signs because they are “smart” and “smart” people are rational and evaluate ideas on their merits to see if it’s something they should do. Unfortunately, they often fail to see their emotional blind spot that’s often driving their decisions.

But perhaps the biggest reason most people are smart idiots is due to the fact they never act on any information that might actually help them. Smart idiots enjoy reading about things for discussion points or party talk but adopting and sticking to something is hard for them.

Perhaps it’s not fair to say they completely don’t act because they do on some level. But their level of commitment to financial plans is on the same level as that friend who tells you about a new diet/ weight loss plan they’ve adopted every other month. And like that friend, you congratulate them fully aware they will move on to something else next month while smiling and pretending to interested in this month’s new diet/ weight loss plan.

What the friend fails to understand is losing weight isn’t complicated. The information is already out there. Don’t eat too much, eat reasonable portions, get lots of greens in your diet, and exercise. The recipe for success isn’t complicated rather what makes it complicated is developing the habits required. Smart idiots are looking for shortcuts to those habits rather than doing the small and often boring actions required for financial success. This is what the friend with the new monthly diet/ weight loss plan is doing, looking for a shortcut to avoid the often boring reality of being healthy.

I will keep saying it till it hits home. Personal finance is about our emotions and that’s why it’s a difficult thing to master. The math skills required for success is basic and by that I mean grade 6 level or lower. A grade 6 student is able to tell you that a 6% interest rate is better than a 16% interest rate if you are borrowing money.

If you want to avoid being a smart idiot you’ve got to stop reading about people who are doing the right things and start incorporating what they are doing right into your life. You have to start acting on the information you’re being provided. Having valuable information but never using it makes it useless. Financial success is a series of small good decisions not about one risky decision that yields you millions. There is no shortcut to being successful financially. It requires patience and time.

That’s what a smart idiot hates and can’t be bothered with; boring small decisions that require time to pay off. Don’t be a smart idiot!

Diversification is a critical piece to investing the right way

I’m not a risk taker. I’ve never really been the type of person to take unnecessary risk. I like having options and for me putting all my eggs in one basket limits my options. In fact, I would consider myself a conservative investor with respect to financial risk tolerance.

But here’s the weird thing. My investment portfolio is 75% equities and 25% fixed income. With respect to investing; that’s not what you would consider a conservative portfolio for someone who claims to have a low-risk investing threshold. So, how is it I can claim to be a conservative investor and yet have a high-risk investment portfolio? One word; diversification.

I’ve written previously about risk and how for the most part we tend to have a dated view on how we define risk. For the most part, we either see risk as a means to achieve something we want or view risk as something that should be avoided to keep what we already have. I don’t view risk in the same context. I have a high-risk portfolio because I believe it’s not as risky with the help of diversification. But before I continue, let’s look at diversification more closely.

When speaking about diversification in the investing context, I am talking about a way to reduce the risk exposure or spread the risk exposure with a portfolio. Investing isn’t a for sure thing. Stocks you believe will do well sometimes go bankrupt and others you believe would go bankrupt end up doubling their value. The idea behind diversification is you’re likely to be wrong more times than you would like to admit and as such you want to avoid trying to constantly pick the winners. Therefore, you pick a little bit of everything in and effort to reduce your risk exposure.

Let’s use my portfolio makeup as an example. I have 75% of my money invested in equities and the other 25% in fixed income. If you’re thinking 75% of my money in equities is risky, you would be right.

Here’s how I reduce that risk, though.  I’ve diversified within my equity holdings. I didn’t simply investment my entire money in a couple of stocks I thought would do good. I hold over 500 companies in different sectors, countries, industries, that are large and small. I reside in Canada but I’m fully aware most of the goods I consume are not from Canada. For example, the iPhone is made by an American company. As such, of the 75% of my money that’s invested in equities; I have 25% in US equities, 25% in Canadian equities, and 25% international equities.

Within each of those regions, I have stocks in large companies such as Apple as well as in small companies. And when it comes to my fixed income portion of my portfolio; I have the 25% spread across federal, provincial, and municipal bonds. Also, the bonds have different time from 90 days all the way up to 30 years.

That’s the great thing about diversification. If you’re probably diversified and avoid trying to constantly pick the winners; your chance of success is much greater. Diversification is a critical piece to investing in reducing the portfolio’s risk profile. And for me, at least, when I look at how I can reduce the potential risk by spreading it around I feel comfortable having a 75/25 portfolio mix. I’m not advocating that everyone needs to do that but rather stressing the importances of  diversification to reducing risk within a portfolio.

A pension plan is not a retirement plan

Having a job that offers a defined benefit plan doesn’t free you from the responsibility of planning for your retirement. It seems everyone wants a government job these days. And I bet the defined benefit plan is a big reason why and less about serving the public.

It’s not okay to do a job you don’t like simply because it offers a defined benefit plan. Perhaps it’s just me but 30 years seems oddly long to do something you don’t like because of a pension income.

I get it, though. It’s a tough world out there and there are some many changes occurring that most of us are not even sure where to begin. Real estate prices are going through the roof, wages are staying stagnant, and the stock market seems too risky. Finding a job with a defined pension plan seems like a pretty safe plan in a world that’s increasingly more complex and uncertain.

But at 30 years, does the benefit outweigh the cost? Perhaps. But one thing I think everyone should avoid doing is hanging around a job they hate for 30 years. It’s bad for the individual, other employees, and the organization. Hate is a strong emotion to have about anything and if you have that about your work, you should look to switch for both your health as well as ensure the health of others around you who enjoy the work you hate. At the same time, I’m also not a fan of those who say you should only work at a job you’re ridiculously passionate about. For me, life is about balance and the right job is somewhere in between those two extremes for most of us.

You should do something you like and feel your work contributes to the organization’s success and perhaps, more importantly, someone is willing to pay you a reasonable wage in exchange for your time.

Back to the pension thing. I hear a lot of young people who are hunting for pension jobs. I’m not against it, I just think for some this is more about shifting responsibilities to someone else. For me, I pay no attention to my pension plan my employer is offering. Why? 30 years is a long time and honestly, I can’t tell you where my employer will be in 30 years or even if I will be with the employer in 30 years. Putting your retirement plan on your employer can entrap you and sometimes cause you to not take up new opportunities because your employer offers a pension plan.

If you have a pension plan, great. If you like what you’re doing, even better. But that doesn’t excuse or free you from planning for your retirement. Ensure you’ve set up and enrolled in the pension plan and once you’ve done that review it annual and pay it no other attention. Go about your life and still put money away towards your own pension plan as though you didn’t have a pension plan. Do not factor in your employer’s pension plan and certainly, do not let anyone tell you that you do not need to plan for retirement because you’ve got a defined pension plan.

In fact, if anyone offers you such an advice, please run..very fast! This is your life and you shouldn’t be passing on the responsibility to someone else. You can factor in your employer’s pension plan when you’re 5 years from retirement. I anticipate, you’re likely to stay at a job you hate if it’s only 5 years before you hit a big jackpot.

Focus on finding something you like and not a pension job. Continue to plan for your retirement on your own. By doing that, you will provide yourself far greater flexibility and ensure you are the master of your own future. Put more bluntly, you avoid being that employee that hates their job but feels obligated to share that every day with other co-workers who enjoy what they do.

Don’t strive for that when you’re young or ever. Plan for your financial future because no one else will care about your money as much as you.

What is defined contribution plan?

Defined contribution plans are far more common today than defined benefit plans. Their popularity is due to a couple of factors; lower investment returns, increased costs, and greater life expectancy. Given the current economic conditions and longer life expectancy, most employers would rather help their employees save towards retirement rather than be responsible for helping and funding their retirement.

What is a defined contribution plan?

A defined contribution plan allows an employee to contribute a certain amount of their yearly earnings towards their retirement. At the same time, an employer matches a certain percentage of the employee’s contribution to further help the employee build up their retirement fund.

The employee is responsible for selecting the type of investment that will help them meets their retirement objectives. All the investment risk falls on the employee. The type of pension income an employee can expect depends on how their investment has done.

What are some of the benefits of a defined contribution plan?

Defined contribution plans provide greater flexibility for an employee who wants to manage their retirement investment account. As such, the employee can select from a range of investment option that will suit their risk profile and investment objectives.

An employee’s retirement income will be the amount of money they’ve managed to save before retirement and the corresponding income they are able to generate from their investment. During retirement, they will live off whatever their investment is able to provide them and the employer isn’t responsible for an additional pension income or any pension shortfall.

What you need to pay attention

Fees. More accurately management expense ratio (MER) attached to the investment option your employer provides you. While employers offer a host of investment option, from my experience, most of the investment plans offered by employers who offer defined contribution plans have high investment fees.

That being the case, pay attention to the fee because fees can eat away at your retirement money. Secondly, avoid just selecting the default plan. Take the time to select the right investment that’s appropriate for your risk and investment objectives. There’s a high probability the default investment profile will not meet or suit your investor profile, yet most employees are overwhelmed and simply select the default plan. Take the time to find out about your option and ask questions.

Defined contribution plans offer greater flexibility and control over the type of retirement investment you hold. The trade off is that you are responsible for the amount of income you can expect upon retiring. Don’t panic, take your employer’s contribution and invest for the long run. Keep an eye on your fees and ensure you take the time to go through all your employer investment option available.



What is a defined benefit plan?

A defined benefit plan is a pension plan that guarantees a certain amount of income upon retiring.  Defined benefit plans are often considered the gold standard for pension income as the income is not dependent on investment return performance.

How much pension will I get?

Broadly speaking, defined pension plans are based on a formula. The formula is usually a combination of the number of years worked, a determined amount of pensionable earnings per year earned, and your salary during your working years. The combination can vary among employers but as a generally rule what you are entitled to is a combination of those three factors. That being said, the most common form is what’s referred to as career average. In short, the employer takes an average salary during your career years, multiplied by the pensionable earnings you earn per year and then multiplied by your pensionable service year.

Let’s use an example to illustrate the career average plan. Please note this is a made up example for illustration only. Let’s assume you work for an employer with the following pension formula. You are able to earn 3% pensionable earning based on the average of the best 5 years of your earning for a maximum pensionable service year of 25 years. Now, let’s assume your best 5 years’ average salary worked out to be $30, 000.00. In this case, you would be entitled to a pension income of $22, 500 per year ($30,000*3%*25). Not too bad, considering you would receive that income indefinitely throughout your retirement regardless of what the market is doing and of course assuming your employer doesn’t go out of business.

What is vesting?

Vesting is an important thing to know if you have a defined pension plan or any benefit that has a vesting period. When your pension becomes vested; it means you are entitled to any pension benefits you have earned and more importantly any pension benefit you employer owes you as well. Before such a time, you are only entitled to anything you’ve paid into the plan and not what your employer has been putting away for you.

Every pension has a different vesting period that can range from 1 year to 10 plus years. As such, it’s important you are aware of the time frame you’re required to be part of the plan to be entitled to both you and your employer’s contribution.

Why are employers moving away from defined pension plan?

Two reasons; increased risks and employees living longer. That’s the simple and honest answer. Here’s the thing. When an employer offers a defined pension plan they are agreeing to fund your retirement income regardless of what’s happening in the world or the company. Employers invest their contribution and their employee’s contribution either directly or indirectly in the stock market. Upon retirement, the employer bears all the responsibility with respect to funding your pension income. And since employers in some form or another are investing your pension in the market, they expose themselves to normal market ups and downs.

And since employees are now living longer, employers are on the hook for a longer period than in the previous generation. I haven’t even discussed the reduced labour force factor. Defined benefit plans are becoming increasingly difficult to fund given our higher life expectancy, increased investment risks, and changing labour force. But I must add, it’s not impossible, just more difficult for employers today in the environment we live in.


What the future holds…

Uncertainty. That’s the word I would use to describe the future of defined pension plans. For the most part, private sectors are getting rid of their defined benefit plans for new employees. On the other side, public sectors are renegotiating their pension entitlement and moving towards a shared risk for new employees. In short, defined benefit plans glorious days are well behind it.

If you’re a young person and happen to work for an employer that offers a defined pension plan, good for you, but do not make the mistake of relaxing and assuming this is your pension plan. These plans are sure to undergo changes in some form or another during your working years.

Defined pension plans offer a consistent level of income during your retirement years. Take the time to speak to your human resource department to understand your pension formula. Be sure to ask them what the vesting period is. Lastly, avoid overspending or taking on additional risk if you happen to have a defined pension plan. It’s important to recognize that a lot can happen in 30 years. You still need to take ownership of your retirement planning and avoid putting that responsibility on someone else; especially when change is the only constant in life.

I’ve never heard anyone who complained about having more money than they anticipated they would upon retiring. Take ownership of your own life and future!

A degree is a lagging indicator to your future success

It’s September, which means its back to school time. I feel somewhat obligated to write a back to school post particularly for those of you going into post-secondary or perhaps on your last semester. I’ve written previously on post-secondary education and why I think it fails most students. In short, we still talk and think about post-secondary education as though our economy is still in the industrial revolution.  That type of approach has left a lot of students frustrated and indebted, who feel post-secondary was a waste of money or worse question its value.

Education is the biggest investment you can mark in yourself. And as a former student, I know at times you can question the value of that investment (I did many times). While education is important and valued by our society, it’s certainly not free for all students. As a result, students are taking on more student loan debts with as competition increases in the workforce. Most graduates end up working term jobs or part-time jobs. It’s can be a frustrating cycle to get out of.

If you currently feel that way or at any point in your study feel that way, I offer this advice. Think of your degree, diploma or any certification you’re pursuing as a lagging indicator of your future success.

What are leading and lagging indicators?

From an economic definition; leading indicators are things that either show up right away when the economy is doing good or bad. Lagging indicators are things that show up much later in the economy to confirm that things are good or bad. The employment rate is one of the indicators economist my turn to confirm there believe on how the economy is doing. When the economy is doing bad, the employment rate is usually the last economic indicator to confirm we are in a recession. When the economy picks back up, the employment rate is again the last thing to confirm this. Therefore, when the economy is on a downward trajectory, the employment rate is unchanged for several months even though most of us know the economy isn’t doing good. The rate doesn’t reflect our conclusion as layoffs take some time to work its way through the economy to be reflected in the employment rate. Therefore, it’s a lagging indicator because it’s not something we can point to right away to support our initial assumptions.

A degree, diploma, or certificate is a lagging indicator of your future success

Most students view their degree as a leading indicator. They believe upon completing their degree they will land a good job and then move up in a couple of years, then buy a house, start a family, and so forth. Unfortunately, this belief leads to frustration because ultimately a degree, diploma, or certificate is a lagging indicator. Obtaining a degree might not help you for the first 10 years of your working career. Sure, it’s required as a competitive tool but it’s true value shows up much later in your life.

A degree shows its value later in your career as you begin to advance into more senior or leadership roles within your industry or career path. It enables you to distinguish yourself from your well-experienced peers who might not have a degree but have a similar level of experience as you. Your degree also enables you to recognize opportunities as your career progresses.

It’s often said when we have something all the time we end up taking it for granted. Education, particularly in the developed world, has fallen victim to this human phenomenon. Nothing worth pursuing comes easy and education isn’t any different. Education is about you and investing in yourself. Finding out who you are isn’t done in 4 or 5 years. It’s a long life journey and educating you provides you with the necessary skills and knowledge to unlock your full potential.

Good luck with your studies and remember it’s a lagging indicator to your future success.