Personal Finance series – Why it is almost NEVER a good idea to have an emergency fund

The summer is super nice and we have been out and about at every opportunity that is why it took us to long to write my next blog. Recently we have been having discussions with some friends about the need of an emergency fund. If any of you cared about your personal finance you must have noticed all personal bankers / financial planner / media /  paid ad recommend at least 3-6 months of your net income in your savings or chequing account. In the past decade we read a lot of personal finance articles, and we have yet to see a single article not recommending this, but we are about to write something that you likely have never seen.

We are here to objectively explain why it is almost never a good idea to put aside 3-6 months of net income in savings or chequing account. But first we need to make an important but realistic assumption: that unforeseeable unexpected bad things happen a lot less often than people think/fear. This is partly the way human brains are wired and partly from brainwashing from paid ads over long periods of time. I will not get into why financial institutions wants you to put money aside in savings account in perpetuity. Let’s be conservative and say the likelihood of bad things happening to you which requires you to use emergency fund is 10%. (lets be honest, if you feel chances of these events will happen to you is over 10%, then it is reasonable to say they are not “unforeseeable unexpected” events).

To make this as relevant as possible to you, we will present various scenarios.

Scenario #1:

Susan, 28 years old, $40K net income per year, recently got a condo (after reading this blog, good job!) and have a mortgage of $250K at 3% interest rate.

Good Susan: listened to her banker, put 3 months of net income, or $10K in her savings account at all times for emergencies.

Bad Susan: read our blog, did not put any money into savings account, but instead opened a personal line of credit with $10K limit at 5% interest (but absolutely no cost if zero usage), and use the $10K cash to pay down her mortgage.

A year later……

90% of the time:  Nothing bad happened to Susan. Bad Susan is now $300 better off than Good Susan because Bad Susan reduced her mortgage balance by $10K a year ago ($10K x 3% interest savings = $300).

10% of the time: Shit happened and Susan lost her job for 3 months. Good Susan used all her $10K in savings to survive. Bad Susan, since no emergency fund in savings account, had to use her personal line of credit and paid $500 in interest ($10K usage x 5%)

In this scenario, Good Susan is actually implicitly paying $300 per year to protect herself from the 10% chance that bad things will happen to her. But with a personal line of credit in place, she only needs to pay $500 in the event shit does happen. The expected value against bad thing is only $50 (or $500 x 10% likelihood). In the long run Bad Susan is always $250 better off  per year by not having an emergency fund in this case!

**Actually, some mortgages let you take out your previous bulk payment with no penalty or cost. Also other mortgages let you skip a few payments due to job loss, or even no reason at all!! etc. These options will completely eliminated any potential benefits of having an emergency fund for any mortgage holder. And you don’t even need a line of credit! To know more about embedded mortgage options, feel free to talk to us.**

Scenario #2:

Blow Joe, 20 years old, $20K net income per year, living pay cheque by pay cheque, live with parents, with combined running credit card balances of $5,000 at 20% interest.

Good Blow Joe: listened to his banker, put 3 months of net income, or $5K in his savings account at all times for emergencies, credit card balance remains at $5,000.

Bad Blow Joe: read our blog, did not put any money into savings account, but instead use the $5K cash to completely pay off his credit card balance.

A year later……

90% of the time:  Nothing bad happened to Blow Joe. Bad Blow Joe is now $1,000 better off than Good Blow Joe because Bad Blow Joe paid off his $5,000 credit card a year ago ($5,000 x 20% interest savings = $1,000).

10% of the time: Shit happened and Blow Joe lost his job for 3 months. Good Blow Joe used all her $5,000 in savings to survive. Bad Blow Joe, since no emergency fund in savings account, had to cash advance on his same credit card and paid $1,000 in interest ($5,000 usage x 20%).

In this scenario, Good Blow Joe is actually implicitly paying $1,000 per year to protect himself from the 10% chance that bad things will happen to him. However she only needs to pay $1,000 interest in the event shit does happen. The expected value against bad thing is only $100 (or $1,000 x 10% likelihood). In the long run Bad Blow Joe is always $900 better off by not having an emergency fund in this case!

Summary:

Emergency funds is unnecessary if you have credit available to draw on when you did it. Best is to open a personal line of credit. Also those financial “guru” out there always says you are more likely to spend the money when you see it sitting in your account every time you check your online banking app. We personally never have any emergency funds and we are doing just fine. We have multiple unused personal line of credits and skip-a-mortgage payment options ready to save our butts at all times. We’ll just dip into those if we ever need it. Best of all, none of these products costs us a penny to setup!

Everyone’s situation is different. If you want to see how you structure your personal finance to eliminate the need of emergency funds, feel free to contact us. We love to chat and save people’s money.

Until next item!

 

 

Mortgage Trend: Is variable rates going up very soon? should I lock-in fixed rate now before they increase? OMG OMG!

We noticed a lot of people are travelling to Japan this year as it feels like half of our Facebook posts are photos from Japan. We also took advantage of the low airfare and took Zoe in past Spring. Those who know us know we always look for best deals in everything, and travelling is no exception.

We are sure most of you travelling to Japan will be using some sort of mobile wifi device. The first time we went, we didn’t know any better, we reserved a device online and picked up at the airport at over $10CAN/day (below left). But this year we found a place at Vancouver is renting out wifi devices for as low as $4CAN/day!!! (below right) They have a store in downtown Vancouver you can go pick up before you trip and no need to wait in line at the Japan airport and waste your vacation time while they try to explain to you in Japanese. The device battery strength is amazing. This device lasts the whole day unless you are always surfing the net like us in which case it still last until 10pm. If you or your friend travelling to Japan be sure to check it out. Don’t worry they speak English 604-683-3510.

http://ketaiya.com/device-and-plan/going-to-japan/

 

Back to our main topic.  Those who heard about the recent news that Bank of Canada is hinting they might increase interest rate soon than previous expected. We already hear people panicking asking us are rates going to go up now? should we convert from variable to fixed now? Or should we lock in fixed rate right now before it’s too late?

We are here to break it down for you with insight that you will probably  won’t see from any mainstream media.

The Scare Tactic:

Before you all go into panic mode that you mortgage rate will go up tomorrow, just think about all the media feeds that you have read/heard in the past, or any mortgage/home buying “experts” suggesting today’s interest rate will not last forever, it will eventually go up, etc. It’s important to take a look at what actually happened to the Bank of Canada rate in the past 18 months:

As we have been mentioning to homeowners last few years, we recognized the Bank of Canada intent is to try to cool down the real estate market. However according to Colin’s and Angel’s Think Tank, it suggested that Bank of Canada, realistically speaking, is not in a position to actually increase the Bank rate as the economy is still recovering, partly of the oil shock. So what they did is to use the scare tactic. They can only keep warning homeowners not to take on excessive debt as rates will eventually rise.  To most of the population it succeed. But to a person with CFA and Econ Major, sorry Mr Poloz we called your bluff. Just look at the chart above. Prime rate did not change for the past 18 months.

Direction of variable rate:

We generally agreed the economy is trending more and more in the right direction in the last few months, and that rate increase should, finally, be in the horizon. However what we want our clients to noted is that this will just push forward slightly the expected 1st rate increase, from mid 2018 to perhaps early 2018. We would be quite surprised if there is a rate increase before 2018. So variable rate holders can breath easier for now, there is still time to decide your next move. For those with variables ending in the next year, that is great news.

Throughout history, Bank of Canada overnight rate typically goes lock-step with mortgage prime rates. We need to noted the last decrease in mortgage prime rate did not decrease in lock-step with the overnight rate. For example the last drop of 0.25% in overnight rate resulted in only 0.15% drop in mortgage prime rate. So there is a good chance when the 1st overnight rate increase, which will be 0.25%, only result in 0.15% increase in mortgage prime rate. So your impact could be lessen by half.

Direction of fixed rate:

Before we start on this topic, we just want to clarify one thing, that fixed mortgage rate has no directly relationship with Bank of Canada overnight rate or prime rate. The fixed mortgage rate is determined solely by the yield in the Canadian bond market + a spread as per the individual Banks. Looking at the 2 graphs below you will see the yields for 2 & 5 years bond as of Jun 14.

And the yield is determined by investors (local and global combined). If investors view Canada as a safe place to park their money and have solid economic prospect, this will drive down the yield thus resulted in a lower fixed mortgage rate. (Assuming the individual Banks will keep the margin the same). Fixed rates has been fluctuating within a close range in the past couple years, maybe within 0.25% boundaries. According to Colin’s and Angel’s Think Tank, in the next few months we expect fixed rates to continue to fluctuate within a very close range. We might see a slight increase in the next couple weeks but we do not think it will go any further, then that. As such, if you are in a variable rate now there is no rush to lock in fixed rate for now.

Feel free to each us if you have any questions about your current mortgage situation or if you are planning to get a new mortgage or close to a mortgage renewal. By not talking to us, we guarantee that you are leaving money on the table with the lender!

Cheers!

 

Disclaimer: The info and predictions above are only personal opinions of the writers. Actual results may varies. We are not responsible for any financial loss as a result.

What time is it? It’s property tax notice time!

Is this time of the year again. (For most of us anyways)

We just got our first property tax notice for 2017 today. Given the continue run up in home prices, when the average homeowner Joe open their envelopes this time around they will again say to themselves “no eye see, how much is my property tax going to be this year?”.

For this particular townhouse in Greater Vancouver that we owned, the 2017 assessment value was up 21% year-over-year, from $491,000 to $596,000. All the people who don’t follow our blogs will be telling on their friends and dim sum buddies “oh man, our property taxes will likely be 21% higher than last year, no money me so poor”.

But for experienced real estate investors like us, we knew despite the 21% increase in assessment value in 2017, we were quite confident that our property tax for this particular property will be more or less the same as in 2016. Not to our surprise, we opened our envelop and found out our property taxes was 3% LESS than last year. 

Now if you are wondering how is this possible? This is not what my friends / auntie / uncle / 24 hours newspaper / inexperience realtors have been telling you all these years. You need to read one of my previous blog:

Property Assessment vs Property Tax Amount – common misconceptions

For those lazy bumps, the short version is that, as most of you know, there is a disproportion of increase in prices of detach homes in Greater Vancouver between July 2015 to July 2016 (which is where the 2016 & 2017 assessment values came from) relative to townhouses and condos. And property taxes are based on your home price relative to your neighbours, not absolute value.  Therefore despite the small overall increase in city’s budget for 2017, townhouses and condos owners are paying a disproportionally less than detach home owners.

If you understand this concept, you will forever be a minority that do as you will never be able to convince someone that this is how property taxes are calculated. They have been brainwashed by the media for as long as they have lived.

Hope you learn something today. Until next time!

 

Greater Vancouver Real Estate Market Updates May 2017

First of all we apologize for not posting for a while now. Many of you have been messaging us when the next blog going to be posted. We have been really busy with life. Since it has been while let’s dive right in on what’s happening in the market as we speak.

For those that’s been hunting for a home lately, you must noticed the market has picked up dramatically again. What’s different this time around is the condo/townhouse segment is white hot right now. Basically what happened to detach houses last couple years has been happening now to condos/townhouses. Houses are picking up as well just not selling as fast.

We are sure most of you would like to know what Colin’s and Angel’s think tank predicts the market will go from here but first I’ll point out the major factors at play here:

1. This is the biggest factor driving multiple bids/rapid increase in prices in condo/townhouse right now – the number of listing ( = supply) at 20 years low. Noticed “supply” here is NOT what the media and government have been saying, which is to build for housing to match demand. This “supply” here is on existing properties where homeowners are reluctant to put their homes for sale. Why is that you say? Put yourself into their shoes, why put the unit on sale today when you know you can sell at the higher price next week? People who are selling now mostly because they HAVE to sell today (ie they are upsizing to a house (committed) / moving out of town etc).

2.  The value of the CDN$. The CDN$ took a further beating this year. And Colin’s and  Angel’s think tank predicts there will be further downward pressure on the CDN$ due to relatively weaker economy than the US and it is unlikely Bank of Canada will match increases in overnight rate with the Feds in the next 12 months, thus widening the  interest rate differential between CDN & USD. Let’s be honest, there’s foreign money at play here, especially RMD and USD.

3.  The introduction of the 15% foreign tax in Ontario. For the past 8 months people are favoring Toronto because of this. Now both cities have it, they are back at the same level of playing field. And let’s be honest again, Vancouver > Toronto.

4. The lessor known factor, which will increase investor demand for properties in Vancouver, is the Rent Control policy change in Toronto effective just last month Apr 20, 2017. Before Apr 2017, unlike in BC, there’s no annual CAP a landlord could rise rents in buildings built after 1991. However there is a CAP now. And looking closely, the CAP is even tighter than the one in BC. This CAP is at inflation AND capped at max 2.5%. (FYI BC is 3.7% in 2017). All else equal this will result in some  investors moving investment properties from Toronto to Vancouver. For the nerds:  https://news.ontario.ca/mof/en/2017/04/ontarios-fair-housing-plan.html

5. On the other hand, the current ultra tight supply is unsustainable at current level as there are tons of pre sales completing in the next couple years which, all else equal, will result in less multiple bids situation.

So do we have a crystal ball on where’s the market is heading in the near-mid term? Yes we do. Are we going to share on our next blog? Maybe. Want to know is it a good time to buy/sell your condo/townhouse/house now? feel free to contact us any questions you might have.

It’s 1am we are going to bed now. K thanks bye.

P.S. We rushed though this and didn’t even prof read this article. Again this is our personal opinion only. Actual turnout might various.