5 RULES FOR FINANCIAL SUCCESS FOR CANADIANS

In 1998 I wrote a letter for posting in the "Daily Rant" section of my first web page entitled
5 Rules for Financial Success for Canadians.
Reading it again recently I wondered if it was still relevant today, 10 years later. I think it is. These rules have helped me and other Canadians attain and maintain financial stability and independence in an increasingly complex world. These ideas of course are not all mine. But arranged in this simple list, I think anyone, especially those without any financial structure or goals, can put it on the fridge and benefit.


1. PAY YOURSELF FIRST.
Save 10% of every dollar you ever earn. That is a simple rule. Set up an automatic debit that takes 10% of your regular paycheque per month from your chequeing account, before any other bills come out and deposits it in your savings account, your RRSP account, purchases units in your favourite mutual fund, buys gold or silver or whatever safe savings vehicle you like. You can save 10% of the gross or the net. The details are not as important as the habit. When irregular income arrives take 10% off the top and add it to the pile. No matter where one lives, no matter how one earns the money, no matter how much money one earns, there are very few other basic rules for living that will provide the kind of financial stability and autonomy that this critically important rule will. On paper it makes sense to pay off debt before saving money. In practice, the habit of saving money on a regular basis will be more valuable than trying to pay off debt and delaying the saving process. Do not dip into your savings for month to month purchases. In the future you will be able to withdraw income from the account for investments and retirement income
Many years ago someone wrote a book about how to save money. It had one page and one word on that page. START. Read it, do it, whether you are 10 years old or 100. It's been said that creating wealth is simple not easy. This rule is a way to begin.

2. BUY YOUR HOUSE.
One must live somewhere. Why not live in a leveraged, secure, capital gains free investment. In Canada, no capital gains taxes are due on the sale price of your principal dwelling. In some circumstances, a mortgage can be made tax deductible. The equity in your house is an anchor for financial stability that will sustain you through good times and bad. Many government incentives exist to assist and encourage people to buy their own houses because the government knows that owners are less likely to become dependent on social systems than renters. Because real estate keeps pace with inflation, owners keep pace with the growing economy and the declining purchasing value of the dollars. If you need a startling example, just ask your parents how much they paid for their first house. The same disparity will exist when your children ask you the same question in 20 years!
There are only two ways to make money in this world. One is to invest in business and the other it to invest in real estate. If you can't afford your dream house, buy an apartment. If you can't afford prices in your own neighbourhood buy in another, or buy some recreational propery. If you like skiing buy a chalet, if you like fishing, buy in the lakes district, it's not what you buy, it's if you buy.

3. BUY GOLD.
The Royal Canadian Mint still mints all our coins and most paper dollars in gold and silver as it has done since the mint was established about 100 years ago. When the RCM began reducing the precious metal content of our coins in the 1960's people lost the ability to accumulate tangible wealth by saving money because the money became almost worthless. Today for example, a dollar, a loonie, is a token worth only its purchasing power, a cheap cup of coffee. In the first half of the last century, say 1938, $1.00 would have bought a meal in a restaurant. The value of that dollar is constantly falling. If you save it long enough, its value will fall to almost zero!
In 1960 a dollar coin was made of 80% fine silver. A 1960 Canadian dollar coin is worth about $10.00 today but a 1960 paper dollar is worth the same as today's loonie. A 1938 Canadian silver dollar however has enough value to purchase a meal in a restaurant!
Now, if you want your money to be worth what its worth, every time you get a paper cheque or even if you find yourself with a jar of coins. Take those almost worthless coins and some of the value of those paper notes to your local coin dealer and buy Maple Leaf Gold and Silver Coins. If you can't afford gold buy silver. If you can't afford an ounce, buy a fractional coin. These assets leave no paper trail and are a great emergency/disaster fund. There's a size for every budget. Do it every month. Doing this will keep the real value of a dollar in your hands for ever...instead of in the hands of the government.

4. BE AN OWNER, not a loaner.
Have your savings in a dividend fund rather than an interest account. Interest income is highly taxable but dividends aren't.
Buy your car don't lease it. Buy your house don't rent it. Own your business. Work for yourself at least part-time. The tax deductions are many, you'll build equity and you'll learn more skills. There are certain things that entail so much risk and have so many costs attached that is makes sense to rent them when they are to be used occasionally or at least short term. Things such as sailboats, airplanes and occasionally used, expensive tools.

5. NEVER BUY A NEW CAR.
A new car is a big status symbol in our society. It has always been so. For many people it's the biggest cheque they will ever write after a house. But all new cars depreciate very rapidly from the moment you drive your $35,000.00 Extravaganza off the lot until it's worth $500.00 some years down the road. A capital loss of 90% or more is hard to justify when its not necessary.
Buy and drive an old car. The thrill of driving a new car wears off long before the payments do! Pay approximately 10% of the new price of the car. This usually means the car will be at least 10 years old. This does not mean that you can't have all benefits of a new car and it will cost much less. You won't have a monthly car payment, you won't pay any interest, you won't pay any GST, you'll pay less PST, and if you wreck it or if it's stolen you'll lose less money. You'll pay less insurance and old cars, especially pre-computer age cars are cheaper to fix. You'll also lose less money if you sell it and it'll be easier to sell. You likely won't buy a lemon because the maintenance records will be in the glove compartment, and even if you do, you'll still risk less money.
Buy a car you like and one that fits your needs. You can keep it in pristine condition or just drive it. You can buy a big one or a small one a blue one or a white one, a fully loaded Mercedes Benz or a Chevy Cavalier these choices are not the point of this rule. It's true that some cars cost more to buy and maintain and that some last longer or use less fuel than others. But cars are available at every price point from $100.00 on up. The 10% rule is the one to follow. Virtually all cars can be had for 10 cents on the dollar at a certain point in time. A $100,000.00 BMW can be had for $10,000.00 after a few years.
After a certain number of years, some old cars actually appreciate! Why not drive a classic car? You'll look great driving it and it won't drain your account.
Exercise the 50% rule no matter what your budget is. Spend only half your money buying the car more or less. You'll need the other half for repairs. You need a $20,000.00 budget to buy that $10,000.00 BMW but a $1000.00 Chevy Cavalier can be had with only $2000.00 in hand. All those flashy ads on TV and billboards and all those huge new car stores will not be paid for by you.

SHOULD GENERAL MOTORS BE ALLOWED TO GO BROKE?

This article is an updated one that I wrote last year. Since dramatic events have occurred since then I thought is was worth re-posting, partly to affirm my own position and partly to emphasize how shocked and disappointed I am by the positions and reactions of the various governments around the world...especially the American Fed who has effectively nationalized GM.

Many Canadians view the USA as a bastion of capitalism compared to Canada and European countries. Just remember, and this most recent bailout of a long terminally ill corporate giant emphasizes the fact, that the United States of America is just as deeply embedded in socialism as other western nations. If the founding fathers can see what has happened to their country since the days of Jefferson they must surely be sick with grief.

The American Fed is even more broke than than GM! The only things that the Fed has over GM are better cash flow and more remaining credit. The nanny state is sacrificing the the present and future purchasing power of its taxpayers by borrowing trillions, YES TRILLIONS of dollars to bail out companies that are no longer viable. Yet the Fed is barely viable itself! Neither GM's $170,000,000,000.00 plus debt will ever be paid nor will the Fed's...are you ready for this $11,000,000,000,000.00 that's eleven trillion by the way, plus debt ever be paid off.

Probably the key reason why this tragedy, this crime, this gross disregard for the constitution and what's worse, common sense, must surely be the abandonment of tangible wealth in the the currency of the nation. It's the same around the world. While no system is perfect, here it is succinctly. This is a quote from another article I wrote years ago called “Once Silver Now Steel”. As we watch the decline of the American empire that began in the latter part of the 20^th century, this final dramatic crash of GM reminds me to pay attention because when the end comes it comes with uncanny speed and power.

In the days when was currency was valuable rather than token, the folks who owned it were rich because the hard currency itself in the form of high carat gold or silver held its value in the tangible asset, not in the promise of purchasing power and backed by the government of the day. Today if you have a million dollars in hand it will be worth less tomorrow than today due to inflation. If you keep it under your mattress it will be worthless in a few years. If our money was still valuable, wealth would be in the hands of citizens rather than governments. The mint would be forced to purchase precious metal from the mines and related industries instead of just making base metal tokens. Actual wealth would be placed in the hands of the people instead of virtually worthless paper and steel tokens and it would hold its value!...workers could save money without being forced to invest it. Governments couldn't print money to pay debts because it would have to buy gold and silver to do it.........Accountability would be required.

So after all these years, some would say decades, General Motors is so close to filing for chapter eleven in the US that the Fed is rumored to be planning a twenty seven BILLION dollar bailout package for the giant failing automaker. Perhaps the buzz phrase "GM's too big to fail" will become a self fulfilling prophesy. Needless to say, the ramifications of GM actually going bankrupt would be wide reaching, no doubt touching deep into the hearts of communities far and wide and affecting millions of people who in one way or another make a living or who's incomes are supported by the manufacturing of automobiles.
The water cooler, on line, talk radio and tavern talk runs the gamut from comments like "it's only because of the global economic slowdown that GM has run into tough times". And, " GM has shot itself in the foot by building huge, lousy cars that use too much fuel and that nobody wants to buy. These are urban myths.
Of course, the real reasons why GM is going broke are complex and GM has been going broke for a long time. Some of the reasons are the result of bad management decisions, like buying Hummer for example, but many are the result of market conditions that are and have been out of control of even a market player as big as GM. Like, for example, the fact that the import/export market has been a one way street for a long, long time. Japanese cars go to America, American cars don't go to Japan. And to complicate matters further, there's GMAC. GMAC lost big time in the subprime mortgage debacle. Then there are the high union wage collective agreements, crushing pension and other benefit obligations and changing demographics.

For an eye opening account of just how long GM has been bleeding to death I urge you to read Porter Stansbury's articles "Letters from the Chairman of GM". Reading these articles will crystallize just how dire GM's situation is and how the current situation is NOT a result of the most recent and dramatic economic conditions.

http://www.growthstockwire.com/archive/2008/sep/2008_sep_20.asp

http://www.dailywealth.com/archive/2007/nov/2007_nov_10.asp

Mr Stansbury's ( http://www.stansberryresearch.com/ ) letters were controversial at the time of his writings because so many people were unaware or disbelieving of just how dire the situation was and is at GM and based on my observations, THEY STILL ARE.

So given this long preamble about how GM came to find itself at the "end of the world as we know it" I must ask the following questions, " should GM be allowed to fail" and " can GM really be saved anyway. Well my answers are yes to the former and no to the latter.
Here's why. I'm philosophically opposed to pumping taxpayers money into specific companies.
That only amounts to a subsidy for a failing company that gives it an edge over its competitors. How can a market work effectively for its participants when the the government is subsidizing some companies and not others.
It's far better to let those affected by changing conditions in the market take advantage of social support systems already in place as they need them. As examples, employee pensions are insured, unemployment insurance is there for displaced workers.

Workers with skills and drive will be picked up by the remaining market players. Others will move on to other industries.
And GM as a viable business cannot be saved anyway. Because GM itself with all of the tools and resources available to it for the last twenty years has not been able to turn a profit. Providing a massive bailout package for a huge, long failing company simply postpones the inevitable at taxpayer's expense and in a very inequitable way.
The elephant has been shot a hundred times already...it just hasn't fallen down yet. GM should be allowed to fail in the normal course of business and its assets and debts absorbed by the remaining investors in the marketplace
Regards,
Julian.

Copyright JulianOnePlanet Publications 2008