This is a course from McGill university, a canadian university. The objectives of this course is to help me make better financial decisions.

Understanding Debt and Borrowing

Common Sources of Debt

People borrow money because of instant gratification.

  • the credit limit
  • the cost of borrowing
  • when it need to be repaid
  • how often is it to be repaid

Credit Card

  • Annual interest rate(15% -20%)
  • annual fees
  • paying minimum monthly balance (21 days)

Line of Card

  • Loan from a bank
  • Overdraft
  • start interest immediately
  • personal, student , secured, unsecured are the different types
  • interest and fees are lower than credit card
  • behaviour and habits sometimes accumulate higher balance making it hard to pay.

Long term financing

  • Needs collateral

Mortgages

  • specific to real estate
  • minimum down payment is(20% to 50%)
  • if lower thatn 20%, you will need to purchase mortgage insurances
  • Mortgages = (Property value - downpayment) + additional fees
  • Changing contract means additional fees
    • Amortization period(time to pay loan)
    • decide type of interest rate
    • frequency of mortgage payment

Credit Scores

Creditors access your behavior using your credit report. Information stays on your credit report for 6 years.

Calculation of credit score

it ranges from 300 to 900. Having good credit will help you have better interest rates.

Rules of Borrowing

  • Try to live within your means
  • always insure you’re using debt wisely
  • make sure you need something before you buy something
  • have a sound financial plan

Your Money: Today and Tomorrow

Discover the importance of the time value of money and learn concepts such as compounding and discounting and the role they play in managing and growing your money.

Compounding

  • present value vrs future value.
  • future value are larger FV = PV x {1+ r}t . r = interest rate per period in decimal i.e 4% is 0.04, t = time
  • You can only compare money at the same point of time (today and 2 years ago).
  • This is making money travel forward
  • receiving money today is much more valuable than receiving money in the future because
    • you can’t compare money in both times
    • due to the potential investment of money received today

Discounting

  • This is making money travel backwards
  • PV = FV / {1 +r}t
  • discounting is the reverse of compounding

Everyday Applications

  • save bi-weekly will give interest more than saving at the end of month.
  • pay bi-weekly will reduce the interest than paying a lumbsome at the end of the month.

Strategic Budget Building

Learn why a budget is an important tool when it comes to reaching your financial goals, and get tips to make budgeting simple, painless and effective.

Why Budget?

It is an estimate of income and expenditure over a period of time.

Tips && Techniques

Preparing

  • 1-3 to describe where you stand financially
  • 1-3 where you’ll like to be
  • good to be flexible
  • have a 3 years vision
  • have problem and solutions to your vision
  • have a list of key holders

Analyzing Phase

  • start calculating your income and expenditure
  • reach your key stakeholders

Decision phase

  • finilize that 3 years vision

Keys steps to budgeting

  • Achieving quick wins
    • list 3 things to get you closer to your goals
    • check your bank balance and indicators to see how things are going
  • An annual budget is important
  • have a vision of where you want to be in 3 years
  • review your budget yearly and adjust accordingly

The Art of Investing part 1

Investment Options

Stocks

  • Stocks are very risky
  • Buying stocks means you own part of the company.When you buy a stock, you own part of the company. This means that you make money if the company does well, but if the company does poorly, you lose money. As such, there are no guarantees that you will earn investment income by buying stocks.
  • You may either gain or lose money depending on how well the company is doing

Bonds

  • Bonds are IOUs
  • when you buy bonds, you loan money to companies and the companies pay back with interest.
  • Great thing about bonds is you make profit if the company still alive
  • They are less risky than stocks
  • Stocks offer higher returns to investors
  • Bond returns depends on interest rates.
  • A Guaranteed Investment Certificate (GIC) is an example of a short-term bond issued by banks. They are very safe investments because they guarantee your original investment as well as a specific rate of return.

How to invest

  • Mutual Funds (passive and active mutual funds)

Common Mistakes and rules to avoid them when investing

  • Diversification of your portfolio
    • buy 10 to 20 stocks
    • buy different kind of stocks
    • buy index funds
    • invest in international markets as well
  • Historical performance is not necessarily an indication of future performance. Data shows that past winners usually don’t become tomorrow’s winners.

The Art of Investing part 2

Progressinve income task

  • The higher you earn, the higher incremental taxes

Paying down debts

  • bank loans, credit cards carry high interest rates
  • pay debt to reduce income tax

Government Incentives

  • TFSA is a government registered account which is investment task free account
    • If you go over your TFSA contribution limit, you will incur a monthly penalty as long as the excess remains in your account
    • An investment advisor can identify strategies that can reduce the amount of tax you pay today and in retirement, based on your personal tax and income situation.
    • If you go over your TFSA contribution limit, you will incur a monthly penalty as long as the excess remains in your account
  • Registered retired savings plan
    • allows to contribute eligle salary
    • it’s tax excempt unless you do a withdrawal
    • tax are calculated based on marginal tax rate of the year of withdrawal
    • using an rrsp will provide more high effective after tax returns
  • Both RRSPs and TFSAs are registered accounts with the Canadian government that have been established to help Canadians save, and they come with significant tax advantages. While RRSPs are specifically designed for retirement savings, TFSAs are flexible retirement vehicles that can be used for retirement or other personal goals.
  • When you pay down debt, you have a guaranteed rate of return equal to the rate of interest you’re avoiding. For example, if you’re paying $100 toward your credit card balance, which carries an interest rate of 19.99%, you “save” having to pay interest of 19.99%. Another way you can look at it is that you’re “earning” a 19.99% rate of return on your investment. What’s more, interest saved on paying down debt is not taxed, making the case for paying down debt even stronger.

The Realities of real estate

Why real estate?

  • they have capital appreciation
  • being a landlord allows money income
  • leverage for mortgage
  • tax benefits
  • offers diversification benefits
  • used as a hedge surge of inflation

Factors to consider

  • Location
    • population and income growth of a city (capital appreciation )
    • quality of life
  • Macro factors
    • mortgage rates
    • housing prices
    • constraints on location
  • Micro factors
    • where do you want to buy?
    • Up and coming neighbourhood
    • established neighbourhood
    • the type of real estates
    • right price
    • avoid old properties
    • unique projects

Renting vrs Buying Decision

  • rent ratio 28% or 36% .The general rule of thumb is that you should not spend more than 28% to 36% on housing. If you are, then your housing investment is too high and out of your comfort zone.
  • Median house price to household income
  • when ratio is high, renting is better.
  • To obtain the price-to-rent ratio for an area, divide the average purchase price of a property by the average rental price of an equivalent property. (500000 / (20000*12))
  • A high price-to-rent ratio suggests that it is more affordable to rent in that city than to buy. Generally, a price-to-rent ratio above 20 indicates that it’s more favourable to rent

Alternative ways into real estate

  • REITS (real estate investment trusts)

Behavorial finance

Behavorial finance is the fusion of finance and psychology.

What kind of investor are you?

  • What is your risk level?
    • Risk arvesed investors
    • stocks usually give 5% more than government bonds but are riskier.
    • Risk arvesed investors usually go for Bonds,t-Bills,Gics and safer investments while the others go for riskier investments like stocks

The few things determining a person risk level

  • Level of wealth
  • Age
  • Personal Situation and liquidity needs
    • mortgage
    • rent
  • Personality

Psychological Mistakes

behavorial biases

  • the conservatism bias This is where investors underreact.Conservatism leads an investor to hold on to their prior beliefs too strongly and underweight the significance of new information.
  • representativeness Upon seeing a long trend of good or bad performance, an investor who exhibits the representativeness bias would view that trend as an inherent and representative property of the stock and overestimate the likelihood that the trend will continue.
  • the disposition effect tendency of investors of selling performing stocks and keeping the bad ones.
  • buyers self attribution praise yourself for good investment and say bad luck when a stock go bad
  • the emotion of fear this affects decisions you make while investing.

Investment Strategies

  • Momentum trading
    • invest in winner stocks. they might continue to turning up good returns
  • The Post-earnings announcement drift