“At year’s end he was 100 percent over his $18,000 budget, having spent $36,000. How had he spent $36,000? Like others who try to live by a budget, Fitzgerald discovered that a lot of money had definitely been spent but didn’t fall into any category that budgets provide—there is “leakage.” Of course, in his case, there was more leakage than is customary. Fitzgerald and Zelda prepared what they thought was a complete record of what they had spent running the household—it came to $1,600 a month. Then they added what they had spent on pleasure, trips to New York, the theater, and so on; that came to $400 a month. Together that totaled $2,000, but Fitzgerald knew he’d spent $3,000. Fitzgerald asked, “You don’t mean to say that every month we lose $1,000?” It was impossible. “People don’t lose $12,000 in a year, it’s just missing.” Somehow a “mysterious third of our income had vanished into thin air.”

Hat tip to TaxDetective blog

It’s fuel economy is one of the best, so money is to be saved there — especially if the price of gas is going back up and staying high (as seems to be the case). It’s also known for being a reliable vehicle that holds its resale value well. All this at a reasonable price, which seems to make it a good value for someone who just wants to get from Point A to Point B. 

 The trigger for acting at this time was the car industry’s obvious desire to jumpstart sales during a recessionary time and, in particular, a July promotion from Toyota Canada featuring 0% financing on selected models.

Just so I wasn’t walking into the dealership blind (and to avoid getting bogged down in minutiae), I used the Build and Price tool on Toyota Canada’s website to price a model with the desired options and accessories. The incidentals of freight, delivery, excise taxes, fuel credit, and GST/PST were also shown. In addition, I used the online tool for getting pre-approved for credit.

The specified model was the 2010 Toyota Corolla CE with automatic transmission and air conditioning. The MSRP came out to $22,031.05 (taxes included). With 0% financing over three years, the monthly payments would be $611. Next step was to talk to some sales reps and see how much of a discount was possible.

Instead of negotiating down from the MSRP, Royce recommends negotiating up from the dealer’s invoice price. So I did a bit of asking around and was told the dealer’s margin on the model was about $1,300 (I don’t know for sure if this was true, but that’s what I went on). Thus, if I allowed the dealer to keep up to $500 of the margin, that meant trying to get a discount of $800 from the MRSP.

As Royce also recommends, I decided not to trade in my existing car. Negotiating the price of both the new car and trade-in can complicate things and gives more of an edge to the dealer. Besides, you can usually get a better price for your existing car through a private sale.

To be continued ….

Another approach involves becoming more skilled at responding to situations that arise from time to time as life goes on. Take fighting traffic tickets. Many people may resort to hiring one of those ticket-fighting services at $500 a pop to represent them in traffic court when they could get the same result doing it themselves. At least that is what I found from my own experience, as described in a previous blog post, Go to court (and save).

That post had the kind of impact that keep some bloggers going (heavens knows it’s not the money). It prompted at least one person to fight their own ticket to a successful conclusion (and to write a nice thank-you note at Thanks, Larry!)

To that end, I thought I might pass on an account of my recent experience shopping for a new car. Perhaps there are a few pointers that may help some readers save a few bucks.

For many people, including myself, it is somewhat daunting to visit a car dealership and haggle with a salesperson. I got into the right frame of mind by reviewing a handy little buyer’s guide, Beat the Car Salesman.

It’s a great little booklet, in my opinion. The author is Michael Royce, an experienced car salesperson turned consumer advocate. It helps level the playing field by disclosing the tricks and techniques of the car salesperson’s trade. After selling a million copies, Royce made it available for free on his website.

To be continued…

He had a contrarian perspective. “I just don’t see the TFSA as such a big deal right now,” he said. Do the math: “If you invest $5,000 in a TFSA, and the money is placed in a low-risk GIC paying 5% (at highest rates) for 12 months, then you get $250 of interest at the end of the first year. That is tax free, so you save $125 (in the highest 50% tax bracket) in the first year.” 

Asks Milevsky: “Hundreds of news articles and stories over the equivalent of a nice dinner and a movie for two?” Some will say that you can get more if you invest in stocks at 8% or more. But he rejects using equity returns because they can just as easily be -8% in 2009. The true comparison requires the risk-free interest rate, in his view.

For such a small benefit “why not give every Canadian a tax credit for $125 and save the financial institutions, their I.T. departments and the rest of us the implementation hassle?” Milevsky suggests (i.e. avoid more bureaucratic costs cutting into what Canadians earn on their savings).

“Sure, maybe in 5 years from now the sums of money I can shelter will be large enough and the compounding impact will be much greater so that the tax savings becomes worth the hassle of going to the bank, standing in line, keeping track of yet more paperwork, opening an account, etc,” Milevsky admits.

But … “let’s see how this program changes over time. Tax policy can be just as fickle as financial markets. What limits will politicians impose on the TFSA by the time this becomes valuable?” (i.e. more regulatory risk for Canadian savers).

For signs of what’s likely to come, check out what some financial advisors are recommending in the early going. They are suggesting risk-tolerant individuals use the self-directed version of a TFSA to go after the big score; they should take aggressive risks and trade highly volatile investments such as penny stocks, options, leveraged funds, etc. in hopes of shooting the lights out.

That’s because capital gains raise contribution room in a TFSA: if a $5,000 bet turns into $30,000, the latter amount can be sheltered from tax indefinitely or withdrawn tax free, leaving the TFSA with $30,000 in contribution room. Trading in a TFSA also incurs no taxes on capital gains. The downside: if the $5,000 goes to zero, contribution room is lost, as is the capital loss to claim for tax purposes.

Jamie Golombek, managing director of tax estate and planning at CIBC, is one of the financial advisers who have suggested this approach. So too has Norbert Schlenker, a financial advisor at Libra Investment Management. As he writes on the Financial Webring discussion forum:

“There’s a feature of the TFSA that I think isn’t being taken into account here, namely that any growth in the account is a de facto permanent increase in cumulative contribution room…. It’s a free option to escape taxability in perpetuity on a larger sum…. might it be better to take a long shot, i.e. take a low percentage bet that will turn $5k into $50k (or $500k)?”

Is this something good or another one of those unintended consequences of government programs?

Other complaints could have been raised. Two are what economists call “perverse incentives” and “regulatory risk.”

Perverse incentives refer to the fact government initiatives often come with unintended consequences. For example, many economists say the OAS, GIS and other income-support programs for elderly persons reduce the incentive for those in their working-age years to work, save and generally be a productive member of society. You can always rely upon government support programs for at least a minimum standard of living in your old age. Or if you want a bit more, you can save but keep it under the amount that would claw back old-age benefits. And if you have saved too much, retire or semi-retire in your 40s or 50s and melt down your registered plans until you don’t face any clawbacks or the prospect of receiving retirement income in the higher tax brackets after 65.

The TFSA adds another plank to the edifice from which such unintended effects come. Ironically, one of the primary reasons for its creation was to address the disincentive to save for retirement, especially in the case of low-wage earners. Perhaps in time we will see how the TFSA creates its own set of unwanted side-effects and requires yet another government program to patch up the leaks. The cost of the bureaucracy seems to just keep feeding on itself, taking an ever greater cut from our savings.

Regulatory risk begins with people and companies undertaking actions on the assumption government rules and regulations continue unchanged into the future. That doesn’t always happen. Governments, for various reasons, often end up changing the rules of the game in midstream or just before the waterfall comes into view.

With registered plans such as RRSPs, RESPs, and TFSAs, this risk is ever present.  Take the decision to contribute to an RRSP. High income persons may see it as worthwhile because their tax rate in retirement will likely be lower — assuming tax rates stay the same. Fifteen years from now when they retire, rates could be higher and wipe out much of the value to deferring taxes.

Many persons will now plow money into the TFSA believing they no longer have to worry about clawbacks or taxes in their old age. But some retirement experts say the loss of tax revenues from the TFSA could become significant in a few years and prompt the government to introduce changes to recoup revenues. Who knows, maybe the changes could include legislation that decrees taxation of some percentage of the amount withdrawn annually from a TFSA.

Notice how all of the above approaches put the emphasis on picking stocks? Yet, academics and a growing number of investors say stock picking plays a minor role in the variability of investment returns. More important factors are asset allocation, diversification, and cost minimization.

A better way to teach children investing, then, may be to set up a portfolio of index funds (say along the lines of the Couch Potato Portfolio). They can be purchased in small amounts at low cost. Dividends can be automatically reinvested, commission-free.

In Canada, they can also be held inside an RESP to collect government education grants and compound tax-free. The account will not only teach the value of saving, diversification, and asset allocation but also provide funds for university courses. A couple of stocks picked without regard for diversification, asset allocation, etc. has a greater risk of not compounding as well, and could end up discouraging saving and investing.

Stingy Investor has a tradition of running a piece or two every Christmas on Mr. Scrooge that paints him in a more favorable light. Here are some links to them.

Scrooge Defended
In Defense of Scrooge
In Defense of the Grinch & Scrooge
The Case for Ebeneezer
What I Like About Scrooge
So, Scrooge was right after all

The personal-finance book begins with the central character, Jamie Morelli, already married, indebted, and about to have twins. What if Jamie had decided to make financial independence a priority while still single? He might have been able to reach his goal much easier and sooner.

If one delays marriage and/or kids for a few years, they can live modestly and save 50% to 80% of their income by living in inexpensive accommodations, taking the bus/riding the bike, and enjoying simple pleasures like reading and hiking. Of course, this extreme frugality will not be everyone’s cup of tea. It’s more for individuals who really don’t want to be chained to a job all their life.

If one does get married early in life, it helps to find out beforehand if their spouse is on the same page. I’ve touched on this before too: if one spouse is parsimonious and the other is not, the sailing could be rough — like it was for Jamie and his wife.

If already married with children, the options are fewer. It will be a longer and less certain haul to financial freedom. But perhaps one can discuss things with their spouse and obtain agreement for some lifestyle changes that result in a much higher rate of saving.

Sometimes there is nothing to be done but other times a bit of knowledge can lessen the blow. Traffic tickets are one such case. I know because I just got back from traffic court after representing someone who had two traffic violations.

You learn a lot going through the system. For example, about a quarter of the people in the court room had their charges dismissed because the police officer did not show up.

Also, before going to traffic court, one might get the charges reduced through a plea bargain. In Ontario, you can call the traffic court and request a “first attendance meeting” with the prosecutor. After hearing your story, they may then reduce the fine — or if you had two or more violations, they may withdraw one if you plead guilty to another.

Plea bargaining occurs on the day of the trial as well. It occurs during the recess called after attendance is taken and the cases represented by agents (none went to trial as they had either reached a plea bargain or were dismissed due to the officer’s failure to show). During the recess the prosecutor and their assistant meet with defendants and often agree to plea bargains.

Prior to trial, one is entitled to request disclosure of the evidence the prosecution intends to present, including the officer’s notes. That’s because you or your agent are allowed to cross-examine the officer at the trial and can use that disclosure to prepare your questions. It’s good to do this in case you don’t get a plea bargain during the recess and have to carry through to trial (or if you want to fight it all the way).

In Ontario, they actually have a form available from the court to request disclosure. If the prosecutor fails to provide disclosure on time (e.g. officer does not forward notes), it may be grounds for dismal, postponement, or a good plea bargain.

One can hire those services that fight tickets, like Pointts or XCopper, but they charge $250 to $500 in Ontario. It seems to me the most they do is just what is outlined above. They know how the system works. Very few of the cases actually go to trial as far as I could see from my visit. Most are settled out of court or the officer does not show up and it’s dismissed. If you have been issued a ticket or two, and know your options, you probably don’t need them.

What leads us astray is the urge to “keep up with the Jones.” Resisting this tendency is key to saving and realizing financial goals like becoming financially independent, chilkdren’s education, comfortableretirement, etc.