With the pandemic wreaking havoc on the personal finances of millions of Americans, investing has become another string to their bow — stocks, real estate, and cryptocurrencies. But, how can people capitalize on their new financial endeavors? How can entrepreneurs get the best out of their businesses amid rising inflation and global instability?
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Personal finance has been an essential part of people’s success in all stages of life, but it has become extremely relevant during these complex and disruptive times.
It is now when people can put their financial skills to work in their favor so they can overcome the critical situation the world is going through, not only to keep themselves afloat but also to identify new and exciting business opportunities.
But for those affected, the possible solutions are not only focused on expenses since major crises are also generators of creativity and can bring out the best in people. Many entrepreneurs or even medium and large companies have been forced to think outside the box, and change their business model to generate income.
We spoke with investing strategy expert Kyle Prevost about the impact of the pandemic on the personal finance of millions of Americans and Canadians, and about new ways of investing, entrepreneurship, and more.
The world economy is all over the place, which makes it difficult to plan for the future. What’s your advice on how to make sense of this moment, in terms of personal finance?
When is the world economy never not all over the place? I mean, if it’s not inflation it’s a coronavirus, the Eurozone falling apart, an energy crisis, deflation, etc.
The truth is that the vast majority of personal finance “best practice” does not change with economic conditions.
For example, no matter what the broader economy is doing, steps like taking advantage of a company pension match, paying down credit card debt, or automatically investing a percentage of your paycheck, are always great actions to take.
Almost 70% of Americans say they believe now is a bad time to buy a home. Why is that so and what piece of advice would you give them?
As a Canadian, it’s interesting to me that so many Americans believe that now is a bad time to buy a home. Given that Canadian housing prices are substantially more expensive than their American counterparts – despite less disposable income and colder winters —I’d say that now might not be a bad time at all to purchase a home from a strict supply-and-demand pricing perspective .
I think that, when you combine low levels of formal financial education with the headline-driven nature of news and social media, you get a very alarmist view of markets.
For example, if you skimmed headlines lately, you might be forgiven for thinking that central banks were soon going to raise interest rates to all-time highs, when in fact even the most “hawkish” experts have predicted a mere raise of 2-5 % over the next couple of years.
While that’s significant, it’s far from the craziest thing to have happened to a potential homebuyer in the last few decades.
Ultimately, buying a home is a personal decision that should have very little to do with national economic headlines. At the end of the day, what matters is that you see a lot of consumer value in owning a home for the next 10+ years, and that you are ready to commit to a particular geographical area.
Everything else is window dressing. Do not view your home as an investment, view it as a very enjoyable purchase that you believe will make you and / or your family’s life better.
How can Canadian homeowners make their interest tax-deductible with the Smith Maneuver?
Canadians often gaze jealously at our home-owning cousins south of the border. Not only do the houses cost less — and come with less snow — but the interest on a mortgage in the U.S. can be deducted when it comes time to prepare taxes each year — Canadians have no such luck.
Fortunately, a unique borrow-and-invest scheme known as the Smith Maneuver allows Canadians to level the tax-advantaged playing field a bit.
The idea is that by borrowing against your home equity — usually using a product called a home equity line of credit — and using 100% of that money to invest in an “income-producing” investment — think Canadian dividend stocks — you can create a tax-deductible investment loan.
If you continuously pay down the original mortgage and then borrow money against your newly-created housing equity, then you can eventually create a tax-deductible loan equal to the size of your original mortgage.
Now, borrowing against one’s home is not for the faint at heart. I’d recommend doing some research into the logistics involved before deciding to make this leap, and taking some time to think about your own risk tolerance as well.
For those entrepreneurs out there who started their businesses during the pandemic, what do you think are the keys to making their investments last?
Entrepreneurs are one of the most difficult groups to provide generalized personal finance for. This is due to the fact that so much of their time, focus, and net worth is often tied up in one asset: their company. From a business-building standpoint that narrow focus is ideal, but from a diversified systemic approach to mitigating risk and building wealth, not so much.
I would encourage relatively-new entrepreneurs to first make sure they have “disaster-proofed” their lives.
What I mean by that is to understand the difference in protection to your personal assets when choosing between a sole-proprietorship and various types of corporate structures, as well as what sort of insurance considerations they need to provide protection to from financial disaster.
This isn’t usually the sort of stuff you hear about from “rah rah” motivational speakers, but entrepreneurs really need to limit their risk whenever possible.
Finally, I’d advocate for “taking some money off the table” and investing it elsewhere as your business begins to payout. Opening a discount brokerage account and investing in a basic index fund ETF is going to take you less than half an hour to set up, and maybe 15 minutes per year to maintain. Having all of your financial eggs in one basket can be great but often it’s not!
Robo advisors. They’re all the rage in the world of finance at the moment, so how to get the best out of them?
Robo advisors would be better described as an online platform that lets you set up your own automated investment plan.
Admittedly, that does not sound quite as cool as “robo advisor,” but it’s a much more accurate description of what the service consists of —whether you are referring to Canadian robo advisors or their American counterparts.
While there are a few different flavors that all claim the title of “robo advisor,” most of these companies begin by having you answer a series of questions. These questions are designed to help both you and your new “advisor” determine what your investment risk tolerance is.
This is a very difficult quest, but it’s quite important in the long run. The bottom of a recessionary stock market is not the place where you want to discover that you’re unsuited for significant risk!
From there, the robo advisor will match you up with an investment portfolio. This portfolio will usually be created using the index investing methods popularized by investment legends such as Jack Bogle and Eugene Fama.
The idea is to own a little of everything. If you do so, your portfolio will experience almost exactly average returns — and average returns are often pretty damn good at building wealth!
Why are robo advisors growing in use among new investors?
There are several reasons why robo advisors are excellent options for the vast majority of investors.
The first is one is the “set it and forget it” nature of automated investing, which makes sure you do not shoot your portfolio in its foot. Once you decide on a diversified investment portfolio full of hundreds of stocks and bonds, all that is left is to send an automatic contribution off of your paycheque each month.
Most DIY investors make way too many trades for their own good and often buy / sell at the most inopportune times. Using a robo advisor lets you get out of your own way and focus on more important things.
Second reason is the index investing strategy, —aka “couch potato investing” – which has been mathematically proven over many decades to be the best bet for the average investor. If you’re going to wander into the stock market a few times a week trying to “buy low and sell high” then you have to compete against Warren Buffett and the NASA-level mathematicians that hedge funds have working for them.
If you embrace index investing, then you can sit back and let these sharks fight it out —knowing that statistically speaking, you’re going to beat half of them.
The third reason is, robo advisors are just so easy that it’s really hard to screw up. So many people never get over the logistical hurdles to get started with investing.
The terminology can be confusing, and there are so many charlatans out there claiming to have the next big thing. On the other hand, robo advisors are the most user-friendly, super easy way to take a piece of your paycheque and effortlessly turn it into a diversified nest egg —and that’s worth a lot!
Last reason is, robo advisors are low cost. The average robo advisor charges substantially less than the chunk traditional mutual funds siphon away from your portfolio every year. This is especially true in Canada where mutual funds charge some of the highest fees in the world.
Of course, you can DIY with an online broker account and shave off a few more slivers of fees, but that requires a little more homework and logistical management.
You do a lot of personal finance teaching for youngsters. What is the outlook of the new generation and their money management skills?
I challenge anyone to find me a generation that —as a group— possessed substantial money management skills. Today’s youngsters aren’t much different in that regard, but elements of financial literacy are working their way into education systems around North America.
One massive financial decision that I think young people and their families are increasingly opening their eyes to is the cost-benefit calculation when it comes to various types of post-secondary education paths.
The decision on what degree / diploma / certificate to pursue has taken on massive importance as education costs have skyrocketed over the past few decades —much faster than the rate of general inflation.
Understanding the financial outcomes associated with specific education certifications —and their accompanying price tags once student loan interest enters the equation— is a massive step toward starting adult life on the right foot.
I have also found that younger people are increasingly embracing the idea of the “side hustle” and trying to earn revenue from multiple sources right from day one.
While it can be debated if the gig economy is collectively a positive direction for society, it does represent substantial opportunity on an individual level — the more sources of income you have the more secure you are on several different levels.
Overall though, today’s youth face a steep climb on their way to financial stability. Companies have gotten so good at selling us stuff we do not really need, social media allows us to think that everyone just bought or renovated their dream home, and for many people it has never been more tempting to borrow massive amounts of money.
If we’re to make a real generation-wide financial literacy impact we must start with teaching the teachers!
The number of teachers with any education or background in personal finance is microscopically small. Teachers are also one of the last remaining fortunate groups in society that has an employer that takes care of many of their long-term financial needs, such as saving for retirement and insurance coverage.
Faculties of Education around North America need to wake up and start training teachers to fill the needs of personal finance courses.