Saturday, September 28, 2013

Giving is Sexy

Do you give to charity?

For those of us who track our net worth monthly, the idea of giving money to charity can be counterintuitive. Why would you give your money away, when it, on paper, decreases your networth. It is a cost, like any other, but it can pay some surprising benefits.

The first is some handy tax deductions:

As a Canadian, for federal tax, you get a 15% tax deduction on the first $200, and 29% on everything over $200. Also, every province has their own additional deductions rates, ranging from Ontario at 5.05% on the first $200/11.6% on everything over $200, to Quebec which allows a deduction of 20% on the first $200, to 24% on everything over $200. You can claim donations up to Dec 31 of the tax year, and any unclaimed donations from the prior 5 years. Canada Revenue Agency has a handy tax credit calculator: Charitable donation tax credit calculator.

If you haven't claimed the Canadian Donation Tax Credit before, the government is offering a First Time Donor's Super Credit! This new tax credit gives an additional 25% off up to $1000 of monetary donation for a first time donor. It can be claimed once in the 2013-2017 tax year for donations made after March 20th 2013. Effectively this means that a first time donor will get 40% federal tax credit for the first $200 of donations, and and 54% federal tax credit for donations between $200 and $1000.

If you're inclined to give to political parties, there are even more generous tax credits available. You can receive a federal tax credit of 75% of your contribution up to $400, 50% of the next $350, and 33.3% of the last $525 up to a maximum credit of $650. Different provinces also have different rules, so read up. The reason for the very generous tax credits is that this is an indirect method of public financing of elections.

The second, and more important in my opinion: Giving makes people happier.

Researcher Arthur Brooks says that people who give charitably are 43 percent more likely to say they are "very happy" than non-givers, while non-givers are three and a half times more likely to report they are "not happy at all." Putting a charitable donation in the mail provide great personal satisfaction.

If you cannot afford to give money, you can give your time. Giving in this way is perhaps even more rewarding, as you can directly see the impact of your efforts. Charitable giving of any form is a great way to get involved and shape your community.

As a donor you have choice in when and how you give. Some people donate to friends and family as they do runs/walks/bikes for charities. Others give to charities they support. Others give funds to shape specific initiatives. I give to a scholarship at my university that was created to support a specific kind of student.

And besides, giving is sexy. A person who is generous is more attractive than someone who is miserly.

What about you? Do you give to charity? Is it a part of your monthly budget?

Tuesday, September 24, 2013

Combining Finances

My girlfriend is broke. Not just a little broke, a lot broke. She's a student, one degree done, working on the second. Plenty of student loans, owes mom and dad money, negative net worth.

We're in different places financially, I've been working for a few years. I struggled a bit early on, with car payments, and rent, but am on a good positive path now. For the most part, she lives off of student loans, and part-time jobs. Good education is a good investment, and it will be worth it in the long run. But, debt is still debt.

I see that she's making some of the money mistakes I made early on. When we first started dating, I wouldn't dream of getting involved. However, the amount of debt she is taking on is small relative to my income. But I don't want to step in and become a rescuer. Learning the lessons early on, helped me get where I am now. I also don't want to lecture (that's her dad's job).

Her debt level is high though, and will take a few years to pay off. And I can see what kind of an impact it will have on our future finances. I am starting to think about our future finances will look like, when my postive net worth meets her negative net worth.

What impact will my being more established have on her financial knowledge? Will she be too dependent? How can we integrate our financial lives in a way that's fair?

More questions than answers on this one, I'm afraid. Time will tell.

Saturday, September 21, 2013

Wednesday, September 18, 2013

When Doubling Down Isn't Worth It

Many employees are given the opportunity to purchase company stock, via a discounted purchase plan, in an RRSP, with a company match, or stock options. This can be a small or large portion of the employees' total compensation, and, particularly in the case of stock options, encourage an employee to stay with the company. So what are the downsides?

The largest risk is lack of diversification, essentially that your employment and your investment are in the same place. If your company suffers difficulty, your employment and your investment are in jeopardy. Also, many employees, "drink the kool-aid" and overestimate the potential of their company compared to others in the industry. They don't pay the same critical eye as they would to other investments.

So what to do? In my case, I can purchase 10% of my salary in stock at a discount. So I purchase the stock at the discount, and then immediately unload the shares to gain the discount. I reinvest the proceeds in other investments.

Which brings to me to the next point, you need to carefully evaluate the terms, conditions and tax implications of accepting the advantage stock. In my case, the only disadvantage is that the discount is taxed as income, not as a capital gain. If you take stock options, there will be vesting requirements, that will tie you to the company. At executive and director levels, there can be mandatory share ownership requirements, to force the executive to have skin in the game with the company. Although, these levels are usually compensated well enough to manage the risk in other ways.

At the end of the day, you need to carefully consider the gains available from taking company stock, evaluating the terms, and any tax implications, and avoid putting too many eggs in the company basket. Look for opportunities to take the gains, but then sell the stock and place the profits elsewhere to avoid taking too much risk in one place.