Stingy Investor Search - Contact - Subscribe - Login
  Home | Articles | Links | SNW
Just Spend It

I was recently asked by Jonathan Chevreau to make a few suggestions on what, given the times, should be done with a $10,000 windfall. An interesting question that is difficult to answer. Nonetheless, in this article I offer a few suggestions and take a look at the vexing choice between spending today and saving for tomorrow.

First and foremost the extra $10,000 should be used to pay down debt. I freely admit to being debt phobic and most Canadians can use the $10,000 to reduce their large debt loads. Paying off the mortgage, credit card or margin loans will help to buffer one from life's misfortunes.

If there is anything leftover then an emergency fund is a must. At a bare minimum, a 3-month supply of ready cash should be locked away in a high interest bank account. The emergency fund is there to help in case of unemployment, deterioration of health or other disaster. Those who have recently been fired know just how valuable such a cushion is.

By this point most Canadians will have used up the entire $10,000 but if there is a bit left over then some should be saved for Christmas cheer. Since most households spend about $1,000 over the Christmas season this seems like an adequate amount to set aside. After all, it is better to pay for Christmas presents with cash than to pay credit card interest in the New Year.

With the basics covered, we are down to the fundamental question of what to do with any excess cash. It can be spent now or squirreled away for later and the option of spending is currently quite attractive. One's desires can be immediately fulfilled by spending today and waiting may lessen both the quantity and quality of consumer satisfaction.

No, I've not gone off my rocker. I just think that savers will be largely unsuccessful in the next decade.

First consider investing in a 10-year government of Canada bond which currently yields about 5.3% and then factor in tax and inflation. A 40% tax rate drops the 5.3% interest rate to 3.2% which is very close to the current 3% inflation rate. The after-tax real return of this investment is only 0.2%. Many investors don't have enough money, or expertise, to buy bonds directly and will opt instead for a solid bond fund such as that offered by PH&N. Regrettably, the PH&N bond fund charges a yearly fee of 0.58% which makes a positive after-tax real return uncertain at best. A break even return is still better than the current crop of Canadian Savings Bonds which yield 3.03%. After tax and inflation the patriotic CSB holder will likely lose 1.2% annually.

Historically bonds have been a bust for investors. David Dreman in Contrarian Investment Strategies: The Next Generation showed that the after-tax real return on bonds was about -2% annually for U.S. investors during the 1946-1996 period. Yes, bond investors lost money and would probably have been better off spending their hoard.

How about stocks? With lofty equity valuations we are in even more hot water. The S&P500 currently has a price-to-earnings ratio of 28.3 whereas its historical average is about 15 (See Figure 1). Let's assume that in the next decade corporations will grow their earnings in line with real GDP growth of 3%, that inflation will average 3%, that dividends will continue at 1.1% and that the average price-to-earnings ratio will fall from 28.3 to 20. These assumptions would result in a return of 3.7% before tax and inflation.

Now consider buying a low-cost index fund that charges a MER of 0.5%. The 3.7% return becomes 3.2% after the MER, then 2.6% after a 20% tax and -0.4% after inflation.

A projected -0.4% return for stocks doesn't leave room for mistakes which regrettably investors make with an alarming regularity. Stephen Nesbitt found that U.S. mutual fund investors are poor timers and loose about 1% annually due to buying high and selling low. Taking bad timing into account 3.7% becomes 2.7% due to timing, 2.2% for the MER, 1.8% after tax and -1.2% after inflation.

Now consider investing in an equity mutual fund that charges a 2.5% MER and manages to outperform the market by 1% before fees. Starting with a return of 4.7% the 2.5% MER fee comes off the top with 1% more for bad timing leaving 1.2%. Now the taxman leaves this poor investor with 1% but inflation steps in resulting in a -2% return.

Are there ways to eke out a positive real return after tax? The odds get better if one follows a cost minimization approach. This means holding stocks for long periods to avoid paying taxes each year and selecting lower cost value oriented securities. However, that may be too much work to justify what is likely to be a break even return.

In the end, most Canadians may be better off just spending their excess cash which is an option largely ignored by most financial experts. Perhaps a compromise position is best with spending accounting for half of any excess and savings the other half. This way Canadians can have some fun now and avoid saving too much. After all, none of us are getting any younger.

Figure 1

First published in November 2001.

Globe & Mail Articles

 Dividend All-Stars for 2024
 250 Megastars for 2024
 Extreme yields
 The easy way
 Smaller stable dividend
 250 Megastars for 2023
 Champagne portfolio
 Screaming Value
 Blended momentum
 Dividend monster
 Frugal dividend
 Stable dividend
 Speads and recessions
 TSX 60 for value investors
 Looking at 10-year returns
 Watching for a bottom
 Oh, bother!
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

MoneySaver Articles
 2 Graham Stocks for 2018
 2 Stingy Stocks for 2017
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Old MS Articles
 Cdn Top 200 2018
 Cdn Top 200 2017
 Cdn Top 200 2016
 Cdn Top 200 2015
 Cdn Top 200 2014
 Cdn Top 200 2013
 Cdn Top 200 2012
 Cdn Top 200 2011
 Cdn Top 200 2010
 Cdn Top 200 2009
 Cdn Top 200 2008
 Cdn Top 200 2007
 Cdn Top 200 2006
 Cdn Top 200 2005
 US Top 500 2018
 US Top 500 2017
 US Top 500 2016
 US Top 500 2015
 US Top 500 2014
 US Top 500 2013
 US Top 500 2012
 US Top 500 2011
 US Top 500 2010
 US Top 500 2009
 US Top 500 2008
 US Top 500 2007
 US Top 1000 2006
 Dividends 100 2017
 Dividends 100 2016
 Retirement 100 2015
 Retirement 100 2014
 Retirement 100 2013
 Retirement 100 2012
 Retirement 100 2011
 Retirement 100 2010
 Income 100 2009
 Income 100 2008
 Income 100 2007
 Top Trusts 2006
 Top Trusts 2005
 Hot Potato
 Buffett Buys
 Stocks that pay
 Value in the S&P500
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividend growers
 Graham's prescription
 The case for optimism
 Wicked investments
 Simply spectacular
 Small stocks, big profits
 Value that sizzles
 So simple it works
 No assembly required
 Investing by the book
 Invest like the masters
 A simple way to get rich
 Stocks for cannibals
 Car bites dogs
 So easy, so profitable
 Dogs of the Dow
 Money for nothing
 Yield of dreams
 Return of the master

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Flip Books

About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...