I know I'm supposed to be preaching advice toward the starving artist, but there comes a time in your life when you actually start making some money... Or your frugality and savvy market investing now has you a moderate or sizeable nestegg and from which you're living comfortably off the proceeds... Either that, or you've gotten your act together and won an audition, got scouted, or been given the big break that you so desperately have been pining for all your life.
What happens now?
Well, your tax bracket is about to change... Formerly you probably were like me only dishing out a few hundred bucks a year to the federal coffers and most of that would be for CCP (Canada Pension Plan) contributions. Now you'll be up the creek without a paddle if you're not careful with your money!
Now, I know some of you might think this is just crazy talk seeing has you have been living hand-to-mouth for many years and any increase in income you have goes to paying off debts or stashed away in your investment accounts, rather than spent foolishly on those Italian shoes that were "calling your name" when you walked by the shop, or that shiny new iPad so you can impress all your friends when you bring it out on the town to show off.
But yes, the reality is that your taxes owed with be CRAZY relative to what you've been paying when you were poor. So start stashing away 25% to 37% of your income into a separate savings account (as well as the 13% for HST) so when tax time comes around you won't be trying to come up with thousands of dollars you already spent! (YES... THOUSANDS OF DOLLARS)
Don't forget to save all your receipts for anything and everything work related. They can make a huge difference if you can manage to bump down your taxable income into the next lower bracket. You'll have to surrender far fewer dollars to the government.
Also, as a self-employed individual, you should consider leasing equipment/cars etc. rather than outright purchases. This way you get a bigger tax advantage for the stuff you'll need to do your craft and get you to your gigs. Yes leasing is more expensive than outright purchase, but remember the tax savings will generally exceed the cost of financing since leases are fully deductible from your taxable income. With cars though you have to pro-rate it against your business vs. personal usage, so if you use your car 60% for work and 40% for other than you can deduct 60% of ALL car expenses including your lease. So an average small/mid size car costs about $10,000 including EVERYTHING. (lease, gas, insurance, parking, oil changes, snow tires etc.) So over a 4 year lease that's $40,000. If your car is 60% business usage then you can deduct $6,000 a year from your taxable income. If your in the 25% tax bracket you just saved $1500 in taxes. If your in the 37% bracket then it's $2200 in tax savings. Over the course of an average lease your going to pay about $2000 to $4000 at today's finance rates for most small to medium sized cars over the course of a 4 year lease. By leasing for 4 years, you will save $6000 to 8800 in taxes. Which is far beyond what you'll pay in financing interest. Plus, if you have a slower year then you can defer the deductions until you're making more money again.
If you want to truly be filthy rich then try to not expand your lifestyle as rapidly as your income increases. Keep stashing away as much as you can afford into your investment accounts. Open up an RRSP account if you don't already have one, and if you're hitched (or even common law) then open up a spousal RRSP as well. If your spouse doesn't have a job in the town where you got your big break then make sure you "share" as much as you can when it comes to the finances. Currently in Canada we don't have income splitting like they do in the USA, but rumour has it that this might be coming our way after the election and new federal budget. However if it doesn't, then make sure you fill up your RRSP and spousal RRSP to as much as you can contribute up to your allotted contribution room. Also, if you have any cash left over, give it to the lower income spouse and have them invest it in a CASH (taxable) brokerage account. This way they will be "earning" money too, but it will be taxed at a way lower rate. (Depending on what sort of investments you buy of course)
I myself haven't checked out the ramifications of "joint" brokerage accounts which are possible, but to me it just looks plain messy when it comes to income taxes, so I've avoided it. However it's something I will investigate in the future and get back to you!
Lastly, the biggest pitfall of a sudden increase in income you start feeling down about work, or your car broke or something just sets you into a bad mood. Try to avoid "retail therapy" if you're thinking you want something and justify the purchase by telling yourself "I'm making $X a year, I deserve it!"
Sadly if you hear yourself thinking this, stop for a minute and ask yourself if you really need it, or do you just want it, and if so can you really afford it? (Pay off those damn credit cards first!)
Don't forget to enjoy the fruits of your labour, but make sure it's from your investment distributions! Pretty soon you won't have to work at all if you don't want to. It's a life/work balance that you'll have to discover on your own. It will be hard at first but stick to the plan and I promise you'll be a rich old crank in no time at all.
Wednesday, March 30, 2011
Tuesday, March 8, 2011
Another (tax) year over!
It's with much angst, hostility, apprehension and worry that we at this time of year get out those shoe-boxes and start tabulating our receipts. If you're self-employed like me then you don't have to get your paperwork in order until June unlike the 9-5 crowd who have to file by the end of April. Now this may sound all well and good since you won't have to think about it until later, however if you OWE any money (which 95% of self-employed people do) then you MUST pay it all by the earlier deadline of April 30th.
How on earth do you know how much to pay if you haven't done your taxes anyway you ask? Good question. If you find out the answer to that then let me know! I'll just boil it down to the Canadian government and "bureaucratic efficiency" at it's finest. I suspect the feds want you to voluntarily remit and then claim your deductions later. Which for those of us who have trouble putting money aside then this is probably a good idea so you don't find yourself in a horrible mess owing money to the CRA. (Canada Revenue Agency) Also your HST/GST is due at the end of April as well. Yes yes, I know some of you pay your GST/HST quarterly, but if you're as low down on the income ladder as I am, you only have to remit once a year.
Since I'm reasonably good (most of the time) keeping my hands off my savings for such things I'm usually ok with this since I can put the money into a "high" interest savings account and earn a few bucks on it.
If you're organized like some annoying jerks I know (myself included) keep a running tab of all my expenses so at this time of year with a few mouse clicks I can print out a summary which has all the pertinent info for my accountant. Yes, I'm sure I could "save" money on his fee if I used a software-box type income-tax dealy but an accountant (a good one) will let you know that it's probably wrong to try and deduct all of your booze receipts. (You can actually deduct 50% of them as an entertainment expense, but don't push your luck. If you try to write off half of your income on booze alone you're begging for an audit)
Other benefits of an accountant: he/she will be keeping himself/herself apprised to all the nit-picky details of the tax code and how it pertains to you in the starving-artist bracket. Also depending on your arts discipline, there might be tax credits toward equipment or supplies that you might not have thought would be deductible.
Essentially EVERYTHING you need to be creative can be deducted in some way shape or form. Your accountant will tell you how much and when too much is too much. Also he/she will be able to help you when you're going to make a big purchase. A car for example: generally people will pay cash or take a car-loan out to buy their vehicle. However leasing is often a much better way to finance since you can deduct the lease payments too! If you buy your car you can only deduct how much the vehicle depreciates. For some vehicles that's a lot and some not so much.
Aside from the "tax-pain" if you haven't been putting money aside for what you owe, if you stay on top of things tax time won't be all that stressful.
How on earth do you know how much to pay if you haven't done your taxes anyway you ask? Good question. If you find out the answer to that then let me know! I'll just boil it down to the Canadian government and "bureaucratic efficiency" at it's finest. I suspect the feds want you to voluntarily remit and then claim your deductions later. Which for those of us who have trouble putting money aside then this is probably a good idea so you don't find yourself in a horrible mess owing money to the CRA. (Canada Revenue Agency) Also your HST/GST is due at the end of April as well. Yes yes, I know some of you pay your GST/HST quarterly, but if you're as low down on the income ladder as I am, you only have to remit once a year.
Since I'm reasonably good (most of the time) keeping my hands off my savings for such things I'm usually ok with this since I can put the money into a "high" interest savings account and earn a few bucks on it.
If you're organized like some annoying jerks I know (myself included) keep a running tab of all my expenses so at this time of year with a few mouse clicks I can print out a summary which has all the pertinent info for my accountant. Yes, I'm sure I could "save" money on his fee if I used a software-box type income-tax dealy but an accountant (a good one) will let you know that it's probably wrong to try and deduct all of your booze receipts. (You can actually deduct 50% of them as an entertainment expense, but don't push your luck. If you try to write off half of your income on booze alone you're begging for an audit)
Other benefits of an accountant: he/she will be keeping himself/herself apprised to all the nit-picky details of the tax code and how it pertains to you in the starving-artist bracket. Also depending on your arts discipline, there might be tax credits toward equipment or supplies that you might not have thought would be deductible.
Essentially EVERYTHING you need to be creative can be deducted in some way shape or form. Your accountant will tell you how much and when too much is too much. Also he/she will be able to help you when you're going to make a big purchase. A car for example: generally people will pay cash or take a car-loan out to buy their vehicle. However leasing is often a much better way to finance since you can deduct the lease payments too! If you buy your car you can only deduct how much the vehicle depreciates. For some vehicles that's a lot and some not so much.
Aside from the "tax-pain" if you haven't been putting money aside for what you owe, if you stay on top of things tax time won't be all that stressful.
Tuesday, March 1, 2011
Embrace your fears!
What a good time for this post! Geo-political events (Mostly in Iran) have led crude oil to once again hit triple digit values. Why? Market INSANITY!
True, there is a lot of things to consider, and yes, supplies have been compromised. Other problems in the middle-east could also snowball into an evil rats-nest of doom. But has it happened yet? No. Did Saudi Arabia start pumping more oil to make up the shortfall? Yes. Did the price of oil return to it's previous level? No. Is the saudi king old? YES! (He's 87) Did he just bribe his government to keep things going just the way they are? YES! (To the tune of MANY billion dollars)
So there's no supply shortfall, there is no refining shortfall, there is no distribution shortfall. But prices are still higher than they were just 2 weeks ago. (15% higher!)
My OPINION: (You can't sue me for this)
Things are going to correct once everything settles down. It may take a few weeks, it make take a month or three, or it may take a completely unrelated geo-political disaster somewhere else in the world to take the fear-mongering media's attention away from this crazy situation.
This means you should consider a SHORT position on oil. I have a small short position which I just bought today (just before market close). To limit my risk I'm not going to hold it for any length of time. With luck I'll be able to sell it tomorrow. (Yes yes, I hear you shaking your heads: what kind of crazy day-trading is this fool doing?) I'm sure I could hold it longer and wait for a proper correction, but I'm happy to take my profits even $5 at a time! (Yes the hourly rate looks craptackular, but profit is profit no matter how thin your slice!) My smallest trade for profit to date has been $0.15. Yes. 15 cents. ONE FIVE CENTS! It was one of my first attempts at day trading because I wanted to see if I could actually do it.
Yes folks, lots of people out there make lots of money day trading. I really don't recommend doing it though. Most of my strategy is long-term oriented. Which is generally why I don't recommend short positions. It's much easier to identify a company that will be around for a while. (Say Bell Canada, or Suncor... something big, something that thousands or millions of customers pay for day in, day out.)
I have been up to this week been too chicken to sell anything short. But when OIL (WTI) Hit $103 per barrel that looked just too tempting. Even if it fell back down to $98 (which it did the next day) I could make some fast profit. And I did! I earned a 4% profit by the next morning. (Which I SOLD and put the money back in my pocket)
Previous valuation for oil before Iran exploded was in the $85 to $95 range. I'm not holding my breath to wait for $85. Take your profits as soon as you can if you want to try short selling anything.
So now I've told you how I've been embracing volatility, this is why you should do it: Oil move a percent or three almost every day. You just have to make sure your on the right side of the move. If you go long and things don't go your way you only need to wait until you're back in the money. Seriously folks, does the price of gasoline go down much? (During big recessions yes... but not most of the time) There are 10+ year stretches of history where gas prices only went up and up and up and up. Geo-political triggers will give you sudden spikes. Then you need to go short a bit as the dust settles. Watch out though, as it will never return to the old range. It will find a new higher range and stay in that range for a very long time.
Details: The two products I use to trade oil are both Horizon Beta Pro ETFs. They trade on the TSX. (HOU and HOD) They are even hedged to cover the US dollar exposure (since oil is traded internationally in USD) and to complicate things they are leveraged to give even more swing. So if Oil goes up 1% today HOU goes up 2% and HOD goes DOWN 2%. However the leveraging and hedging (and contango) complicate things so these two products always trend down faster than they go up. So they are NOT great for long term holds. (HOD only goes up when oil goes down. Will OIL ever go down long term? NO! So don't hold HOD long term! Don't hold HOU long term either!) I was stuck out of the money for a while this past year. I didn't get out in time during the summer doldrums. But eventually it came back to profitability and I'm back trading these funds a few times a week.
Disclaimer: I'm not a "certified" investment adviser. My opinions are exactly that. I'm using them to help eek out a slightly better living than I could have afforded to if I had just put my money in the mattress. I've made some money at this, but I've also lost some money at this. (More gains than losses thankfully) There is risk here people. You can't blame me if you lose everything. If you follow my advise and lose everything then I'll have lost everything too! If you sue me then it won't get you much since I'll be broke too. If your clever lawyer things he can squeeze blood out of a stone good luck!
True, there is a lot of things to consider, and yes, supplies have been compromised. Other problems in the middle-east could also snowball into an evil rats-nest of doom. But has it happened yet? No. Did Saudi Arabia start pumping more oil to make up the shortfall? Yes. Did the price of oil return to it's previous level? No. Is the saudi king old? YES! (He's 87) Did he just bribe his government to keep things going just the way they are? YES! (To the tune of MANY billion dollars)
So there's no supply shortfall, there is no refining shortfall, there is no distribution shortfall. But prices are still higher than they were just 2 weeks ago. (15% higher!)
My OPINION: (You can't sue me for this)
Things are going to correct once everything settles down. It may take a few weeks, it make take a month or three, or it may take a completely unrelated geo-political disaster somewhere else in the world to take the fear-mongering media's attention away from this crazy situation.
This means you should consider a SHORT position on oil. I have a small short position which I just bought today (just before market close). To limit my risk I'm not going to hold it for any length of time. With luck I'll be able to sell it tomorrow. (Yes yes, I hear you shaking your heads: what kind of crazy day-trading is this fool doing?) I'm sure I could hold it longer and wait for a proper correction, but I'm happy to take my profits even $5 at a time! (Yes the hourly rate looks craptackular, but profit is profit no matter how thin your slice!) My smallest trade for profit to date has been $0.15. Yes. 15 cents. ONE FIVE CENTS! It was one of my first attempts at day trading because I wanted to see if I could actually do it.
Yes folks, lots of people out there make lots of money day trading. I really don't recommend doing it though. Most of my strategy is long-term oriented. Which is generally why I don't recommend short positions. It's much easier to identify a company that will be around for a while. (Say Bell Canada, or Suncor... something big, something that thousands or millions of customers pay for day in, day out.)
I have been up to this week been too chicken to sell anything short. But when OIL (WTI) Hit $103 per barrel that looked just too tempting. Even if it fell back down to $98 (which it did the next day) I could make some fast profit. And I did! I earned a 4% profit by the next morning. (Which I SOLD and put the money back in my pocket)
Previous valuation for oil before Iran exploded was in the $85 to $95 range. I'm not holding my breath to wait for $85. Take your profits as soon as you can if you want to try short selling anything.
So now I've told you how I've been embracing volatility, this is why you should do it: Oil move a percent or three almost every day. You just have to make sure your on the right side of the move. If you go long and things don't go your way you only need to wait until you're back in the money. Seriously folks, does the price of gasoline go down much? (During big recessions yes... but not most of the time) There are 10+ year stretches of history where gas prices only went up and up and up and up. Geo-political triggers will give you sudden spikes. Then you need to go short a bit as the dust settles. Watch out though, as it will never return to the old range. It will find a new higher range and stay in that range for a very long time.
Details: The two products I use to trade oil are both Horizon Beta Pro ETFs. They trade on the TSX. (HOU and HOD) They are even hedged to cover the US dollar exposure (since oil is traded internationally in USD) and to complicate things they are leveraged to give even more swing. So if Oil goes up 1% today HOU goes up 2% and HOD goes DOWN 2%. However the leveraging and hedging (and contango) complicate things so these two products always trend down faster than they go up. So they are NOT great for long term holds. (HOD only goes up when oil goes down. Will OIL ever go down long term? NO! So don't hold HOD long term! Don't hold HOU long term either!) I was stuck out of the money for a while this past year. I didn't get out in time during the summer doldrums. But eventually it came back to profitability and I'm back trading these funds a few times a week.
Disclaimer: I'm not a "certified" investment adviser. My opinions are exactly that. I'm using them to help eek out a slightly better living than I could have afforded to if I had just put my money in the mattress. I've made some money at this, but I've also lost some money at this. (More gains than losses thankfully) There is risk here people. You can't blame me if you lose everything. If you follow my advise and lose everything then I'll have lost everything too! If you sue me then it won't get you much since I'll be broke too. If your clever lawyer things he can squeeze blood out of a stone good luck!
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