Moshe Milevsky has emerged in the last decade as one of Canada’s most important personal finance educators. One of the few with the letters PhD after his name, he balances a growing portfolio of popular, plain-language educational writings with a full course-load at York University’s Schulich School of Business. If you’re looking for a guru, Moshe’s your guy.
He and I spoke this week about his new book, Your Money Milestones. Milevsky told me that like many Canadians, this downturn has influenced his thinking. “Part of writing the book was my attempt to put down in writing some of the things that I’ve changed my views on,” he told me. “One of them is the importance of diversification. Not just across financial assets, across all assets that we own. Diversify across physical capital, human capital, social capital and the list goes on and on.”
In part, that means looking at risk differently and accepting that sometimes it is important to account for the unthinkable. For example, Milevsky is holding a small amount of gold. Literally. “I don’t hold that in the form of exchange traded funds, gold mutual funds or gold companies. I actually went out and bought some physical gold bars. I got a safety deposit box at one of the major banks, and I store it there. That’s my gold exposure. The argument is that if gold really goes through the roof, if it hits $5,000 an ounce, we’ve had a major catastrophe. I don’t think my ATM machine is going to be working, let alone getting a net asset value on my ETF gold fund. The idea is that if you’re going to buy into diversification, you have to buy into it at the extreme. That’s one of the things I’ve learned: how fragile our financial system is. It was bailed out by the U.S. government and the European government. This means that in the future, there’s no guarantee that won’t happen again.”
Your Money Milestones answers nine questions:
- Is education worth the cost? “The first financial decision we face in our life is what to study in school, and hence, how to structure our human capital. Do we take the easy route, take the simple courses and graduate with a degree that’s basically useless? Or do we spend a bit more time learning something that is practical,” said Milevsky. Education pays. “Not only does it pay, but it pays in the millions of dollars … Keep your options open. Study things that have future potential. You want to acquire building blocks that you can put together and build a structure out of.”
- How much do I need to save? “Saving 10% of your salary just for the sake of saving makes absolutely no sense. If you actually have a goal in mind, you’ll realize that saving should be a lot less rigid than it is nowadays. A lot of people are counseled to save a fraction of their salary. I think it should be the other way around. They should be focusing on their consumption,” said Milevsky. “My bottom line is that youngsters are being told to save more than they should, and people who are older can actually afford to save more. They should be saving more.”
- How much debt can I afford? “There’s a substantial group out there that’s indebting themselves at very low rates, and they have be aware of the fact that at some point The Bank of Canada – Mark Carney has been very clear about this – will raise rates and this will have a big impact on what it costs to carry that debt load. I’m sometimes surprised when I talk to people and they tell me: ‘I just bought a house, and I locked it in for five years so I’ll be okay when interest rates rise.’ That number that they locked in, the 4.5% mortgage, will rise for certain in five years. My question to them is, sure for the next five years, you’re okay but what happens five years from now when rates are back to the normal 7% or 8%? Then what are you going to do?”
- Can I afford to have children? “In Canada, it is about $160,000 to $170,000 to raise a child from zero to 18. That assumes that they move out of the house at the age of 18, let along if they stay for another decade. So there are important implications and I think that people should spend a little bit more time thinking about the costs associated with, as well as the benefits of family. And the flip side, in retirement the evidence seems to suggest that people who have more than one child tend to spend less on medical and healthcare because there’s that natural support system. That’s why I call children pensions.”
- What about taxes? “Every time you spend a dollar or receive a dollar, ask yourself: ‘what implication does this have to my silent partner, the tax authority, who takes 30% to 50% of everything that comes in or goes out?’”
- How much house can I afford? “At some point [prices] just become so detached from reality that you have to stop and tell people: ‘you are going to lose money on this deal.’ You have to think very carefully about whether this is the right thing for you … I suspect that what’s driving this is the very, very low interest rates. All you have to do is put down 5%, and you can leverage up 19- or 20-to-one. That’s driving this, and I don’t think it’s going to end well for a large group out there.”
- How much insurance do I need? “Some people shy away from all insurance, they don’t want to think about negative things and they end up under-insuring themselves. We have to change that behaviour. Other people tend to be over-insurers, they have too much insurance or they insure the wrong things. My argument is that you should have a very well-developed sense of the catastrophic risks in your life. And you must insure those. Anything else: self-insure. Say no to the extended warranty on the cell phone. But take those premiums and buy some more disability insurance. Because a disability can destroy your human capital. That’s a catastrophic risk.”
- What’s the right investment mix for me? “The basic theme throughout the book is this notion of human capital being very valuable. When you’re doing an analysis in RRSP season of how much you should have in stocks and bonds, don’t forget to count yourself. You are an investment. You have a risk classification. You have a net asset value included in the asset allocation.”
- When can I retire? “For many people the age of 65 is a ridiculous time to retire. We have to get people accustomed to the fact that instead of counting forward, they should count backwards. It’s not the number of years since you’ve been born. It’s the number of years before you will no longer be with us. And 35 years isn’t an appropriate time to spend in retirement … It’s ridiculous to simply stop generating income at that point and hope that your financial capital will sustain you for the rest of your life.”
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