School can be an expensive endeavor.  Tuition, books, room, food, spending money- it all adds up. What are some ways to save money if you are sending your kids away to school?

1. Budget

Have a very candid conversation before you send your kids to school on what you are willing to spend. Stick to it.  It will teach your child to live within your/their means if you stay disciplined on a budget and it will be a good life-learning lesson on personal finance. Better yet, have the both of you sit down and prepare a budget together. If there is a shortage in the budget, your child can always look for part-time work to make up the short-fall.

2. Think  prepaid

Instead of giving your kids a conventional credit card to spend at university or college, think about providing a prepaid credit card instead. Prepaid credit cards are like debit cards in that a certain amount of money are stored on the card and when the prepaid credit card runs out of cash it can no longer be used without it being topped up with more money (paid link).

Prepaid credit cards also avoid the issue of high interest rates and teaches someone to budget properly.

Similarly, instead of arming a child with a conventional cell phone, think prepaid cell phones. The concept is the same as the prepaid credit card. You preload a certain amount of time on the phone and once it is used up, the cell phone cannot be used without topping up more minutes; it will teach your children that nothing is free in life. Best of all, most prepaid cell phone carriers do not require you to sign a long term contract.

The issue with conventional cell phones is that roaming, SMS charges, long distance charges do add up (you may be better off buying a  long distance phone card if you are sending your kids away from home rather than get a long distance plan on a conventional phone).

3. Think second-hand

I used to like buying second-hand books simply because someone highlighted all the important sections for me! Text books also go out of date very quickly (how else is a professor to make side income then to put out new editions every few years) so there is no real value in buying new.

Refurnished computers are also a good bargain (and, really, a new computer with massive amounts of memory will be used to download music and movies and not for school-work).

4. It is a dorm room, not a hotel

My regular columnist, Mom2KG, gave me this tip (who, incidentally, I went to school with so I witnessed this first-hand when we went to school). Every orientation week, vendors attempt to rent/sell mini-fridges to people. These tend to be used for nothing more than storing booze, water and more booze. They tend to be luxuries more than anything else so skip the bells and whistles.

Also avoid buying a lot of items for the dorm room (lamps, posters, book shelves etc. ) at the university book store. They tend to be more expensive. One is better off making a Costco or Ikea run beforehand.

5. Do not forget free money

There’s a lot of grants, bursaries and scholarships that most people don’t apply to. People tend to focus on the large entrance scholarships and forget the smaller grants, bursaries and scholarships. Most universities are dying to give this money away. Encourage your child to apply early and apply often. In my last year of law school, they were dying to give money away. I remember people who could afford to cover their own way were still receiving bursaries because the University had to give it away.

During the recovery from the 1990’s recession, a lot of outrage was aimed at the fact that when a company announced lay-offs the stock market indexes went up; this appears to be a trend we have seen recently. But, if rising unemployment rates are a bad thing for the economy, why are stock indexes going up?

At its very core, unemployment rates and stock market indexes are lagging and leading economic indicators respectively. A lagging economic indicator is a snapshot of the past and may not be necessarily reflective of the here and now. For example, businesses tend to engage in massive lay-offs after the financial results are in for the previous quarter; management may have a feeling it is doing properly but until the bean-counters consolidate the financial statements, it is a feeling only. Thus, a lagging indicator tends to merely validate past events.

A leading economic indicator estimates future economic activity. Stock indexes are basically a measure of future expectation of profit. Building permits issued are indicators of potential upcoming real estate activity (there is a difference between an issued permits and a built permits; the former predicts the future, the latter measures the past- if you are a real estate investor, look for built permits not issued permits when conducting your due diligence; it is a truer measure of real estate activity). Leading indicators, because of their speculative nature, tend not to be accurate all the time so take leading indicators with a grain of salt.

Thus, you are not actually measuring apples to apples when you look at unemployment rates and stock market indexes. One looks back, the other forward.

However, more specifically, why do stock markets react positively to rising unemployment numbers? The answer may be two-fold. First, massive spikes in unemployment may signal a quick descent to the bottom and an imminent recovery, meaning a quick bounce back in stock prices. Second, from a quantitative perspective, lay-offs mean lower expenses which means a company can maintain the same level of business but make greater profits.

Both factors, despite a certain cold-heartedness to the analysis, tend to warm the hearts of traders who take this as a sign things will get better for the economic performance of a stock (although not necessarily for the common working person on unemployment insurance).

If you subscribe to the theory that the worse of the credit crisis is over and we are entering into a plain-old recession (a hunch to be sure in such unpredictable times), one factor to look for to validate this theory is to see if we are going to see the early 90’s behavior again of a parallel rise in unemployment rates and stock market indexes. A long and sustained rise in unemployment rates accompanied by a long and sustained fall in stock market indexes (think years for both) may validate the depression theorist out there. It may take the rest of 2009 and early 2010 for anyone to call it.

Have a safe and fun long weekend.

Someone I had not spoken to in years call me last week to catch up. In the course of the conversation, the caller, who is self-employed, made an off-handed comment about the economy being in a depression and how we needed to become self-employed soon. My one pet peeve lately is the rather liberal use of the term depression and how short of memories we all have.

Thus, I wanted to give some context of the current downturn vs. the early 1990’s using unemployment numbers as opposed to some media driven hysteria. My sources are the U.S. Department of Labor and Stats Canada. I noticed I can’t link to the specific search pages (the searches expiry as a link page) so I had to give you the general page.

What I have done is looked at when unemployment numbers begin to trend upwards and attempted to determine when they trend back down and counted the # of months the unemployment rate was high.

I am using as my assumption my economics 100 course in undergrad that 5% unemployment is a desirable unemployment rate- not too low to trigger inflation, not too high to slow the economy. However, I will make an allowance that a healthy unemployment rate is somewhere in the 5%’s.

United States

In March 1989, the unemployment rate was 5.0% . From this date to June 1990, the unemployment rate fluctuates in the 5%’s until hitting 5.2%. After that month, the unemployment spikes to 5.5% and begins an upwards and steady accent. I will mark July 1990 as the begin of steady job losses. Here are the average monthly unemployment rates until the rate settles back into the 5%’s:

July-Dec 1990: 5.92%
1991: 6.85%
1992: 7.49%
1993: 6.9%
Jan 1994-Aug 1994: 6.3% (the unemployment rate decreases to 5.9% in Sept. of that year and begins a decent for the remainder of 1994 and onward).

That’s 50 months between the unemployment rate begin a steady climb from 5.2% back to 5.9. Peak monthly unemployment occurs in June 1992 at 7.8%. This is not to suggest that it will take 50 months to a full job recovery but it did take 24 months from the commencement of the upward trend to peak unemployment in June 1992. After that, there is a steady, albeit slow, recovery on the job front.

Thus, based on the 1991 precedent, there’s a 24 month span of rising unemployment before the rate hits peak and drops (I understand that the unemployment rate does not differentiate between full and part time jobs and good jobs or bad jobs. This is merely a snapshot).

Canada

I had a much more difficult time finding monthly unemployment rates in Canada. I have had to rely on annual unemployment rates so the analysis is much more broadly based. In 1989, Canada’s unemployment rate was 7.5%; the lowest rate in the 1980’s. Thus, Canada was not in an optimal full employment state when the economy started going south.

The unemployment rate then begins the following upward trend of annual unemployment rates:

1990: 8.1%
1991: 10.2%
1992: 11.2%
1993: 11.4%

In 1994, the annual unemployment rate drops to 10.4% and drops every year until 2000. Because of the imprecise detail of the data, it appears that the Canada took longer to hit its unemployment peak (1993 as opposed to 1992) and the recovery took longer to unfold. In fact,  it took until 1999 for the Canadian unemployment rate to get back to where it was in 1989- a full 10 year recovery!

There are a wide variety of academic sources which studied Canada’s slower job recovery. I cite one factor below.

Today

The U.S. unemployment rate is at 7.2% at the end of December 2008. There has been a general tread upwards since May when the unemployment rate jumped from 5.0% to 5.5% with two big 0.4% leaps in the rate in August and December from the previous months. If you want to start the clock running on when unemployment begins to rise, May 2008 would be a good time for the starting point.

If you believe this rescission will unfolded similarly as 1991, that would make approximately spring 2010 when the unemployment rate peaks and begins to fall. This is based purely on a sample size on one so keep this in mind.

The Canadian unemployment rate stands at 6.6% as of December 2008.

What does this all mean?

Few random observations:

1. The Canadian recovery in the 1990’s took much longer in the U.S. for many reasons. One was Canada was running massive debts and deficits prior to that time and there was a very painful transition to balancing budgets. The government’s lack of financial flexibility to stimulate the economy most likely slowed the recovery. Will this happen in the U.S.?
2. It is way too early to press the depression button. Perhaps the “holy cow, its 1992 all over again!” button can be pressed (the 1991 recession was brought on in part by a speculative real estate bubble bursting and savings and loan bailouts- in smaller scales).
3. Just hope this does not become the 1982 recession. I took a quick over-view of the 1982 recession and it was ugly by any comparison.  For example, the American monthly unemployment rate was over 10% from Sept. 1982 to June 1983 and the American Central Bank Prime Rate was 12% in Oct. 1982  (source is WSJ); Canadian unemployment rate went from 7.6% to 11% in 1982; Bank of Canada Prime Rate was 11.53% in Oct. 1982. In other words, you had the worse of both words in 1982, high unemployment and high interest rates.

…is this another “normal” recession and, our collective memories being so short, we don’t remember what a recession truly feels like? I sit on in the “let’s not get hysteria” camp and believe what we have is a good old fashion recession, of which we have no collective memory of so we are paniking (think of your advisor in their 30’s or 40’s; they would have been in school during 1991 and not experienced the full force of the recession). Howerver, time will tell…

Someone asked me the other day what I thought about Congress trying to curb executive compensation as part of the (now failed) bail-out package. I responded that I believe this is one of those classic misdirections put out by the government where the public focuses on one thing which, emotionally, is a nice hot-button topic to  act as a smoke-screen for what truly is going on. Very slowly and very steadily, the greatest banking consolidation in history is happening right before our eyes with the government’s blessing and depending on your point of view, this is either one of the best or worse things to happen.

I am not a big believer in conspiracies and shadowy men in shadowy rooms plotting our collective demise.  The roots of the consolidation almost seems more accident than design. But, facts are facts. The early and clear winners in the credit crisis so far are (in no particular order):

1. Bank of America
2. JP Morgan Chase

..and watch Goldman Sachs (see below for why). What have these two done to become the big two so far?

Bank of America benefited from the collapse from Citigroup, its largest rival. If it did nothing else, it would come out better simply based on Citigroup’s implosion. But, in September 2007 (very early on in the credit crisis), it bought ABN Amro North America and LaSalle Bank basically handing BOA the market lead in Chicago and the mid-west.

In the short term, BOA mis-stepped by buying Countrywide Financial but, in the long term, just consolidated its hold on the residential mortgage market (Countrywide had 20% of the mortgage market in 2006). Then, BOA buys Merrill Lynch for an issuance of stock (which creates dilution issues and reduces ROE but keeps BOA cashed up for more acquisitions).

Merrill Lynch may not sound like much right now but its strength is a massive and aggressive sales force. Fuse this with BOA current products and bench strength and this is a long-term strategic acquisitoin.

The result? BOA is now the largest financial services company in the world.

JP Morgan Chase was featured in Fortune Magazine as the financial institution coming out smelling like roses (relatively speaking). It dumped a lot of toxic products before the crash. In the spring of this year, it bought Bear Stearns for effectively nothing. Yes, nothing. To quote Fortune Magazine: “Dimon [the CEO] paid virtually nothing for Bear – just look at the numbers: The $11.5 billion in cash on Bear’s books should fully offset the costs of the merger. Yet J.P. Morgan captured businesses worth as much as $15 billion…”

The kicker? The Federal Reserve backed all of Bear Stearns bad assets (remember this was the first bailout) so they bought the good parts of Bear Stearns and the tax-payer effectively bought the bad parts up.

Last week, JP Morgan Chase bought the assets of Washington Mutual (“WM”) for $1.9 billion from the government (who had seized the bank). Because this is an asset and not share sale, JP Morgan Chase effectively washed itself of most of the liabilities of WM. $1.9 billion sounds like a lot until you consider WM had $188.3 billion of deposits as of June 30, 2008. Assuming even a massive withdrawal of 50% of the deposit base in the intervening 3 months, JP Morgan Chase still stole WM and surpassed its arch-rival Citigroup as well.

You could say BOA turned itself into a powerhouse by aggressive management. JP Morgan Chase was basically handed the keys to the car by the government.

…and then there’s Goldman Sachs who turned itself into a deposit taking institution in September to be eligible for Federal Reserve help. More importantly, because it now has a deposit-base to mitigate against liquidity issues (remember the issue is not financial institutions have no cash; they have no short-term cash), it can “help” the government the same way as JP Morgan Chase. Guess where Henry Paulson, U.S. Treasury Secretary, use to work? He was CEO of Goldman Sachs. Think they may get thrown a few good deals now?

…my investment advisor had a good line yesterday- “this isn’t a crash. This is nothing but a huge transfer of wealth disguised as a crash.”

There’s an urban myth that the greatest number of millionaires was created during the Great Depression. I have never seen a statistic to back this up but I can see how, in great times of change, some dive for cover and others prosper.

In a couple of weeks, parents send their kids back to school which is the happiest or saddest day of the year depending on which side of the care-giver/dependent side of the fence you sit on and how long or short the summer was. For parents sending away their kids to college/university, the advice is the usual series of don’ts: don’t spend all your money, don’t party too much, don’t fall behind in class etc. etc. But how many parents actually tell their kids: “Don’t forget to apply for every bursary possible. Its free money. Apply early, apply often.“

When I went to law school, there was a general bursary fund awarded to students on their second degree if they could prove need by the second semester of school. “Need” was a bit of a loose term. I remember a class-mate who was quite well-off by student-terms (lived by themselves in a nice apartment in the good part of town, owned a car outright, not on student loans) who applied as a lark and got $1500. FREE MONEY. Now, if your sense of justice cries out that this classmate was abusing the system, I would actually suggest not. No one applied to this bursary so every year the school had excess money sitting around. They had to give the money away. They employed people to administer this program and, as urban myth had it, the employee was bored to tears. No one applied. Thus, it wasn’t like this class-mate was taking money away from more needy applicants. There was more than enough to go around.

One more story- I once won a $500 scholarship in undergrad. How? I was the only one that applied. In the entire country. Time to complete the application? About an hour. Other Costs? Try a $1.00 to photocopy my transcripts. $500.00 for one hours work is not bad. Hell, most lawyers don’t bill that much per hour. How did I find out about it? They desperately wanted someone to win and I happened to bump into someone who knew about the scholarship and lack of applicants.

It stupefies me how much free money we leave on the table. I was once asked by a client to research some grants opportunities for them. Starting a tech company in west of Manitoba? The feds have a grant for you. An entrepreneur in Prince Edward County? The province has a grant for you. Employing employees under 35? The feds will subsidize their wage. Hiring someone on EI? The feds and the province will pay for their first 6 months of salary. Yet, after speaking to some of these grant officers, NO ONE APPLIES. Entrepreneurs always need more money but they never bother researching grants, subsidies and low-interest loans and approach banks who are anything but small-business friendly.

There’s a ton of other examples: people not applying for child-care tax credits, not applying to your local city for rebates when you purchase energy saving products (City of Toronto gives you $60 if you buy a front-loading washer), not completely maxing out every single tax deduction you are eligible for, not applying for credit cards that give you cash back etc.

Since I don’t have a post tomorrow, I will leave you with this thought for the weekend- what parts of your life are you leaving money on the table? I do not mean being frugal. I mean instances were you could be eligible to receive money but do not do it because you don’t want to apply, you don’t look into it, you don’t think you will win etc.

For those with student loans, MoneyGrubbingLawyer gives some tips on tackling student debt (incidentally, isn’t the term Money Grubbing Lawyer redundant? Haha, sorry had to go there).

Have a great weekend.

On the heels of the Royal Bank of Scotland warning of an impeding stock market crash, Warren Buffet commented yesterday that the U.S. economy is in a recession and getting worse. The economy is under at least three distinct pressures: collapse of the real estate market in the United States, the financial industry unwilling to lend money and high fuel and food costs. You have the worse of three worlds: a slow-down of consumption in a consumption based economy, lack of capital to fuel business growth and productivity and out of control expenses on essential items.

Before you head to your bomb shelter and hunker down for a few years, there are a few things to remember:

1. There is a people shortage in all sectors. This isn’t like the 70’s or the early 90’s where there was a large supply of labor relative to demand. Everybody needs people. Remember the hue and cry about there being too many lawyers (please no lawyer jokes, I have heard them all)? My friend can’t hire a junior lawyer to save his life; there are none available. If you live in Alberta, you know full well the labor shortages everywhere (Tim Hortons in Alberta are known not to open for lack of employees). The U.S. unemployment rate is at 5.5% as of May, 2008.  I remember my first year economics professor telling me (before the internet, tech bubbles and globalization) that a 5% unemployment rate was the perfect unemployment rate (not too hot and not too cold). Despite all the rhetoric about outsourcing and the collapse of traditional manufacturing (without looking at the growth of non-unionized and high tech manufacturing) demographically, the work-force needs people. The more skilled, the better. But, North America needs bodies because there are more people retiring than we can bring into the work-force (and, hence, why choking off immigration may win political points but is economically unviable especially if government promotes a consumption based economy).
2. …but, there’s clearly something not right with the financial system. It is pretty clear with hind-sight what the banks did with all the money the federal banks pumped into the system; they used it to prop up their balance sheet and didn’t lend it out. Easy access to capital is the foundation of business growth. By choking off access, the banks are slowing the economy down. This won’t be felt until later this year and 2009 but it works its way through the system.
3. The American election is sugar-coating the real problems. America has a lame-duck President until November (and, realistically, 2009) and, given it is election season, a lot of issues are being glossed over. There’s been a lot of policies which got us here (the deductibility of interest payments on mortgages, the subsidization of a bio-fuel industry, the propping up of the financial industry rather than the defense of the U.S. dollar) which cannot be examined in-depth with quick sound-bite quotes which all elections are built in. 2008 is a stand-still year because of that reason and we seem to be living in a never-never land.

Do I think the economy will get worse? Yes. A crash? Probably not. We increasingly live in “I want it now and let’s forget tomorrow” society, governments will do anything to prop up the economy for a crash regardless of the long-term consequences. The real crash will be driven by demographics in about 5 years.

However, some things to note in the realm of personal finance:

1. It is time to get back to fundamentals:My banker friend says it best- “when there’s more junk than common sense on the street, its the end of the cycle.” I am seeing a lot of strange stuff being sold: exchange traded funds hedged to markets, mutual funds disguised as exchanged traded funds (with the requisite high MER’s), limited partnership units investing in treasure ships and whatnot. WHAT?!? Stick to the bread and butter products: government issued bonds, blue-chip/dividend paying stocks and real estate based on positive cash flow production. Things your grand-parents bought when they were your age; there’s a reason why they keep selling it now. It works. BORING EQUALS GOOD in investing (and in life if you really think about it).
2. Forget appreciation, focus on cash flow. I have mentioned before I sometimes vet deals for a friend of mine who lends money out. Here are his instructions- I will not lend on potential or appreciation. Lend on cash flow only. My friend is not dumb. The past 5 years were all about looking for the home-run appreciation stock or real estate. Those days are, alas, done. The easy money is gone. Anything you invest in, look for cash flow first then appreciation second. Cash flow gives you a margin of safety in bad times. Look for stocks that pay a dividend (which it can maintain), real estate with positive cash flow or businesses that are cash rich.
3. Better get your credit now. HSBC turned off the taps on all new real estate lending recently. Globally. Banks and lenders are systemically shutting off one risky loan portfolio after another. If you have shaky credit, best to secure some now. If you have good credit, ask for an extension before the pool of money to be lent out by banks shrinks.
4. Asset allocation is your friend. Balance your portfolio with the right mix of cash, fixed income and stocks and you can weather the worse. Never forget that cash is an asset allocation category. The pros are not fully invested and neither should you.
5. The consumer is in control. Remember the days you could not find a trades person, a car on sale or an affordable home? Those days are gone. The consumer has the power so use it to hunt out the best deals.

..and, above all, stay positive.

BCE still could be the largest private-equity privatization in history but it is stuck in legal and financing molasses (one of the most concise summaries of BCE’s privatization woes was made by Michael James on Money). The point of this post is not to address BCE per se. Others have discussed this topic to death. Instead, the legal decision stopping the privatization substantially on the basis that a company has a legal duty to look after both the shareholders and bondholders rights, and it failure to look after the latter, raises the larger question what the two largest stakeholders in any business should expect.

As a side-note, the BCE decision has profound implications beyond the business itself. If the Supreme Court of Canada upholds the Quebec Court of Appeal decision, the result will be it will make it harder for private-equity, mostly international financiers, to take Canadian companies private. One wonders if this is judicial economic nationalism at work (remember that BCE is nominally a Quebec company and Quebec economic interests are often intertwined with Quebec political aspirations).

Paradoxically, under the law of unintended consequences, you could also see the watering-down of bondholder rights substantially to avoid another BCE situation (some would argue this is already occurring). Rather than embolden bondholders, companies may simply beat them into submission with restrictive covenants and dare the bondholders to fund an expensive and time-consuming litigation to enforce their common (judge made) law rights.

Back to the topic at hand though…what rights do bondholders and shareholders get? Bondholders buy the corporate debt of a business. If you own a bond mutual fund, you may indirectly be a corporate bondholder. Traditionally, a bondholder’s right is confined by contract to certain obligations of the business in connection with your bond: mainly, how much interest you are paid, for how long, when does the company have to redeem (i.e. buyback) your bond etc. A bondholder’s rights, in other words, are traditionally set out in contract and not common law. The trade off is simple: in return for a certainty of payment, you forgo the upside of the company. Even if the company takes off, you continue, in most cases, to only get the interest rate set out. Think of a bondholder as an accountant- they always know they will make money doing your taxes. They may never get rich doing it but there’s a certainty of income year after year.

To continue the analogy, a shareholder is a poker player (which is a career choice now just like being an accountant- Mothers close your eyes and shudder). It is playing the odds that it has a good hand (i.e. the business is strong) and it can win the pot which could be potentially huge. Rather than seek the certainty of payment of an accountant, you are going all in thinking (hoping?) for the upside. A shareholders rights are not set out in contract instead investing in stock is an exercise in risk management; you are hedging that the company will do well. Therefore, the government and the Courts pass laws and make decisions to make sure that the house isn’t stacked against you and your risk insulated somewhat from shady dealers/board of directors and shifting rules (shareholder have to consent to a wide variety of fundamental changes to how the business is run). A shareholder’s play is upside in lieu of certainty of payment which is enforced by law and common law.

Who gets paid first? A bondholder’s interest payment gets paid before a shareholder’s dividend (hence the term “debt before equity”). Who reaps the reward of a take-over or acquisition? The shareholder by a rise in the share price.

How does this affect you?

1. The rights of bondholders and shareholders form the cornerstone of asset allocation. You can’t have a portfolio of all poker players or all accountants. The former is too risky and the latter is B-O-R-I-N-G! You need both to maintain balance.
2. Remember why you invest in a stock- the promise of future performance- and why you invest in bonds- the certainty of now. Depending on your life cycle, the future may be a much better place to invest in than now or vice versa. This is why my parents will not a biotech company- there is no certainty of a now.
3. Short of extraordinary situations, bondholders are given little to no say in the company as long as it is paid interest. Shareholders do have a vote on the future direction of the company. It becomes a preference of ownership (however small) over being a lender.

As for BCE…the Court decision is really a side-show to a larger problem. Even if BCE wins on appeal or settles with the bondholders, the banks won’t fund a deal as is. Even if the banks get sued, a Court will be hard-pressed to force specific performance (a type of legal remedy) of the financing term if the banks show that it doesn’t have the liquidity to fund the deal (can’t get blood from a stone). I would consider the gap between financing demand and supply to be the much larger problem for not only BCE but the entire market and, while BCE makes for some great headlines, there’s a much larger issue coming our way from the fallout of businesses not having readily available supplies of money to expand- an issue which wouldn’t fully be felt until the 2nd half of this year and into 2009.

A reader writes: “can you blog about married couples having joint bank accounts, credit cards and investments and what happens if one of them is in trouble financially?”

I may be qualified and contextually challenged to answer this question since I am a lawyer by training (qualified albeit I am not in practice) but do not have any joint accounts given I am single (contextually challenged). Keeping in mind this is not advice but information and not specific to anyone’s situation the response is- it depends (there’s the lawyer talking!).

It depends for a variety of reasons- laws differ depending on the jurisdiction of the joint account but, generally (with double emphasis on generally), here are some scenarios to think about.

1. If there is a joint credit card issued in both spouses name, the “good” spouse is responsible for the entire debt even if the “bad” spouse has declared bankruptcy (in simple terms, a bankruptcy freezes any action a creditor may have against you and a trustee in bankruptcy disposes of the estate (i.e. the bankrupt’s assets) and divides it among creditors for usually cents on a dollar)- I am assuming that the spouses are jointly liable for the debt. Thus, sharing a credit card with a fiscally irresponsible spouse if both spouses are jointly liable for the debt is a very risky proposition for the household (please note there is a difference between joint signing authority and jointly liable- the former allow other people to incur debt, the latter means all the card-holders are responsible for the debt regardless of who authorized the charges- you cannot use “I did not know” as a defense: ignorance of the law is generally not a defense).
2. If you have a joint bank account and one of the account holders is being pursued by creditors (whether in or out of a court action), the creditors will obviously assert that the entire sum in the bank account belongs to the “bad” spouse and it is up to the “good” spouse to prove how much of the bank account belongs to them. Under Canadian bankruptcy law, the monies held by the bad spouse in a joint account will be part of the bankrupt’s estate and used to pay out creditors (if indeed there is any money in the joint account). In a garnishment situation, the same analysis applies. Thus, in one way or another, the spouses have to determine what part of the account was deposited by whom to protect or to pay out from the joint account.
3. The same analysis applies to investments with one twist- insurance products (life insurance, segregated funds etc.) are exempt from seizure from creditors in Canada (assuming monies were not diverted to these instruments for the primary purpose of evading creditors in which case the transaction can be reversed). Thus, the entire pool of investment among spouses is protected if it is in an insurance product. If a joint investment account is not in a creditor-proofed insurance vehicle then the same accounting has to occur as per #2.

The long and the short being: if you are married to a fiscally irresponsible person who may have creditors knocking on your door before too long, make sure you have separate accounts. However, if creditors are already knocking on the door, it may be too late since there are laws to prevent the deliberate transfer of monies to avoid creditors.

As an aside, for those readers who are entrepreneurs, please do think about limiting your household’s exposure to your business risk by avoiding joint accounts and removing yourself from title to the house (a personal guarantee for a business loan will pool the home into the assets the bank can seize upon non-payment).

My usual disclaimer applies to this and all posts: this is information only and not advice and not written with any specific individual or jurisdiction in mind. Please consult an accountant or trustee in bankruptcy if you hold joint accounts of any kind whatsoever with a fiscally irresponsible spouse to ensure the household is protected. Good luck.

Recently, I was faced with a situation where I had the option of obtaining an extended warranty on a big-ticket item. This brought up the larger issue of when anyone needs to buy a warranty on any items. A warranty is, at its essence, an insurance policy on a product that you purchase. In the event something goes wrong, you are supposed to be insured on it. However, as a Consumer Report study found, most warranties are really insurance policies with loop-holes you can drive a truck through (I could not find the entire article).

Having said that, rather than dismiss all warranties outright, here are the worse case scenarios in product warranties:

1. Exclusions are greater than the coverage. Warranties are insurance and insurance should be looked at for what it doesn’t cover more than for what it does. For example, if you commit suicide, your life insurance policy is void. If you participate in extreme sports, you may be voiding the terms of your critical illness or disability insurance. In product warranties, if you drop your laptop computer and it breaks, most warranties will not cover accidents. Most warranties will not cover wear and tear damage either. In essence, a product warranty will not cover you from the things you think it should. Instead, it covers freak occurrences such as your laptop computer battery catching on fire. The other thing to remember is that warranties only cover the direct damage (i.e. we will replace your computer if it catches fire) and not the indirect damage (we cannot pay someone to recover your lost date when your computer caught fire).
2. There is no Cost Benefit. When laptops use to regularly cost over $2500.00, it may have been worthwhile to purchase an extended warranty given how expensive it was to replace one. But when computers sell for under $1500.00 now, what is the cost benefit of purchasing a $250 warranty that has more exclusions to the coverage than the actual coverage? Products that once may have needed warranties because of the high price point have become so affordable that it may be cheaper to replace the product with a more technological advanced model than go through the hassle of applying for warranty protection. Having said that, an extended warranty on a car may be worth it if you drive a lot (but wear and tear is excluded on car warranties). But…
3. Warranty is Issued by a Third Party. Here’s the kicker- someone other than the manufacturer could be offering the warranty protection. This happens a lot in the automotive industry. The dealers set up a separate company that covers the warranty (aka self insuring). If there are too many claims for the separate companies’ comfort, it could always wind itself up and the dealer has no liability and you have no recourse on the warranty. The equivalent in electronics is a warranty issued by the retailer and not the manufacturer.

Do I ever buy warranties above and beyond that built into the purchase price? No. As a friend who once worked at a car company told me, the fattest commissions come from the sale of warranties by salespeople. I also tend not to buy very technologically advanced or overly complicated gadgets. The more complicated things are, the easier they are to break. I try to buy nice reliable things and play the averages it will last a long time. If you are offered a warranty, read the fine-print carefully; if you see all three worse case scenarios described above run for the hills.

Warren Buffet announced that the company he runs, Berkshire Hathaway, is shopping for a big acquisition (anywhere between $30-$60 billion depending on what you read) and there is much speculation on what he is going to buy. The added twist is that Buffet has recently begun to buy outside of the United State market (for example, Berkshire Hathaway owns a part of PetroChina Company Limited). This has lead some to believe that Buffet is going to buy something outside of the United States. Given what we know about the Warren Buffet style of investing, it won’t be trendy, it won’t be tech and it won’t be an up and coming company. Buffet likes to invest in what he knows: insurance, utilities and infrastructure to name a few sectors.

As a purely speculative guess, what would stop Buffet from buying a Canadian company with a large international presence who are market leaders in their industry? What about Manulife Insurance, SNC-Lavalin or Thomson Corporation? It appears that the Canadian government is taking a rather hands-off approach on international companies buying up resource companies so I am not sure that regulatory barriers are as prevalent as they use to be.

Love to hear what you think Buffet will invest in.