canned goods & ammo

I have had a few people write to ask me what I do with my cash while waiting for a correction. Frankly, I do not know what the heck to do with it. Stuff it in my mattress? Hide it in plain sight? Good question.

My response has been that I am very conservative with my capital, and because it is so hard to come by, I keep it in the bank - either in GIC's, or these days, in a "high" interest (4%) savings account at a big bank. I have had the option of putting it into market-linked GIC's, but stayed with the staid old cashable GIC.

So, I am making 4%, but factor in inflation (supposedly ~3%, and income tax on the earned interest, and I am not really getting any further ahead. I could gamble with ABCP, oil futures, pork belly futures, precious metals, the stock market, or the casino, but those are not guaranteed safe havens. I sure could have made money in TSX-linked GIC's, or gold, but I also could have lost money. I could have bought a few pre-sales and made money too (if I bought 3 years ago, and sold this past summer, I would have done well), but I also could have lost it all (I have been expecting a correction for a while...).

What are your safe havens? My 4% earned does not add up to a hill of beans.

taxes & interest

In the last post, Larry questioned whether our savings from renting over owning were net of tax. I found it an interesting question, as I've never really thought about it, so I did.

Firstly, the principle of savings is tax free - the money itself is not taxed, but the interest is. The tax on the interest would be relatively little. Putting aside appreciation in my example, we still saved more than we would have paid on the principle of the mortgage. Then there is the thirty odd thousand that we would have paid in interest. We make about $500/month in interest on our capital, so in the last 3 years we have made about $18,000 on that, less maybe $5K in tax (to be honest, I have never paid any attention to what percentage I pay in taxes, but it doesn't seem any where near 25% of gross. I don't really mind paying taxes, as long as they are spent wisely. They seldom are, but I don't have to pay thousands of dollars a day to stay in the hospital, and Canadian universities don't charge 30-40 thousand a year for tuition, etc.). Add that $13K to the $24K in rent/own savings and we are up at least $37K.

OK, I have to address the appreciation. I thought at the time (2003-2004) that prices were due for a haircut (as did many of you). I was wrong. But what if prices had retreated by 10%? There would be no appreciation, and that $400K house would be worth $360K - maybe less because of it's problems. The $18K in principle pay down would mitigate things a bit(?), but... There would also have been about 6K in property taxes over that time, plus PTT, agents' commissions, etc.

Then I thought, wouldn't that $30K in interest paid be a kind of taxation in the truest sense of the word?

Oh well, I have always recognized that you have to spend money to make money, unless of course, you are a money lender. Then you get your money for nothing, and your chicks for free.

I take some solace in the idea of a 50% correction, which would put that house back to about $350K. Our down-payment will be bigger, and our mortgage will be smaller.