Newsletter February 16 2006

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Signed,Robert "Scrooge" Lunan

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The Scrooge Guide is a publication of the Lunan Corporation copyright 2006, all rights reserved.

103% Financing

Are you tired of renting and have no downpayment for a mortgage? No problem, says Monika our mortgage broker. If you have reasonably good credit she will get you a mortgage that pays 100% of the new house value plus another 3% to help pay for new furniture, etc. If you live in Ontario call her today at (613) 258-3454 and tell her you are interested in the 103% Mortgage Financing.

Principal Protected Notes – Buyer Beware.

Principal protected notes (PPN) are hot this year. Most financial institutions are selling them and they seem to be popular because of the guarantees. This is how it works. You buy a PPN for $1000. It is locked in for 5 to 11 years and at the end of that period you are guaranteed to get back your full $1000 plus a share of any gains. And gains you are told have averaged 15% in some sectors in the past, but past performance is no guarantee of future results, blah, blah, blah. So you are convinced. After all isn’t this guarantee a wonderful thing, and just imagine if those 15% profits pan out! But just a minute, let’s look into this a little closer. How do those big conservative financial institutions guarantee the money to come back to you and offer you such lucrative potential gains? Has there been a change of heart in the big banks? Are they now looking after my best interests instead of theirs? Is this some sort of goodw ill gesture? Have they become my sugar daddy? Don’t count on it! A closer look tells the real story. First, they take about 70% of your money and put it into very low risk investments. This is the part that guarantees the 100% return in 5 to 11 years. So they are covering any potential loss with your own money (and you thought they just loved you!). This of course severely limits any potential gains. The other 30% of your investment is put into higher growth vehicles but (and this is a big but) it is also subject to a number of fees such as commissions (5% of your money to the person who sells it to you), set up fees, annual fees of 2% to 3%, performance fees of up to 20% of returns, swap and brokerage fees, etc., etc., ad nauseam. It looks to me like this isn’t such a good deal after all. You could in fact make your own much more effective PPN by investing 70% of your funds in low risk bonds or a good bond ETF and the other 30% i n higher risk (and potential higher return) investments. Buyer beware.

How to Use a Broker

We have an in-house mortgage broker and we also offer insurance brokerage services. One thing we notice over and over is that most people don’t know what a broker is and how to use them. We often hear things like “I’m shopping around from broker to broker”. This is akin to saying “I’m shopping around from Walmart store to Walmart store to find the Walmart store with the best prices.” So let’s be clear about what a broker does: a broker shops the market for you so you don’t have to do it yourself. If you approach two different brokers, please be aware that they are looking at the same market (of lenders or insurance providers or whatever) and you will probably get the same answer. Where the brokers offer a difference is in the customer service and speed of service and ability to find the very best product for your situations. That’s where our broker shines and that’s the type of broker you should seek out and find.

The Curse of Registered Pension Plans

If you have the option of joining a registered pension plan (RPP) or a group RRSP with your employer, choose the group RRSP. (The exception of course is where the RPP is a guaranteed benefit plan mostly or entirely paid for by your employer.) Here’s the simple reason, you cannot touch the RPP until you are of retirement age and even then a formula tells you how much you can have each year. Even worse, if you are unemployed or sick and dying, you still cannot get to it! Take this example: you worked long and hard and at 50 years old you are diagnosed with terminal cancer. You are too sick to work and will probably die within two years according to your doctor. You have a spouse who doesn’t work and four minor children. Okay, you say to yourself I have $200,000 in my RPP I’ll pull it out and live off that. Sorry!!! No can do! The rules only allow around $20,000 (after tax) to be pulled out per year under these circumstances and o nly after you prove that all your other assets have been used up first. So while you are starving and heading out to the food bank the government pension watchdogs can be content that they are doing their job and protecting you from depleting your pension fund too fast. Same thing applies if you are down on your luck and out of work. You may have a giant pension fund but you cannot have access to it. So if you have a choice, choose a group RRSP over a RPP. Better still, pressure your employer to drop that overly restrictive RPP and offer a group RRSP where they (the employer) still contribute to your plan. If this looks like it will never happen, make minimum payments into your RPP and build up your own RRSP funds. You may or may not live to access your RPP funds because the formula only allows you to get to all of it by your late 80’s – should you live so long!Life Insurance UpdateNow is a good time to mark your cal endar to have your life insurance looked at. In many cases you may be paying too much. Make sure you get a broker (like us) to look at it. If you are in Ontario we can look into it for you. Otherwise find a good life insurance broker in your area. In some cases a broker will be able to cut your life insurance premiums in half!

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Please note that all information is given on an "as is" basis, without warranty. While every precaution has be en taken in the preparation of this material, neither the authors, the Scrooge Guide® nor the Lunan Corporation shall have any liability to any person or entity with respect to any loss or damage caused or alleged to be caused directly or indirectly by the material on this web-site or contained in the Scrooge Guide® newsletter. In this newsletter and on our site we do not give professional advice including and without limitation financial, legal, tax or accounting advice. Nor do we offer a solicitation to buy or sell investments. We offer general information, common sense tips and an educational website and newsletter about frugal living, saving money,and making money.
COPYRIGHTS & TRADEMARKSThe Scrooge Guide is a registered trademark of the Lunan Corporation. All information on this site and contained in The Scrooge Guide® Newsletter and in other attachments and available downloads is copyrighted by the Lunan Corporation. All rights reserved. (c) 2006.