Personal Financial Planning

“Cash Cows, Pigs and Jackpots – David Trahair”

Presented to Professor E. Otuteye.

By Andre Julien Caron 3289440

University of New Brunswick, Fredericton, New Brunswick.

Canada

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Executive Summary

This short book review will attempt to review the book “Cash Cows, Pigs and Jackpots” written by David Trahair. The aim of this review will be to give a detailed outlined of each chapter, a personal review as well as a conclusion.

This book outlines many ways to save money as well as how to be efficient in terms of spending and saving. The author attempts to prove that every person should try to save in order to retire comfortably while advocating the principal of a “cash cow”. Meaning an asset that continues to produce income over its entire lifespan. Examples of a cash cow can be summed up to a dairy cow, meaning that even after the dairy cow is purchased and paid for, it continues to provide income for the owner in the form of milk.

The book also attempts to reflect on different investments products such as Tax Free Savings Accounts and RRSP’s and the difference (Pro’s and Con’s) associated with each of these.

This book also outlines the difference between home ownership, renting and condos. Each of these residential properties has significant Pro’s and Con’s that should be considered by all citizens that are actively looking to purchase a new residential property.

Chapter 1
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Chapter one describes the relationship as well as the differences between the term “Cash cow”, “Cash pigs” and “Jackpots”. The Author identifies each term by giving examples and scenarios.

During the duration of this book, the word “cash cow” is defined as “ A business, product, or asset that, once acquired and paid off, will produce consistent cash flow its lifespan. This term is a metaphor for a dairy cow that produces milk over the course of its life and requires little maintenance. A dairy cow is an example of cash a cash cow, “as after the initial capital outlay has been paid off, the animal continues to produce milk for many years to come.”

As scene above by the example given by the author, a cash cow is an asset that once paid off; continues to provide cash to the owner at a return on asset (ROA) that is higher then the market growth rate.

The author also describes a “Cash pig” as “ Something that constantly drains cash from your pocket.” While this definition makes it seem like a cash pig is a phenomenon that should be avoided and categorized as being bad, that is not always the case. Some cash pigs can be very useful, such as purchasing a car. While the value of the automobile will decrease with added mileage and normal wear and tear, it can be scene as necessity for normal citizens and may improve one’s quality of life.

Finally, the author describes a “Jackpot” as something (an asset) that gives a substantial payout. The most prevalent example of this would be a lottery ticket. While a lottery ticket is a 2$-20$ asset (purchased at a convenience store) it has the potential to pay out upwards of 1 million dollars (if not more). Another example of a “jackpot” would be that of a home sale. Lets assume a home purchased in the 1960’s for 50 000$ then sold in 2013 for 350 000$, this would render a “jackpot” of 300 000$. The author makes sure to advocate the prudence one should associate with “Jackpots” as they are risky since no one can effectively predict the future.

The first chapter also advocates that cash flow is the most important aspect of ones financial life and success. This is true for the simple fact that it dictates the old principal of more money coming “in” then going “out”. Examples of money coming “in” would be pay cheques, dividends, bonus (from work) etc., examples of money going “out” are credit cards, car payments, cash withdrawal’s etc. The author also claims that “cash pigs” can become “cash cows” over time, he uses the example of RRSP contributions. While someone takes many years to fund them (cash pigs), over time the RRSP end up paying the contributor, which makes them a cash cow.

The author also emphasizes on the fact that buying a house as well as personal debt is a cash pig while gambling can be scene as jackpot but the odds are not favorable therefor, it should be avoided. It is also noted that the Canadian Pension plan, which every citizen pays into, is at first a cash pig, but then becomes a cash cow upon retirement.

Chapter 2
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Chapter two deals with the fact that one’s biggest cash cow is himself. This is true for the simple fact that as a working individual, you receive a steady income from your business or employment.

Since an individual can be scene as its biggest “cash cow”, the author stresses the fact that one should take care of him self. This means surrounding ones life with positive thoughts while ensuring a good diet, exercise regiment and sleep pattern. These simple yet efficient steps can greatly improve ones life and state of mind while making an individual more productive.

Chapter 3
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Chapter 3 aims to define the term “Rich” while putting the word into context. The author aims to prove that some ones net worth is not an adequate way to measure if someone is rich or not. While a net worth is important, someone could be worth millions of dollars but have no cash flow meaning all there assets would be “tied-up”. An example of this would be a multi-million dollar home that produces no additional income (assuming no job, or income from rent or other investments). While on paper, the owner of the home would be worth millions of dollars due to his home; he would most likely end up in debt due to no cash flow.

The author also aims to distinguish the difference between pre-tax and after-tax income since only after-tax income would be able to provide a clear indication of one’s value. The author uses the example of a marginal tax rate of 46%, lets assume someone makes 250 000$ in one year, due to tax’s the individual would of only really made 135 000$. The authors circles this tax problem by offering key points regarding RRSP’s and TSFA’s and their associated value in terms of avoiding certain tax’s.

During this chapter, the author also claims that certain current assets, such as stocks or property may crash over time, meaning that the value of something today, may crash in the near future. In regards to a persons net worth this is very important because what someone may think they are worth today, could change very rapidly in the near future.

This chapter also deal’s with the fact that money does not correlate with happiness. Meaning that the size of a person’s wallet does not relate to their happiness or overall quality of life.

Chapter 4
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Chapter 4 relates to the fact that banks keep on making money while the average citizen does not. Reason being that banks collect fees from a ride array of customers, which stands to prove that the “cash cow” system does work. The author also advocates the average person should aim to “plug the cash pigs leaks” meaning that one should aim to avoid small expenditures that are costing them money, like withdrawal fees among other things.

The author also shows that mutual funds can be a significant “cash pig” for people since the fees are very high. While some may trust a mutual fund to handle their money, the mutual fund company does not get compensated on results but on fees that are charged every month to the consumer. This concept means that the mutual fund does not have any motivation to provide a significant return since they will get paid (in fees) anyways unlike hedge funds or other investment models.

During this chapter, the author goes on to show that a major problem surrounding average citizens is that once someone feels rich, they tend to spend more money. This can be a major problem since people seem to get out of hand with their spending. Meaning that it is all-relative so if you make 100 000$/ year, and spend 50 000$/year is the same as making 200 0000$/year and spending 100 000$/year.

Chapter 5
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Chapter 5 deals with the dream of home ownership. The author aims to prove that real estate is not always a sure way to make money. Evidence of this can be scene in the real estate bubble that exploded in the United States during 2006.

This chapter also aims to show what the average citizen can afford in terms of a house purchase. Many factors come into play when looking at a home purchase, first off, one must look at the:

Gross debt Ratio: The author advocates that a monthly payment should not exceed 32% of your house old income.

Total Debt Ratio: which means that your total debt load should not be more than 40% of your gross monthly income

The Age Factor: Meaning that you should allocate yourself enough time to pay off a mortgage.

Another important factor that homebuyers should look at is the CHMC calculator, which takes into account the down payment and interest rate. This allows homebuyers to properly budget their monthly payment.

Another important thing to look at is the difference between renting a home and buying one. While renting does not offer equity into a property, it may be worth wile with the hopes of saving money. Since renting is a turnkey option, it can help avoid closing cost, some insurance and property tax, which are commonly associated with home purchasing. Therefor, in certain scenarios, renting may be a viable option compared to home purchasing.

This chapter also deals with the difference between a Tax Free Savings Account and RRSP’s. Both are proven to be good options but in certain scenarios, one may be better then the other. This depends on the return as well as the tax associated with these returns.

Chapter 6
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Chapter 6 deals with another buying option other then rentals and traditional homes. This other buying option is the purchase of a condominium. The author defines a condominium as “ A form of legal ownership that is often used for high rise residential properties but can also apply to townhouses.” Condos may be a viable option for people that want to purchase a home, but at a cheaper price with the convenience of an apartment. These conveniences are lawn care, snow removal, a lobby and sometimes security. The author goes into detail regarding legal implications of the sale of a condo as well as the associated cost with such a purchase or sale.

Chapter 7
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Chapter 7 describes the concept commonly known as inflation. Inflation is defined as “ A persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.” Essentially inflation can be scene as hidden tax on personal or business income. This is true for the simple fact that if inflation is 2% a year, but your annual return (on GIC’s or other investment products) is 1%, you actually end up loosing 1% as your money is worth less then it was in the previous year.

Chapter 8
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Chapter 8 relates to the Canadian Pension Plan, commonly known as the CPP, which enables Canadians to draw pensions (which they pay into over a lifetime). The author goes into detail explaining the associated penalties with “early” withdrawals (currently 0.5%/month). Canadians pay into the CPP directly from their paychecks. This can be scene as a “cash pig” that upon retirement turns in to a “cash cow”. Eligibility for the CPP (without penalties) starts at 65, but it may be viable to take it out early, or later depending on your needs and expected life expectancy.

Chapter 9
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Chapter 9 outlines the difference between the CPP and Old Age Security is that as a Canadian, you are automatically eligible for Old Age Security depending on how many years they have lived in Canada. Unlike the CPP, Canadians do not have to pay into Old Age Security. This government program is an important source of Income for low-income Canadians across the nation. This government program is scene as a “cash cow” to all Canadians.

Chapter 10
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Chapter 10 is a conclusion to the book. It relates to all past chapters outlined in this book. It once again outlines that cash flow is key to personal financial success. It also states that every citizen should be ready for retirement by advocating savings and efficient spending and savings through out their lifetime.

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Review
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As a personal review regarding this book, I found the book very useful in terms of personal financial planning. The book aims to provide much needed information regarding saving strategies as well as overall essential financial planning information. While some of this information may seem slightly elementary to Finance students, much of it has proved to be very useful and knowledgeable.

The most interesting part in my opinion was the chapter outlining the major differences between RRSP’s and Tax Free Savings account and how each of them should be approached in a different matter depending on an individual’s need at a certain point in time. The differences come into play when somebody needs to save a large amount of money, Since RRSP contributions are tax deductible, but taxed upon withdrawal, they must be approached with caution and due diligence. RRSP’s also include a minimal withdrawal at a certain date (when the owner of the RRSP turns 71). Tax Free Saving Accounts on the other hand allow customers (Canadian citizens) to deposit 5500$/ year tax free, there is also no necessary withdrawal date or future taxable income derived from this saving model. Both of these saving vehicles aid Canadians in saving some of their hard earned money over time ensuring a successful and relaxing retirement. They also both help by offsetting the tax burden pressed upon Canadians.

Another important chapter discussed in this book that may be very useful to Canadians is the difference between Condo’s, Homes, and Rental properties. While all of them have significant advantages, they also have disadvantages associate with each of them. Home ownership is a basic “wish/hope” for all Canadians. This dream might not be financially viable for all Canadians at a certain point in their life since many extra cost come with home ownership such as insurance, property tax, maintenance and of course the burden of paying off a mortgage every month. The author advocates that home owners should not spend more then 32% of their income on a home (Calculated on a monthly basis/mortgage). In order to avoid this heavy burden, Young Canadians should aim to save some income by either purchasing a condo or renting a property (apartment). This can help them by allowing them to achieve a financial cushion before purchasing a “brick and mortar” home for themselves.

One interesting concept that I found to be prevalent in this book is the chapter regarding happiness. As many people (parents) tell us, happiness is not derived from the size of one’s wallet but in effect regarded on ones state of mind, family, friendship and physical/mental fitness. Although this chapter was friendly reminder, I found it surprising that the author left out the impact of drinking (alcohol) alongside the impact of tobacco products. Since both of these products are commonly associated with health problems, along side financial expenditures. It would have been interesting to see the actual impact that smoking and drinking has on the average person in terms of dollars. In fact, it is estimated (according to Health Canada) that there is over 5 million smokers nation wide. If the average smoker consumes four “packs” a week, at a cost of 10$/pack over 25 years, this would render a cost of 52 000$ CAD or 2080$ CAD/year. Now if that same person would of invested this income in an Index fund at an average rate of return of 2.76% (5 year moving average for S&P 500 – According to Bloomberg). This would render a future value of 102708.35$ CAD which would be a substantial down payment on a new home.

Conclusion
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In conclusion, I found this book to be very useful and informative. I would recommend it to all young Canadians in hopes that they allow themselves to become financially responsible. If most people took this information seriously and applied the concepts featured in this book they would be able to live a financially successful life by not allowing themselves to live beyond their means.

This book was the perfect size, 190 pages, which makes it an easy read for everyone. The author gives clear examples while providing many useful graphs to depict a clear picture of the information given. The book introduces key financial strategies a simplistic way that anybody can understand. I would highly recommend this book to all young Canadians.