This article was included in the Carnival of Personal Finance #255.

Every now and again, Larry MacDonald posts another article proclaiming the need to move to a flat tax. He's certainly not the only proponent of a flat tax, but he's the only one that I read. His reasoning for liking a flat tax is its supposed simplicity. Others who find themselves in the highest (or even second highest) tax bracket expect that a flat tax will personally save them money.

Tax Simplicity

Simply put, the complexity of your tax return has nothing to do with paying progressive taxes. The impact of progressive tax on your return is limited to the section on Schedule 1 shown below, and a similar provincial version. A flat tax would consolidate 4 columns into one, that's it, that's all. In any event, the form is designed so that you only have to fill one of the 4 columns, so a flat tax wouldn't even save you much writing.

For the most part, the complexity of your tax return is determined by the number of credits and deductions available to you. Some of these are necessary - if you have self employment income, eliminating all the complexity would have you pay tax on your gross business income, which I doubt anyone would enjoy. Alternatively, we can simply tax net income as determined through GAAP style accounting...which many self-employed individuals would probably like. But those of us who make most of our money through regular employment probably wouldn't appreciate it, as it allows for more abuse in the mixing personal and business expenses, as GAAP is much less rigid than the tax code - this would shift the tax burden onto those with normal, T4-reported, income.

With investment income, we could simplify the return by not allowing you to write of interest on margin accounts, broker fees, and other costs of investing. We could eliminate the dividend tax credit, leaving us the choice of either double-taxing dividends (once at the corporate end, and once at the personal end), or shifting the tax burden from foreign investors onto domestic investors by making dividends tax-deductible in the hands of the corporation.

Eliminating social policy credits, such as the public transit credit or the spousal credit transfer available to married couples with only one income (and single mothers), would reduce complexity, as would eliminating medical credits (80% of the time I spend on my taxes is spent on calculating medical credits...and usually only gets me $20-$100 for my trouble). These, of course, are the types of credits that most people receive, and would therefore be politically difficult to remove. It also brings up a fundamental philosophical question of whether the government should use the tax code to align the profit motive with the public interest. I think this is a good use of resources, others may disagree.

These are the legitimate way to reduce tax complexity. It will work. But as you can see there is always a trade off. For the most part, it's been my observation that people would like the lines that other people use removed from the tax form...not the lines that we ourselves use.

Saving Money

There is no doubt that some people will save money by a switch to a flat tax. But if the government needs to raise the same amount of revenue under either system, then someone else needs to pay more, it's pretty simple math. There's a few different ways to set up a flat tax to decide which group wins and loses in the system change. Holy Potato has a pretty good explanation of these options.

Option 1 - a simple percentage of every dollar earned

Currently, those near the bottom of the income distribution pay little to no tax. Charging a flat tax on every dollar will introduce a tax on the most vulnerable in society who never before had to pay. Likely, this won't raise enough money to covered a significant reduction at the top end, either, and the flat tax rate will be set in such a way that many who already pay a little tax will have to pay more.

Option 2 - a flat tax for all income above a tax floor

The way Alberta has implemented this is through an increase in the Personal Tax Credit that everyone has available to them. Now there is lost tax income at both the top and the bottom of the income distribution that has to be made up by the people in the middle.

Option 3 - like option 2, but with a very high tax floor

When income taxes were first introduced, only those with relatively high incomes paid any tax. This option would return to that system, charging those near the top of the income distribution more than they currently pay, in order to completely eliminate tax for the majority of Canadians who fall into the lower and middle class. I might enjoy this tax holiday, but giving the majority of Canadians a free ride would probably push for a spiraling, ever larger, amount of public services...something most proponents of a flat tax would be unimpressed with. It's likely to also lead to a flight of capital from the country as the wealthy look to protect their wealth.

The Proof

I've been trying to set up an accurate model for this, but not being an academic who does a lot of modeling, I haven't been doing so well. The simplest method is comparing Alberta to Ontario, two provinces with similar wealth levels and a similar amount of revenue raised through income tax (proportional to the size of their economies). While this is a workable comparison, similar is not "exactly the same," so while it's a reasonable stand-in, it's not precisely valid as a comparison of a flat tax to a progressive tax. Still it's what I'm going with for now.

As you can see, if you earn between $25k and $154k, you will pay less income tax in Ontario. (You will pay more sales tax, though, since Ontario doesn't get as much in resource royalties). This isn't some fluke, this is because the flat tax is structured to spread the tax burden around in the vast middle, instead of concentrating it near the top. The majority of people do not benefit financially from a flat tax.

Further to my post yesterday, considering whether the financial cost of a law degree will pay off, the economists at Worthwhile Canadian Initiative have analyzed the return on investment for a post-secondary education. In short, unless you are a woman living in France, the cost of a university education will pay off, on average.

It's easier to calculate ROI in aggregate for a whole country, since you can work with averages. There's a high deviation in the numbers though - some people will get paid hundreds of thousands, while someone else with the same degree will struggle to find a job that breaks $40k. So on an individual level it's hard to say what kind of return we'll get.

I find myself facing something akin to financial armageddon straight in the face. My wife has been accepted to law school, something that our current level of savings simply can't support. With some simple lifestyle cutbacks we have enough in the bank to get through the three years on one income, but shelling out for tuition, textbooks, and any other extra costs that come with going to school will be challenging. This means taking on tens of thousands in new debt, a scary prospect to say the least.

I imagine that this is a problem faced by many people, whether they are in high school and just choosing a school, or like us, a 30ish couple with a mortgage and other inflexible financial commitments. I'll never be happy about taking on debt, something for which I'm thankful, as I think this will lead to long-term financial security. So I need to justify any new debt, and this one is no different.

On the surface the debt is certainly justified simply as a lifestyle choice. My wife can continue to languish in a dead end job, or she can improve her education, and start on a new and more rewarding career path. The non-financials are solid enough to go for it. But I like numbers, and I think there's a good case to be made that it's the right financial decision as well. How much more money is my wife likely to make as a lawyer compared to her current income as an accounting clerk?

To compare, let's look at the cost of attending school:

*Whistle.* That's a lot of money. So how much extra does my wife have to make as a lawyer in order to pay for school?

Well, an education is like an annuity - you invest money up front then get an payback in small chunks over the course of your working life. In my wife's case, she'll have 30 years left to work once she's finished school. How much an annuity is worth is determined using Present Value, and depends on interest rates...when interest rates are low, as they are now, you have to spend more money to get the same payoff. At today's interest rates, a 30 year annuity yields about 4.5%, and investing $110,781 will get you an annual payoff of $6801. In more "normal" times when a 30 year annuity might yield 7.5%, the investment would pay $9880.

So that's how much extra she has to earn after graduation, compared to what her salary would have been if she'd kept working. This seems quite doable, as a salary survey seems to indicate that even a first year associate at a medium size, local, firm makes $25k more than her current wages. So it looks like law school should be a profitable venture, on top of being personally rewarding.

This is certainly a case where it is smart to take on the debt.

ImageAndres Rueda

For better or worse, credit cards have become the way we pay for things. These are incredibly useful cards, which make it easy to pay for purchases, move money between countries quickly and easily, and can act as a free loan from the bank. But because there's nothing to stop you from spending more than you have, they can become very, very expensive if used incorrectly.

The banks work hard to make it as easy as possible to accumulated debt on your card. They constantly increase your credit limit even if you don't ask for it. They advertise a "minimum payment" that is just a tiny fraction of what you owe on the card. And every now and again they'll actually process your payment slowly in order to charge you late penalties - if this ever happens call them and don't hang up until they've refunded you.

Using a credit card responsibly can provide you with great rewards, and simplify your financial life.

Never Think About Minimum Payments

In the end, you have to pay for everything you buy, whether you buy it on a card or in cash. If you fail to pay your card off every month, you can easily end up paying many times the cost of the item. Worse, credit cards are absolutely the most expensive money you can borrow. I cannot stress this enough, but if you don't pay your credit cards off every month, it's time to start. There are innumerable resources about the details of doing this, and I will probably write more on it later, but the fundamentals are simple. If you haven't paid your card off, you will pay interest on every item you buy starting the day you buy it. If you pay your cards every month, you get an interest free loan that generally lasts 15-45 days. This loan can be used to reduce your financing charges on other loans.

First option - obtain a new card that you WILL pay off every month. Use any excess cash to pay down other debts, starting with the highest interest rates. If you cannot make this payment for even one month proceed to option 2.

Second option - stop using credit cards altogether, stick to cash. This will lose you the benefit of the interest free loan, making this the inferior option. But if you have an overspending problem on credit cards, it will be cheaper in the long run.

Under either option, minimize your spending, and then pay whatever is leftover towards your outstanding balances on your old cards.If you have a decent credit rating, investigate lines of credit to pay off your balances. They are substantially cheaper than carrying a balance on your card, and only charge interest on what is owed - not all of your spending like a card does.

Taking Advantage

With your credit cards paid off in full every month, you now effectively have an interest-free, short term, loan for everything you spend on your card. This is great. If you put as much spending as you possibly can on your card, let's say $1500 per month, that means that on average your bank account is about $750 fatter than it would be paying everything in cash. Interest rates are very low right now, so over the course of the year, this might mean an extra $7.50 or so in interest...nothing to write home about. But it wasn't so long ago - and probably won't be so long into the future - when you can get 4% or 5% for your savings...that's about $40, a nice dinner out. These small things add up, and it's cost you nothing. If you are using the interest free loan to reduce other debts, the payoff can be even higher.

Points cards

About the greatest benefit to using credit cards is the points that are offered. Some credit cards give you travel points, some give you straight cash back, some will make a donation to your favourite charity. The first two are great options, but using a card to make a charitable donation is a bad idea. If you want to use your credit card rewards to fund a charity, get a cash back card and make a donation when the rewards come due. This way, you get a tax refund, which can be a substantial portion of the donation. In a future article, I will compare several Canadian and US credit cards and the rewards they offer and try to pin a dollar figure on to those travel points.

The end result is that credit cards are beautiful things. Use them wisely and they can be your best friend. A credit card is only a bad thing if you are spending more than you are earning, and then it's just a facilitator, the problem is still your spending habits.

I started this article some time ago, before my recent blogging hiatus. Last summer, I became a married man, and in the process learned a lot about how to plan an event and keep costs down. Weddings are generally big, expensive affairs. Weddingbells magazine reports that on average, Canadians expect to spend $19,274 on their big day. In my experience, once you commit to spending such a large amount of money, a few extra dollars here and there to get what you want are easily justified so I'm going to go out on a limb and say that most people spend more than they expect to on their wedding. I know I did.

But it doesn't have to be expensive. Though I did spend more than I expected, not only did my wedding cost only a fraction of the typical $20k, but factoring in cash gifts received - which were entirely unsolicited - it actually turned a decent profit. There are two sides of the equation to turning a profit on your wedding, as with any event - revenue and expenses. While I highly recommend inviting any wealthy and generous relatives that you might have to increase your gift count, the reality is that you don't have a lot of control over the income side of the equation. But you can still keep your costs to a minimum without sacrificing the beauty of the day. Such cost savings can take the extreme case, as chronicled in The $2000 Wedding, but in our case we put on a relatively typical wedding while keeping the cost to around $6000. How we did it:

Avoid the wedding industry

Businesses that are dedicated solely to weddings tend to overcharge. Even businesses that only do a few wedding things will often raise prices if they know you're inquiring about a wedding. The biggest offenders are clothing, flowers, cakes and most of all hotels. Before visiting a wedding dress shop, try a few ordinary dress shops. We found an absolutely gorgeous dress for my wife on sale for $270 at the tail end of grad season...the same dress was also available in white for traditionalists, no difference in price. Venues are an even bigger cost issue. The Weddingbells poll claims that most couples expect to spend almost $8000 on their reception venue. Even if this includes food, it's absurd.

Community halls can be excellent venues for a wedding, if you hunt around for one that you like. Ours was just lovely and cost all of $400. The catering was extra, of course, and by hunting around we found a caterer that charged about half what the big local names charge, and would give us the menu we wanted. The key - he's new in the business, having just graduated from the food program at a local college about 3 years ago. In things like catering, increased experience and name recognition does mean higher prices, but not necessarily higher quality.

The cake was, I think, our best accomplishment. A coworker who was planning her wedding at the same time was unable to get her cost below $400. For half that, we got ice cream cake. It was good. The only downside was a limited display time for the cake, but this disadvantage was more than made up for by tasting really, really good.

Do it yourself

With the amount of organising that goes into a wedding it's tempting to hire a professional wedding planner to take the load off. In terms of cost, it's not so much the cost of the planner - they are, after all, a value added service - but the type of wedding that they steer you towards. They do a lot of these, and so the businesses they deal with are in the wedding industry, and charge accordingly. Another reason we opted against the planner was because friends we talked to found that the planner didn't reduce their stress...they just moved the stress to increasingly trivial things. One cousin reported spending days going back and forth about whether to have a matte or satin finish on the napkins. Nobody even asked us that question.

Doing it yourself also applies to invitations, flowers, and decorations. If you're having a summer wedding, consider growing your own flowers. Instead of dropping $800-$1000 on flowers, we spent $90 on bedding plants, seeds, and planters in the spring, and by the time our wedding rolled around these looked at least as good as anything a florist could have provided. $20 worth of decorative paper and some borrowed craft and stamping supplies gave us some beautiful invitations, a far cry from the hundreds that the people ahead of me in line at the paper store were spending to have theirs printed. Additionally, I could have run theirs off my printer, whereas ours were more personal.

Keep it simple, keep it small

There's a law of diminishing returns when it comes to inviting a lot of guests. And I'm not just talking about gifts, though of course more distant relations are unlikely to pull their weight there either. Mostly the problem with inviting a lot of people is that you don't have time to talk to any of them, making the day even more hectic than it already is. More guests increases the cost, and reduces the intimacy of your wedding...do you really want that? My wife and I faced a fair bit of pressure to invite relatives that we don't really know, and sometimes we gave in so as to balance things (I was inviting all my cousins, so Kathy needed to as well), but when my father wanted me to invite some of his cousins that I might exchange pleasantries with once every year or two, that was going too far.

Of the 120 people we invited, about sixty people turned out, pretty much in line with what the wedding planning literature told us to expect. Those 60 people were more than enough, as I'm still not sure I managed to even say hello to everybody, let alone have a real conversation.

As for simplicity - you don't need the fanciest room for your reception - a community hall will do. If you're religious, the ceremony venue is often free or "by donation," if you're not, a wedding in a park can be reasonably cost effective, or the same community hall can be used for the ceremony. The city here charged us $35/hour for a park site reservation. Total venue cost for the whole day: $620.

Reuseability

This doesn't lower the cost of your wedding, but it does increase its long term value. It's simple - buy things that you'll use again. I bought my last suit when I was 18...it didn't fit me anymore. So instead of spending a bunch of money on a rental tux, I bought a suit that will be useful in the future for job interviews and other people's weddings. The same applies to the dress, though I'm not sure what kind of occasion will call for a formal dress, we now own one. Our flower pots will be used again next year. So all these things which we justified buying because they were for the wedding have added value to our lives every other day.

You can also save money by reusing. My suit was bought second hand. Now I have an Armani suit, and it didn't break the bank. For smaller things, the waste management department in our city has a reuse centre, where certain types of "junk" can be brought and then picked up by other people. They supplied the vases for our cut flowers, some of our invitation supplies, and possibly some other things that I've forgotten about. You might think this is cheap, but I don't think any of our guests knew where they came. Except for the friend who volunteers there, and saved us the $2 pickup fee.

Call in Favours

Instead of paying for a DJ, our music was supplied by a friend who could borrow the equipment from his employer at no cost. A friend of my mother's handled the photography in return for $50 and dinner. He's not the most artistic photographer in the world, but he's got all the equipment, and the colour and vibrancy of the pictures came out better than anything an true amateur could have done. We did look at several professional, artistic photographers, and while many could produce stunning results, I do not think they are worth several thousand dollars. The one we liked the best would have charged $7000, more than doubling the cost of the wedding.

Budget, budget, budget

As with anything, decide in advance how much it's worth to you, and then find a way to get what you want for the price you're willing to pay. Be reasonable...if you plan to invite 500 people, you can't reasonably expect to spend $4000. But consider whether there's really 500 people that you like well enough to buy them dinner. Break down your budget into categories, so that you have an idea of your target in each one. That way every step of the way, you'll be able to see whether each item is over or under budget. The largest items are venues, catering and clothing, which together ate up about $4000. We could have reduced catering costs either by going with a more typical roast beef or turkey dinner, or by opting for disposable plates and cups. Neither one reflected how we wanted to remember our wedding, and so we spent the money to arrange a custom menu and rent real plates and glasses.

The rules of wedding planning are no different from the rules you should be applying to any other purchase. Always make sure you get value for your money by refusing to pay more than you feel something is worth. It can be more expensive than you expected, but if it's more expensive than it is worth then it is not worth having at all.

Amongst the top three expenditures in most North American households is the automobile. Despite my previously mentioned love for bicycles, my wife and I also own a car, and it's lately been weighing on me as a large cost. Well, today specifically since I got nailed with a $900 repair bill. And I still need to replace the tires, which looks like it will run me at least another $500.

As someone active in the cycling community, I have a number of car free friends, and I do sometimes wonder whether this might be a realistic option for me. While I'm not in the mood to figure out all the costs involved, it is valuable to contemplate the alternatives. My current car use is pretty minimal...the car remains parked 4-5 days per week, and much of the time when it does get used, it is only slightly more convenient. Alternatives to car ownership are usually not entirely adequate by themselves, but a combination could save a lot of money without any meaningful deterioration in quality of life.

Rental Cars

For someone who drives infrequently - and mostly on weekends - rental cars are actually a very efficient use of money. Renting a car on the weekend often costs only about $20-$30 per day. This is usually how I get myself to the airport, being much cheaper than parking there, or taking a cab. While a weekly car rental would no doubt be a hassle, I could rent a car three Saturdays every month to run my errands without spending more than my current insurance bill. Without even taking into account the capital investment in the car, or revenue from renting out my parking stall, I'm coming out even.

We also take occasional weekend trips out of town, which, at $100/weekend would take 160 weekends (or once a month for 13 years) before it would cost as much as buying a low-end car. Since we would like to replace our car roughly every 10 years, if these are the only two times we actually need a car, then renting is coming out ahead.

Bicycle

For an urban resident, the bicycle is a very practical vehicle. Cheap to buy, cheap to maintain, free to park at most venues, and often - thanks to avoiding traffic congestion - they can get places in a similar amount of time to a car. The capital cost of a decent bike is anywhere from $500-$1500, depending on your definition of decent. In other words for the amount that just spent fixing my car, I could have bought a new bike.

Winter is usually the biggest hurdle to biking, and I think this might be the downfall of my plan. While I've biked a bit this winter, it's much less fun than summer biking, so having to bike everywhere might cramp my style. That said, many people bike year-round here, and since the main hurdle is willpower, being forced to might make the difference.

Public Transit

Public transit is particularly useful for trips that go to central locations, such as a downtown job or school at a major university. Given the cost of parking at these locations, I already use transit for those sorts of trips, so owning or not owning a car makes no difference.

I think there's little doubt that we could save a lot of money by selling our car and living car-free. But the lifestyle adjustment is a bit frightening, so it probably won't happen. It's something to consider, though, if you ever find yourself having to adapt to a lower income, or if you're having trouble staying on top of your bills.

The received wisdom of personal finance bloggers and other "experts" is that part of good money management is to have an emergency fund consisting of enough money to get you through 3-6 months with no income. This, to me, does not make sense as good advice to give someone who is paying off revolving debt, especially credit card debt or anything else with similarly high interest. Why do I think this is a bad idea? Simple:
You are borrowing your emergency fund.

Taken by Brad Noble on June 29, 2009.

Between getting married and working on an article about how to get married without breaking the bank, I've missed the past couple of deadlines. Bad Neil Bad! So tonight, since my wedding article isn't ready yet, a quick one about this year's one-time only home renovation tax credit.

Most Canadians have probably encountered some ad or another trumpeting this tax credit. The basics of it are that any renovation work done on your home qualifies for a federal tax credit - this could bring up to $1350 back into your pocket. I was looking into this as it may be an incentive to get my act together on replacing some doors and window coverings around the house that I've been thinking need to be done.

Articles and blogs about saving money like to point out ways we "waste money." Money is only wasted when you don't make a conscious decision to spend it. Everything else is about getting value for your money. Maybe a pair of jeans really is worth $200 to you? The problem is that value is such a subjective concept, it's kind of hard to blog about, so it doesn't get much digital ink.

How do you decide value? Well, it's really an art form, there aren't really set rules.

Comparison Shopping

First things first - compare to other options. This is the basic shopping around approach. If you can buy the exact same product through a different retailer, and the price is lower, then all else being equal the more expensive one is poor value. But other things are rarely equal. The cheaper store may be further away, thus requiring extra investment of time and fuel to get the discount. In some cases, you may place higher value on supporting local business, so you're willing to pay more knowing that the staff are higher paid and the profit will stay in your community. You may have ethical issues with how the prices are lowered in the cheaper stores - I refuse to shop at Walmart because of how their treat their employees and suppliers. It's hard to put a dollar value on these things, but they are important factors in getting value for your money.

Quality

Then there's quality questions. I'm currently looking into an all-inclusive vacation for my upcoming honeymoon. It'll be the first one I've ever taken, so I'm spending a lot of time determining what's worth paying for and what's really important to me. The cheapest options are in Cancun or Varadero, both massively built up resort areas where I'd be unlikely to see a local person who is not employed by the hotel. But smaller resort areas - where there are maybe a half dozen hotels at most - are only a couple hundred dollars more, which is probably worth it to me. Likewise, I'm willing to pay more for adult-only, smaller number of rooms, and good snorkeling access. All of these things increase the quality of the product, and so are worth extra money.

With physical purchases, quality is often less subjective. A department store bike sold for $100-$300 won't stand up to the amount of riding a $800 bike will. If you ride regularly, it's likely the department store bike will have to be replaced every year or two, whereas the expensive bike should last a decade or more. This makes the direct financial cost of a cheap bike higher than an expensive bike, so long as you're going to use it. The same thing comes into play when buying computers, power tools or clothing - going cheap now usually means having to replace it sooner. Even food...it costs more to shop at the farmers market, but fresh produce picked ripe tastes better than commercial produce picked 2 weeks ago and shipped. That's worth something.

Where it fits

What's this purchase going to do for you. This is the biggest, and most subjective value calculation. If you're buying something that you're going to use a lot for years to come, spending thousands of dollars isn't unreasonable. But if you're replacing say, an old car, the calculation isn't so clear. What do you get out of buying the new car? Is what you get worth the price you're paying?

I can't make that decision for you, and neither should any other blogger. The end message of this post is that to make the decision, don't just spend the money blindly.